Keurig Green Mountain, Inc.
GREEN MOUNTAIN COFFEE ROASTERS INC (Form: 10-Q, Received: 02/03/2011 16:03:31)

 

 

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 December 25, 2010

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   þ     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   þ     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   þ    Accelerated filer   ¨
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   þ

As of January 28, 2011, 141,600,550 shares of common stock of the registrant were outstanding.

 

 

 


Part I. Financial Information

Item 1. Financial Statements

2010 Restatement

As described in our Annual Report on Form 10-K for the year ended September 25, 2010, we have restated our financial statements and other information.

For further discussion of the effects of the 2010 restatement see Part 1, Item 1. Financial Statements , Note 1, Basis of Presentation, of the Notes to Consolidated Financial Statements, Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition and Item 4. Controls and Procedures .

 

-2-


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Balance Sheets

(Dollars in thousands)

 

     December 25,
2010
     September 25,
2010
 
Assets      

Current assets:

     

Cash and cash equivalents

   $ 32,921       $ 4,401   

Restricted cash and cash equivalents

     30,003         355   

Receivables, less uncollectible accounts and return allowances of $28,989 and $14,056 at December 25, 2010 and September 25, 2010, respectively

     238,068         172,200   

Inventories

     269,132         262,478   

Income taxes receivable

     —           5,350   

Other current assets

     24,211         23,488   

Current deferred income taxes, net

     24,626         26,997   

Current assets held for sale

     25,839         —     
                 

Total current assets

     644,800         495,269   

Fixed assets, net

     389,608         258,923   

Intangibles, net

     573,935         220,005   

Goodwill

     769,401         386,416   

Other long-term assets

     65,247         9,961   

Long-term assets held for sale

     96,262         —     
                 

Total assets

   $ 2,539,253       $ 1,370,574   
                 
Liabilities and Stockholders’ Equity      

Current liabilities:

     

Current portion of long-term debt

   $ 8,476       $ 19,009   

Accounts payable

     148,034         139,220   

Accrued compensation costs

     24,607         24,236   

Accrued expenses

     75,750         49,279   

Income tax payable

     2,922         1,934   

Other short-term liabilities

     26,097         4,377   

Current liabilities related to assets held for sale

     11,181         —     
                 

Total current liabilities

     297,067         238,055   

Long-term debt

     1,076,541         335,504   

Long-term deferred income taxes, net

     167,632         92,579   

Other long-term liabilities

     32,669         5,191   

Long-term liabilities related to assets held for sale

     1,977         —     

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 - 200,000,000 shares; Issued - 141,569,636 and 132,823,585 shares at December 25, 2010 and September 25, 2010, respectively

     14,157         13,282   

Additional paid-in capital

     725,984         473,749   

Retained earnings

     216,073         213,844   

Accumulated other comprehensive income (loss)

     1,901         (1,630
                 

Total parent stockholders’ equity

     958,115         699,245   

Noncontrolling interests

     5,252         —     
                 

Total stockholders’ equity

     963,367         699,245   
                 

Total liabilities and stockholders’ equity

   $ 2,539,253       $ 1,370,574   
                 

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)

 

     Thirteen
weeks ended
December 25,
2010
    Thirteen
weeks ended
December 26,
2009
 
           (As Restated)  

Net sales

   $ 575,027      $ 345,152   

Cost of sales

     430,613        249,575   
                

Gross profit

     144,414        95,577   

Selling and operating expenses

     78,448        53,375   

General and administrative expenses

     42,887        23,172   
                

Operating income

     23,079        19,030   

Other income (expense)

     137        243   

Gain (loss) on financial instruments, net

     (6,377     (354

Gain (loss) on foreign currency, net

     1,605        —     

Interest expense

     (6,023     (1,048
                

Income before income taxes

     12,421        17,871   

Income tax expense

     (10,167     (7,811
                

Net Income

     2,254        10,060   

Less: Net income attributable to noncontrolling interests

     25        —     
                

Net income attributable to GMCR

   $ 2,229      $ 10,060   
                

Basic income per share:

    

Basic weighted average shares outstanding

     141,374,327        130,969,293   

Net income

   $ 0.02      $ 0.08   

Diluted income per share:

    

Diluted weighted average shares outstanding

     147,036,072        137,486,331   

Net income

   $ 0.02      $ 0.07   

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

 

-4-


GREEN MOUNTAIN COFFEE ROASTERS, INC.

