Keurig Green Mountain, Inc.
GREEN MOUNTAIN COFFEE ROASTERS INC (Form: 10-Q, Received: 08/03/2009 06:22:17)

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the thirteen weeks ended June 27, 2009

OR

 

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

For the transition period from              to             

Commission file number 1-12340

 

 

GREEN MOUNTAIN COFFEE ROASTERS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   03-0339228

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

33 Coffee Lane, Waterbury, Vermont 05676

(Address of principal executive offices) (zip code)

(802) 244-5621

(Registrants’ telephone number, including area code)

 

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

 

 

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   ¨     NO   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act)    YES   ¨     NO   x

As of July 28, 2009, 37,710,494 shares of common stock of the registrant were outstanding.

 

 

 


Part I. Financial Information

Item 1. Financial Statements

GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands)

 

     June 27,
2009
    September 27,
2008
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 4,100      $ 804   

Restricted cash and cash equivalents

     161        161   

Receivables, less uncollectible accounts and return allowances of $4,288 and $3,002 at June 27, 2009 and September 27, 2008, respectively

     68,458        54,782   

Income tax receivable

     285        —     

Inventories

     103,238        85,311   

Other current assets

     4,725        4,886   

Deferred income taxes, net

     9,967        6,146   
                

Total current assets

     190,934        152,090   

Fixed assets, net

     117,054        97,678   

Intangibles, net

     37,935        29,396   

Goodwill

     99,558        73,953   

Other long-term assets

     4,114        4,531   
                

Total assets

   $ 449,595      $ 357,648   
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Current portion of long-term debt

   $ 37      $ 33   

Accounts payable

     61,491        43,821   

Accrued compensation costs

     15,687        11,669   

Accrued expenses

     20,654        14,645   

Income tax payable

     —          2,079   

Other short-term liabilities

     3,441        673   
                

Total current liabilities

     101,310        72,920   

Long-term debt

     126,018        123,517   

Deferred income taxes, net

     22,696        21,691   

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $0.10 par value: Authorized - 1,000,000 shares; No shares issued or outstanding

     —          —     

Common stock, $0.10 par value: Authorized - 60,000,000 shares; Issued - 42,904,827 and 41,690,466 shares at June 27, 2009 and September 27, 2008, respectively

     4,290        4,169   

Additional paid-in capital

     82,069        61,987   

Retained earnings

     122,787        81,280   

Accumulated other comprehensive loss

     (2,078     (419

ESOP unallocated shares, at cost - 27,194 shares

     (161     (161

Treasury shares, at cost - 5,208,993 shares

     (7,336     (7,336
                

Total stockholders’ equity

     199,571        139,520   

Total liabilities and stockholders’ equity

   $ 449,595      $ 357,648   
                

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

 

2


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands except per share data)

 

     Thirteen
weeks ended
June 27,

2009
    Thirteen
weeks ended
June 28,

2008
 

Net sales

   $ 190,509      $ 118,120   

Cost of sales

     126,428        75,626   

Gross profit

     64,081        42,494   

Selling and operating expenses

     28,597        20,620   

General and administrative expenses

     12,708        9,772   

Patent litigation (settlement) expense

     —          773   
                

Operating income

     22,776        11,329   

Other expense

     (39     (25

Interest expense

     (1,080     (1,376

Income before income taxes

     21,657        9,928   

Income tax expense

     (7,517     (3,599
                

Net income

   $ 14,140      $ 6,329   
                

Basic income per share:

    

Weighted average shares outstanding

     37,591,760        36,139,803   

Net income

   $ 0.38      $ 0.18   

Diluted income per share:

    

Weighted average shares outstanding

     39,670,046        38,492,987   

Net income

   $ 0.36      $ 0.16   

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

 

3


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Operations

(Dollars in thousands except per share data)

 

     Thirty-nine
weeks ended
June 27, 2009
    Thirty-nine
weeks ended
June 28, 2008
 

Net sales

   $ 580,841      $ 365,442   

Cost of sales

     401,428        234,946   

Gross profit

     179,413        130,496   

Selling and operating expenses

     92,873        69,495   

General and administrative expenses

     33,165        29,277   

Patent litigation (settlement) expense

     (17,000     2,268   
                

Operating income

     70,375        29,456   

Other expense

     (323     (228

Interest expense

     (3,494     (4,415

Income before income taxes

     66,558        24,813   

Income tax expense

     (25,051     (9,602
                

Net income

   $ 41,507      $ 15,211   
                

Basic income per share:

    

Weighted average shares outstanding

     37,132,434        35,803,980   

Net income

   $ 1.12      $ 0.42   

Diluted income per share:

    

Weighted average shares outstanding

     39,106,086        38,276,990   

Net income

   $ 1.06      $ 0.40   

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

 

4


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

     Thirteen
weeks ended
June 27,
2009
   Thirteen
weeks ended
June 28,
2008
   Thirty-nine
weeks ended
June 27,
2009
    Thirty-nine
weeks ended
June 28,
2008

Net income

   $ 14,140    $ 6,329    $ 41,507      $ 15,211

Other comprehensive loss, net of tax:

          

Deferred gain (loss) on derivatives designated as cash flow hedges

     416      1,378      (1,866     250

Loss on derivatives designated as cash flow hedges reclassified to net income

     118      —        207        —  
                            

Other comprehensive gain (loss)

     534      1,378      (1,659     250
                            

Comprehensive income

   $ 14,674    $ 7,707    $ 39,848      $ 15,461

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

 

5


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statement Of Changes In Stockholders’ Equity

For the Period Ended June 27, 2009 (Dollars in thousands)

 

     Common stock    Additional
paid-in
capital
   Retained
earnings
   Accumulated
other compre-
hensive (loss)
    Treasury stock     ESOP unallocated
shares
    Stockholders’
Equity
 
     Shares    Amount            Shares     Amount     Shares     Amount    

Balance at September 27, 2008

   41,690,466    $ 4,169    $ 61,987    $ 81,280    $ (419   (5,208,993   $ (7,336   (27,194   $ (161   $ 139,520   

Options exercised

   1,152,832      115      4,903      —        —        —          —        —          —          5,018   

Issuance of common stock under employee stock purchase plan

   61,529      6      1,327                   1,333   

Stock compensation expense

   —        —        4,812      —        —        —          —        —          —          4,812   

Tax benefit from exercise of options

   —        —        8,960      —        —        —          —        —          —          8,960   

Deferred compensation

   —        —        80      —        —        —          —        —          —          80   

Other comprehensive loss, net of tax

   —        —        —        —        (1,659   —          —        —          —          (1,659

Net income

   —        —        —        41,507      —        —          —        —          —          41,507   
                                                                      

Balance at March 28, 2009

   42,904,827    $ 4,290    $ 82,069    $ 122,787    $ (2,078   (5,208,993   $ (7,336   (27,194   $ (161   $ 199,571   

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

 

6


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

     Thirty-nine
weeks ended
June 27,
2009
    Thirty-nine
weeks ended
June 28,
2008
 

Cash flows from operating activities:

    

Net income

   $ 41,507      $ 15,211   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     13,054        9,851   

Amortization of intangibles

     3,861        3,609   

Loss on disposal of fixed assets

     168        187   

Provision for doubtful accounts

     327        913   

Loss on futures derivatives

     207        —     

Tax expense (benefit) from exercise of non-qualified options and disqualified dispositions of incentive stock options

     (163     (365

Deferred income taxes

     (1,940     184   

Deferred compensation and stock compensation

     4,892        4,572   

Changes in assets and liabilities:

    

Receivables

     (14,003     791   

Inventories

     (15,640     (24,198

Income tax payable (receivable)

     (2,364     (2,328

Other current assets

     187        (1,019

Other long-term assets, net

     587        314   

Accounts payable

     15,474        (2,092

Accrued compensation costs

     4,018        3,369   

Accrued expenses

     5,681        1,215   
                

Net cash provided by operating activities

     55,853        10,214   

Cash flows from investing activities:

    

Acquisition of certain assets of Tully’s Coffee Corporation

     (41,451     —     

Capital expenditures for fixed assets

     (29,027     (28,109

Proceeds from disposal of fixed assets

     152        319   
                

Net cash used for investing activities

     (70,326     (27,790

Cash flows from financing activities:

    

Net change in revolving line of credit

     2,500        5,800   

Proceeds from issuance of common stock

     6,351        4,408   

Excess tax benefits from equity-based compensation plans

     9,123        5,408   

Deferred financing fees

     —          (794

Repayment of long-term debt

     (205     (54
                

Net cash provided by financing activities

     17,769        14,768   

Net increase (decrease) in cash and cash equivalents

     3,296        (2,808

Cash and cash equivalents at beginning of period

     804        2,818   
                

Cash and cash equivalents at end of period

   $ 4,100      $ 10   

Fixed asset purchases included in accounts payable and not disbursed at the end of each period:

   $ 7,399      $ 4,877   

Noncash financing activity:

    

Debt assumed in conjunction with acquisition of certain assets of Tully’s Coffee Corporation

   $ 210      $ —     

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

 

7


Green Mountain Coffee Roasters, Inc.

Notes to Consolidated Financial Statements

 

1. Basis of Presentation

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

In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included. Results from operations for the thirteen and thirty-nine week periods ended June 27, 2009, are not necessarily indicative of the results that may be expected for the fiscal year ending September 26, 2009.

The September 27, 2008, balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for Green Mountain Coffee Roasters, Inc. for the fiscal year ended September 27, 2008. Throughout this presentation, we refer to the consolidated company as the “Company”.

The Company has revised the classification of its treasury shares for the periods ending June 27, 2009, and September 27, 2008, on its Consolidated Balance Sheets and Consolidated Statement of Changes In Stockholders’ Equity. This reclassification reflects treasury stock issued as a result of the Company’s July 7, 2007, stock dividend, as well as to include such shares in the presentation of capital stock of both the issued and the issued and outstanding shares of common stock as of such dates. The Company has never used treasury shares for issuance upon the exercise of options.

The Company has revised the classification of certain information presented in its fiscal 2008 Consolidated Statements of Operations to conform to its fiscal 2009 presentation.

 

2. Stock Split

On May 19, 2009, the Company announced that its Board of Directors had approved a three-for-two stock split effected in the form of a stock dividend of one share for every two issued shares outstanding. The stock dividend was distributed on June 8, 2009, to stockholders of record at the close of business on May 29, 2009. The par value of the common stock remained unchanged at $0.10 per share. All share and per share data presented in this report have been adjusted to reflect this stock split.

 

3. Segment Reporting

The Company manages its operations through two operating segments: Specialty Coffee Business Unit (“SCBU”) formerly referred to as Green Mountain Coffee (“GMC”) and Keurig Business Unit (“Keurig”). SCBU sells whole bean and ground coffee, coffee, cocoa and tea in K-Cups, Keurig single-cup brewers and other accessories mainly in domestic wholesale and retail channels. Keurig sells their single-cup brewers, and coffee, cocoa and tea in K-Cups produced by a variety of licensed roasters and related accessories mainly in domestic wholesale and retail markets. Throughout this report, unless otherwise noted, the information provided is on a consolidated basis.

 

8


The Company evaluates performance based on several factors, including business segment income before taxes. The operating segments do not share manufacturing or distribution facilities, except for brewer fulfillment at our Knoxville facility, and most administrative functions such as accounting and information services are decentralized. In the event any materials and/or services are provided to one segment by the other, the transaction is valued at estimated market price and eliminated in consolidation. The costs of the Company’s manufacturing operations are captured within the SCBU segment while the Keurig segment does not have manufacturing facilities and purchases its saleable products from third parties, including the SCBU. The Company’s property, plant and equipment, inventory and accounts receivable are captured and reported discretely within each operating segment.

Expenses not specifically related to either operating segment are shown separately as “Corporate”. Corporate expenses are comprised mainly of the compensation and other related expenses of the Company’s Chief Executive Officer, Chief Financial Officer, Chief Information Officer, Corporate General Counsel and Secretary, Vice President Human Resources and Vice President of Corporate Social Responsibility, Vice President of Environmental Affairs and other selected employees who perform duties related to our entire enterprise. Corporate expenses also include interest expense, amortization of identifiable intangibles related to the acquisition of Keurig, as well as certain corporate legal expenses and compensation of the board of directors. All of the Company’s goodwill for the Keurig business unit and intangible assets related to the Keurig business unit are included in Corporate assets.

