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 25, 2004
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 [X] No [ ]
The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on April 10, 2004 was approximately $93,148,000 based upon the closing price of such stock on that date. As of November 30, 2004, 7,127,536 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 2005 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 25, 2004 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, 2004 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 registered public accounting firm for Keurig, is being filed as an exhibit hereto.
Item 15. Exhibits and Financial Statement Schedules
(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.
(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 | Second Amended and Restated Credit Agreement, dated as of June 30, 2004, by and among the Company, as borrower, Fleet National Bank ("Fleet"), as agent, and Fleet and Citizens Bank New Hampshire ("Citizens"), as lenders (incorporated by reference to Exhibit 4.1 in thee Current Report on Form 8-K dated July 2, 2004). | ||
(a) | Revolving Note dated June 30, 2004 by the Company in favor of Fleet (incorporated by reference to Exhibit 4.1(a) in the Current Report on Form 8-K dated July 2, 2004). | ||
(b) | Revolving Note dated June 30, 2004 by the Company in favor of Citizens (incorporated by reference to Exhibit 4.1(b) in the Current Report on Form 8-K dated July 2, 2004). | ||
(c) | Term Note dated June 30, 2004 by the Company in favor of Fleet (incorporated by reference to Exhibit 4.1(c) in thee Current Report on Form 8-K dated July 2, 2004). | ||
(d) | Term Note dated June 30, 2004 by the Company in favor of Citizens (incorporated by reference to Exhibit 4.1(d) in thee Current Report on Form 8-K dated July 2, 2004). | ||
(e) | Equipment Note dated June 30, 2004 by the Company in favor of Fleet (incorporated by reference to Exhibit 4.1(e) in thee Current Report on Form 8-K dated July 2, 2004). | ||
(f) | Equipment Note dated June 30, 2004 by the Company in favor of Citizens (incorporated by reference to Exhibit 4.1(f) in thee Current Report on Form 8-K dated July 2, 2004). | ||
(g) | Swing Line Note dated June 30, 2004 by the Company in favor of Fleet (incorporated by reference to Exhibit 4.1(g) in thee Current Report on Form 8-K dated July 2, 2004). | ||
(h) | Amendment to Leasehold Mortgage dated as of June 30, 2004 among the Company, Fleet and Citizens (incorporated by reference to Exhibit 4.1(h) in thee Current Report on Form 8-K dated July 2, 2004). | ||
4.2 | 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") (incorporated by reference to Exhibit 4.1 in the Current Report on Form 8-K dated August 30, 2002). ** | ||
(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. | ||
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 | 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). | ||
10.21 | 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).* | ||
10.22 | 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).* | ||
10.23 | 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 fiscal year ended September 27 , 2003).* | ||
14. | Green Mountain Coffee Roasters Finance Code of Professional Conduct (incorporated by reference to Exhibit 14 in Annual Report on Form 10-K for the fiscal 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 25, 2004). | ||
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 25, 2004). | ||
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 |
(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, 2004 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/ Frances G. Rathke |
Audited Financial Statements
Keurig, Inc.
Years Ended December 31, 2004, 2003 and 2002
Keurig, Inc.
Audited Financial Statements
Years Ended December 31, 2004, 2003 and 2002
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 Registered Public Accounting Firm
The Board of Directors
Keurig, Inc.
We have audited the accompanying balance sheets of Keurig, Inc. (the Company) as of December 31, 2004 and 2003, 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, 2004. 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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit s 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, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 4, 2005
Keurig, Inc.
