UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 24, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 1-12340
GREEN MOUNTAIN COFFEE ROASTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 03-0339228 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) |
33 Coffee Lane, Waterbury, Vermont | 05676 |
(Address of principal executive offices) | (Zip Code) |
| Registrant's telephone number, including area code: | (802) 244-5621 |
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]
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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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. Yes [_] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [_]
Indicate by check mark whether the registrant is a shell company (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 November 30, 2005 was approximately $204,000,000 based upon the closing price of such stock on that date. As of November 30, 2005, 7,493,309 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 2006 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 Annual Report are incorporated by reference in Part III, Items 10-14 of this Annual Report.
EXPLANATORY NOTE
This amendment to the Annual Report on Form 10-K/A for the fiscal year ended September 24, 2005 of Green Mountain Coffee Roasters, Inc. ("Green Mountain") is being filed to include the audited financial statements of Keurig, Incorporated ("Keurig") for the fiscal year ended December 31, 2005 as required by Rule 3-09 of Regulation S-X. Green Mountain has a 41.3% 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.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this Form 10K/A.
(1) See Index to the audited Financial Statements of Keurig, Inc. included in this report.
(2) See Index to the audited Financial Statements of Keurig, Inc. included in this report.
(3) The exhibits to this report are listed in the Exhibit Index contained below.
(b) 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). | ||
(i) | Amendment to the Second Amended and Restated Credit Agreement and Loan Documents dated September 12, 2005 (incorporated by reference to Exhibit 4.1 (i) in the Annual Report on Form 10-K for the year ended September 24, 2005). | ||
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 | 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. | ||
10.2 | 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.* | ||
10.3 | 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.)* | ||
10.4 | 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.* | ||
10.5 | 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).* | ||
10.6 | 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).* | ||
10.7 | 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).* | ||
10.8 | 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* | ||
10.9 | 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). | ||
10.10 | 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). | ||
10.11 | 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). | ||
10.12 | 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). | ||
10.13 | 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). | ||
10.14 | 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). | ||
10.15 | 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). | ||
10.16 | 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). | ||
10.17 | 2002 Deferred Compensation Plan (incorporated by reference to Appendix A of the Definitive Proxy Statement filed on January 24, 2003).* | ||
10.18 | 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).* | ||
10.19 | Ground Lease Agreement dated April 14, 2005 between Pilgrim Partnership, LLC and the Company (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended April 9, 2005) | ||
(a) | Amendment to Ground Lease Agreement dated November 15, 2005 (incorporated by reference to Exhibit 10.19 (a) in the Annual Report on Form 10-K for the year ended September 24, 2005). | ||
10.20 | Employment agreement of James Travis dated July 27, 2005 (incorporated by reference to Exhibit 10.20 in the Annual Report on Form 10-K for the year ended September 24, 2005).* | ||
10.21 | Lease Agreement dated November 15, 2005 between Pilgrim Partnership, LLC and the Company (incorporated by reference to Exhibit 10.21 in the Annual Report on Form 10-K for the year ended September 24, 2005). | ||
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 24, 2005). | ||
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 24, 2005). | ||
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 | |||
(c) 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, 2005 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.
| March 30, 2006 | By: /s/ Frances G. Rathke |
Keurig, Inc.
Audited Financial Statements
Years Ended December 31, 2005, 2004 and 2003
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, 2005 and 2004, 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, 2005. 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 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, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States.
February 25, 2006
/s/ Ernst & Young LLP
Keurig, Inc.
Balance Sheets
December 31 | ||
2005 | 2004 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | ||
$ 1,278,939
$ 3,863,962
Accounts receivable, net of allowances of $480,742 in 2005 and $207,888 in 2004
8,285,279
5,397,455
Inventories
6,140,520
2,240,703
Prepaid expenses and other assets
227,844
585,993
Total current assets
15,932,582
12,088,113
Equipment, net of accumulated depreciation and amortization
2,943,558
2,605,816
Restricted cash
86,654
84,874
Other assets, principally equipment deposits
274,795
283,616
$ 19,237,589
$ 15,062,419
======
======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses
$ 9,234,067
$ 6,328,632
Total current liabilities
9,234,067
6,328,632
Other liabilities
-
20,066
Commitments(Note 6)
-
-
Series B Redeemable Convertible Preferred Stock at redemption value, $.01 par value; 500,000 shares authorized, issued and outstanding (liquidation preference of $3,669,703)
9,511,974
5,947,816
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; 3,379,692 shares in 2005 and 3,309,842 shares in 2004 issued and outstanding, including 1 treasury share
33,796
33,098
Additional paid-in capital
18,977,304
18,609,970
Accretion to redemption value on Series B and C Redeemable Convertible Preferred Stock
(26,242,807)
(12,842,985)
Accumulated deficit
(15,876,188)
(16,797,957)
Treasury stock, at cost
(124,403)
(124,403)
$ 19,237,589
$ 15,062,419
=======
=======
See accompanying notes.