Selected financial data for segment disclosures for the thirteen weeks ended June 27, 2009, and June 28, 2008, are as follows:

 

     Thirteen weeks ended June 27, 2009
(Dollars in thousands)
     SCBU    Keurig    Corporate     Eliminations     Consolidated

Sales to unaffiliated customers

   $ 100,435    $ 90,074    $ —        $ —        $ 190,509

Intersegment sales

   $ 20,572    $ 17,679    $ —        $ (38,251   $ —  

Net sales

   $ 121,007    $ 107,753    $ —        $ (38,251   $ 190,509

Income before taxes

   $ 16,030    $ 12,296    $ (6,649   $ (20   $ 21,657

Total assets

   $ 412,413    $ 112,857    $ 99,565      $ (175,240   $ 449,595

Stock compensation

   $ 654    $ 514    $ 688      $ —        $ 1,856

Interest expense

   $ —      $ —      $ 1,080      $ —        $ 1,080

Property additions

   $ 14,937    $ 1,625    $ —        $ —        $ 16,562

Depreciation and amortization

   $ 4,311    $ 518    $ 1,203      $ —        $ 6,032
     Thirteen weeks ended June 28, 2008
(Dollars in thousands)
     SCBU    Keurig    Corporate     Eliminations     Consolidated

Sales to unaffiliated customers

   $ 72,363    $ 45,757    $ —        $ —        $ 118,120

Intersegment sales

   $ 4,357    $ 8,616    $ —        $ (12,973   $ —  

Net sales

   $ 76,720    $ 54,373    $ —        $ (12,973   $ 118,120

Income before taxes

   $ 5,579    $ 9,126    $ (5,568   $ 791      $ 9,928

Total assets

   $ 202,398    $ 59,050    $ 104,552      $ (67,394   $ 298,606

Stock compensation

   $ 475    $ 633    $ 512      $ —        $ 1,620

Interest expense

   $ —      $ —      $ 1,376      $ —        $ 1,376

Property additions

   $ 8,281    $ 873    $ —        $ —        $ 9,154

Depreciation and amortization

   $ 3,021    $ 407    $ 1,203      $ —        $ 4,631

 

9


Selected financial data for segment disclosures for the thirty-nine weeks ended June 27, 2009, and June 28, 2008, are as follows:

 

     Thirty-nine weeks ended June 27, 2009
(Dollars in thousands)
     SCBU    Keurig    Corporate     Eliminations     Consolidated

Sales to unaffiliated customers

   $ 283,237    $ 297,604    $ —        $ —        $ 580,841

Intersegment sales

   $ 56,843    $ 50,850    $ —        $ (107,693   $ —  

Net sales

   $ 340,080    $ 348,454    $ —        $ (107,693   $ 580,841

Income before taxes

   $ 38,395    $ 29,725    $ (498   $ (1,064   $ 66,558

Total assets

   $ 412,413    $ 112,857    $ 99,565      $ (175,240   $ 449,595

Stock compensation

   $ 1,685    $ 1,397    $ 1,730      $ —        $ 4,812

Interest expense

   $ 17    $ —      $ 3,477      $ —        $ 3,494

Property additions

   $ 30,122    $ 2,628    $ —        $ —        $ 32,750

Depreciation and amortization

   $ 11,780    $ 1,526    $ 3,609      $ —        $ 16,915
     Thirty-nine weeks ended June 28, 2008
(Dollars in thousands)
     SCBU    Keurig    Corporate     Eliminations     Consolidated

Sales to unaffiliated customers

   $ 214,229    $ 151,213    $ —        $ —        $ 365,442

Intersegment sales

   $ 21,350    $ 27,746    $ —        $ (49,096   $ —  

Net sales

   $ 235,579    $ 178,959    $ —        $ (49,096   $ 365,442

Income before taxes

   $ 18,923    $ 22,961    $ (16,667   $ (404   $ 24,813

Total assets

   $ 202,398    $ 59,050    $ 104,552      $ (67,394   $ 298,606

Stock compensation

   $ 1,380    $ 1,797    $ 1,330      $ —        $ 4,507

Interest expense

   $ —      $ —      $ 4,415      $ —        $ 4,415

Property additions

   $ 21,988    $ 3,171    $ —        $ —        $ 25,159

Depreciation and amortization

   $ 8,598    $ 1,253    $ 3,609      $ —        $ 13,460

 

10


4. Acquisition of Certain Assets of Tully’s Coffee Corporation

On September 15, 2008, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Tully’s Coffee Corporation, a Washington corporation, and its wholly-owned subsidiary, Tully’s Bellaccino, LLC, a Washington limited liability company (collectively “Tully’s”) to acquire the Tully’s coffee brand and certain assets of its wholesale business. The transaction was completed on March 27, 2009. Since the date of acquisition, Tully’s results from operations have been included in the Company’s consolidated financial statements.

Tully’s wholesale business division distributes handcrafted coffees and related products via office coffee services, food service distributors, and over 5,000 supermarkets located primarily in the western states. The Company expects the geographic region encompassed by the Tully’s brand to create an advantaged opportunity for the Company to accelerate growth in the west coast by capitalizing on Tully’s brand recognition and the loyalty of its customer base.

Total consideration under the terms of the Agreement amounted to approximately $40,300,000 in cash. The Agreement contains customary representations, warranties and covenants given by the parties. Under the terms of the Agreement, $3,500,000 of the purchase price was placed in escrow at the closing and will be available to satisfy indemnification claims by the Company under the Agreement for a period of up to 12 months from the completion date.

The total net cash disbursement associated with the Agreement was $41,361,000. This includes $40,300,000 of cash consideration paid to Tully’s for the assets associated with its wholesale business and brand and direct acquisition costs of approximately $1,061,000. The Company also assumed approximately $210,000 in debt which was recorded as a noncash transaction.

The allocation of the purchase price based on fair value of the acquired assets less liabilities assumed is as follows:

 

Inventories

   $ 2,191,000

Fixed assets

     1,527,000

Intangible assets

     12,400,000

Goodwill

     25,243,000
      

Total

   $ 41,361,000
      

In addition, the Company recorded goodwill related to assumed debt of $210,000 and exit and transition related accruals of $327,000. Exit and transition related accruals include the costs associated with the plan to relocate the Tully’s manufacturing facility to a new location which is expected to be completed no later than one year from the acquisition date.

The purchase price and its allocation could change as a result of changes in the estimates and assumptions used in determining certain acquisition related accruals. Any change to these estimates and assumptions in the year following the acquisition could result in an offsetting adjustment to the acquired goodwill.

This acquisition was recorded in accordance with Statements of Financial Accounting Standards No. 141 (“SFAS 141”) “Business Combinations” and No. 142 (“SFAS 142”) “Goodwill and Other Intangibles”. In December 2007, the FASB issued SFAS No. 141 (Revised 2007), (“SFAS 141R”) effective for the Company beginning in fiscal year 2010. The guidance proposed by SFAS 141R applies prospectively, except that acquisitions consummated prior to adoption are required to adjust changes in deferred tax asset valuation allowances and acquired income tax uncertainties through earnings rather than as an adjustment to the cost of the acquisition.

Amortizable intangible assets acquired on March 27, 2009, include approximately $10,300,000 for identifiable customer relationships with an average life of 13 years, approximately $2,000,000 for the Tully’s trade name with an average life of 10 years and approximately $100,000 for non-compete agreements with an average life of 5 years. The weighted-average amortization period for these assets is 12.5 years and will be amortized on a straight-line basis over their respective useful lives. Amortization of intangibles expense (gross of tax) is anticipated to be approximately $506,000 in fiscal 2009 and $1,012,000 in each of the fiscal years 2010 through fiscal 2014.

 

11


The cost of the acquisition in excess of the fair market value of assets acquired less liabilities assumed represents acquired goodwill of approximately $25,780,000. Goodwill and intangible assets related to this acquisition are reported in the SCBU segment of the Company.

Under the terms of the Agreement, the Company has granted to the remaining retail operations of the former Tully’s business an exclusive, world-wide, perpetual, fully paid up, non-transferable license for use of the acquired trademarks in association with the operation of retail locations and the sale of related retail products. In addition, as defined in the Agreement, the Company entered into a Supply Agreement to provide Tully’s with all coffee requirements for use in the operation of Tully’s retail locations.

 

5. Warranty Reserve

The Company offers a one-year warranty from the date of the consumer purchase on all Keurig brewers it sells. Keurig 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 changes in the carrying amount of product warranties for the thirty-nine weeks ended June 27, 2009, and June 28, 2008, are as follows:

 

Thirty-nine weeks ended June 27, 2009   

Balance at September 27, 2008

   $ 648,000  

Provision charged to income

     2,710,000  

Usage

     (2,277,000
        

Balance at June 27, 2009

   $ 1,081,000   
        
Thirty-nine weeks ended June 28, 2008   

Balance at September 29, 2007

   $ 815,000  

Provision charged to income

     1,724,000  

Usage

     (1,769,000
        

Balance at June 28, 2008

   $ 770,000  
        

 

6. Inventories

Inventories consisted of the following at:

 

     June 27,
2009
   September 27,
2008

Raw materials and supplies

   $ 21,175,000    $ 19,494,000

Finished goods

     82,063,000      65,817,000
             
   $ 103,238,000    $ 85,311,000
             

Inventory values above are presented net of $1,133,000 and $440,000 of obsolescence reserves at June 27, 2009, and September 27, 2008, respectively.

At June 27, 2009, the Company had approximately $48,353,000 in green coffee purchase commitments, of which approximately 88% had a fixed price. These commitments extend through 2011. The value of the variable portion of these commitments was calculated using an average “c” price of coffee (the price per pound quoted by the Coffee, Sugar and Cocoa Exchange) of $1.22 per pound. In addition to its green coffee commitments, the Company had approximately $143,581,000 in fixed-priced brewer inventory purchase commitments and $96,524,000 in production raw materials commitments at June 27, 2009. The Company believes based on relationships established with its suppliers that the risk of non-delivery on such purchase commitments is remote.

 

12


7. Earnings Per Share

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

 

     Thirteen
weeks ended
June 27,

2009
   Thirteen
weeks ended
June 28,

2008
   Thirty-nine
weeks ended
June 27,

2009
   Thirty-nine
weeks ended
June 28,

2008

Numerator - basic and diluted earnings per share:

           

Net income

   $ 14,140    $ 6,329    $ 41,507    $ 15,211
                           

Denominator:

           

Basic earnings per share - weighted average shares outstanding

     37,591,760      36,139,803      37,132,434      35,803,980

Effect of dilutive securities - stock options

     2,078,286      2,353,184      1,973,652      2,473,010
                           

Diluted earnings per share - weighted average shares outstanding

     39,670,046      38,492,987      39,106,086      38,276,990

Basic earnings per share

   $ 0.38    $ 0.18    $ 1.12    $ 0.42

Diluted earnings per share

   $ 0.36    $ 0.16    $ 1.06    $ 0.40

For the thirteen and thirty-nine weeks ended June 27, 2009, options to purchase 1,000 and 311,000 shares of common stock, respectively, were excluded in the calculation of diluted earnings per share because they were antidilutive.

For the thirteen and thirty-nine weeks ended June 28, 2008, options to purchase 366,000 and 161,000 shares of common stock, respectively, were excluded in the calculation of diluted earnings per share because they were antidilutive.

 

8. Financial Instruments

In March of 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 requires entities to provide greater transparency about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under SFAS 133, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity. The Company adopted SFAS 161 effective March 28, 2009.

The Company is exposed to certain risks relating to ongoing business operations. The primary risks that are mitigated by financial instruments are interest rate risk and commodity price risk. The Company uses interest rate swaps to mitigate interest rate risk associated with the Company’s variable-rate borrowings and regularly enters into coffee futures contracts to hedge price-to-be-established coffee purchase commitments of green coffee with the objective of minimizing cost risk due to market fluctuations. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company designates the swap agreements and coffee futures contracts as cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activity” (“SFAS 133”). The Company measures the effectiveness of these derivative instruments at each balance sheet date. The changes in the fair value of these instruments are classified in accumulated other comprehensive income (“AOCI”). Gains and losses on these instruments are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. If it is determined that a derivative is not highly effective, the gains and losses will be reclassified into earnings upon determination.

 

13


The Company has interest rate swap agreements with Bank of America N.A. (“Bank of America”) and Sovereign Bank. For the thirteen and thirty-nine weeks ended June 27, 2009, the Company paid $666,000 and $1,479,000, respectively, pursuant to the swap agreements, which increased interest expense.

The following table summarizes the interest rate swaps outstanding at June 27, 2009:

 

Hedged Transaction

   Notional Amount of
Underlying Debt
   Fixed Rate
Received
    Maturity    Fair Value of
Swap
 

30-day LIBOR

   $ 30,000,000    2.35   2010    $ (512,000

30-day LIBOR

   $ 25,700,000    5.44   2011    $ (1,747,000

30-day LIBOR

   $ 20,000,000    3.87   2013    $ (1,182,000
                    
   $ 75,700,000         $ (3,441,000
                    

The following table summarized the coffee futures contracts outstanding at June 27, 2009:

 

Coffee Pounds

  Average
Contract Price
  “C” Price   Maturity   Fair Value of
Futures Contract
1,125,000   $ 1.20   $ 1.22   December 2009   $ 25,000
             
1,125,000         $ 25,000
             

The following table discloses the fair value of the Company’s financial instruments included in the Consolidated Balance Sheets:

 

Fair Value of Derivative Instruments
     June 27,
2009
    September 27,
2008
   

Balance Sheet

Classification

Coffee Futures

   $ 25,000      $ (39,000   Other current assets

Interest Rate Swaps

   $ (3,441,000   $ (634,000   Other short-term liabilities
                  

Total

   $ (3,416,000   $ (673,000  
                  

 

14


The following table discloses the effect of the Company’s financial instruments included in the Consolidated Statement of Operations:

 

Effect of Derivatives Instruments on Earnings (Gross of Tax)

for the Thirteen Weeks Ended June 27, 2009

  

  

     Amount of
Gain or (Loss)
in AOCI
   

Location of Gain or
(Loss) Reclassified
from AOCI into
Income

   Amount of Gain
or (Loss)
Reclassified
from AOCI into
Income
 

Coffee Futures

   $ (16,000   Cost of Sales    $ (198,000

Interest Rate Swaps

   $ (682,000   Interest Expense    $ —     
                   

Total Derivatives

   $ (698,000      $ (198,000
                   

Effect of Derivatives Instruments on Earnings (Gross of Tax)

for the Thirty-Nine Weeks Ended June 27, 2009

  

  

     Amount of
Gain or (Loss)
in AOCI
   

Location of Gain or
(Loss) Reclassified
from AOCI into
Income

   Amount of Gain
or (Loss)
Reclassified
from AOCI into
Income
 

Coffee Futures

   $ (315,000   Cost of Sales    $ (343,000

Interest Rate Swaps

   $ (2,808,000   Interest Expense    $ —     
                   

Total Derivatives

   $ (3,123,000      $ (343,000
                   

The Company estimates the deferred losses of coffee futures will be reclassified to net income within the next nine months, which is consistent with the period over which the Company hedges its exposure to the variability in future cash flows. The Company hedges a portion of its exposure to the variability in interest rates through the maturity date of its credit facility.

 

9. Fair Value Measurements

In September 2008, the Company adopted Financial Accounting Standards No. 157 Fair Value Measurement (“SFAS 157”) for financial assets and liabilities. This standard defines fair value and establishes a hierarchy for reporting the reliability of input measurements used to access fair value for all assets and liabilities. SFAS 157 defines fair value as the selling price that would be received for an asset, or paid to transfer a liability, in the principal or most advantageous market on the measurement date. The hierarchy established prioritizes fair value measurements based on the types of inputs used in the valuation technique. The inputs are categorized into the following levels:

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities

Level 2 – Directly or indirectly observable inputs for quoted and other than quoted prices for identical or similar assets and liabilities in active or non-active markets

Level 3 – Unobservable inputs not corroborated by market data, therefore requiring the entity to use the best available information, including managements assumptions

 

15


The following table discloses the level used by fair value measurements at June 27, 2009:

 

     Fair Value Measurements Using    Balance Sheet
Classification
     Level 1    Level 2     Level 3   

Derivatives

   $ —      $ 25,000      $ —      Other current assets

Derivatives

   $ —      $ (3,441,000   $ —      Other short-term liabilities
                

Total

   $ —      $ (3,416,000   $ —     
                

The following table discloses the level used by fair value measurements at September 27, 2008:

 

     Fair Value Measurements Using    Balance Sheet
Classification
     Level 1    Level 2     Level 3   

Derivatives

   $ —      $ (673,000   $ —      Other short-term liabilities
                

Total

   $ —      $ (673,000   $ —     
                

Derivative financial instruments include coffee futures contracts and interest rate swap agreements. To determine fair value, the Company utilizes the market approach valuation technique for the coffee futures contracts and the income approach for the interest rate swap agreements. The Company uses Level 2 inputs that are based on market data of identical (or similar) instruments that are in observable markets. All derivatives on the balance sheet are recorded at fair value with changes in fair value recorded in accumulated other comprehensive income for temporary valuation adjustments and in the statement of operations for settlement of contracts.

