SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X ] Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 27, 2003
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 number1-12340 |
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) | (IRS employer identification no.) | |
33 Coffee Lane, Waterbury, Vermont | 05676 | |
(Address of principal executive offices) | (Zip code) |
Registrant's telephone number:(802) 244-5621 |
Securities registered pursuant to Section 12(b) of the Exchange Act: None |
Securities registered pursuant to Section 12(g) of the Exchange Act: |
Common Stock, $.10 par value per share |
(Title of class) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on April 12, 2003 was approximately $49,166,000 based upon the closing price of such stock on that date.
As of December 12, 2003, 7,015,317 shares of common stock of the registrant were outstanding. See "Market for the Registrant's Common Equity and Related Stockholder Matters."
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference in Part III, Items 10-14 of this Form 10-K.
This Form 10-K includes statements that constitute "forward-looking statements" within the meaning of federal securities regulations. For more detail regarding "forward-looking statements" see item 7 of Part II of this Form 10-K.
EXPLANATORY NOTE
This amendment to the Annual Report on Form 10-K/A for the fiscal year ended September 27, 2003 of Green Mountain Coffee Roasters, Inc. ("the Company" or"Green Mountain"or "Green Mountain Coffee") is being filed to include the audited financial statements of Keurig, Incorporated ("Keurig") for the fiscal year ended December 31, 2003 as required by Rule 3-09 of Regulation S-X. Green Mountain has a 41.8% equity interest in Keurig. In accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, the text of the amended item is set forth in its entirety in the pages attached hereto.
A consent of Ernst & Young LLP, independent accountants for Keurig, is being filed as an exhibit hereto.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Form 10K/A.
(1) See Index to audited Financial Statements of Keurig, Incorporated which are included in this report.
(2) See Index to audited Financial Statements of Keurig, Incorporated which are included in this report.
(3)The exhibits to this report are listed in the Exhibit Index contained in subsection below.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on July 31, 2003. The Company furnished its third 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."
(c) Exhibits.
Exhibit No. | Exhibit Title | ||
3.1 | Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 in the Quarterly Report on Form 10-Q for the 12 weeks ended April 13, 2002). | ||
3.2 | Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.2 in the Quarterly Report on Form 10-Q for the 12 weeks ended April 13, 2002). | ||
3.3 | Certificate of Merger (incorporated by reference to Exhibit 3.3 in the Quarterly Report on Form 10-Q for the 16 weeks ended January 18, 2003). | ||
4.1 | Amended and Restated Credit Agreement, dated as of August 30, 2002, by and among the Company, as guarantor, Green Mountain Coffee Roasters, Inc. ("GMCR") and Green Mountain Coffee Roasters Franchising Corporation ("GMCRF"), as borrowers, Fleet National Bank, as agent ("Fleet"), and Fleet National Bank and Banknorth, N.A. ("Banknorth"), as lenders (collectively, the "Lenders"). | ||
(a) | Revolving Note dated August 30, 2002, by GMCR and GMCRF in favor of Fleet (incorporated by reference to Exhibit 4.1(a) in the Current Report on Form 8-K dated August 30, 2002). | ||
(b) | Revolving Note dated August 30, 2002, by GMCR and GMCRF in favor of Banknorth (incorporated by reference to Exhibit 4.1(b) in the Current Report on Form 8-K dated August 30, 2002). | ||
(c) | Term Note dated August 30, 2002, by GMCR and GMCRF in favor of Fleet (incorporated by reference to Exhibit 4.1(c) in the Current Report on Form 8-K dated August 30, 2002). | ||
(d) | Term Note dated August 30, 2002, by GMCR and GMCRF in favor of Banknorth (incorporated by reference to Exhibit 4.1(d) in the Current Report on Form 8-K dated August 30, 2002). | ||
(e) | Equipment Note dated August 30, 2002, by GMCR and GMCRF in favor of Fleet (incorporated by reference to Exhibit 4.1(e) in the Current Report on Form 8-K dated August 30, 2002). | ||
(f) | Equipment Note dated August 30, 2002, by GMCR and GMCRF in favor of Banknorth (incorporated by reference to Exhibit 4.1(f) in the Current Report on Form 8-K dated August 30, 2002). | ||
(g) | Swing Line Note dated August 30, 2002, by GMCR and GMCRF in favor of Fleet (incorporated by reference to Exhibit 4.1(g) in the Current Report on Form 8-K dated August 30, 2002). | ||
(h) | Security Agreement dated as of August 30, 2002, by and between GMCR and Fleet, as agent for the benefit of the Lenders (incorporated by reference to Exhibit 4.1(h) in the Current Report on Form 8-K dated August 30, 2002). | ||
(i) | Security Agreement dated as of August 30, 2002, by and between GMCRF and Fleet, as agent for the benefit of the Lenders (incorporated by reference to Exhibit 4.1(i) in the Current Report on Form 8-K dated August 30, 2002). | ||
(j) | Security Agreement (Intellectual Property) dated as of August 30, 2002, by and between GMCR and Fleet, as agent for the benefit of the Lenders (incorporated by reference to Exhibit 4.1(j) in the Current Report on Form 8-K dated August 30, 2002). | ||
(k) | Pledge Agreement dated as of August 30, 2002, by and between GMCR and Fleet, as agent for the benefit of the Lenders (incorporated by reference to Exhibit 4.1(k) in the Current Report on Form 8-K dated August 30, 2002). | ||
(l) | Mortgage, Security Agreement and Fixture Filing dated as of August 30, 2002, by and between GMCR and Fleet, as agent for the benefit of the Lenders (incorporated by reference to Exhibit 4.1(l) in the Current Report on Form 8-K dated August 30, 2002). | ||
(m) | Collateral Assignment of Leasehold Interests dated as of August 30, 2002, by and between GMCR and Fleet, as agent for the benefit of the Lenders (incorporated by reference to Exhibit 4.1(m) in the Current Report on Form 8-K dated August 30, 2002). | ||