Balance Sheets
December 31 | ||
2004 | 2003 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $ 3,863,962 | $ 2,856,939 |
Accounts receivable, net of allowances of $207,888 in 2004and $113,000 and 2003 | 5,397,455 | 4,437,314 |
Inventories | 2,240,703 | 1,584,909 |
Prepaid expenses and other assets | 585,993 | 345,111 |
Total current assets | 12,088,113 | 9,224,273 |
Equipment, net of accumulated depreciation and amortization | 2,605,816 | 5,225,592 |
Restricted cash | 84,874 | 84,441 |
Other assets, principally equipment deposits | 283,616 | 330,464 |
______________ | _____________ | |
$ 15,062,419 | $ 14,864,770 | |
Liabilities and Stockholders' Equity | ||
Current liabilities: | ||
Accounts payable and accrued expenses | $ 6,328,632 | $ 4,292,940 |
Current portion of capital lease obligations | - | 39,269 |
Total current liabilities | 6,328,632 | 4,332,209 |
Other liabilities | 20,066 | 68,133 |
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 $6,507,017) Series B Redeemable Convertible Preferred Stock at redemption value, $.01 par value; 500,000 shares authorized, issued and outstanding (liquidation preference of $3,524,212) | 13,887,151
5,947,816 | 12,684,711
5,315,916 |
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 authorized; 3,309,842 shares in 2004 and 3,309,317 shares in 2003 issued and outstanding, including 1 treasury share | 33,098 | 33,093 |
Additional paid-in capital | 18,609,970 | 18,516,601 |
Accretion to redemption value on Series B and C Redeemable Convertible Preferred Stock | (12,842,985) | (11,008,645) |
Accumulated deficit | (16,797,957) | (14,953,876) |
Treasury stock, at cost | (124,403) | (124,403) |
______________ | _____________ | |
$ 15,062,419 | $ 14,864,770 |
See accompanying notes.
Keurig, Inc.
Statements of Operations
Years EndedDecember 31 | |||
2004 | 2003 | 2002 | |
Revenues: | |||
Product revenue | $ 20,367,218 | $ 14,360,437 | $10,398,137 |
Royalty income | 13,804,943 | 10,105,459 | 8,409,516 |
Packaging equipment sales | 2,602,146 | 886,062 | 3,349,258 |
36,774,307 | 25,351,958 | 22,156,911 | |
Costs and expenses: | |||
Cost of product revenue | 16,247,921 | 11,243,650 | 7,195,250 |
Cost of royalty income | 239,381 | 348,738 | 608,650 |
Cost of packaging equipment sales | 2,229,649 | 680,854 | 2,270,638 |
Research and development | 3,582,806 | 2,851,427 | 2,220,483 |
Selling, general and administrative | 16,428,211 | 13,838,945 | 9,214,985 |
Impairment charges | - | 530,038 | - |
38,727,968 | 29,493,652 | 21,510,006 | |
Income (loss) from operations | (1,953,661) | (4,141,694) | 646,905 |
Other income (expense): | |||
Interest income | 13,964 | 33,578 | 110,547 |
Interest expense | (33,763) | (10,335) | (480,062) |
Other | 129,379 | 151,692 | 131,307 |
____________ | ___________ | ___________ | |
Net income (loss) | $ (1,844,081) | $ (3,966,759) | $ 408,697 |
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, 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 |
Exercise of stock options | 525 | 5 | 93,369 | 93,374 | |||||||||
Accretion (decretion) to redemption value on Series B and C Redeemable Convertible Preferred Stock | 631,900 | 1,202,440 | (1,834,340) | - | |||||||||
Net loss | (1,844,081) | (1,844,081) | |||||||||||
________ | _________ | _________ | _________ | ________ | ________ | ____________ | ________ | __________ | ___________ | __________ | __________ | __________ | |
Balance at December 31, 2004 | 103,091 | $1,031 | 500,000 | $5,947,816 | 1,550,000 | $13,887,151 | 3,309,842 | $33,098 | $18,609,970 | $(12,842,985) | $(16,797,957) | $(124,403) | $ 8,713,721 |
See accompanying notes.
Keurig, Inc.