 

10. Compensation Plans

The Company accounts for stock compensation under Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payments” (“FAS123R”). The grant-date fair value of employee share options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued in the thirty-nine weeks ended June 27, 2009: an expected life averaging 6 years; an average volatility of 52%; no dividend yield; and a risk-free interest rate averaging 2.0%. The weighted-average fair value of options granted during the thirty-nine weeks ended June 27, 2009, was $13.55 per share.

For grants issued in the thirty-nine weeks ended June 28, 2008, the following assumptions were used: an expected life averaging 5.9 years; an average volatility of 45%; no dividend yield; and a risk-free interest rate averaging 3.1%. The weighted-average fair value of options granted during the thirty-nine weeks ended June 28, 2008, was $8.83 per share.

The grant-date fair value of employees’ purchase rights under the Company’s Employee Stock Purchase Plan is estimated using the Black-Scholes option-pricing model with the following assumptions for the purchase rights granted in the thirty-nine weeks ended June 27, 2009: an expected life averaging 6 months; an average volatility of 72%; no dividend yield; and a risk-free interest rate averaging 0.4%. The weighted-average fair value of purchase rights granted during the thirty-nine weeks ended June 27, 2009, was $8.99 per share.

For the purchase rights granted in the thirty-nine weeks ended June 28, 2008, the following assumptions were used: an expected life averaging 6 months; an average volatility of 59%; no dividend yield; and a risk-free interest rate averaging 3.3%. The weighted-average fair value of purchase rights granted during the thirty-nine weeks ended June 28, 2008, was $6.67 per share.

For the thirteen and thirty-nine weeks ended June 27, 2009, income before income taxes was reduced by a stock compensation expense of $1,856,000 and $4,812,000, respectively.

For the thirteen and thirty-nine weeks ended June 28, 2008, income before income taxes was reduced by a stock compensation expense of $1,620,000 and $4,507,000, respectively.

The Company maintains an Employee Stock Ownership Plan (the “ESOP”). The ESOP is qualified under

 

16


sections 401(a) and 4975(e)(7) of the Internal Revenue Code. In the thirty-nine week periods ended June 27, 2009, and June 28, 2008, the Company recorded compensation costs of $195,000 and $183,000, respectively, to accrue for anticipated stock distributions under the ESOP. On June 27, 2009, the ESOP held 27,194 unearned shares at an average cost of $6.02.

The Company also maintains a Deferred Compensation Plan, which is not subject to the qualification requirements of Section 401(a) of the Internal Revenue Code and which allows participants to defer compensation until a future date. Only non-employee directors and certain highly compensated employees of the Company selected by the Company’s board of directors are eligible to participate in the Plan. In the thirty-nine week periods ended June 27, 2009, and June 28, 2008, $80,000 and $65,000, respectively, of compensation expense was recorded under this Plan.

 

11. Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes, as set forth in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

The Internal Revenue Service has completed its audit of the Company’s fiscal year ending September 30, 2006. A draft of the closing letter indicates no adjustments will be made. As a result of the audit and tax return filing, the FIN 48 reserve was reduced from $598,000 at March 28, 2009, to $426,000 at June 27, 2009. “FIN 48” relates to the accounting for uncertainty in income taxes and is an interpretation of SFAS 109. No significant changes to the FIN 48 reserve are anticipated within the next 12 months.

Additionally, during the audit the Company requested and received permission to carry forward foreign tax credits which it utilized on its 2007 tax return.

 

12. Fixed Assets

Fixed assets consist of the following:

 

    

Useful Life in

Years

   June 27,
2009
    September 27,
2008
 

Production equipment

  

1-15

   $ 82,728,000      $ 68,783,000   

Equipment on loan to wholesale customers

  

3-7

     13,135,000        12,269,000   

Computer equipment and software

  

1-10

     30,479,000        24,020,000   

Land

  

Indefinite

     1,391,000        1,391,000   

Building and building improvements

  

4-30

     15,151,000        14,744,000   

Furniture and fixtures

  

1-15

     7,015,000        6,598,000   

Vehicles

  

4-5

     1,269,000        1,070,000   

Leasehold improvements

   1-20 or remaining life of lease, whichever is less      8,807,000        7,135,000   

Construction-in-progress

        18,976,000        11,843,000   
                   

Total fixed assets

        178,951,000        147,853,000   

Accumulated depreciation

        (61,897,000     (50,175,000
                   
      $ 117,054,000      $ 97,678,000   

 

17


Total depreciation expense relating to all fixed assets was $4,577,000 and $13,054,000 for the thirteen and thirty-nine weeks ended June 27, 2009, respectively. Total depreciation expense relating to all fixed assets was $3,428,000 and $9,851,000 for the thirteen and thirty-nine weeks ended June 28, 2008, respectively.

Assets classified as construction-in-progress are not depreciated, as they are not ready for production use. All assets classified as construction-in-progress on June 27, 2009, are expected to be in production use in the next twelve months.

In the thirteen and thirty-nine weeks ended June 27, 2009, the Company capitalized $120,000 and $274,000 of interest expense, respectively.

In the thirteen and thirty-nine weeks ended June 28, 2008, the Company capitalized $125,000 and $342,000 of interest expense, respectively

 

13. Patent Litigation Settlement

On October 23, 2008, Keurig entered into a Settlement and License Agreement with Kraft Foods, Inc., Kraft Foods Global, Inc., and Tassimo Corporation (collectively “Kraft”) providing for a complete settlement of Keurig’s previously filed lawsuit against Kraft. Pursuant to the terms of the Settlement and License Agreement, Kraft paid to Keurig a lump sum of $17,000,000 and Keurig grants to Kraft and its affiliates a limited, non-exclusive, perpetual, worldwide, fully paid up license of certain Keurig patents. The settlement is recorded in operating income in the first quarter of fiscal 2009.

 

14. Related Party Transactions

The Company uses travel services provided by Heritage Flight, a charter air services company owned by Mr. Stiller, the Company’s former CEO and current Chairman of the Board. During the thirteen and thirty-nine weeks ended June 27, 2009, Heritage Flight billed the Company $85,000 and $157,000, respectively, for travel services provided to various employees of the Company. During the thirteen and thirty-nine weeks ended June 28, 2008, Heritage Flight billed the Company $80,000 and $253,000, respectively, for travel services provided to various employees of the Company.

 

15. Subsequent Event

On June 29, 2009, the Company exercised its increase option under its existing $225,000,000 revolving credit facility. This increase option was in the form of a $50,000,000 term loan, to be amortized at the rate of 10% annually, commencing on September 30, 2009. All borrowings under the credit agreement, including the outstanding balance under the term loan, are due on December 3, 2012. In addition, the Company amended the credit agreement which removed the capital expenditures limitation covenant and adjusted the definition of the fixed charge coverage ratio to modify the capital expenditures captured in the definition to 50% of unfinanced capital expenditures.

The Company has performed an evaluation of subsequent events through August 3, 2009, which is the date the financial statements were issued.

 

16. Recent pronouncements

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS 141R). This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. This replaces Statement 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. The Statement retains the guidance in Statement 141 for identifying and recognizing intangible assets separately from goodwill. SFAS 141R will now require acquisition costs to

 

18


be expensed as incurred, restructuring costs associated with a business combination must generally be expensed prior to the acquisition date and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. Statement 141 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which is fiscal year 2010 for the Company. For acquisitions completed prior to September 27, 2009, the new standard requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period must be recognized in earnings rather than as an adjustment to the cost of the acquisition. We do not expect this new guidance to have a significant impact on our consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP 157-2”). FSP 157-2 delays the implementation of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”) for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This statement defers the effective date to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, which is fiscal year 2010 for the Company. The Company adopted SFAS 157 for financial assets and liabilities for the first quarter of fiscal 2009. The Company is currently reviewing FSP 157-2 but does not expect it to have a material impact on its financial statements.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements – An amendment of ARB No. 51”. SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Statement 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this Statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, which is fiscal 2010 for the Company. The effect of adoption on the Company’s financial statements will depend primarily on the materiality of non-controlling interests arising in future transactions.

In May 2009, the FASB issued SFAS 165, “Subsequent Events” (“SFAS 165”). The objective of SFAS 165 is to establish general standards of accounting for the disclosure of events after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 clarifies the period after the balance sheet date that the reporting entity should evaluate events or transactions and clarifies the circumstances that may potentially require recognition or disclosure in the financial statements. Additionally, the reporting entity is required to disclosure the date through which the entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for financial statements issued for interim and annual periods ending after June 15, 2009. The Company adopted SFAS 165 for the interim period ending June 27, 2009 and the effect of adoption on the Company’s financial statements did not have a material impact.

In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”). The objective of SFAS 168 is to establish the FASB Accounting Standards Codification, (“Codification”) as the single source of authoritative accounting principles in the preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission are also sources of authoritative GAAP for SEC registrants. The effect of the Codification will not change existing GAAP, however will compile authoritative guidance from multiple standard setters into one source for all authoritative guidance. The effect of adoption on the Company’s financial statements is not expected to have a material impact. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which is fiscal 2010 for this Company.

 

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to help you understand the results of operations and financial condition of Green Mountain Coffee Roasters, Inc. (together with its subsidiaries, the “Company”). You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere in this report.

Overview

We are a leader in the specialty coffee and the overall coffee maker industries. We roast premium, high-quality Arabica coffees and offer over 100 coffee selections, including single-origins, estates, certified organics, Fair Trade Certified TM , proprietary blends, and flavored coffees that sell under the Green Mountain Coffee ® , , Newman’s Own ® Organics and, as of March 27, 2009, Tully’s ® brands. We also sell cocoa, teas and coffees in K-Cup ® portion packs, Keurig ® single-cup brewers and other accessories. In recent years, a significant driver of the Company’s growth has been the sale of K-Cups and Keurig brewing systems.

Business Segments

The Company manages its operations through two operating segments, Specialty Coffee Business Unit (“SCBU”) formerly referred to as Green Mountain Coffee (“GMC”) and Keurig Business Unit (“Keurig”). We evaluate performance primarily based on segment operating income. Expenses not specifically related to either operating segment are recorded as “Corporate”.

SCBU sells whole bean and ground coffee, and cocoa, teas and coffees in K-Cups, and to a lesser extent, Keurig single-cup brewers and other accessories mainly in domestic wholesale and retail channels, and directly to consumers. The majority of SCBU’s revenue is derived from its North American wholesale channels.

Additionally, on March 27, 2009, the Company acquired certain assets of the Tully’s Coffee Corporation (“Tully’s”) which is included in the SCBU. The SCBU began selling whole bean and ground coffee and coffee in K-Cups under the Tully’s brand in the third quarter of fiscal 2009.

Keurig is a pioneer and leading manufacturer of gourmet single-cup brewing systems and markets its premium patented single-cup brewing systems for consumers at home (“AH”) or away-from-home (“AFH”) mainly in North America. Keurig sells its AFH single-cup brewers to distributors for offices and its AH single-cup brewers to select retailers such as department stores and club stores. Keurig sells coffee, tea and cocoa in K-Cups produced by a variety of roasters, including the SCBU, and related accessories to select retailers such as department stores and club stores and also directly to consumers. Keurig earns royalty income from K-Cups shipped by its licensed roasters. Keurig also earns income from the K-Cups manufactured and sold under its trademark license arrangement with Caribou Coffee ® Company.

Cost of sales for the Company consists of the cost of raw materials including coffee beans, flavorings and packaging materials; a portion of our rental expense; the salaries and related expenses of production; distribution and merchandising personnel; depreciation on production equipment; the cost of brewers manufactured by suppliers, and freight, duties and delivery expenses. Selling and operating expenses consist of expenses that directly support sales, including media and advertising expenses; a portion of the rental expense; and the salaries and related expenses of employees directly supporting sales and marketing as well as research and development. General and administrative expenses consist of expenses incurred for corporate support and administration, including a portion of the rental expense and the salaries and related expenses of personnel not elsewhere categorized.

Historically, the SCBU and Keurig operating segments have not shared manufacturing or distribution facilities, and administrative functions such as accounting and information services have been decentralized. Throughout this discussion, we refer to the consolidated company as “the Company” and

 

20


we refer to our operating segments as “SCBU” and “Keurig”. Expenses not specifically related to either operating segment are shown separately as “Corporate”. Corporate expenses are comprised mainly of the compensation and other related expenses of the Company’s Chief Executive Officer, Chief Financial Officer, Chief Information Officer, Corporate General Counsel and Secretary, Vice President Human Resources, Vice President of Corporate Social Responsibility and Vice President of Environmental Affairs and other selected employees who perform duties related to our entire enterprise. Corporate expenses also include interest expense, amortization of identifiable intangibles, as well as certain corporate legal expenses and compensation of the board of directors. All of the Company’s goodwill for the Keurig business unit and intangible assets related to the Keurig business unit are included in Corporate assets.

Basis of Presentation

Included in this presentation are discussions and reconciliations of net income in accordance with generally accepted accounting principles (“GAAP”) to net income excluding certain expenses and losses, which we refer to as non-GAAP net income. These non-GAAP measures exclude amortization of identifiable intangibles and one time operating income related to the Company’s patent litigation settlement and the related legal expenses. Non-GAAP net income is not in accordance with, or an alternative to, GAAP. The Company’s management uses these non-GAAP measures in discussing and analyzing its results of operations because it believes the non-GAAP measures provide investors with greater transparency by helping to illustrate the underlying financial and business trends relating to the Company’s results of operations and financial condition and comparability between current and prior periods. Management uses the non-GAAP measures to establish and monitor budgets and operational goals and to evaluate the performance of the Company.