10.1 | U.S. Small Business Administration ("SBA") Authorization and Debenture Guaranty relating to $766,000 loan to Green Mountain Coffee, Inc. together with Letters dated July 14, 1993 and July 19, 1993 from SBA to Central Vermont Economic Development Corporation relating thereto (incorporated by reference to Exhibit 10.22 in the Registration Statement on Form SB-2 (Registration No. 33-66646) filed on July 28, 1993 and declared effective on September 21, 1993). | ||
(a) | Small Business Administration Guaranty dated September 30, 1993, from Robert P. Stiller to Central Vermont Economic Development Corporation (incorporated by reference to Exhibit 10.22(a) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(b) | Assignment, dated September 30, 1993, by Central Vermont Economic Development Corporation to Small Business Administration of Small Business Administration Guaranty dated September 30, 1993, from Robert P. Stiller to Central Vermont Economic Development Corporation (incorporated by reference to Exhibit 10.22(b) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(c) | Mortgage, dated September 30, 1993, between Green Mountain Coffee Roasters, Inc., and Central Vermont Economic Development Corporation (incorporated by reference to Exhibit 10.22(c) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(d) | Assignment, dated September 30, 1993, by Central Vermont Economic Development Corporation to Small Business Administration of Mortgage, dated September 30, 1993, between Green Mountain Coffee Roasters, Inc., and Central Vermont Economic Development Corporation (incorporated by reference to Exhibit 10.22(d) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(e) | "504" Note, dated September 30, 1993, in the amount of $766,000, from Green Mountain Coffee Roasters, Inc. to Central Vermont Economic Development Corporation, as amended, including Servicing Agent Agreement among Green Mountain Coffee Roasters, Inc., and Colson Services Corp. (incorporated by reference to Exhibit 10.22(e) in the Quarterly Report on Form 10-QSB for the 16 weeks ended January 15, 1994, filed on February 25, 1994). | ||
(f) | Assignment, dated September 30, 1993, by Central Vermont Economic Development Corporation to Small Business Administration of "504" Note, dated September 30, 1993, in the amount of $766,000, from Green Mountain Coffee Roasters, Inc., to Central Vermont Economic Development Corporation (incorporated by reference to Exhibit 10.22(f) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(g) | Security Agreement from Green Mountain Coffee Roasters, Inc., to Central Vermont Economic Development Corporation (incorporated by reference to Exhibit 10.22(g) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(h) | Assignment, dated September 30, 1993, by Central Vermont Economic Development Corporation to Small Business Administration of Security Agreement from Green Mountain Coffee Roasters, Inc., to Central Vermont Economic Development Corporation (incorporated by reference to Exhibit 10.22(h) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(i) | Letter Agreement, dated October 1, 1993, among Central Vermont Economic Development Corporation, Green Mountain Coffee Roasters, Inc., and Small Business Administration, amending the Authorization and Debenture Guaranty among Small Business Administration, Central Vermont Economic Development Corporation, and Green Mountain Coffee Roasters, Inc., (incorporated by reference to Exhibit 10.22(i) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(j) | Development Company 504 Debenture, issued October 14, 1993, for principal amount of $766,000, by Central Vermont Economic Development Corporation to Harris Trust of New York, as Trustee (incorporated by reference to Exhibit 10.22(j) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
10.2 | Lease Agreement, dated April 28, 1993, between Pilgrim Partnership and Green Mountain Coffee, Inc., (incorporated by reference to Exhibit 10.33 in the Registration Statement on Form SB-2 (Registration No. 33-66646) filed on July 28, 1993 and declared effective on September 21, 1993). | ||
(a) | Addendum to Lease Agreement dated April 28, 1993(incorporated by reference to Exhibit 10.33(a) in the Registration Statement on Form SB-2 (Registration No. 33-66646) filed on July 28, 1993, and declared effective on September 21, 1993). | ||
(b) | Lease Amendment dated August 16, 1993 (incorporated by reference to Exhibit 10.33(b) in the Annual Report on Form 10-KSB for the fiscal year ended September 25, 1993, filed on December 23, 1993). | ||
(c) | Letter Agreement dated July 30, 1997 (incorporated by reference to Exhibit 10.33(c) in the Quarterly Report on Form 10-Q for the 16 weeks ended January 17, 1998). | ||
(d) | Amendment to Lease Agreement dated July 1, 2002 (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10-Q for the 12 weeks ended July 6, 2002). | ||
(e) | Addendum & Amendment to Lease dated October 15, 2003. (incorporated by reference to Exhibit 10.2(e) in the Annual Report on Form 10-K for the year ended September 27, 2003). | ||
10.3 | 1993 Stock Option Plan of the Company, as revised (incorporated by reference to Exhibit 10.36 in the Annual Report on Form 10-K for the fiscal year ended September 27, 1997).* | ||
(a) | Form of Stock Option Agreement.* | ||
10.4 | 1998 Employee Stock Purchase Plan with Form of Participation Agreement (incorporated by reference to Exhibit 10.37 in the Annual Report on Form 10-K for the fiscal year ended September 26, 1998.)* | ||
10.5 | 1999 Stock Option Plan of the Company (incorporated by reference to Exhibit 10.38 in the Quarterly Report on Form 10-Q for the 16 weeks ended January 18, 1999).* | ||
(a) | Form of Stock Option Agreement.* | ||
10.6 | Employment Agreement of Stephen J. Sabol dated as of July 1, 1993 (incorporated by reference to Exhibit 10.41 in the Registration Statement on Form SB-2 (Registration No. 33-66646) filed on July 28, 1993, and declared effective on September 21, 1993).* | ||
10.7 | Employment Agreement of Paul Comey dated as of July 1, 1993 (incorporated by reference to Exhibit 10.42 in the Registration Statement on Form SB-2 (Registration No. 33-66646) filed on July 28, 1993, and declared effective on September 21, 1993).* | ||