Statements of Cash Flows
Years Ended December 31 | |||
2004 | 2003 | 2002 | |
Operating activities | |||
Net income (loss) | $(1,844,081) | $(3,966,759) | $ 408,697 |
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | |||
Depreciation and amortization | 1,409,528 | 1,019,742 | 1,061,205 |
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 | (960,141) | (2,689,753) | 37,864 |
Inventories | 1,573,855 | 124,650 | 2,779,911 |
Prepaid expenses and other assets | (194,467) | (150,833) | 31,301 |
Accounts payable and accrued expenses | 2,035,692 | 2,290,224 | (385,524) |
Other liabilities | (48,067) | (48,249) | (48,158) |
Net cash provided (used) by operating activities | 1,972,319 | (2,890,940) | 4,304,121 |
Investing activity | |||
Purchase of equipment | (1,019,401) | (2,606,643) | (2,617,725) |
Net cash used in investing activity | (1,019,401) | (2,606,643) | (2,617,725) |
Financing activities | |||
Proceeds from sale of capital stock | - | - | 9,387,367 |
Early extinguishment of secured debentures | - | - | (1,165,547) |
Early extinguishment of capital lease obligations, net of deposits | - | - | (1,820,788) |
Payment of capital lease obligations | (39,269) | (59,955) | (804,912) |
Proceeds from exercise of stock options and warrants | 93,374 | 36,621 | 721,107 |
Net cash provided (used) by financing activities | 54,105 | (23,334) | 6,317,227 |
(Decrease) increase in cash and cash equivalents | 1,007,023 | (5,520,917) | 8,003,623 |
Cash and cash equivalents at beginning of year | 2,856,939 | 8,377,856 | 374,233 |
Cash and cash equivalents at end of year | $ 3,863,962 | $ 2,856,939 | $ 8,377,856 |
Noncash investing activities | |||
Reclassification of packaging equipment from equipment to inventories | $(2,229,649) | $(1,167,485) | $(2,270,638) |
Supplemental data | |||
Interest paid | $ 1,961 | $ 10,725 | $ 491,530 |
See accompanying notes.
Keurig, Inc.
Notes to Financial Statements
December 31, 2004
1. The Company
Keurig, Inc. (the Company) was incorporated in 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-home and at-home use on a global basis.
In February 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, had 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.
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 consist of the following at December 31:
2004 | 2003 | |
Trade receivables | $3,555,080 | $2,467,409 |
Royalties receivable | 2,050,263 | 2,082,905 |
5,605,343 | 4,550,314 | |
Less allowances for returns and doubtful accounts | (207,888) | (113,000) |
| $5,397,455 | $4,437,314 |
Inventories
Inventories, consisting of finished goods comprised of coffee brewers and related parts and accessories, and portion-packs 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 and accepted by the customer.
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 40% and 55% of the accounts receivable balance at December 31, 2004 and 2003, respectively, and 35%, 47% and 51% of the Company's total revenues for 2004, 2003 and 2002, respectively.
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 the Black-Scholes option pricing model with the following weighted-average assumptions for 2004, 2003 and 2002: risk-free interest rate of 3.43% in 2004, 2.8% in 2003 and 3.1% in 2002, dividend yield of 0%, volatility factor of .96 in 2004, 1.01 in 2003 and 1.10 in 2002, and a weighted-average expected life of the option of four years. The Company's pro forma information is as follows:
2004 | 2003 | 2002 | |
Net income (loss), as reported | $(1,844,081) | $(3,966,759) | $ 408,697 |
Less: Total stock-based compensation expense determined under the fair value based method for all employee awards | (355,793) | (378,427) | (311,026) |
Pro forma net income (loss) | $(2,199,874) | $(4,345,186) | $ 97,671 |
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 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 2004, the Company changed the useful lives of classified certain machinery and equipment from five to three years due to technological changes affecting the useful lives of these assets. The additional depreciation recognized in 2004 due to this change in estimate was approximately $450,000. 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 the financial reporting and tax bases 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.
Equipment
Equipment is stated at cost and consists of the following at December 31:
2004 | 2003 | |
Production equipment | $5,045,906 | $5,978,383 |
Office equipment | 195,406 | 171,502 |
Packaging equipment in progress | 365,052 | 1,982,850 |
5,606,364 | 8,132,735 | |
Less accumulated depreciation and amortization | (3,000,548) | (2,907,143) |
$2,605,816 | $5,225,592 |
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 $1,409,528, $1,019,742 and $1,061,205 in 2004, 2003 and 2002, respectively.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
2004 | 2003 | |
Accounts payable | $3,092,527 | $2,262,083 |
Accrued compensation | 1,606,606 | 1,339,642 |
Accrued warranty costs | 242,371 | 162,325 |
Deferred royalties and deposits | 952,532 | 348,273 |
Other | 434,596 | 180,617 |
$6,328,632 | $4,292,940 |
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 Company experienced a significant increase in warranty claims during 2004 compared to historical claim rates related to an unexpected increase in failure rates for certain parts. The Company believes the exposure related to the parts has been appropriately remediated, and future warranty claims will be consistent with historical patterns. The changes in the carrying amount of product warranties for the years ended December 31, 2004 and 2003 are as follows:
2004 | 2003 | |
Balance at beginning of year | $ 162,325 | $ 222,650 |
Provision charged to income | 798,377 | 233,210 |
Usage | (718,331) | (293,535) |
Balance at end of year | $ 242,371 | $ 162,325 |
Advertising Costs
All advertising costs are expensed as incurred. Total advertising expense for the year ended December 31, 2004, 2003 and 2002 amounted to $271,640, $67,439 and $35,274, respectively.