These non-GAAP financial measures should be considered in addition to, and not as a substitute or superior to, the other measures of financial performance prepared in accordance with GAAP. Using only the non-GAAP financial measures to analyze our performance would have material limitations because their calculation is based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. Management compensates for these limitations by presenting both the GAAP and non-GAAP measures of its results.

Results of Operations

Summary financial data of the Company

The following table presents certain financial data of the Company expressed as a percentage of net sales for the periods denoted below:

 

     Thirteen
weeks ended
June 27,
2009
    Thirteen
weeks ended
June 28,
2008
    Thirty-nine
weeks ended
June 27,
2009
    Thirty-nine
weeks ended
June 28,
2008
 

Net sales

   100.0   100.0   100.0   100.0

Cost of sales

   66.4   64.0   69.1   64.3

Gross profit

   33.6   36.0   30.9   35.7

Selling and operating expenses

   15.0   17.5   16.0   19.0

General and administrative expenses

   6.7   8.3   5.7   8.0

Patent litigation (settlement) expense

   —        0.6   (2.9 )%    0.6
                        

Operating income

   11.9   9.6   12.1   8.1

Other expense

   0.0   0.0   (0.1 )%    (0.1 )% 

Interest expense

   (0.6 )%    (1.2 )%    (0.6 )%    (1.2 )% 

Income before income taxes

   11.3   8.4   11.4   6.8

Income tax expense

   (3.9 )%    (3.0 )%    (4.3 )%    (2.6 )% 
                        

Net income

   7.4   5.4   7.1   4.2
                        

 

21


Segment Summary

Net sales, after inter-company eliminations, and income before taxes for each of our operating segments are summarized in the tables below:

 

     Net sales (in millions)  
     Thirteen
weeks ended
June 27,
2009
    Thirteen
weeks ended
June 28,
2008
    Thirty-nine
weeks ended
June 27,
2009
    Thirty-nine
weeks ended
June 28,
2008
 

SCBU

   $ 100.4      $ 72.4      $ 283.2      $ 214.2   

Keurig

   $ 90.1      $ 45.7      $ 297.6      $ 151.2   

Corporate

   $ —        $ —        $ —        $ —     
                                

Total Company

   $ 190.5      $ 118.1      $ 580.8      $ 365.4   
                                
     Income before taxes (in millions)  
     Thirteen
weeks ended
June 27,
2009
    Thirteen
weeks ended
June 28,
2008
    Thirty-nine
weeks ended
June 27,
2009
    Thirty-nine
weeks ended
June 28,
2008
 

SCBU

   $ 16.0      $ 5.6      $ 38.4      $ 18.9   

Keurig

   $ 12.3      $ 9.1      $ 29.7      $ 23.0   

Corporate

   $ (6.6   $ (5.6   $ (0.5   $ (16.7

Inter-company eliminations

   $ (0.0   $ 0.8      $ (1.0   $ (0.4
                                

Total Company

   $ 21.7      $ 9.9      $ 66.6      $ 24.8   
                                

Thirteen weeks ended June 27, 2009 versus thirteen weeks ended June 28, 2008

Revenue

Company Summary

Net sales for the third quarter of fiscal 2009 increased 61.3% to $190.5 million, up from $118.1 million reported in the third quarter of fiscal 2008 (“the prior year period). Sales related to the Tully’s brand represented approximately 5.5% of this increase, which are included in the Company’s results for the first time. The primary driver of the increase in net sales was the increase in K-Cup net sales which were up 79.1% on a consolidated basis. Total K-Cup shipments of coffee, cocoa and tea by all Keurig licensed roasters increased 63.8% in the third quarter of fiscal 2009 as compared to the prior year period.

SCBU

SCBU segment net sales, after inter-company eliminations, increased by $28.1 million or 38.8%, to $100.4 million in the third quarter of fiscal 2009 as compared to $72.4 million reported in the prior year period. Coffee, tea and cocoa pounds shipped by the SCBU segment increased 39.7% over the prior year period with the primary driver being the continued growth in K-Cup sales.

 

22


Keurig

Keurig segment net sales, after inter-company eliminations, increased by $44.3 million, or 97.0%, to $90.1 million in the third quarter of fiscal 2009 as compared to $45.7 million reported in the prior year period. The increase in Keurig segment net sales was primarily due to higher K-Cup sales of approximately $24.3 million which increased 112.0% over the prior year period. Net sales of At Home brewers and accessories contributed approximately one-third of the increase in total Keurig segment net sales over the prior year period. Additionally, royalty income from the sale of K-Cups from third party licensed roasters increased $2.9 million over the prior year period and totaled $9.1 million.

Company-wide Keurig brewer and K-Cup portion pack shipments

(In thousands)

 

     Q3 FY09
13 wks
ended
06/27/09
   Q3 FY08
13 wks
ended
06/28/08
   Q3 Y/Y
Increase
   Q3 % Y/Y
Increase
    FY 09
39 wks
ended
06/27/09
   FY 08
39 wks
ended
06/28/08
   FY 09 Y/Y
Increase
   FY 09% Y/Y
Increase
 

Total Keurig brewers shipped (1)

   439    153    286    187   1,629    668    961    144

Total K-Cups shipped(system-wide) (2)

   397,962    242,934    155,028    64   1,183,904    739,821    444,083    60

 

(1)

Total Keurig brewers shipped means brewers shipped by Keurig to customers in the U.S./Canada.

(2)

Total K-Cups shipped (system-wide) means K-Cup shipments by all Keurig licensed roasters to customers in the U.S./Canada. These shipments form the basis upon which royalties are calculated by licensees for payments to Keurig.

Gross Profit

Company gross profit for the third quarter of fiscal 2009 totaled $64.1 million, or 33.6% of net sales, as compared to $42.5 million, or 36.0% of net sales, in the prior year period. The margin decline is due primarily to the increase in sales of AH single-cup brewers, which are sold approximately at cost as part of the Company’s strategy to increase the installed base of Keurig brewers.

Selling, General and Administrative Expenses

Company selling, general and administrative expenses (S,G&A) increased 35.9% to $41.3 million in the third quarter of fiscal 2009 from $30.4 million in the prior-year period. As a percentage of sales, S,G&A declined to 21.7% in the third quarter of fiscal 2009 from 25.7% in the prior year period. This improvement in S,G&A margin was mainly due to leveraging selling and organizational resources on a higher sales base.

Interest Expense

Company interest expense decreased to $1.1 million in the third quarter of fiscal 2009, down from $1.4 million in the prior year period.

Income before taxes

Company income before taxes increased to $21.7 million in the third quarter of fiscal 2009, up from $9.9 million in the prior year period, and, as a percentage of net sales, 11.4% and 8.4%, respectively.

Excluding the non-cash amortization expenses related to the identifiable intangibles ($1.5 million in the third quarter of fiscal 2009 and $1.2 million in the prior year period) and $0.8 million of patent litigation expense in the prior year period, the Company’s non-GAAP income before taxes was $23.1 million, or 12.1% of net sales as compared to $11.9 million, or 10.1% of net sales in the prior year period.

 

23


The SCBU segment contributed $16.0 million in income before taxes in the third quarter of fiscal 2009, up from $5.6 million in the prior year period.

The Keurig segment contributed $12.3 million in income before taxes in the third quarter of fiscal 2009, up from $9.1 million in the prior year period.

The Corporate segment accounted for a reduction of $(6.6) million from income before taxes in the third quarter of fiscal 2009, as compared to a reduction of ($5.6) million in the prior year period.

Taxes

The effective income tax rate for the Company was 34.7% in the third quarter of fiscal 2009, as compared to 36.3% in the prior year period. The difference was primarily due to higher research and development and foreign tax credits taken in the third quarter of fiscal 2009.

Net Income and Diluted EPS

Company net income in the third quarter of fiscal 2009 was $14.1 million, up 123.4% from $6.3 million in the prior year period.

Company diluted EPS increased $0.20 to $0.36 per share in the third quarter of fiscal 2009, as compared to $0.16 per share in the prior year period.

Thirty-nine weeks ended June 27, 2009 versus thirty-nine weeks ended June 28, 2008

Revenue

Company Summary

Net sales for the thirty-nine weeks ended June 27, 2009 (the “2009 YTD period”) increased 58.9% and totaled $580.8 million as compared to $365.4 million reported for the thirty-nine weeks ended June 28, 2008 (the “prior YTD period”). The primary driver of the increase in net sales was the increase in K-Cup net sales which were up 82.9% on a consolidated basis. Total K-Cup shipments of coffee, cocoa and tea by all Keurig licensed roasters increased 60.0% over the prior YTD period.

SCBU

SCBU segment net sales, after inter-company eliminations, increased to $283.2 million, or 32.2% in the 2009 YTD period as compared to $214.2 million reported in the prior YTD period.. Coffee, tea and cocoa pounds shipped by the SCBU segment increased 24.0% over the prior YTD period with the primary driver being the continued growth in K-Cup sales.

Keurig

Keurig segment net sales, after inter-company eliminations, increased to $297.6 million, or 96.8%, in the 2009 YTD period as compared to $151.2 million reported in the prior YTD period. The increase in Keurig segment net sales was primarily due to higher K-Cup sales of $72.5 million which increased 120.5% over the prior YTD period. Net sales of At Home brewers and accessories contributed approximately one-third of the increase in total Keurig segment net sales over the prior YTD period. Additionally, royalty income from the sale of K-Cups from third party licensed roasters increased approximately $12.0 million over the prior YTD period and totaled $30.0 million.

 

24


Gross Profit

Company gross profit for the 2009 YTD period totaled $179.4 million, or 30.9% of net sales, as compared to $130.5 million, or 35.7% of net sales, in the prior YTD period. The margin decline is due primarily to the increase in sales of AH single-cup brewers, which are sold approximately at cost as part of the Company’s strategy to increase the installed base of Keurig brewers.

Selling, General and Administrative Expenses

Company selling, general and administrative expenses (S,G&A) increased 27.6% to $126.0 million in the 2009 YTD period from $98.8 million in the prior YTD period. As a percentage of sales, S,G&A improved to 21.7% in the 2009 YTD period from 27.0% in the prior YTD period. This improvement in S,G&A margin was the result of leveraging selling and organizational resources on a higher sales base.

Patent Litigation Settlement

On October 23, 2008, Keurig entered into a Settlement and License Agreement with Kraft Foods, Inc., Kraft Foods Global, Inc., and Tassimo Corporation (collectively “Kraft”) providing for a complete settlement of Keurig’s previously filed lawsuit against Kraft during the first quarter of fiscal 2009. Accordingly, the Company recognized the receipt of a patent litigation settlement of $17.0 million as a non-recurring item included in operating income for the Company’s first quarter of fiscal 2009. The Company incurred $2.3 million in litigation expenses during the comparable prior YTD period.

Interest Expense

Company interest expense decreased to $3.5 million in the 2009 YTD period, down from $4.4 million in the prior YTD period, due to a decrease in interest rates.

Income before taxes

Company income before taxes increased to $66.6 million in the 2009 YTD period, up from $24.8 million in the prior YTD period, and, as a percentage of net sales, 11.5% and 6.8%, respectively. This increase is mainly attributable to the $17.0 million (pretax) patent litigation settlement as described above.

Excluding the non-cash amortization expenses related to the identifiable intangibles ($3.9 million in the 2009 YTD period and $3.6 million in the prior YTD period), the patent litigation income of $17.0 million in the 2009 YTD period, and the patent litigation expense of $2.3 million in the prior YTD period, non-GAAP income before taxes increased to $53.4 million in the 2009 YTD period from $30.7 million in the prior YTD period.

The SCBU segment contributed $38.4 million in income before taxes in the 2009 YTD period, up from $18.9 million in the prior YTD period.

The Keurig segment contributed $29.7 million in income before taxes in the 2009 YTD period, up from $23.0 million in the prior YTD period.

The Corporate segment accounted for a reduction of $(0.5) million in income before taxes in the 2009 YTD period, as compared to a reduction of $(16.7) million in the prior YTD period. This increase is mainly attributable to the $17.0 million (pretax) patent litigation settlement as described above.

Taxes

The effective income tax rate for the Company was 37.6% in the 2009 YTD period, as compared to 38.7% in the prior YTD period.

 

25


Net Income and Diluted EPS

Company net income in the 2009 YTD period was $41.5 million, up 173.0% from $15.2 million in the prior YTD period.

Company diluted EPS increased $0.66 to $1.06 per share in the 2009 YTD period, as compared to $0.40 per share in the prior YTD period.

Liquidity and Capital Resources

Working capital increased to $89.6 million at June 27, 2009, up from $79.2 million at September 27, 2008. The increase is primarily due to higher inventory levels to ensure both efficiencies and sufficient inventory for anticipated consumer demand in the fourth quarter of fiscal 2009.

Net cash provided by operating activities was $55.9 million in the 2009 YTD period as compared to $10.2 million in the prior YTD period. The increase in operating cash flow was primarily due to an improvement in net income of $26.3 million, which includes the patent litigation settlement of $17.0 million.

During the 2009 YTD period we had capital expenditures of $29.0 million, as compared to $28.1 million in the prior YTD period.

In the 2009 YTD period, cash flows from financing activities included $6.4 million generated from the exercise of employee stock options and the issuance of shares under the employee stock purchase plan, up from $4.4 million in the prior YTD period. In addition, cash flows from operating and financing activities included a $9.0 million tax benefit from the exercise of non-qualified options and disqualifying dispositions of incentive stock options, up from $5.0 million in the prior YTD period. As stock options we have granted are exercised, we will continue to receive proceeds and a tax deduction where applicable; however, we cannot predict either the amounts or the timing of any such proceeds or tax benefits.

On March 27, 2009, we purchased certain assets of the Tully’s Coffee Corporation for $40.3 million. Total cash disbursed was $41.5 million which includes direct acquisition costs of $1.2 million. We financed this transaction through our existing senior revolving credit facility. Long-term debt increased to $126.0 million at June 27, 2009, from $95.8 million at June 28, 2008, reflecting our acquisition of Tully’s, which is partially offset by our positive cash flow provided by operating activities during the second and third quarters of fiscal 2009.

On June 29, 2009, during the fourth quarter of fiscal 2009, we exercised our increase option under our revolving credit facility. This increase is in the form of a $50.0 million term loan and will be amortized at a rate of 10% annually with payments beginning on September 30, 2009.