10.8 | Employment Agreement of Jonathan C. Wettstein dated as of July 1, 1993 (incorporated by reference to Exhibit 10.44 in the Registration Statement on Form SB-2 (Registration No. 33-66646) filed on July 28, 1993, and declared effective on September 21, 1993).* | ||
10.9 | 2000 Stock Option Plan of the Company (incorporated by reference to Exhibit 10.105 in the Annual Report on Form 10-K for the fiscal year ended September 30, 2000).* | ||
(a) | Form of Stock Option Agreement* | ||
10.10 | Green Mountain Coffee, Inc., Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.113 in the Annual Report on Form 10-K for the fiscal year ended September 30, 2000). | ||
10.11 | Green Mountain Coffee, Inc., Employee Stock Ownership Trust (incorporated by reference to Exhibit 10.114 in the Annual Report on Form 10-K for the fiscal year ended September 30, 2000). | ||
10.12 | Loan Agreement by and between the Green Mountain Coffee, Inc., Employee Stock Ownership Trust and Green Mountain Coffee, Inc., made and entered into as of April 16, 2001 (incorporated by reference to Exhibit 10.118 in the Quarterly Report on Form 10-Q for the 12 weeks ended April 14, 2001). | ||
10.13 | Asset Purchase Agreement between Green Mountain Coffee, Inc., and Frontier Cooperative Herbs dated June 5, 2001 (incorporated by reference to Exhibit 10.119 in the Quarterly Report on Form 10-Q for the 12 weeks ended July 7, 2001). | ||
10.14 | Promissory note from Kevin G. McBride, dated January 5, 2001, (incorporated by reference to Exhibit 10.16 in the Annual Report on Form 10-K for the fiscal year ended September 29, 2001). | ||
10.15 | Employment agreement of Robert D. Britt dated September 13, 2001, (incorporated by reference to Exhibit 10.17 in the Annual Report on Form 10-K for the fiscal year ended September 29, 2001).* Superceded by Employment Agreement of Robert D. Britt dated as of November 11, 2002 filed as Exhibit 10.24 . | ||
10.16 | Shareholder Rights Agreement dated April 4, 2002, by and among Green Mountain Coffee Roasters, Inc., Keurig, Incorporated and MD Co. (incorporated by reference to Exhibit 10.1 in the Current Report on Form 8-K dated April 5, 2002). | ||
10.17 | Second Amended and Restated First Refusal Agreement dated as of February 4, 2002, by and among Green Mountain Coffee Roasters, Inc., Keurig, Incorporated and certain other holders of the capital stock of Keurig, Incorporated (incorporated by reference to Exhibit 10.2 in the Current Report on Form 8-K dated April 5, 2002). | ||
10.18 | Voting Agreement dated as of February 4, 2002, by and among Green Mountain Coffee Roasters, Inc., Keurig, Incorporated and certain other holders of the capital stock of Keurig, Incorporated (incorporated by reference to Exhibit 10.3 in the Current Report on Form 8-K dated April 5, 2002). | ||
10.19 | Stock Rights Agreement dated as of February 4, 2002, by and among Keurig, Incorporated, Green Mountain Coffee Roasters, Inc., and other holders of preferred stock of Keurig, Incorporated (incorporated by reference to Exhibit 10.4 in the Current Report on Form 8-K dated April 5, 2002). | ||
10.20 | Fourteenth Amendment of Commercial Loan Agreement and Loan Documents dated April 3, 2002 between the Green Mountain Coffee Roasters, Inc., and Fleet National Bank (incorporated by reference to Exhibit 10.5 in the Current Report on Form 8-K dated April 5, 2002).** | ||
10.21 | $5,000,000 Term Promissory Note dated April 3, 2002 issued by Green Mountain Coffee Roasters, Inc., in favor of Fleet National Bank (incorporated by reference to Exhibit 10.1 in the Current Report on Form 8-K dated April 5, 2002).** | ||
10.22 | Stock Pledge and Security Agreement dated April 3, 2002 executed by Green Mountain Coffee Roasters, Inc., in favor of Fleet National Bank (incorporated by reference to Exhibit 10.1 in the Current Report on Form 8-K dated April 5, 2002).** | ||
10.23 | Equipment Purchase Agreement dated as of June 21, 2002 by and between Green Mountain Coffee Roasters, Inc., and Keurig, Incorporated (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10-Q for the 12 weeks ended July 6, 2002). | ||
10.24 | Employment Agreement between Green Mountain Coffee, Inc., and Robert D. Britt dated as of November 11, 2002 (incorporated by reference to exhibit 10.24 in the Annual Report on Form 10-K for the fiscal year ended September 28, 2002).* | ||
10.25 | Resignation of Kevin G. McBride dated December 11, 2002, and Exhibit A (proposed Release and Severance Agreement) (incorporated by reference to exhibit 10.25 in the Annual Report on Form 10-K for the fiscal year ended September 28, 2002). * | ||
10.26 | Employment Agreement between Green Mountain Coffee Roasters, Inc. and Frances G. Rathke dated as of October 31, 2003 incorporated by reference to Exhibit 10.26 in the Annual Report on Form 10-K for the year ended September 27, 2003). * | ||
14. | Green Mountain Coffee Roasters Finance Code of Professional Conduct (incorporated by reference to Exhibit 14 in the Annual Report on Form 10-K for the year ended September 27, 2003). | ||
21 | List of Subsidiaries of the Company (incorporated by reference to Exhibit 21 in the Annual Report on Form 10-K for the year ended September 27, 2003). | ||
23 | Consent of PriceWaterhouseCoopers LLP (incorporated by reference to Exhibit 23 in the Annual Report on Form 10-K for the year ended September 27, 2003). | ||
23.1 | Consent of Ernst & Young LLP.*** | ||
24 | Powers of Attorney (incorporated by reference to Exhibit 24 in the Annual Report on Form 10-K for the year ended September 27, 2003). | ||
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 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 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *** | ||
* Management contract or compensatory plan ** Superceded and replaced by the agreements included in Exhibit 4.1 and related to a new credit facility *** Filed herewith | |||
(d) Financial Statements of Subsidiaries Not Consolidated and Fifty-Percent-or-Less-Owned Persons.
The financial statements of Keurig, Incorporated for the fiscal year ended December 31, 2003 are filed as part of this form.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GREEN MOUNTAIN COFFEE ROASTERS, INC.
By: /s/ Robert P.Stiller__ | |
Chairman of the Board of Directors, |
Keurig, Inc.