Keurig, Inc.
Statements of Operations
Years EndedDecember 31 | |||
2005 | 2004 | 2003 | |
Revenues: | |||
Product revenue | |||
$40,044,171
$20,367,218
$14,360,437
Royalty income
19,078,017
13,804,943
10,105,459
Packaging equipment sales
1,920,000
2,602,146
886,062
61,042,188
36,774,307
25,351,958
Costs and expenses:
Cost of product revenue
30,238,945
16,247,921
11,243,650
Cost of royalty income
238,063
239,381
348,738
Cost of packaging equipment sales
1,694,000
2,229,649
680,854
Research and development
5,245,353
3,582,806
2,851,427
Selling, general and administrative
22,752,995
16,428,211
13,838,945
Impairment charges
-
-
530,038
60,169,356
38,727,968
29,493,652
Income (loss) from operations
872,832
(1,953,661)
(4,141,694)
Other income (expense):
Interest income
23,442
13,964
33,578
Interest expense
(51,010)
(33,763)
(10,335)
Other
76,505
129,379
151,692
Net income (loss)
$ 921,769
$(1,844,081)
$(3,966,759)
=====
======
=======
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, 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
575
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
3,309,892
33,098
18,609,970
(12,842,985)
(16,797,957)
(124,403)
8,713,721
Exercise of stock options
69,800
698
367,334
368,032
Accretion (decretion) to redemption value on Series B and C Redeemable Convertible Preferred Stock
3,564,158
9,835,664
(13,399,822)
-
Net income
921,769
921,769
Balance at December 31, 2005
103,091
$1,031
500,000
$9,511,974
1,550,000
$23,722,815
3,379,692
$33,796
$18,977,304
$(26,242,807)
$(15,876,188)
$(124,403)
$10,003,522
See accompanying notes.
Keurig, Inc.
Statements of Cash Flows
Years Ended December 31 | |||
2005 | 2004 | 2003 | |
Operating activities | |||
Net income (loss) | |||
$ 921,769
$(1,844,081)
$(3,966,759)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization
1,306,612
1,409,528
1,019,742
Loss from impairment/disposal of equipment
-
-
530,038
Changes in operating assets and liabilities:
Accounts receivable
(2,887,842)
(960,141)
(2,689,753)
Inventories
(4,092,095)
1,573,855
124,650
Prepaid expenses and other assets
365,208
(194,467)
(150,833)
Accounts payable and accrued expenses
2,905,435
2,035,692
2,290,224
Other liabilities
(20,066)
(48,067)
(48,249)
Net cash provided (used) by operating activities
(1,500,979)
1,972,319
(2,890,940)
Investing activity
Purchase of equipment
(1,452,076)
(1,019,401)
(2,606,643)
Net cash used in investing activity
(1,452,076)
(1,019,401)
(2,606,643)
Financing activities
Payment of capital lease obligations
-
(39,269)
(59,955)
Proceeds from exercise of stock options and warrants
368,032
93,374
36,621
Net cash provided (used) by financing activities
368,032
54,105
(23,334)
(Decrease) increase in cash and cash equivalents
(2,585,023)
1,007,023
(5,520,917)
Cash and cash equivalents at beginning of year
3,863,962
2,856,939
8,377,856
Cash and cash equivalents at end of year
$ 1,278,939
$ 3,863,962
$ 2,856,939
======
======
=====
Noncash investing activities
Reclassification of packaging equipment from equipment to inventories
$ (192,278)
$(2,229,649)
$(1,167,485)
Supplemental data
Interest paid
$ 51,010
$ 1,961
$ 10,725
See accompanying notes.
Keurig, Inc.
Notes to Financial Statements
December 31, 2005
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:
2005 | 2004 | |
Trade receivables |
$5,802,920
$3,555,080
Royalties receivable
2,963,101
2,050,263
8,766,021
5,605,343
Less allowances for returns and doubtful accounts
(480,742)
(207,888)
$8,285,279
$5,397,455
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2. Significant Accounting Policies (continued)
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 for pricing and free products for which no discernible value is measurable. Until October 1, 2005, the Company deferred recognition of revenue related to certain sales of brewers until the customer's right-of-return period lapsed. As of October 1, 2005, after two years of sales return experience, the Company has determined that it can reliably estimate returns and, accordingly, recognizes these sales upon shipment to the customer, net of an estimated allowance for returns. 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.