 

26


We are party to interest rate swap agreements with Bank of America N.A. (“Bank of America”) and Sovereign Bank. The total notional amount of the swap agreements at June 27, 2009, and September 27, 2008, was $75.7 million and $78.5 million, respectively. The swap agreements terminate between June 2010, and December 2012.

At June 27, 2009 and September 27, 2008, we estimate that we would have paid $3.4 million and $0.6 million (gross of tax), respectively, had we terminated our swap agreements. We designate the swap agreements as a cash flow hedges and the changes in the fair value of the swaps are classified in accumulated other comprehensive income.

The credit facility is subject to the following financial covenants: a funded debt to adjusted EBITDA ratio, a fixed charge coverage ratio and a capital expenditures covenant. We were in compliance with these covenants at June 27, 2009. On June 29, 2009, we amended the credit agreement which removed the capital expenditures limitation covenant and adjusted the definition of the fixed charge coverage ratio to modify the capital expenditures captured in the definition of 50% of unfinanced capital expenditures.

We expect to spend between $55.0 million and $60.0 million in capital expenditures in fiscal 2009. Capital expenditures are anticipated to be funded from operating cash flows and availability under our credit facility.

We believe that our cash flows from operating activities, existing cash and our credit facility will provide sufficient liquidity to pay all liabilities in the normal course of business, fund anticipated capital expenditures and service debt requirements through the next 12 months. However, several risks and uncertainties could cause us to need to raise additional capital through equity and/or debt financing. From time to time we consider acquisition opportunities which, if pursued, could also result in the need for additional financing, which could be through debt or equity. We also may consider from time to time engaging in stock buyback plans or programs. The availability and terms of any such financing would be subject to prevailing market conditions and other factors at that time.

A summary of cash requirements related to our outstanding long-term debt, future minimum lease payments and inventory purchase commitments is as follows:

 

Fiscal Year    Long-Term Debt (1)    Operating Lease
Obligations
   Purchase
Obligations
   Total

2009

   $ 11,000    $ 1,230,000    $ 138,968,000    $ 140,209,000

2010

     30,000      4,552,000      99,417,000    $ 103,999,000

2011

     9,000      4,128,000      50,388,000    $ 54,525,000

2012

     5,000      3,438,000      —      $ 3,443,000

2013

     126,000,000      2,611,000      —      $ 128,611,000

Thereafter

     —        7,583,000      —      $ 7,583,000

Total

   $ 126,055,000    $ 23,542,000    $ 288,773,000    $ 438,370,000

 

(1)    Fiscal 2009 through fiscal 2012 long-term debt obligations are comprised of capital lease obligations.

(2)    The above table does not include future obligations under the new $50.0 million term loan excuted on June 30, 2009.

Factors Affecting Quarterly Performance

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

 

27


Forward-Looking Statements

Certain statements contained herein are not based on historical fact and are “forward-looking statements” within the meaning of the applicable securities laws and regulations. Generally, these statements can be identified by the use of words such as “anticipate,” “believe,”, “could,” “estimate,” “expect,” “feel,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “would,” “and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those stated here. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the impact on sales and profitability of consumer sentiment in this difficult economic environment, the Company’s success in efficiently expanding operations and capacity to meet growth, the Company’s success in efficiently and effectively integrating Tully’s wholesale operations and capacity into its Specialty Coffee business unit, the Company’s success in introducing new product offerings, the ability of our lenders to honor their commitments under our credit facility, competition and other business conditions in the coffee industry and food industry in general, fluctuations in availability and cost of high-quality green coffee, any other increases in costs including fuel, Keurig’s ability to continue to grow and build profits with its roaster partners in the office and At Home businesses, the impact of the loss of major customers for the Company or reduction in the volume of purchases by major customers, delays in the timing of adding new locations with existing customers, the Company’s level of success in continuing to attract new customers, sales mix variances, weather and special or unusual events, as well as other risks described more fully in the Company’s filings with the SEC. Forward-looking statements reflect management’s analysis as of the date of this press release. The Company does not undertake to revise these statements to reflect subsequent developments, other than in its regular, quarterly earnings releases.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to our operations result primarily from changes in interest rates and the commodity “c” price of coffee (the price per pound quoted by the Coffee, Sugar and Cocoa Exchange). To address these risks, we enter into hedging transactions as described below. We do not use financial instruments for trading purposes.

For purposes of specific risk analysis, we use sensitivity analysis to determine the impacts that market risk exposures may have on our financial position or earnings.

Interest rate risks

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

 

     Expected maturity date  
     2009     2010     2011     2012     2013     Total  

Long-term debt:

            

Variable rate (in thousands)

   $ —        $ —        $ —        $ —        $ 50,300      $ 50,300   

Average interest rate

     —          —          —          —          2.9     2.9

Fixed rate (in thousands)

   $ 11      $ 30      $ 9      $ 5      $ 75,700      $ 75,755   

Average interest rate

     7.3     7.8     10.7     10.7     4.8     4.8

At June 27, 2009, we had $126.1 million outstanding under our Credit Facility subject to variable interest rates. However, the interest rate on $75.7 million of this debt was fixed through interest rate swap agreements, as discussed further below. Therefore, $50.3 million outstanding under our Credit Facility remains subject to variable interest rates. Should interest rates (LIBOR and Prime rates) increase by 100 basis points, we would incur additional interest expense of $503,000 annually. At September 27, 2008, we had $45.0 million subject to variable interest rates.

 

28


On June 27, 2009, the effect of our interest rate swap agreements was to limit the interest rate exposure on the outstanding balance of the Credit Facility to a fixed rate versus the 30-day Libor rate as follows: 5.4% on $25.7 million; 2.4% on $30 million; and 3.9% on $20 million. The total notional amount covered by these swaps will decrease progressively in future periods and terminates on various dates from June 2010 through December 2012.

Commodity price risks

The “c” price of coffee is subject to substantial price fluctuations caused by multiple factors, including weather and political and economic conditions in coffee-producing countries. Our gross profit margins can be significantly impacted by changes in the “c” price of coffee. We enter into fixed coffee purchase commitments in an attempt to secure an adequate supply of coffee. These agreements are tied to specific market prices (defined by both the origin of the coffee and the time of delivery) but we have significant flexibility in selecting the date of the market price to be used in each contract. We generally fix the price of our coffee contracts three to nine months prior to delivery, so that we can adjust our sales prices to the market. At June 27, 2009, the Company had approximately $48.4 million in green coffee purchase commitments, of which approximately 88% had a fixed price. At September 27, 2008, the Company had approximately $73.2 million in green coffee purchase commitments, of which approximately 59% had a fixed price.

In addition, we regularly use commodity-based financial instruments to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point they are added to cost of sales. At June 27, 2009, we held outstanding futures contracts covering 1,125,000 pounds of coffee with a fair market value of $25,000, gross of tax. At September 27, 2008, we held outstanding futures contracts covering 1,162,500 pounds of coffee with a fair market value of $(39,000), gross of tax. If we had terminated these contracts on June 27, 2009, we estimate that we would have recognized a gain of $25,000, gross of tax, which represented the fair market value on such date. The average contract price used to calculate the fair value of the contracts outstanding was $1.20 per pound as compared to the weighted average “c” price of $1.22 at June 27, 2009. If the “c” price were to drop on average by 10%, the loss incurred will be approximately $137,000, gross of tax. However, this loss, if realized, would be offset by lower costs of coffee purchased during fiscal 2010.

 

29


Item 4. Controls and Procedures

As of June 27, 2009, the Company’s management with the participation of its Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15 of the Exchange Act) are effective.

There have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

 

Item 1A. Risk Factors.

Risks Related to Our Operations

Our financial performance is highly dependent upon the sales of K-Cup portion packs.

A significant and increasing percentage of our total revenue has been attributable to royalties and other revenue from sales of K-Cups for use with our Keurig ® single-cup brewing systems. In fiscal 2008, total consolidated net sales of K-Cups and Keurig brewers and royalties earned upon shipment of K-Cups by licensed roasters represented approximately 70% of our consolidated net sales. This relative percentage continued to increase through the first three quarters of fiscal 2009. Continued acceptance of Keurig single-cup brewing systems and sales of K-Cups to our installed base of brewers are significant factors in our growth plans. Any substantial or sustained decline in the acceptance of Keurig single-cup brewing systems or sales of our K-Cups would materially adversely affect us.

Our intellectual property may not be valid, enforceable or commercially valuable.

While we make efforts to develop and protect our intellectual property, the validity, enforceability and commercial value of our intellectual property rights may be reduced or eliminated by the discovery of prior inventions by third parties, the discovery of similar marks previously used by third parties, the successful independent development by third parties of the same or similar confidential or proprietary innovations or changes in the supply or distribution chains that render our rights obsolete.

Many factors bear upon the exclusive ownership and exploitation right to intellectual properties, including, without limitation, prior rights of third parties, nonuse and/or nonenforcement by us, and/or related entities. Our ability to compete effectively depends, in part, on our ability to maintain the proprietary nature of our technologies, which include the ability to obtain, protect and enforce patents and other trade secrets and know how relating to our technology. We own patents that cover significant aspects of our products, and certain patents of ours will expire in the near future. In the United States, we have patents expiring between 2012 and 2017 associated with the K-Cup portion packs presently used in Keurig brewers. We also have pending patent applications associated with current K-Cup portion packs technology. These applications may not issue, or if they issue, they may not be enforceable, may be challenged, invalidated or circumvented by others. Additionally, we have a number of portion pack patents that extend to 2021 but which we have elected not to commercialize yet and may never commercialize. In addition, Keurig continues to invest in further innovation in portion packs and brewing technology and takes steps it believes are appropriate to protect all such innovation. We are prepared to protect our patents vigorously; however, there can be no assurance that we will prevail in any intellectual property infringement litigation we institute to protect our intellectual property rights given the complex

 

30


technical issues and inherent uncertainties in litigation. Even if we prevail in litigation, such litigation could result in substantial costs and diversion of resources and could materially adversely affect us. In addition, the validity, enforceability and value of our intellectual property depends in part on the continued maintenance and prosecution of such rights through applications, maintenance documents, and other filings, and rights may be lost through the intentional or inadvertent failure to make such necessary filings. Similarly, third parties may allege that our activities violate their intellectual property. To the extent we are required to defend our self against such a claim, no assurance can be given that we will prevail. Such defense could be costly and materially adversely affect our business and prospects.

Competition in single-cup brewing systems is intense and could affect our sales of Keurig single-cup brewing systems, K-Cups and profitability.

We are highly dependent on the continued acceptance of the Keurig single-cup brewing system. There are a multitude of competitive single-cup brewing systems available in North America and internationally. Competition in single-cup brewing systems includes lower-cost brewers that brew coffee packaged in non-patented pods. Many of our current and potential competitors in single-cup brewing systems have substantially greater financial, marketing and operating resources and access to capital than we do. Our primary competitors in this marketplace are FLAVIA Beverage Systems (manufactured and marketed by Mars), the TASSIMO beverage system (manufactured and marketed by Bosch and Kraft), the Senseo brewing system (manufactured and marketed by Philips and Sara Lee) and a number of additional single-cup brewing systems and brands. If we do not succeed in effectively differentiating ourselves from our competitors in single-cup brewers, based on technology or otherwise, or our competitors adopt our strategies, then our competitive position may be weakened and our sales of Keurig single-cup brewing systems and K-Cups, and accordingly our profitability, may be materially adversely affected.

Competition in specialty coffee is intense and could affect our sales and profitability.

The specialty coffee business is highly fragmented. Competition in specialty coffee is increasingly intense as relatively low barriers to entry encourage new competitors to enter the marketplace. In addition, we believe that maintaining and developing our brands, including Green Mountain Coffee, Keurig and Tully’s and our licensed co-branded Newman’s Own ® Organic coffees, are important to our success and that the importance of brand recognition may increase to the extent that competitors offer products similar to ours. Many of our current and potential competitors have substantially greater financial, marketing and operating resources and access to capital than we do. Our primary competitors in specialty coffee include Gevalia Kaffe (Kraft Foods), Dunkin’ Donuts, Peet’s Coffee & Tea, Millstone The Folgers Coffee Company (The J.M. Smucker Co.), New England Coffee Company and Starbucks. There are numerous smaller, regional brands that also compete in the specialty coffee business. In addition, we compete indirectly against all other coffee brands in the marketplace. A number of nationwide coffee marketers, such as Kraft Foods, The Folgers Coffee Company (The J.M. Smucker Co.), Sara Lee and Nestlé, are distributing premium coffee brands in supermarkets. These premium coffee brands may serve as substitutes for our coffee. If we do not succeed in effectively differentiating ourselves from our competitors in specialty coffee, including by developing and maintaining our brands, or our competitors adopt our strategies, then our competitive position may be weakened and our sales of specialty coffee, and accordingly our profitability, may be materially adversely affected.

Because we have all of our single-cup brewers manufactured by a single manufacturer in China, a significant disruption in the operation of this manufacturer or political unrest in China could materially adversely affect us.

We have only one manufacturer of single-cup brewers. Any disruption in production or inability of our manufacturer to produce adequate quantities to meet our needs, whether as a result of a natural disaster or other causes, could significantly impair our ability to operate our business on a day-to-day basis. Furthermore, our manufacturer is located in China. This exposes us to the possibility of product supply disruption and increased costs in the event of changes in the policies of the Chinese government, political

 

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unrest or unstable economic conditions in China, or developments in the U.S. that are adverse to trade, including enactment of protectionist legislation. Any of these matters could materially adversely affect us.

Product recalls and/or product liability may adversely impact us.

We are subject to regulation by a variety of regulatory authorities, including the Consumer Product Safety Commission. In the event our manufacturer of single-cup brewers, which is located in China, does not adhere to product safety requirements or our quality control standards, we might not identify a deficiency before brewers ship to our customers. The failure of our third party manufacturer to produce merchandise that adheres to our quality control standards could damage our reputation and brands and lead to customer litigation against us. If our manufacturer is unable or unwilling to recall products failing to meet our quality standards, we may be required to remove merchandise or recall those products at a substantial cost to us. We may be unable to recover costs related to product recalls.

We may not be able to enter into license agreements with coffee roasters and other third parties to manufacture, distribute and sell K-Cups or maintain our current license agreements, or it may be expensive to do so. In addition, our current licensees may fail to perform their obligations under existing licensing agreements.