Audited Financial Statements
Years ended December 31, 2003, 2002 and 2001
Contents
| Report of Independent Auditors | 1 |
| Audited Financial Statements | |
| Balance Sheets | 2 |
| Statements of Operations | 3 |
| Statements of Redeemable Preferred Stock and Stockholders' Equity | 4 |
| Statements of Cash Flows | 5 |
| Notes to Financial Statements | 6 |
Report of Independent Auditors
The Board of Directors
Keurig, Inc.
We have audited the accompanying balance sheets of Keurig, Inc. (the Company) as of December 31, 2003 and 2002, and the related statements of operations, redeemable preferred stock and stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Keurig, Inc. at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 29, 2004
Keurig, Inc.
Balance Sheets
December 31 | ||
2003 | 2002 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $ 2,856,939 | $ 8,377,856 |
Accounts receivable, net of allowances of $113,000 in 2003 and 2002 | 4,437,314 | 1,747,561 |
Inventories | 1,584,909 | 542,074 |
Prepaid expenses and other assets | 345,111 | 147,902 |
Total current assets | 9,224,273 | 10,815,393 |
Equipment, net of accumulated depreciation and amortization | 5,225,592 | 5,336,214 |
Restricted cash | 84,441 | 80,991 |
Other assets, principally equipment deposits | 330,464 | 380,290 |
$ 14,864,770 | $ 16,612,888 | |
============== | ========== | |
Liabilities and stockholders' equity (deficit) | ||
Current liabilities: | ||
Accounts payable and accrued expenses | $ 4,292,940 | $ 2,002,716 |
Current portion of capital lease obligations | 39,269 | 54,615 |
Total current liabilities | 4,332,209 | 2,057,331 |
Capital lease obligations, net of current portion | - | 44,609 |
Other liabilities | 68,133 | 116,382 |
| Commitments (Note 6) | - | - |
Series C Redeemable Convertible Preferred Stock at redemption value, $.01 par value; 1,550,000 shares authorized, issued and outstanding (liquidation preference of $6,236,397) | 12,684,711 | 12,685,692 |
Series B Redeemable Convertible Preferred Stock at redemption value, $.01 par value; 500,000 shares authorized, issued and outstanding (liquidation preference of $3,378,721) | 5,315,916 | 5,034,844 |
Series A Convertible Preferred Stock, $.01 par value; 103,091 shares authorized and issued, including 42,749 treasury shares (liquidation preference of $292,641) | 1,031 | 1,031 |
Common Stock, $.01 par value; 7,100,000 shares in 2003 and 6,500,000 shares in 2002 authorized; 3,309,317 shares in 2003 and 3,300,054 shares in 2002 issued and outstanding, including 1 treasury share | 33,093 | 33,000 |
Additional paid-in capital | 18,516,601 | 18,480,073 |
Accretion to redemption value on Series B and C Redeemable Convertible Preferred Stock | (11,008,645) | (10,728,554) |
Accumulated deficit | (14,953,876) | (10,987,117) |
Treasury stock, at cost | (124,403) | (124,403) |
$ 14,864,770 | $ 16,612,888 | |
========== | ========== | |
See accompanying notes.
Keurig, Inc.
Statements of Operations
Year endedDecember 31 | |||
| 2003 | 2002 | 2001 |
Revenues: | |||
Product revenue | $ 14,360,437 | $ 10,398,137 | $ 8,845,177 |
Royalty income | 10,105,459 | 8,409,516 | 7,320,846 |
Packaging equipment sales | 886,062 | 3,349,258 | 810,000 |
25,351,958 | 22,156,911 | 16,976,023 | |
Costs and expenses: | |||
Cost of product revenue | 11,243,650 | 7,195,250 | 6,533,764 |
Cost of royalty income | 348,738 | 608,650 | 642,639 |
Cost of packaging equipment sales | 680,854 | 2,270,638 | 617,833 |
Research and development | 2,851,427 | 2,220,483 | 1,419,745 |
Selling, general, and administrative | 13,838,945 | 9,214,985 | 8,266,549 |
Impairment charges | 530,038 | - - | - - |
29,493,652 | 21,510,006 | 17,480,530 | |
Income (loss) from operations | (4,141,694) | 646,905 | (504,507) |
Other income (expense): | |||
Interest income | 33,578 | 110,547 | 25,853 |
Interest expense | (10,335) | (480,062) | (646,249) |
Other | 151,692 | 131,307 | 93,496 |
Net income (loss) | $ (3,966,759) | $ 408,697 | $(1,031,407) |
| ========== | =========== | ========= | |
See accompanying notes.
Keurig, Inc.
Statements of Redeemable Preferred Stock and Stockholders' Equity
Series B Redeemable | Series C Redeemable | Additional | Accretion to Redemption Value on Series B and C | ||||||||||
Series A Convertible | Convertible | Convertible | Redeemable | ||||||||||
Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-in | Preferred | Accumulated | Treasury | ||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Stock | Total | |
Balance at December 31, 2000 | 103,091 | $ 1,031 | 362,909 | $ 4,473,021 | 1451,577 | $ 11,910,209 | 1,928,002 | $ 19,280 | $ 9,503,727 | $ (10,447,558) | $ (10,364,407) | $ (187,407) | $ 4,907,896 |
Exercise of stock options | 100 | 1 | 699 | 700 | |||||||||
Exercise of warrants | 20,619 | 206 | 206 | ||||||||||
Accretion (decretion) to redemption value on Series B and C Redeemable Convertible Preferred Stock | (371,138) | 539,672 | (168,534) | - - | |||||||||
Net income | (1,031,407) | (1,031,407) | |||||||||||
Balance at December 31, 2001 | 103,091 | 1,031 | 362,909 | 4,101,883 | 1,451,577 | 12,449,881 | 1,948,721 | 19,487 | 9,504,426 | (10,616,092) | (11,395,814) | (187,407) | 3,877,395 |
Exercise of stock options | 37,390 | 374 | 174,251 | 174,625 | |||||||||
Exercise of warrants | 120,106 | 1,201 | 545,281 | 546,482 | |||||||||
Sale of capital stock | 137,091 | 769,899 | 98,423 | 286,411 | 1,193,837 | 11,938 | 8,256,115 | 63,004 | 9,387,367 | ||||
Accretion (decretion) to redemption value on Series B and C Redeemable Convertible Preferred Stock | 163,062 | (50,600) | (112,462) | - - | |||||||||
Net income |
|
|
|
|
|
|
|
|
|
| 408,697 |
| 408,697 |
Balance at December 31, 2002 | 103,091 | 1,031 | 500,000 | 5,034,844 | 1,550,000 | 12,685,692 | 3,300,054 | 33,000 | 18,480,073 | (10,728,554) | (10,987,117) | (124,403) | 14,394,566 |
Exercise of stock options | 9,263 | 93 | 36,528 | 36,621 | |||||||||
Accretion (decretion) to redemption value on Series B and C Redeemable Convertible Preferred Stock | 281,072 | (981) | (280,091) | - - | |||||||||
Net loss | (3,966,759) | (3,966,759) | |||||||||||
Balance at December 31, 2003 | 103,091 | $ 1,031 | 500,000 | $ 5,315,916 | 1,550,000 | $ 12,684,711 | 3,309,317 | $ 33,093 | $ 18,516,601 | $ (11,008,645) | $ (14,953,876) | $ (124,403) | $ 10,464,428 |
See accompanying notes.