2. Significant Accounting Policies (continued)
Customer and Product Information
Van Houtte and Green Mountain accounted for approximately 29% and 40% of the accounts receivable balance at December 31, 2005 and 2004, respectively and 28%, 35% and 47% of the Company's total revenues for 2005, 2004 and 2003, respectively.
During 2005, 2004 and 2003, product revenue was comprised of brewer sales representing 77%, 81% and 91%, and K-Cup sales representing 19%, 11% and 2% of product revenue.
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 Statement of Financial Accounting Standards (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 2005, 2004 and 2003: risk-free interest rate of 4.25% in 2005, 3.43% in 2004 and 2.8% in 2003, dividend yield of 0%, volatility factor of .82 in 2005, .96 in 2004 and 1.01 in 2003, and a weighted-average expected life of the option of four years in 2003 and 2004 and 6.25 years in 2005. The Company's pro forma information is as follows:
2005 | 2004 | 2003 | |
Net income (loss), as reported |
$ 921,769
$(1,844,081)
$(3,966,759)
Less: Total stock-based compensation expense determined under the fair value- based method for all employee awards
(582,540)
(575,876)
(579,023)
Pro forma net income (loss)
$ 339,229
$(2,419,957)
$(4,545,782)
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2. Significant Accounting Policies (continued)
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 certain machinery and equipment from five to three years due to technological changes affecting the useful lives of these assets. The additional depreciation recognized due to this change was approximately $455,000 and $450,000 for 2005 and 2004, respectively. During 2003, the Company recorded impairment charges of approximately $530,038 related to certain production equipment that would no longer be utilized in operations, and for which no alternative use existed.
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:
2005 | 2004 | |
Production equipment |
$ 5,999,500
$ 5,045,906
Office equipment
228,474
195,406
Packaging equipment in progress
981,523
365,052
7,209,497
5,606,364
Less accumulated depreciation and amortization
(4,265,939)
(3,000,548)
$ 2,943,558
$ 2,605,816
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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.
2. Significant Accounting Policies (continued)
Depreciation expense amounted to $1,306,612, $1,409,528 and $1,019,742 in 2005, 2004 and 2003, respectively.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
2005 | 2004 | |
Accounts payable |
$5,636,237
$3,092,307
Accrued compensation
1,918,524
1,574,118
Accrued warranty costs
494,000
242,371
Deferred royalties and deposits
22,769
952,532
Accrued sales and marketing costs
950,666
184,046
Other
211,871
283,258
$9,234,067
$6,328,632
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Warranty Obligations
The Company provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized. The Company experienced an increase in warranty claims during 2005 compared to 2004 due to an increase in the volume of products shipped and the increase in failure rates for certain parts in older style products. The changes in the carrying amount of product warranties for the years ended December 31, 2005 and 2004 are as follows:
2005 | 2004 | |
Balance at beginning of year |
$ 242,371
$ 162,325
Provision charged to income
1,592,188
798,377
Usage
(1,340,559)
(718,331)
Balance at end of year
$ 494,000
$ 242,371
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2. Significant Accounting Policies (continued)
Advertising Costs
All advertising costs, including allowances on sales to customers for which a discernible value is determinable, are expensed as incurred. Total advertising expense for the years ended December 31, 2005, 2004 and 2003 amounted to $1,120,210, $271,640 and $67,439, respectively.
Reclassifications
Certain reclassifications have been made to the 2004 and 2003 financial statements to conform with the 2005 presentation.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004),Share-Based Payment (SFAS No. 123R). Under SFAS No. 123R, companies will be required to recognize as expense the estimated fair value of all share-based payments to employees, including the fair value of employee stock options. Pro forma disclosure of the estimated expense impact of such awards is no longer an alternative to expense recognition within the financial statements. SFAS No. 123R is effective for public companies in the first annual reporting period beginning after June 15, 2005. Accordingly, the Company will adopt the provisions of SFAS No. 123R effective for fiscal year 2006.