We license the right to manufacture, distribute and sell K-Cups on an exclusive or non-exclusive basis to gourmet coffee roasters and tea packers in return for royalty payments from the licensees when they ship the K-Cups. Although many licensees are willing to enter into such licensing agreements, there can be no assurance that such agreements will be negotiated on terms favorable to us, or at all. In addition, our current licensees may fail to perform their obligations under such licensing agreements due to operational disruptions, economic hardship or bankruptcy. Our failure to enter into similar licensing agreements in the future or the failure of our licensees to perform their obligations under existing license agreements could limit our ability to develop and sell our products and could cause our business to suffer.

We also have an exclusive coffee license agreement with Newman’s Own Organics. We produce a line of several co-branded Newman’s Own Organics coffees under the Newman’s Own Organics and Green Mountain Coffee Roasters brand names. In addition, from time to time, we enter into licensing agreements to allow for the development, marketing and sale of single-cup brewing systems by other companies. We recently announced license and distribution agreements with Jarden Corporation for the Mr. Coffee ® brand and Conair Corporation for the Cuisinart ® brand. The failure to maintain these agreements could adversely impact our future growth.

Our increasing reliance on a limited number of specialty coffee farms could impair our ability to maintain or expand our business.

Because an increasing amount of our supply of Arabica coffee beans comes from specifically identified specialty farms, estates, and cooperatives, we are more dependent upon a limited number of suppliers than some of our competitors. In fiscal 2008 and for the first three quarters of fiscal 2009, approximately 40% of our green coffee purchases were “farm-identified”. The timing of these purchases is dictated by when the coffee becomes available (after the annual crop), which does not always coincide with the period in which we need green coffee to fulfill customer demand. This can lead to higher and more variable inventory levels. Any deterioration of our relationship with these suppliers, or problems experienced by these suppliers, could lead to inventory shortages. In such case, we may not be able to fulfill the demand of existing customers, supply new customers, or expand other channels of distribution. A raw material shortage could result in decreased revenue or could impair our ability to maintain or expand our business.

 

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Our business is highly dependent on sales of specialty coffee, and if demand for specialty coffee decreases, our business would suffer.

Substantially all of our revenues are dependent on demand for specialty coffee. Demand for specialty coffee is a driving factor in the sales of our Keurig single-cup brewing systems. Demand for specialty coffee and demand for our Keurig single-cup brewing systems is affected by many factors, including:

 

   

Changes in consumer tastes and preferences;

 

   

Changes in consumer lifestyles;

 

   

National, regional and local economic conditions;

 

   

Perceptions or concerns about the environmental impact of our products;

 

   

Demographic trends; and

 

   

Perceived or actual health benefits or risks.

Because we are highly dependent on consumer demand for specialty coffee, a shift in consumer preferences away from specialty coffee or our product offerings would harm our business more than if we had more diversified product offerings. If customer demand for our specialty coffee decreases, our sales would decrease and we would be materially adversely affected.

Our roasting methods are not proprietary, so competitors may be able to duplicate them, which could harm our competitive position.

We consider our roasting methods essential to the flavor and richness of our coffee and, therefore, essential to our various brands. Because our roasting methods cannot be patented, we would be unable to prevent competitors from copying our roasting methods if such methods became known. If our competitors copy our roasting methods, the value of our brands could be diminished and we could lose customers to our competitors. In addition, competitors could develop roasting methods that are more advanced than ours, which could also harm our competitive position.

We depend on the expertise of key personnel. If these individuals leave or change their role within the Company without effective replacements, our operations could suffer.

The success of our business is dependent to a large degree on our President and Chief Executive Officer, Lawrence J. Blanford, and the other members of our management team. We have an employment agreement with Mr. Blanford that expires on May 3, 2012. If Mr. Blanford or the other members of our management team leave without effective replacements, our ability to implement our business strategy could be impaired.

We may be able to incur substantial additional indebtedness in the future, which could restrict our ability to operate our business.

We may be able to incur substantial additional indebtedness in the future. In addition, future disruptions in the financial markets, such as have been recently experienced, could affect our ability to obtain new or additional debt financing or to refinance our existing indebtedness on favorable terms (or at all), and have other adverse effects on us. We have a $225 million revolving credit facility, which we recently increased by an additional $50 million term loan. On June 29, 2009, we exercised our increase option in the form of a $50 million term loan, to be amortized at the rate of 10% annually, commencing on September 30, 2009. All borrowings under the credit agreement, including the outstanding balance under the term loan, are due on December 3, 2012. In addition, on June 29, 2009, we amended the credit facility to remove the capital expenditures limitation covenant and adjusted the definition of the fixed charge coverage ratio to modify the capital expenditures captured in the definition to 50% of unfinanced

 

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capital expenditures. As of July 30, 2009 approximately $50 million was outstanding under our term loan and $99 million was outstanding on our revolving line of credit under this credit facility. The incurrence of debt under our credit facility could adversely affect our business. Our debt obligations could:

 

   

Increase our vulnerability to general adverse economic and industry conditions;

 

   

Require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes;

 

   

Impair our rights to our intellectual property, which have been pledged as collateral under our credit facility, upon the occurrence of a default;

 

   

Limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, thereby placing us at a competitive disadvantage compared to our competitors that may have less debt; and

 

   

Limit, by the financial and other restrictive covenants in our debt agreements, our ability to borrow additional funds and have a material adverse effect on us if we fail to comply with the covenants in our debt agreements because such failure could result in an event of default which, if not cured or waived, could result in a substantial amount of our indebtedness becoming immediately due and payable.

A significant interruption in the operation of our roasting, manufacturing or distribution capabilities could materially adversely affect us.

We currently roast our coffee at three facilities: Waterbury, Vermont; Knoxville, Tennessee; and Seattle, Washington. We expect to be able to meet current and forecasted demand for the near term. However, if demand increases more than we currently forecast, we will need to either expand our current roasting capabilities internally or acquire additional roasting capacity and the failure to do so in a timely or cost effective manner could have a negative impact on our business. Significant interruption in the operation of our current facilities, whether as a result of a natural disaster or other causes, could significantly impair our ability to operate our business on a day-to-day basis.

In addition, we and other licensed coffee roasters manufacture the K-Cups sold for use with our single-cup brewing systems. We manufacture K-Cups at our Vermont, Tennessee and Washington State facilities, and any significant disruption in our or our licensees’ ability to manufacture adequate quantities of K-Cups to meet our needs, whether as a result of a natural disaster or other causes, could adversely affect our business and financial results. We currently have three distribution facilities, one located adjacent to our roasting facility in Waterbury, Vermont, another located in Essex, Vermont and a third at our facility in Knoxville, Tennessee. Any disruption to our distribution facilities could significantly impair our ability to operate our business. In addition, because we have our coffee roasting and primary distribution facilities in Vermont, our ability to ship coffee and receive shipments of raw materials could be adversely affected during winter months as a result of severe winter conditions and storms.

Our order processing and fulfillment systems may fail or limit user traffic, which could cause us to lose sales.

We process all customer orders through an order fulfillment facility in Waterbury, Vermont. We are dependent on our ability to maintain our computer and telecommunications equipment at this facility in effective working order and to protect against damage from fire, natural disaster, power loss, telecommunications failure or similar events. In addition, growth of our customer base may strain or exceed the capacity of our systems and lead to degradations in performance or systems failure. We have experienced capacity constraints in the past that have resulted in decreased levels of customer service, such as increased customer call center wait times and delays in service to customers for limited periods of time. Although we continually review and consider upgrades to our order fulfillment infrastructure and

 

34


provide for system redundancies to limit the likelihood of systems overload or failure, substantial damage to our systems or a systems failure that causes interruptions for a number of days could adversely affect our business. Additionally, if we are unsuccessful in updating and expanding our order fulfillment infrastructure, our ability to grow may be constrained.

Our reliance on a single order fulfillment company for our Keurig subsidiary’s at-home business exposes us to significant credit risk.

We rely on a single order fulfillment company to process the majority of orders for our at-home single-cup business sold through retailers. We sell a significant number of brewers and K-Cups to this third party fulfillment company for re-sale to certain retailers. Receivables from this company were approximately 36% of our consolidated accounts receivable balance at September 27, 2008, and approximately 39% at June 27, 2009. Accordingly, we are subject to significant credit risk regarding the creditworthiness of this company. The inability of this company to perform its obligations to us, whether due to a deterioration in its financial condition or otherwise, could result in significant losses that could materially adversely affect us. If our relationship with this company is terminated, we can provide no assurance that we would be able to contract with another third party to provide these services to us in a timely manner or on favorable terms.

Because we rely heavily on common carriers to deliver our coffee and brewers, any disruption in their services or increase in shipping costs could adversely affect our business.

We rely on a number of common carriers to deliver coffee and brewers to our customers and distribution centers. We have no control over these common carriers and the services provided by them may be interrupted as a result of labor shortages, contract disputes or other factors. If we experience an interruption in these services, we may be unable to ship our products in a timely manner. A delay in shipping could:

 

   

Have an adverse impact on the quality of the coffee, hot cocoa or tea shipped, and thereby adversely affect our brands and reputation;

 

   

Result in the disposal of an amount of coffee, hot cocoa or tea that could not be shipped in a timely manner; and

 

   

Require us to contract with alternative, and possibly more expensive, common carriers.

Any significant increase in shipping costs could lower our profit margins or force us to raise prices, which could cause our revenue and profitability to suffer.

Our acquisition of certain assets from Tully’s Coffee Corporation was completed on March 27, 2009. The failure to successfully integrate the Tully’s wholesale business into our business may cause us to fail to realize the expected synergies, cost savings and other benefits expected from the acquisition, which could significantly affect us.

The integration of the Tully’s wholesale business into our business presents significant challenges and risks to our business, including:

 

   

distraction of management from regular business concerns;

 

   

assimilation and retention of employees and customers of Tully’s;

 

   

managing the West Coast-based Tully’s wholesale operations and employees, both of which are distant from our current headquarters and operational locations;

 

   

expansion into new geographies;

 

   

integration of technologies, services and products; and

 

35


   

achievement of appropriate internal control over financial reporting.

We may fail to successfully complete the integration of Tully’s into our business and, as a result, may fail to realize the synergies, cost savings and other benefits expected from the acquisition. We may fail to grow and build profits in the Tully’s business line or achieve sufficient cost savings through the integration of customer service or administrative and other operational activities. If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all, or it may take longer to realize them than expected, and our results of operations could be materially adversely affected.

Tully’s has a history of operating losses, and our ability to achieve and then maintain the profitability of its business lines will depend on our ability to manage and control operating expenses and to generate and sustain increased levels of revenue. Our expectation to achieve profitability from this business may not be realized, and losses on the Tully’s business may continue as we integrate its operations into our business. If revenue from the Tully’s operation grows more slowly than we anticipate, or if its operating expenses are higher than we expect, we may not be able to achieve, sustain or increase its profitability, which could materially adversely affect us.

Strategic investments or acquisitions may result in additional risks and uncertainties in our business.

We may seek to grow our business through opportunistic strategic investments or acquisitions. From time to time we may be in various stages of negotiation with parties relating to the possible investment in or acquisition of businesses or assets. We are unable to predict whether our negotiations will result in any agreement to invest in or acquire a business or an asset or whether any such transaction will be consummated on favorable terms or at all. Additionally, we may pursue an acquisition that is not accretive initially due to its long term strategic value.

In addition, to the extent we are successful in completing one or more opportunistic strategic investments or acquisitions, we would face numerous risks and uncertainties integrating the relevant businesses and systems, including the need to combine accounting and data processing systems and management controls and to retain relationships with customers and business partners.

Due to the seasonality of many of our products and other factors, our operating results are subject to quarterly fluctuations.

Historically, we have experienced increased sales of our Keurig single-cup brewing systems in our first fiscal quarter due to the holiday season. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. The impact on sales volume and operating results due to the timing and extent of these factors can significantly impact our business. For these reasons, you should not rely on our quarterly operating results as indications of our future performance.

 

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Risks Related to our Industry

Increases in the cost of high-quality Arabica coffee beans or cost of materials used to produce our brewers could reduce our gross margin and profit.

We utilize a combination of outside brokers and direct relationships with farms, estates, cooperatives and cooperative groups for our supply of green coffees. Outside brokers provide the largest supply of our green coffee. The supply and price of coffee are subject to high volatility. Although most coffee trades in the commodity market at a price referred to as the “c” price (the price per pound quoted by the Coffee, Sugar and Cocoa Exchange), coffee of the quality we are seeking tends to trade on a negotiated basis at a substantial premium or “differential” above the “c” price, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors, such as weather, pest damage, politics and economics in the producing countries.

Cyclical swings in commodity markets are common, and 2008 was an especially volatile year, with the “c” price of coffee climbing to record levels until mid-year, then declining with most other commodity markets in the second half of calendar 2008 and rising again in the first half of 2009. It is expected that coffee prices will remain volatile in the coming years. In addition to the “c” price, coffee of the quality sought by us tends to trade on a negotiated basis at a substantial premium or “differential” above the “c” price. These differentials also are subject to significant variations and have generally been on the rise in recent years with some slight decline in the first half of 2009.

We generally try to pass on coffee price increases and decreases to our customers. There can be no assurance that we will be successful in passing on these cost increases to customers without losses in sales volume or gross margin. Additionally, even if higher green coffee costs can be offset on a dollar-for-dollar basis by price increases, this still lowers our gross margin as a percentage of sales. Similarly, rapid and sharp decreases in the cost of green coffee could also force us to lower sales prices before realizing cost reductions in our green coffee inventory and purchase commitments.

Significant fluctuations in the cost of other commodities, such as steel, petroleum and copper influence prices of plastic and other components used in manufacturing our coffee brewers. Approximately 90% of Keurig brewers shipped in fiscal 2008, and 95% of those shipped in the first half of 2009, were sold to the at-home channel at our cost with essentially no gross margin. With respect to the Keurig single-cup at-home system, we are continuing to pursue a model designed to penetrate the marketplace, a component of which is to sell brewers and accessories essentially at cost, and are focused on driving new customers into single serve coffee. Any rapid, sharp increases in our cost of manufacturing at-home brewers would be unlikely to lead us to raise sales prices to offset such increased cost as our current strategy is to drive penetration and not risk slowing down the rate of sales growth to competitors or before realizing cost reductions in our purchase commitments. There can be no assurance that we will able to maintain our gross margin when such fluctuations occur.

Decreased availability of high-quality Arabica coffee beans could jeopardize our ability to maintain or expand our business.