Keurig, Inc.
Statements of Cash Flows
Year ended December 31 | |||
2003 | 2002 | 2001 | |
Operating activities | |||
Net income (loss) | $ (3,966,759) | $ 408,697 | $ (1,031,407) |
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | |||
Depreciation and amortization | 1,019,742 | 1,061,205 | 739,805 |
Loss from impairment/disposal of equipment | 530,038 | 87,115 | - - |
Costs related to early extinguishments of secured debentures and capital leases | - | 331,710 | - |
Changes in operating assets and liabilities: | |||
Accounts receivable | (2,689,753) | 37,864 | 568,406 |
Inventories | 124,650 | 2,779,911 | 148,856 |
Prepaid expenses and other assets | (150,833) | 31,301 | (663,611) |
Accounts payable and accrued expenses | 2,290,224 | (385,524) | (373,614) |
Other liabilities | (48,249) | (48,158) | 164,540 |
Net cash (used) provided by operating activities | (2,890,940) | 4,304,121 | (447,025) |
| Investing activity | |||
Purchase of equipment | (2,606,643) | (2,617,725) | (1,740,676) |
Net cash used by investing activity | (2,606,643) | (2,617,725) | (1,740,676) |
Financing activities | |||
Proceeds from sale of capital stock | - - | 9,387,367 | - - |
Proceeds from issuance of debentures | - - | - - | 1,000,000 |
Early extinguishment of secured debentures | - - | (1,165,547) | - - |
Proceeds from equipment master lease line | - - | - - | 1,672,819 |
Early extinguishment of capital lease obligations, net of deposits | - - | (1,820,788) | - |
Payment of capital lease obligations | (59,955) | (804,912) | (1,162,140) |
Repayment of borrowings under line of credit | - - | - - | (50,000) |
Proceeds from exercise of stock options and warrants | 36,621 | 721,107 | 906 |
Net cash (used) provided by financing activities | (23,334) | 6,317,227 | 1,461,585 |
(Decrease) increase in cash and cash equivalents | (5,520,917) | 8,003,623 | (726,116) |
Cash and cash equivalents at beginning of year | 8,377,856 | 374,233 | 1,100,349 |
| |||
Cash and cash equivalents at end of year | $ 2,856,939 | $ 8,377,856 | $ 374,233 |
| ========== | ========== | ========= | |
Noncash investing activities: | |||
Reclassification of packaging equipment from equipment to inventories | $ (1,167,485) | $ (2,270,638) | $ (617,834) |
| ========== | ========== | ========= | |
Supplemental data: | |||
Interest paid | $ 10,725 | $ 491,530 | $ 411,307 |
| ========== | ========== | ========= | |
See accompanying notes.
Keurig, Inc.
Notes to Financial Statements
December 31, 2003
1. The Company
Keurig, Inc. (the Company) was incorporated on March 31, 1992 to develop and sell a portion-pack single-cup coffee-brewing system for specialty coffees. The Company is currently designing, developing, manufacturing, marketing and selling (both directly or through third parties) brewer and portion-pack single-cup beverage systems, related manufacturing equipment and accessory products for away-from and at-home use on a global basis.
In February of 2002, the Company issued 1,193,837 shares of Common Stock, 158,742 shares of Series B Redeemable Convertible Preferred Stock, and 98,423 shares of Series C Redeemable Convertible Preferred Stock to Van Houtte Inc. (Van Houtte) for gross cash proceeds of $9,509,500. This investment represents an ownership interest of approximately 27%. Van Houtte is a coffee roaster that manufactures and distributes portion-packs of its brand coffees for brewing coffee by the cup in the Keurig coffee-brewing system.
As of December 31, 2002, Green Mountain Coffee Roasters, Inc. (Green Mountain), as a result of purchasing shares of common and preferred stock held by existing investors in Keurig, has acquired a 42% ownership interest in the Company. Green Mountain has been conducting business with Keurig since 1994 in connection with both the development of a single-cup brewing system and as the initial licensed roaster and distributor of portion-packs. As a result of its 42% ownership of Keurig, Green Mountain accounts for its investment of approximately $15 million using the equity method.
2. Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.
Accounts Receivable
Accounts receivable consists of the following at December 31:
2003 | 2002 | |
Trade receivables | $ 2,467,409 | $ 806,900 |
Royalties receivable | 2,082,905 | 1,053,661 |
4,550,314 | 1,860,561 | |
Less allowances for returns and doubtful accounts | (113,000) | (113,000) |
$ 4,437,314 | $ 1,747,561 | |
| ========== | ========== |
2.Significant Accounting Policies (continued)
Inventories
Inventories, consisting of finished goods comprised of coffee brewers and related parts and accessories, are valued at the lower of cost (first-in, first-out method) or market.