There are three transition alternatives for nonpublic companies adopting the statement: the modified prospective method, the modified retrospective method and the prospective transition method. Under the modified prospective method, companies are required to recognize compensation cost for share-based payments to employees, based on the grant date estimate of fair value, from the beginning of the fiscal period in which the recognition provisions of SFAS No. 123R are first applied. Prior period financial information would not be restated under this method. Under the modified retrospective method, companies would restate prior periods to include the recognition of compensation cost based on amounts previously reported in the pro forma disclosures relating to stock based compensation under the existing requirements of SFAS No. 123, such as is presented above under "Stock-Based Compensation". Under the prospective method nonpublic companies that previously applied SFAS No. 123 using the minimum-value method would continue to account for nonvested equity awards outstanding at the date of adoption of SFAS No. 123R in the same manner as they had been accounted for prior to adoption. All awards granted, modified or settled after the date of adoption should be accounted for using the measurement, recognition and attribution provisions of SFAS No. 123R. The Company has elected the modified prospective method upon adoption in 2006.
2. Significant Accounting Policies (continued)
The Company expects that the adoption of SFAS No. 123R will have a material effect on its financial statements, in the form of additional compensation expense, on a annual basis. The Company is still in the process of evaluating the impact of SFAS No. 123R, and has not yet quantified the expense impact of this accounting pronouncement on future financial periods. However, the Company's historic financial statements are relevant for evaluating the potential level of expense that might be recorded in future periods. Based on these results, the Company estimates that annual pre-tax compensation expense, after the adoption of SFAS No. 123R, could increase by approximately $518,000 in 2006. There can be no assurance that the actual expense recognition upon adoption of SFAS No. 123R will not exceed these estimates.
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 2005, 2004 and 2003. The current portion of the deferred royalty is classified in accounts payable and accrued expenses. The long-term portion is classified in other liab ilities. At December 31, 2005 and 2004, the total amount of the deferred royalty was $20,065 and $68,223, respectively. During 2005 and 2004, the Company received $542,477 and $422,619, respectively, in royalty payments from UCC.
4. Line of Credit
The Company had a line of credit arrangement with a bank, which provided up to $6,000,000 of borrowings, subject to the level of qualifying accounts receivable and inventory. The borrowings, due upon demand, were secured by a primary lien on all assets of the Company. The line of credit expires in December 2006.
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.
4. Line of Credit (continued)
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. Commitments
The Company leased certain assets under capital leases which expired in 2004. Amortization on these capitalized leases amounted to $59,955 in 2003. The Company also has certain operating leases which provide for a base rent plus real estate taxes, insurance and other expenses.
At December 31, 2005, 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, | |
2006 |
$ 566,173
2007
545,667
$1,111,840
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Rent expense totaled $532,725, $528,655 and $447,212 in 2005, 2004 and 2003, respectively.
The Company has an outstanding letter of credit in the amount of $61,654, which expires in December 2007, and is collateralized by restricted cash of the same amount at December 31, 2005. Additional restricted cash of $25,000 is held in a certificate of deposit to collateralize a business credit card arrangement.
6. 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
6. Convertible and Redeemable Preferred Stocks and Stockholders' Equity (Deficit) (continued)
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, 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
Granted
114,750
7.50
Exercised
(69,800)
5.27
Cancelled
(9,500)
6.70
Options outstanding at December 31, 2005
1,145,885
4.64
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6. Convertible and Redeemable Preferred Stocks and Stockholders' Equity (Deficit) (continued)
The weighted-average fair value of options granted in 2005, 2004 and 2003 was $4.63, $3.94 and $3.51, respectively. The weighted-average contractual life of options outstanding at December 31, 2005 was seven years.
At December 31, 2005, there were 338,474 options available for grant and 820,166 options exercisable at a weighted-average exercise price of $4.22.
Warrants
The Company has warrants outstanding at December 31, 2005, 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 3,381,768 shares for the exercise of stock options and warrants, and conversion of Series A, B and C Preferred Stock.
7. 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 | ||
2005 | 2004 | |
Deferred tax assets: | ||
Net operating loss carryforwards | ||
$ 5,055,000
$ 5,855,000
Accrued expenses and allowances
366,000
306,000
Allowance for doubtful accounts
192,000
83,000
Equipment
179,000
57,000
Other
25,000
46,000
5,817,000
6,347,000
Valuation allowance
(5,817,000)
(6,347,000)
Net deferred tax assets
$ -
$ -
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7. Income Taxes (continued)
For federal income tax purposes, the Company has net operating loss carryforwards (NOLs) of approximately $12,639,000 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 in 2005 due to the Company's use of net operating loss carryforwards, for which a full valuation allowance had previously been provided. In 2004, no tax benefit was recognized on the Company's loss due to the uncertainty of realization.
As indicated in the table above, the Company maintains a full valuation allowance of net deferred tax assets due to the uncertainty of the realization of the NOLs and other deductible temporary differences.