We roast over 40 different types of green coffee beans to produce more than 100 coffee selections. If one type of green coffee bean were to become unavailable or prohibitively expensive, we believe we could substitute another type of coffee of equal or better quality meeting a similar taste profile. However, a worldwide supply shortage of the high-quality Arabica coffees we purchase could have a material adverse impact on us.

Worldwide or regional shortages of high-quality Arabica coffees can be caused by multiple factors, such as weather, pest damage and economics in the producing countries. In addition, the political situation in many of the Arabica coffee growing regions, including Africa, Indonesia, and Central and South America, can be unstable, and such instability could affect our ability to purchase coffee from those regions. If Arabica coffee beans from a region become unavailable or prohibitively expensive, we could be forced to discontinue particular coffee types and blends or substitute coffee beans from other regions in our blends. Frequent substitutions and changes in our coffee product lines could lead to cost increases, customer alienation and fluctuations in our gross margins.

 

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While production of commercial grade coffee is generally on the rise, many industry experts are concerned about the ability of specialty coffee production to keep pace with demand. Arabica coffee beans of the quality we purchase are not readily available on the commodity markets. We depend on our relationships with coffee brokers, exporters and growers for the supply of our primary raw material, high-quality Arabica coffee beans. In particular, the supply of Fair Trade Certified coffees is limited. We may not be able to purchase enough Fair Trade Certified coffees to satisfy the rapidly increasing demand for such coffees, which could impact our revenue growth.

The recent adverse changes in global and domestic economic conditions or a worsening of the United States economy could materially adversely affect us.

Our revenues and performance depend significantly on consumer confidence and discretionary spending, which have recently deteriorated due to current worldwide economic conditions. This economic downturn and decrease in consumer spending may adversely impact our revenues, ability to market our products, build customer loyalty, or otherwise implement our business strategy and further diversify the geographical concentration of our operations. For example, we are highly dependent on consumer demand for specialty coffee and a shift in consumer demand away from specialty coffee due to economic or other consumer preferences would harm our business. Keurig brewer sales may also decline as a result of the economic environment. We also have exposure to various financial institutions under coffee hedging arrangements and interest rate swaps, and the risk of counterparty default is currently higher in light of existing capital market and economic conditions.

Our products must comply with government regulation.

The USDA adopted regulations with respect to a national organic labeling and certification program which became effective in February 2001, and fully implemented in October 2002. Amendments to Canada’s Organic Products regulations as administered by the Canada Organic Office of the Canadian Food Inspection Agency became effective in December 2008. Although the implementation period has not yet been defined, we will be required to apply for recertification of our organic products under the new regulations and update any affected packaging. In addition, similar regulations and requirements exist in the other countries in which we may market our products. Our organic products are covered by these various regulations. Future developments in the regulation of labeling of organic foods could require us to further modify the labeling of our products, which could affect the sales of our products and thus harm our business.

Furthermore, new government laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscations, recalls or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on us.

We rely on independent certification for a number of our products, the loss of any of which could harm our business.

We rely on independent certification, such as certifications of our products as “organic” or “fair trade,” to differentiate our products from others. The Newman’s Own Organics product line, combined with the Specialty Coffee business unit’s own branded Fair Traded Certified coffee line, represented a combined 28% of the Specialty Coffee business unit’s total consolidated sales volume in fiscal year 2008, and 29% in the third fiscal quarter of 2009. The loss of any independent certifications could adversely affect our market position, which could harm our business.

We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. For example, we can lose our “organic” certification if a manufacturing plant becomes contaminated with non-organic materials or if it is not properly cleaned after a production run. In addition, all raw materials must be certified organic.

 

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Item 6. Exhibits

 

  (a) Exhibits:

 

4.1    Agreement to Exercise Facility Increase Option and Amendment No. 2 to Amended and Restated Revolving Credit Agreement dated June 29, 2009, among Green Mountain Coffee Roasters, Inc., its guarantor subsidiaries, Bank of America, N.A., Banc of America Securities LLC and the other lender parties thereto.
31.1    Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

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

 

  GREEN MOUNTAIN COFFEE ROASTERS, INC.
Date: August 3, 2009   By:  

/s/ Lawrence J. Blanford,

    Lawrence J. Blanford,
    President and Chief Executive Officer
Date: August 3, 2009   By  

/s/ Frances G. Rathke,

    Frances G. Rathke,
    Chief Financial Officer

 

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Exhibit 4.1

EXECUTION

AGREEMENT TO EXERCISE FACILITY INCREASE OPTION

AND

AMENDMENT NO. 2 TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT

This AGREEMENT TO EXERCISE FACILITY INCREASE OPTION AND AMENDMENT NO. 2 TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this “ Agreement ”) is made and entered into as of the 29 th day of June, 2009, by and among GREEN MOUNTAIN COFFEE ROASTERS, INC. , a Delaware corporation (the “ Borrower ”), the Subsidiaries of Borrower as Guarantors, the lenders party hereto (collectively, the “ Lenders ” and, individually, a “ Lender ”), BANK OF AMERICA, N.A. as Administrative Agent (the “ Agent ”) and a Lender, BANC OF AMERICA SECURITIES LLC as sole lead Arranger (the “ Arranger ”), SOVEREIGN BANK as Syndication Agent and a Lender, TD BANK, N.A. as Documentation Agent and a Lender, and BMO CAPITAL MARKETS FINANCING, INC. and KEYBANK NATIONAL ASSOCIATION as Co-Documentation Managers and Lenders.

WHEREAS , Borrower, Agent and the Lenders named therein are parties to that certain Amended and Restated Revolving Credit Agreement, dated as of December 3, 2007, as amended by that certain Amendment No. 1 to Amended and Restated Revolving Credit Agreement, dated as of July 18, 2008 (as the same may be further amended and in effect from time to time, the “ Credit Agreement ”);

WHEREAS , pursuant to Section 2.14 of the Credit Agreement, Borrower is exercising its increase option of $50,000,000 (the “ Facility Increase ”) to its existing senior secured facility of $225,000,000 (the “ Existing Credit Facility ”, and, together with the Facility Increase, the “ Credit Facilities ”);

WHEREAS , the Facility Increase will be in the form of a new Term Loan A (as defined in Section 2.1 hereof), which is set forth in Part I hereof; and

WHEREAS, in addition to the Facility Increase, the Borrower, the Agent and the Required Lenders are amending the Credit Agreement in Part II hereof.

NOW, THEREFORE , in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

PART I

INCREASE AGREEMENT

1. Definitions.

1.1 Generally . Capitalized terms used herein without definition shall have the meaning assigned to such terms in the Credit Agreement.

 

1


1.2 Effect of Facility Increase . Part I of this Agreement, constituting the Increase Agreement (the “ Increase Agreement ”), is entered into by Borrower, Agent and the lenders signatory to Part I hereof (collectively, the “ Term A Lenders ” and, individually, a “ Term A Lender ”) to implement the terms of the increase option being exercised by Borrower pursuant to Section 2.14 of the Credit Agreement. Term A Lenders shall be “ Lenders ” under and for all purposes of the Credit Agreement; and Term Loan A shall be defined as a “ Loan ” under and pursuant to the Credit Agreement. In addition:

(a) Aggregate Commitments . Pursuant to Section 2.14 of the Credit Agreement, the term “ Aggregate Commitments ” now means the Commitments of all Lenders (including the Commitments to make Term Loan A hereunder), which amount, as of the effective date of this Increase Agreement, is $275,000,000, less any reductions pursuant to Section 2.06 of the Credit Agreement and Section 2.2 hereof. Notwithstanding the foregoing, references to the “Aggregate Commitments” in Article II of the Credit Agreement shall continue to apply only to the Aggregate Commitments of the Committed Loans that are revolving loans made pursuant to Section 2.01 of the Credit Agreement, Swing Line Loans and Letters of Credit.

(b) Applicable Percentage . The term “ Applicable Percentage ” as used in Article II of the Credit Agreement (other than Section 2.12(a)(ii) ), shall continue to apply only to Committed Loans that are revolving loans made pursuant to Section 2.01 of the Credit Agreement, Swing Line Loans and Letters of Credit; except that , with respect to any prepayments of Term Loan A under Section 2.05 of the Credit Agreement, the term “ Applicable Percentage ” shall mean the Term Loan A Percentage of Term A Lenders as set forth on Schedule A hereto.

(c) Borrowing . The term “ Borrowing ” means, as the context may require, the borrowing of Term Loan A.

(d) Committed Loan Notice . The term “ Committed Loan Notice ” in the definition of “Interest Period” in Section 1.01 of the Credit Agreement and in Section 2.02 thereof now includes the Term Loan A Notice attached hereto as Exhibit A .

(e) Committed Loans . The term “ Committed Loans ” now includes Term Loan A, but references to “Committed Loans” in Sections 2.01 , 2.03 through 2.04 , 2.06 and 2.09 through 2.12 of the Credit Agreement shall continue to refer only to those Committed Loans that are revolving loans made pursuant to Section 2.01 of the Credit Agreement, Swing Line Loans and Letters of Credit.

(f) Outstanding Amount . The term “ Outstanding Amount ” means, with respect to Term Loan A on any date, the aggregate outstanding principal amount thereof.

 

2


2. The Term Loan A.

2.1 Generally . Subject to the terms and conditions of this Increase Agreement, each Term A Lender severally agrees to lend to Borrower, and Borrower hereby agrees to borrow and repay to each Term A Lender in accordance with this Increase Agreement and the Credit Agreement, a Loan in an original principal amount equal to the amount set forth on Schedule A hereto opposite such Term A Lender’s name, the aggregate principal amount of which is $50,000,000. All such Loans are collectively referred to herein as the “ Term Loan A ” or the “ Facility Increase ”. Term Loan A shall be deemed a “ Loan ” and a “ Committed Loan ” for all purposes of the Credit Agreement, except as expressly set forth herein. Schedule A hereto reflects the Facility Increase of $50,000,000, each Term A Lender’s Applicable Percentage of Term Loan A, and each Lender’s Applicable Percentage of the Aggregate Commitments upon the effectiveness of the Facility Increase. Subject to the terms hereof, Term Loan A shall be disbursed on the closing date of the Facility Increase (the “ Increase Effective Date ”), which date shall occur on or before June 30, 2009 (the “ Outside Closing Date ”).

2.2 Repayment; Prepayments . Borrower promises to repay Term Loan A on the Maturity Date and on the dates and in the amounts set forth below:

 

DATE

   AMOUNT

9/30/2009

   $ 1,250,000

12/31/2009

   $ 1,250,000

3/31/2010

   $ 1,250,000

6/30/2010

   $ 1,250,000

9/30/2010

   $ 1,250,000

12/31/2010

   $ 1,250,000

3/31/2011

   $ 1,250,000

6/30/2011

   $ 1,250,000

9/30/2011

   $ 1,250,000

12/31/2011

   $ 1,250,000

3/31/2012

   $ 1,250,000

6/30/2012

   $ 1,250,000

9/30/2012

   $ 1,250,000

12/3/2012

   $ 33,750,000

Amounts repaid on Term Loan A may not be reborrowed.

Borrower may, subject to the terms and conditions of Section 2.05(a) of the Credit Agreement, prepay Term Loan A at any time in whole or in part without premium or penalty upon written notice thereof in accordance with Section 2.05(a) thereof. Any such prepayment shall be applied to the remaining scheduled payments of principal thereof pro rata against all remaining installments, and the amount of each Term A Lender’s Applicable Percentage of such prepayment shall be such Lender’s Term Loan A Percentage as set forth on Schedule A hereto. Notwithstanding the foregoing, payments and prepayments made during the continuance of an Event of Default shall be applied in the manner specified in Section 8.03 of the Credit Agreement.

 

3


2.3 Interest Rate .

(a) Subject to Section 2.8(b) of the Credit Agreement, (i) each Term Loan A that is a Eurodollar Rate Loan shall bear interest at the Eurodollar Rate plus 3.50% per annum, and Term Loan A shall, so long as the interest rate is based on the Eurodollar Rate, be deemed for all purposes of the Credit Agreement (other than under Section 2.08(a)(i) thereof) a Eurodollar Rate Loan, and (ii) each Term Loan A that is a Base Rate Loan shall bear interest at the Base Rate plus 2.50% per annum, and Term Loan A shall, so long as the interest rate is based on the Base Rate, be deemed for all purposes of the Credit Agreement (other than under Section 2.08(a)(ii) thereof) a Base Rate Loan.

(b) Interest on Term Loan A shall be due and payable at the times and in the manner specified in the Credit Agreement.

2.4 Borrowing, Conversion and Continuation of Term Loan A . Borrower shall specify in the Term Loan A Notice whether Term Loan A shall initially be a Base Rate Committed Loan or a Eurodollar Rate Loan, and if the latter, the duration of the Interest Period relating thereto. Thereafter, Borrower may convert and continue all or any portion of Term Loan A as a Committed Loan of one Type or the other, in accordance with the terms of Section 2.02 of the Credit Agreement.

2.5 Security Interest . Term Loan A, as a Loan under the Credit Agreement, shall share ratably with all other Loans and other Obligations under the Credit Agreement in respect to all Collateral existing from time to time under the Credit Facilities, any treasury management and foreign exchange arrangements and any interest rate swap or similar agreements with any Lender under the Credit Facilities.

2.6 Notes . If any Term A Lender requests a Note pursuant to Section 2.11(a) of the Credit Agreement to evidence such Term A Lender’s Term Loan A made pursuant to this Increase Agreement, the Note to be issued with respect thereto shall be in the form of Exhibit B to this Increase Agreement.

3. Agreement of Term A Lenders. Each Term A Lender acknowledges that it has, independently and without reliance upon Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Increase Agreement. Each Term A Lender also acknowledges that it will, independently and without reliance upon Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Increase Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.

 

4


4. Use of Proceeds. The proceeds of Term Loan A shall be used for working capital, capital expenditures and other general corporate purposes of Borrower not in contravention of any Law or of any Loan Document.

5. Full Exercise of Increase Option. Borrower acknowledges that the Facility Increase constitutes the exercise in full of its increase option under Section 2.14 of the Credit Agreement and that Section 2.14 of the Credit Agreement shall be deemed to be terminated following the effectiveness of the transactions contemplated hereby.

PART II

AMENDMENT NO. 2 TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT

6. Amendment No. 2.

6.1 Generally . The Credit Agreement is amended as set forth herein effective as of the Increase Effective Date, except that the amendment to Section 7.06 of the Credit Agreement is effective as of June 15, 2006.