Revenue Recognition
Revenue is recognized when brewers are shipped and title has passed to the customer. Product revenue is comprised of the total sales billed during the period less the sales value of estimated returns, trade discounts and customers' allowances. The Company defers recognition of revenue for its estimate of potential sales returns under right-of-return agreements with its customers until the right-of-return period lapses. Royalty revenue is recognized upon shipment of K-Cups by roasters as set forth under the terms and conditions of various licensing agreements. Revenue related to packaging equipment is recognized once installation is complete.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management 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. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. The Company invests its excess cash balances with highly rated financial institutions to minimize any concentration of credit risk. Concentrations of credit risk with respect to accounts receivable are limited due to the creditworthiness of the Company's larger coffee roaster licensee customers, the large number of customers comprising the Company's customer brewer distributor base and their dispersion across several geographic areas. The Company maintains allowances for credit losses, and such losses have been within management's expectations. The Company does not require collateral for its accounts receivable.
Van Houtte and Green Mountain accounted for approximately 55% and 38% of the accounts receivable balance at December 31, 2003 and 2002, respectively, and 47%, 51% and 32% of the Company's total revenues for 2003, 2002 and 2001, respectively.
2.Significant Accounting Policies (continued)
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (APB 25) and the related interpretations included in Financial Accounting Standards Board (FASB) Interpretation No. 44, in accounting for its stock-based compensation plans for employees, rather than the alternative fair value accounting method provided for under Financial Accounting Standards Board Statement (SFAS) No. 123,Accounting forStock-Based Compensation, as this alternative requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of options granted to employees or directors under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required.
Pro forma information regarding net income (loss) was computed in accordance with SFAS No. 123 and has been determined as if the Company accounted for its employee stock options granted under the fair value methods of that Statement. The fair value for these options was estimated at the date of grant using a minimum value option pricing model with the following weighted-average assumptions for 2003, 2002 and 2001: risk-free interest rate of 2.8% in 2003, 3.1% in 2002, and 4.7% in 2001, dividend yield of 0%, volatility factor of zero and a weighted-average expected life of the option of four years. The Company's pro forma net income (loss) as computed under SFAS No. 123 amounted to a net loss of $(4,103,055) in 2003, net income of $277,258 in 2002, and a net loss of $(1,040,347) in 2001.
Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. During 2003, the Company recorded impairment charges of approximately $530,038 related to certain production equipment that will no longer be utilized in operations and for which no alternative use exists.
Income Taxes
Deferred income taxes are determined utilizing the liability method. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
2.Significant Accounting Policies (continued)
Equipment
Equipment is stated at cost and consists of the following at December 31:
2003 | 2002 | |
Production equipment | $ 5,978,383 | $ 5,821,124 |
Office equipment | 171,502 | 116,162 |
Packaging equipment in progress | 1,982,850 | 1,886,088 |
8,132,735 | 7,823,374 | |
Less accumulated depreciation and amortization | 2,907,143 | 2,487,160 |
$ 5,225,592 | $ 5,336,214 | |
| ========== | ========== |
Depreciation and amortization of equipment is principally calculated using the straight-line method over three to seven years, which is the estimated useful life of the related equipment. Depreciation expense amounted to $1,019,742, $1,061,205 and $739,805 in 2003, 2002 and 2001, respectively.
Effective January 1, 2001, the Company changed the useful lives of certain production equipment from three to seven years. This change in estimate was based on the establishment by management and engineering personnel that the equipment's productive capacity would extend for at least four more years. The effect of the change was to decrease depreciation by approximately $900,000 and to increase interest expense by approximately $200,000 in 2001.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
2003 | 2002 | |
Accounts payable | $ 1,916,179 | $ 584,710 |
Accrued compensation | 1,339,642 | 949,473 |
Accrued warranty costs | 162,325 | 222,650 |
Deferred royalties and deposits | 348,273 | 45,101 |
Other | 526,521 | 200,782 |
$ 4,292,940 | $ 2,002,716 | |
| ========== | ========== |
2.Significant Accounting Policies (continued)
Warranty Obligations
The Company provides for the estimated cost of product warranties, primarily using historical information and repair costs, at the time product revenue is recognized. The changes in the carrying amount of product warranties for the years ended December 31, 2003 and 2002 are as follows:
2003 | 2002 | |
Balance at beginning of year | $ 222,650 | $ 175,690 |
Provision charged to income | 233,210 | 231,548 |
Usage | (293,535) | (184,588) |
Balance at end of year | $ 162,325 | $ 222,650 |
| ========= | ========= |
Advertising Costs
All advertising costs are expensed as incurred. Total advertising expense for the year ended December 31, 2003, 2002 and 2001 amounted to $67,439, $35,274 and $29,406, respectively.
Reclassifications
Certain reclassifications have been made to the 2002 and 2001 financial statements to conform with the 2003 presentation.
Recent Accounting Pronouncements
In January 2003, the FASB released Interpretation No. 46,Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires that all primary beneficiaries of Variable Interest Entities (VIE) consolidate such entities. FIN 46 is effective immediately for VIE's created after January 31, 2003 and for VIE's in which an enterprise obtains an interest after that date. In December 2003, the FASB published a revision to FIN 46 (FIN 46R) to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, entities that do not have interests in structures that are commonly referred to as special purpose entities (SPE's) are required to apply the provisions of the interpretation in financial statements for periods ending after March 14, 2004 otherwise the effective date for adoption of FIN 46 for SPE's existing as of January 31, 2003 is interim reporting periods beginning after March 15, 2004. The Company is currentl y evaluating the impact of this standard and will apply the provisions of FIN 46R during the year ending December 31, 2004.
2.Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, that established standards for how an issuer classifies and measures certain financial instruments with characteristics of liabilities and equity. Financial instruments within its scope that were previously classified as equity, such as mandatorily redeemable shares, must be classified as a liability. The adoption of SFAS No. 150 did not have an effect on the Company's financial position or results of operations.