Reclassifications
Certain reclassifications have been made to the 2003 and 2002 financial statements to conform with the 2004 presentation.
Recent Accounting Pronouncements
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),Share-Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted for nonpublic entities at the beginning of the first annual period beginning after December 15, 2005. The Company expects to adopt SFAS No. 123(R) on January 1, 2006.
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. Subsequent to the issuance of SFAS No. 150, the FASB issued FSP 150-3, which further deferred the transition requirements for nonpublic companies. The classification, measurement and disclosure provisions of SFAS No. 150 are deferred indefinitely pending further Board action.
3. License and Distribution Agreements
In February 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 five-year term of the agreement. Amortization of the deferred royalty amounted to $48,158 per year during 2004, 2003 and 2002. 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 had a line of credit arrangement with a bank, which provided up to $3,000,000 of borrowings, subject to the level of qualifying accounts receivable. The borrowings, due upon demand, were secured by a primary lien on all assets of the Company. The line of credit expired in December 2004.
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 12.5% 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 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.
The Company leased certain assets under capital leases which expired in 2004. At December 31, 2003 and 2002, the Company had $170,395 in assets under capital lease. Amortization on these capitalized leases amounted to $59,955 and $51,755 in 2003 and 2002, respectively. The Company also has certain operating leases which provide for a base rent plus real estate taxes, insurance and other expenses.
At December 31, 2004, the minimum commitments under these noncancelable operating leases with initial or remaining terms of more than one year are as follows:
Year ending December 31, | |
2005 | $ 546,039 |
2006 | 521,653 |
2007 | 545,667 |
$1,613,359 |
Rent expense totaled $528,655, $447,212 and $408,796 in 2004, 2003 and 2002, respectively.
The Company has an outstanding letter of credit in the amount of $59,874 which expires in December 2007, and is collateralized by restricted cash of the same amount at December 31, 2004. 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, 2004 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.
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.
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, 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 |
Granted | 51,500 | 5.75 |
Exercised | (575) | 5.00 |
Cancelled | (26,925) | 6.49 |
Options outstanding at December 31, 2004 | 1,110,435 | $4.47 |
The weighted-average fair value of options granted in 2004, 2003 and 2002 was $3.94, $3.51 and $3.74, respectively. The weighted-average contractual life of options outstanding at December 31, 2004 was seven years.
At December 31, 2004, there were 443,724 options available for grant and 730,161 options exercisable at a weighted-average exercise price of $4.03.
Warrants
The Company has warrants outstanding at December 31, 2004 for the purchase of common stock, the details of which are as follows:
Shares Subject | Exercise Price | Expiration Date |
17,857 | $ 7.00 | July 2006 |
894 | 4.55 | March 2008 |
53,580 | 7.00 | March 2009 |
11,420 | 7.00 | April 2009 |
4,000 | 10.00 | March 2010 |
The Company has reserved 3,348,318 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 | ||
2004 | 2003 | |
Deferred tax liability: | ||
Equipment | $ (323,000) | $ (317,000) |
Deferred tax assets: | ||
Net operating loss carryforwards | 5,855,000 | 4,825,000 |
Allowance for doubtful accounts | 83,000 | 45,000 |
Accrued expenses and allowances | 306,000 | 173,000 |
Other | 46,000 | - |
5,967,000 | 4,726,000 | |
Valuation allowance | (5,967,000) | (4,726,000) |
Net deferred tax assets | $ - | $ - |
For federal income tax purposes, the Company has net operating loss carryforwards (NOLs) of approximately $14,637,000 that can be used to offset future taxable income which expire through 2024. 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.