6.2 Definitions . Section 1.01 of the Credit Agreement is amended by:

(a) (i) deleting the definition of “Fixed Charge Coverage Ratio” in its entirety, and (ii) replacing it with the following:

““ Fixed Charge Coverage Ratio ” means the ratio of (a) the sum of Adjusted EBITDA, minus 50% of the amount of Unfinanced Capital Expenditures, minus cash income taxes, to (b) the sum of cash interest expense plus scheduled principal payments (including without limitation the principal portion of any capital lease payments).”

(b) (i) deleting the definition of “Loan Documents” in its entirety, and (ii) replacing it with the following:

““ Loan Documents ” means this Agreement (as amended from time to time), the Agreement to Exercise Facility Increase Option and Amendment No. 2 to Amended and Restated Revolving Credit Agreement (and any Note delivered pursuant thereto), each Note, each Issuer Document, the Fee Letter, each Collateral Document, the Guaranty and the Omnibus Amendment.”

(c) Adding the definition of “Net Equity Proceeds” as set forth below:

““ Net Equity Proceeds ” means, with respect to the sale or issuance of any Equity Interests by Borrower, the excess of (i) the sum of the cash and cash equivalents received in connection with such transaction over (ii) the

 

5


investment banking fees, underwriting discounts and commissions, and other reasonable and customary out-of-pocket expenses, incurred by Borrower in connection therewith.”

(d) (i) deleting the definition of “Unfinanced Capital Expenditures” in its entirety, and (ii) replacing it with the following:

““ Unfinanced Capital Expenditures ” means all capital expenditures except: (1) capital expenditures financed using capital leases or purchase money obligations; (2) capital expenditures financed using proceeds from dispositions permitted under Sections 7.05(a) or 7.05(c) (to the extent such proceeds were not included in the calculation of Adjusted EBITDA); (3) capital expenditures financed using insurance and/or condemnation proceeds of replaced assets (to the extent such proceeds were not included in the calculation of Adjusted EBITDA); or (4) capital expenditures financed using Net Equity Proceeds, provided that (i) such Net Equity Proceeds are invested, or committed to be invested, in fixed or capital assets within twelve (12) months of receipt of such Net Equity Proceeds, (ii) Borrower provides to Agent, concurrently with the delivery of the first Compliance Certificate required to be delivered pursuant to Section 6.02(b) after such investment or commitment to invest pursuant to clause (i), a Responsible Officer’s Certificate setting forth the amount of such capital expenditure and describing the assets purchased thereunder, which shall be substantially in the form attached hereto as Exhibit D, and (iii) each Compliance Certificate delivered by Borrower pursuant to Section 6.02(b) during the twelve (12) month period thereafter shall provide an updated schedule of capital or fixed assets purchased or to be purchased with Net Equity Proceeds, which shall be substantially in the form of the reporting required by Exhibit A but with such additional detail as the Agent may reasonably request.”

6.3 Section 6.12(d) of the Credit Agreement is hereby deleted in its entirety.

6.4 Section 7.06 of the Credit Agreement is amended by:

(a) Deleting the “and” at the end of subsection (c) thereof.

(b) Renumbering the current paragraph (d) as (f) by (i) deleting the “(d)” at the beginning of the current subsection (d) thereof, and (ii) replacing it with: “(f)”.

(c) Adding new subsections (d) and (e) as set forth below:

“(d) Borrower may issue or sell Equity Interests, provided that (i) no Change of Control results therefrom, and (ii) except to the extent permitted by Section 7.06(f), no such Equity Interests, or any agreement relating thereto, shall require any cash dividends or distributions to be made by the Borrower at any time in respect thereof, or require the Borrower or any Subsidiary to purchase, redeem, defease, retire or otherwise acquire any such Equity Interests, or any interest therein;

 

6


(e) Wholly-owned Subsidiaries may issue or sell Equity Interests to Borrower or any other wholly-owned Subsidiary in transactions permitted by Section 7.02(c); and”

PART III

PROVISIONS APPLICABLE TO PARTS I & II OF THIS AGREEMENT

7. Conditions to Effectiveness of this Agreement. The effectiveness of this Agreement, and the obligation of each Term A Lender to make Term Loan A pursuant to the Increase Agreement, are subject to the satisfaction of each of the following conditions precedent:

7.1 Agent’s receipt of the following, each of which shall be originals or PDF versions (in each case followed promptly by originals), each properly executed by a Responsible Officer of the signing Loan Party, each dated as of the Increase Effective Date and each in form and substance reasonably satisfactory to Agent and:

(a) executed counterparts of this Agreement and the Consent of Guarantor attached hereto as Exhibit C , sufficient in number for distribution to Agent, each Lender and Borrower;

(b) with respect to each Term A Lender, a Note executed by Borrower in favor of each Term A Lender requesting a Note, which shall be in the form of Exhibit B hereto;

(c) such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Loan Party as Agent may reasonably require evidencing the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Agreement and the other Loan Documents provided in connection herewith to which such Loan Party is a party, and certifying and attaching the resolutions adopted by such Loan Party approving or consenting to the Facility Increase, the borrowing of Term Loan A and/or the Amendment, as applicable;

(d) such documents and certifications as Agent may reasonably require to evidence that each Loan Party is duly organized, validly existing, in good standing and qualified to engage in business in each jurisdiction where such qualification is required, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect;

(e) a favorable opinion of counsel to the Loan Parties reasonably acceptable to Agent addressed to Agent and each Lender, as to the matters set forth concerning the Loan Parties and the Loan Documents in the form and substance previously delivered to Agent pursuant to the Credit Agreement;

(f) a certificate signed by a Responsible Officer of Borrower certifying that:

(i) before and after giving effect to the borrowing of Term Loan A and this Agreement, (1) no Default or Event of Default exists or would result

 

7


from the borrowing of Term Loan A or from the application of the proceeds thereof, and (2) the representations and warranties contained in Article V of the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date. For purposes hereof, the representations and warranties contained in subsections (a) and (b) of Section 5.05 of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 of the Credit Agreement;

(ii) there has not occurred any event or state of facts that constitutes or reflects the occurrence of a Material Adverse Effect under the Credit Agreement since September 27, 2008;

(iii) there is no action, suit, investigation or proceeding pending or, to the knowledge of Borrower, threatened in any court or before any arbitrator or governmental authority that could reasonably be expected to (x) have a Material Adverse Effect, (y) adversely affect the ability of Borrower and the other Loan Parties to perform their obligations under the Credit Agreement and this Agreement or (z) adversely affect the rights and remedies of Agent or the Lenders under the Credit Facilities; and

(iv) all consents, licenses and approvals necessary for the execution, delivery and performance of this Agreement have been obtained and are in full force and effect;

(g) receipt by Agent of the financial statements required by Section 6.01(b) of the Credit Agreement for the fiscal quarter ended March 28, 2009, and the certificates with respect thereto required by Section 6.02 of the Credit Agreement, and such financial statements and certificates shall not reflect the occurrence of any Material Adverse Effect since September 27, 2008;

7.2 Receipt by Agent of payment in cash of the fees in the amounts specified in the Fee Letter dated May 6, 2009, by and between Borrower, Agent and Banc of America Securities LLC, as the Arranger;

7.3 Borrower shall have paid all reasonable expenses, including, but not limited to, reasonable fees, charges and disbursements of counsel to Agent and Arranger (directly to such counsel if requested by Agent) to the extent invoiced prior to the Increase Effective Date, plus such additional amounts of such expenses, fees, charges and disbursements as shall constitute its reasonable estimate of such expenses, fees, charges and disbursements incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude a final settling of accounts between Borrower and Agent);

 

8


7.4 The Increase Effective Date shall have occurred on or before June 30, 2009, and Term A Lenders shall have signed this Agreement and have agreed to loan in the aggregate the full original principal amount of $50,000,000 contemplated hereby;

7.5 On the Increase Effective Date, after giving effect to the transactions occurring hereunder, Borrower shall on a consolidated basis have a ratio of Funded Debt as of the Increase Effective Date (after giving effect to Term Loan A) to Adjusted EBITDA for the four consecutive fiscal quarters ending March 28, 2009 not exceeding 3.00:1.00; and

7.6 Agent and Lenders shall have received from Borrower updated financial projections and business assumptions covering the period of the Credit Facilities, which shall be in a form and substance reasonably satisfactory to Agent and the Arranger.

Without limiting the generality of the provisions of Section 9.04 of the Credit Agreement, for purposes of determining compliance with the conditions specified in this Section 3 , each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless Agent shall have received notice from such Lender prior to the proposed Increase Effective Date specifying its objection thereto.

8. Representations and Warranties. Borrower represents and warrants to Agent and the Lenders as follows:

8.1 Existence, Qualification and Power . Each Loan Party and each Subsidiary thereof (a) is duly organized or formed, validly existing and, as applicable, in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own or lease its assets and carry on its business and (ii) execute, deliver and perform its obligations under this Agreement and the other Loan Documents to which it is a party, and (c) is duly qualified and is licensed and, as applicable, in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license; except in each case referred to in clause (b)(i), or (c), to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.

8.2 Authorization; No Contravention . The execution, delivery and performance by each Loan Party of this Agreement and other Loan Documents to which such Person is a party have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any such Person’s Organizational Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any Contractual Obligation to which such Person is a party or affecting such Person or the properties of such Person or any of its Subsidiaries or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any Law.

8.3 Governmental Authorization; Other Consents . No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any

 

9


other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Loan Party of this Agreement or any Loan Document other than customary filings with respect to Collateral.

8.4 Binding Effect . This Agreement has been, and each other Loan Document to be executed in connection herewith, when delivered hereunder, will have been, duly executed and delivered by each Loan Party that is party thereto. This Agreement constitutes, and each other such Loan Document when so delivered will constitute, a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or other Laws of general application affecting creditors and general principles of equity.

8.5 Credit Agreement . Before and after giving effect to Term Loan A and this Agreement, the representations and warranties contained in Article V of the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct in all material respects as of such earlier date. For purposes hereof, the representations and warranties contained in subsections (a) and (b) of Section 5.05 of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 of the Credit Agreement.

9. Ratification, etc . Except as otherwise expressly provided hereunder, the Credit Agreement, the other Loan Documents and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Agreement and the Credit Agreement shall hereafter be read and construed as a single document.

10. Miscellaneous.

10.1 Counterparts . This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or PDF shall be as effective as delivery of an original executed counterpart of this Agreement.

 

10


10.2 Severability . If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

10.3 GOVERNING LAW; JURISDICTION; ETC . THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

 

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IN WITNESS WHEREOF , each of the undersigned has duly executed this Agreement as a sealed instrument as of the date first set forth above.

 

BORROWER:
GREEN MOUNTAIN COFFEE ROASTERS, INC.
By:  

/s/ Frances Rathke

Name:   Frances G. Rathke
Title:   Chief Financial Officer

 

BANK OF AMERICA, N.A.,

as Administrative Agent

By:  

/s/ Christopher S. Allen

Name:   Christopher S. Allen
Title:   Senior Vice President


BANK OF AMERICA, N.A. , as a Lender     KEYBANK NATIONAL ASSOCIATION , as a Lender
By:  

/s/ Christopher S. Allen

    By:  

/s/ Martin J. Costello

Name:   Christopher S. Allen     Name:   Martin J. Costello
Title:   Senior Vice President     Title:   Vice President
BANC OF AMERICA SECURITIES LLC , as Arranger     BMO CAPITAL MARKETS FINANCING, INC. , as Co-Documentation Manager
By:  

/s/ Mark Hardison

    By:  

/s/ Tara Cuprisin

Name:   Mark Hardison     Name:   Tara Cuprisin
Title:   Vice President     Title:   Vice President
SOVEREIGN BANK , as Syndication Agent     BMO CAPITAL MARKETS FINANCING, INC. , as a Lender
By:  

/s/ Karen Ng

    By:  

/s/ Tara Cuprisin

Name:   Karen Ng     Name:   Tara Cuprisin
Title:   Vice President     Title:   Vice President


SOVEREIGN BANK , as a Lender     COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. “RABOBANK NEDERLAND”, NEW YORK BRANCH , as a Lender
By:  

/s/ Karen Ng

    By:  

/s/ Theodore W. Cox

Name:   Karen Ng     Name:   Theodore W. Cox
Title:   Vice President     Title:   Executive Director
      By:  

/s/ Rebecca Morrow

      Name:   Rebecca Morrow
      Title:   Executive Director
TD BANK, N.A. , as Documentation Agent     BROWN BROTHERS HARRIMAN & CO. , as a Lender, but only with respect to Parts II & III
By:  

/s/ Douglas S. Graham

    By:  

/s/ Amy Lyons

Name:   Douglas S. Graham     Name:   Amy Lyons
Title:   Senior Vice President     Title:   SVP
TD BANK, N.A. , as a Lender     HSBC BANK USA, NATIONAL ASSOCIATION , as a Lender
By:  

/s/ Douglas S. Graham

    By:  

/s/ David A. Carroll

Name:   Douglas S. Graham     Name:   David A. Carroll
Title:   Senior Vice President     Title:   Vice President, Senior Relationship Manager
SUNTRUST BANK , as a Lender      
By:  

/s/ M. Gabe Bonfield

     
Name:   M. Gabe Bonfield      
Title:   Vice President      

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lawrence J. Blanford, Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Green Mountain Coffee Roasters, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2009

 

/s/ Lawrence J. Blanford

Lawrence J. Blanford
President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14 and 15d-14

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Frances G. Rathke, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Green Mountain Coffee Roasters, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2009

 

/s/ Frances G. Rathke

Frances G. Rathke
Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Green Mountain Coffee Roasters, Inc. (the “Company”) on Form 10-Q for the period ending June 27, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lawrence J. Blanford, as the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 3, 2009

 

/s/ Lawrence J. Blanford

Lawrence J. Blanford*
President and Chief Executive Officer

 

* A signed original of this written statement required by Section 906 has been provided to Green Mountain Coffee Roasters, Inc. and will be retained by Green Mountain Coffee Roasters, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Green Mountain Coffee Roasters, Inc. (the “Company”) on Form 10-Q for the period ending June 27, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Frances G. Rathke, as the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: August 3, 2009

 

/s/ Frances G. Rathke

Frances G. Rathke*
Chief Financial Officer

 

* A signed original of this written statement required by Section 906 has been provided to Green Mountain Coffee Roasters, Inc. and will be retained by Green Mountain Coffee Roasters, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.