In November 2002, the FASB issued FIN 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45). FIN 45 requires a guarantor to recognize a liability at fair value for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. FIN 45 also addresses the disclosure requirements regarding product warranties. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have an effect on the Company's financial position or results of operations. See "Warranty Obligations" in this footnote for the Company's related disclosures required under this standard.
In November 2001, the Emerging Issues Task Force (EITF) issued Consensus 01-9,Accounting for Consideration Given by a Vendor to a Customer. The purpose of the Consensus was to address certain issues related to the accounting for consideration given by a vendor to a customer. The provisions of Consensus 01-9 are applicable for financial statements for years beginning after December 15, 2002. As a result of the adoption, the Company has classified certain customer sales incentives amounting to $329,889, $153,060 and $173,631 as cost of product revenue for 2003, 2002 and 2001, respectively.
In April 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which, among other things, requires gains and losses from the extinguishment of debt to be classified as extraordinary items only if the debt is extinguished in connection with discontinued operations. The Company early adopted the provisions of SFAS No. 145 during 2002 and therefore classified the losses due to the early extinguishments of certain capital leases and the subordinated debentures within income from operations.
3. License and Distribution Agreements
In February of 2001, the Company entered into a series of agreements (Agreements) with Ueshima Coffee Co., Ltd. (UCC). The purpose of the Agreements was to facilitate the manufacture and sale of the Company's beverage systems in Japan and other Asian markets. As a result of the Agreements the Company owns a 10% interest in a corporate joint venture, which has been accounted for under the cost method, and executed certain license and distribution agreements with UCC for the sale of its products. As required by the terms of the licensing agreement, the Company received an advance royalty of $240,790 upon the agreement's execution. This advance royalty amount is being recognized in income on a straight-line basis over the 5-year term of the agreement. Amortization of the deferred royalty amounted to $48,158 during 2003, 2002, and $28,092 in 2001. The current portion of the deferred royalty is classified in accounts payable and accrued expenses. The long-term portion is classified in other liabilities.
4. Line of Credit
The Company has a line of credit arrangement with a bank, which provides up to $3,000,000 of borrowings, subject to the level of qualifying accounts receivable. The borrowings, due upon demand, are secured by a primary lien on all assets of the Company. The line of credit expires on December 31, 2004. As of December 31, 2003, no borrowings were outstanding under the line.
In connection with entering into a previous line of credit arrangement, the Company issued warrants to purchase 17,857 shares of common stock at an exercise price of $7.00 per share. The right to exercise these warrants commenced as of the date of the agreement and expires on July 20, 2006. The warrants include a conversion feature whereby the holder may convert the warrants, in whole or in part, into a number of common shares as determined by a conversion formula.
The Company estimated the fair value of the warrants using the Black-Scholes option pricing model. The Black-Scholes valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The warrants have characteristics significantly different from those of stock options, and changes in the subjective input assumptions can materially affect the fair value estimate. Based on the Company's assessment, no value has been assigned to the warrants.
5. Secured Debentures
Pursuant to a Debenture Purchase Agreement dated November 7, 2001, the Company issued debentures with principal of $1,000,000. The holders of the debentures had a perfected security interest on all assets of the Company subordinate to any rights of the holders of the line of credit and equipment leasing arrangements. During the fourth quarter of 2002, the Company repurchased the entire principal amount of its debentures for $1,165,547 in cash, resulting in a loss from early extinguishment of $40,000.
The debentures bore interest at a rate of 12 ½% per annum. Interest was payable monthly in arrears on the first of each month, commencing on December 1, 2001. The debentures also included a mandatory exit fee as defined by the Debenture Purchase Agreement which was accrued as additional interest expense ratably over the expected term of the Debenture Purchase Agreement. The fully accrued exit fee of $99,783 was paid to the holder of the debenture at the time of repurchase which amount has been recognized as a loss on extinguishment of debt.
6. Commitments
During 2000, the Company entered into several master equipment lease line agreements under which the Company had leased certain packaging line equipment at a total value of $5,037,290 at December 31, 2001, which were accounted for as capital leases. Accumulated amortization on these capitalized leases amounted to $1,509,704 at December 31, 2001. During 2002, the Company extinguished all of its outstanding capital lease obligations related to packaging line equipment which resulted in a loss of $231,927 on extinguishment of debt. The net cash consideration paid amounted to $1,820,788 which included certain costs related to the early extinguishments.
At December 31, 2003 and 2002, the Company has $170,395 in assets under capital lease. Amortization on these capitalized leases amounted to $59,955, $51,755 and $19,416 in 2003, 2002 and 2001, respectively. The Company also has certain operating leases which provide for a base rent plus real estate taxes, insurance and other expenses.
6. Commitments (continued)
At December 31, 2003, the minimum commitments under these noncancelable capital and operating leases with initial or remaining terms of more than one year are as follows:
Fiscal Year | Operating Leases | CapitalLeases |
2004 | $ 487,389 | $ 41,230 |
2005 | 497,079 | |
2006 | 462,400 | |
2007 | 483,182 | |
$ 1,930,050 | 41,230 | |
Less amount representing interest | ========= | 1,961 |
Present value of net minimum lease payments | 39,269 | |
Less current portion of obligations under capital leases | (39,269) | |
Long-term obligations under capital leases | $ - | |
| ======= | ||
Rent expense totaled $447,212, $408,796 and $390,477 in 2003, 2002 and 2001, respectively.
The Company has an outstanding letter of credit in the amount of $59,441 which expires in December 2007 and is collateralized by restricted cash of the same amount at December 31, 2003. Additional restricted cash of $25,000 is held in a certificate of deposit to collateralize a business credit card arrangement.
7. Convertible and Redeemable Preferred Stocks and Stockholders' Equity (Deficit)
Preferred Stock
Each share of Series A, B and C Preferred Stock is convertible, at the option of the holder, into shares of Common Stock at the conversion ratio then in effect. The conversion ratio at December 31, 2003 is one common share for each share of Series A and C Preferred Stock and 1.07558 for each share of Series B Preferred Stock. If the Company issues or sells future
securities for consideration per share less than the then-existing conversion price per share of Series B and C Preferred Stock and the holder of the stock fails to purchase the portion to which they are entitled, then the percentage of shares held by such holder equal to the percentage amount by which such holder shall have failed to purchase these future securities shall automatically be converted into shares of Common Stock at the then-effective conversion ratio.
7. Convertible and Redeemable Preferred Stocks and Stockholders' Equity (Deficit) (continued)
The holders of the Preferred Stock shall participate in any dividend or distribution declared or paid on the Common Stock on the basis of the numbers of shares of Common Stock into which the Preferred shares are convertible. A cumulative dividend on the Series B and C Preferred Stock accrues at a rate of 6% per share per annum. These dividends are payable, as determined by the Board of Directors, upon sale, liquidation or winding-up of the Company or upon redemption of the Series B and C Preferred Stock. Accrued and unpaid dividends on the Series B and C Preferred Stock shall be paid prior to the payment of dividends on the Common Stock or any other Preferred Stock.
The holders of Series C Preferred Stock shall be entitled, before payment to holders of any other equity securities of the Company, to an amount equal in value to the aggregate liquidation value of shares of Series C Preferred Stock then outstanding. Any amounts remaining after payment of the liquidation value of shares of Series C Preferred Stock, up to an amount equal in value to the aggregate liquidation value of shares of Series B Preferred Stock then outstanding, will be distributed to the holders of Series B Preferred Stock. Any amounts remaining after payment of the liquidation value of shares of Series B Preferred Stock, up to an amount equal in value to the aggregate liquidation value of shares of Series A Preferred Stock then outstanding, will be distributed to the holders of Series A Preferred Stock. Any amounts remaining after payment of all such preferential amounts will be distributed to the holders of Series A, B and C Preferred Stock and Common Stock on a pro rata basis.
The holders of not less than 25% of the Series B and C Preferred Stock may redeem all or a portion not less than one-third of their initial holdings beginning at the redemption date and extending until the time of a public offering. Upon redemption, the holders will receive the liquidation value of their Series B and C Preferred Stock, plus any unpaid accrued dividends plus an amount equal to the valuation of the Company less the total liquidation value of all the Preferred Stock multiplied by the percentage of Common Stock represented by the Series B and C Preferred Stock on an as-if-converted basis to the number of fully diluted shares of Common Stock outstanding (Redemption Value). The carrying value of the Series B and C Preferred Stock is being accreted to the Redemption Value ratably through the respective earliest redemption date, which dates were amended in 2002 to February 4, 2007.
Each share of Preferred Stock shall be entitled to exercise the number of votes equal to the number of shares of Common Stock into which it is convertible on the appropriate record date.
7. Convertible and Redeemable Preferred Stocks and Stockholders' Equity (Deficit) (continued)
Stock Option Plan
The Company has a stock option plan which provides for up to 1,620,000 shares of Common Stock issuable upon exercise of incentive and nonqualified options granted under the plan. Incentive stock options may be granted at an exercise price not less than fair market value on the date of grant. Options generally vest ratably over a four-year period and expire ten years after the date of grant. During 2002, the Company modified its existing stock option agreement to provide for immediate vesting upon certain conditions as defined in the Amendment. Based upon the intrinsic value of the affected options as of the modification date, no compensation expense was recognizable.
Information regarding the Company's stock option plan is summarized below:
Weighted-Average | ||
Options | Exercise Price | |
Options outstanding at December 31, 2000 | 607,229 | $ 3.84 |
Granted | 93,471 | 7.42 |
Exercised | (100) | 7.00 |
Cancelled | (15,500) | 7.31 |
Options outstanding at December 31, 2001 | 685,100 | 4.22 |
Granted | 213,900 | 5.00 |
Exercised | (37,390) | 4.67 |
Cancelled | (26,188) | 6.18 |
Options outstanding at December 31, 2002 | 835,422 | 4.36 |
Granted | 297,798 | 5.00 |
Exercised | (9,263) | 3.95 |
Cancelled | (37,522) | 6.71 |
Options outstanding at December 31, 2003 | 1,086,435 | $ 4.46 |
| ======= | ========= |
The weighted-average fair value of options granted in 2003 and 2002 was $0.52 and $0.55, respectively. The weighted-average contractual life of options outstanding at December 31, 2003 was seven years.
At December 31, 2003, there were 468,299 options available for grant and 577,498 options exercisable at a weighted-average price of $3.61.
7. Convertible and Redeemable Preferred Stocks and Stockholders' Equity (Deficit) (continued)
Warrants
The Company has warrants outstanding at December 31, 2003 for the purchase of common stock, the details of which are as follows:
Shares Subjectto Warrant | Exercise PricePer Share | Expiration Date |
53,580 | $ 7.00 | March 2009 |
17,857 | 7.00 | July 2006 |
11,420 | 7.00 | April 2009 |
4,000 | 10.00 | March 2010 |
894 | 4.55 | March 2008 |
The Company has reserved 3,365,467 shares for the exercise of stock options and warrants and conversion of Series A, B and C Preferred Stock.
8. Income Taxes
Deferred tax assets and liabilities are determined based on the differences between financial and tax reporting. Deferred taxes are attributable to the following temporary differences:
December 31 | ||
2003 | 2002 | |
Deferred tax liability: | ||
Equipment | $ (317,000) | $ (342,000) |
Deferred tax assets: | ||
Net operating loss carryforwards | 4,825,000 | 3,912,000 |
Allowance for doubtful accounts | 45,000 | 45,000 |
Accrued expenses and allowances | 173,000 | 157,000 |
4,726,000 | 3,772,000 | |
Valuation allowance | (4,726,000) | (3,772,000) |
Net deferred tax assets | $ - - | $ - - |
| ========== | ======== | |
8. Income Taxes (continued)
For federal income tax purposes, the Company has net operating loss carryforwards (NOLs) of approximately $12,062,000 that can be used to offset future taxable income which expire through 2023. The use of these NOLs may be subject to limitations based on changes of ownership as defined in the Internal Revenue Code.
The effective tax rate differs from the expected federal and state rate due to the Company's full valuation allowance established due to the uncertainty of the realization of the NOLs and other deferred tax assets.