Unaudited Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

     Thirteen weeks ended
December 25, 2010
     Thirteen weeks ended
December 26, 2009
 
     GMCR      Noncontrolling
Interests
     Total      GMCR     Noncontrolling
Interests
     Total  
                          (As Restated)               

Net income

   $ 2,229       $ 25       $ 2,254       $ 10,060      $ —         $ 10,060   

Other comprehensive income, net of tax:

                

Deferred gain on derivatives designated as cash flow hedges

     385         —           385         286        —           286   

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

     —           —           —           (38     —           (38

Foreign currency translation adjustment

     3,146         22         3,168         48        —           48   
                                                    

Other comprehensive gain

     3,531         22         3,553         296        —           296   
                                                    

Comprehensive income

   $ 5,760       $ 47       $ 5,807       $ 10,356      $ —         $ 10,356   
                                                    

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 December 25, 2010 (Dollars in thousands)

 

    Common stock    

Additional

paid-in

    Retained     Accumulated other
comprehensive
   

Total Parent

Shareholders’

   

Equity Attributable

to Noncontrolling

    Total
Stockholders’
 
    Shares     Amount     capital     earnings     income (loss)     Equity     Interests     Equity  

Balance at September 25, 2010

    132,823,585      $ 13,282      $ 473,749      $ 213,844      $ (1,630   $ 699,245      $ —        $ 699,245   

Sale of common stock

    8,566,649        857        248,667        —          —          249,524        —          249,524   

Options exercised

    179,402        18        393        —          —          411        —          411   

Stock compensation expense

    —          —          2,200        —          —          2,200        —          2,200   

Purchase noncontrolling interests

    —          —          —          —          —          —          5,205        5,205   

Tax benefit from exercise of options

    —          —          914        —          —          914        —          914   

Deferred compensation expense

    —          —          61        —          —          61        —          61   

Other comprehensive income, net of tax

    —          —          —          —          3,531        3,531        22        3,553   

Net income

    —          —          —          2,229        —          2,229        25        2,254   
                                                               

Balance at December 25, 2010

    141,569,636      $ 14,157      $ 725,984      $ 216,073      $ 1,901      $ 958,115      $ 5,252      $ 963,367   
                                                               

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)

 

     Thirteen
weeks ended
December 25,
2010
    Thirteen
weeks ended
December 26,
2009
 
           (As Restated)  

Cash flows from operating activities:

    

Net income

   $ 2,254      $ 10,060   

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

    

Depreciation

     12,164        5,853   

Amortization of intangibles

     6,160        2,143   

Amortization of deferred financing fees

     2,964        —     

Gain on foreign currency exchange transactions

     (1,605     —     

Loss on disposal of fixed assets

     34        34   

Provision for doubtful accounts

     384        298   

Provision for sales returns

     27,521        8,516   

Loss on financial instruments, net

     6,377        392   

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

     —          5   

Excess tax benefits from equity-based compensation plans

     (914     (1,124

Deferred income taxes

     2,260        (578

Deferred compensation and stock compensation

     2,261        1,977   

Changes in assets and liabilities, net of effects of acquisition:

    

Receivables

     (52,145     (49,422

Inventories

     29,828        21,885   

Income tax receivable, net

     6,752        4,624   

Other current assets

     (2,109     (834

Other long-term assets, net

     (16,662     145   

Accounts payable

     3,309        4,662   

Accrued compensation costs

     (8,745     (4,923

Accrued expenses

     16,384        14,707   

Other short-term liabilities

     (375     (354

Other long-term liabilities

     13,560        —     
                

Net cash provided by operating activities

     49,657        18,066   

Cash flows from investing activities:

    

Change in restricted cash

     117        (120

Proceeds from notes receivable

     19        —     

Acquisition of Timothy’s Coffee of the World Inc.

     —          (154,742

Advance on acquisition of Diedrich Coffee, Inc.

     —          (8,517

Acquisition of LJVH Holdings, Inc. (Van Houtte)

     (907,895     —     

Capital expenditures for fixed assets

     (47,406     (23,701

Proceeds from disposal of fixed assets

     21        145   
                

Net cash used in investing activities

     (955,144     (186,935

Cash flows from financing activities:

    

Net change in revolving line of credit

     288,095        —     

Proceeds from issuance of common stock under compensation plans

     411        384   

Proceeds from issuance of common stock

     249,524        —     

Excess tax benefits from equity-based compensation plans

     914        1,124   

Capital lease obligations

     (2     (8

Proceeds from borrowings of long-term debt

     794,500        —     

Deferred financing fees

     (41,438     —     

Repayment of long-term debt

     (354,544     (1,250
                

Net cash provided by financing activities

     937,460        250   

Change in cash balances included in short-term assets held for sale

     (3,638     —     

Effect of exchange rate changes on cash and cash equivalents

     185        —     

Net (decrease) increase in cash and cash equivalents

     28,520        (168,619

Cash and cash equivalents at beginning of period

     4,401        241,811   
                

Cash and cash equivalents at end of period

   $ 32,921      $ 73,192   
                

Supplemental disclosures of cash flow information:

    

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

   $ 11,676      $ 8,350   

Noncash investing activity:

    

Liabilities assumed in conjunction with acquisitions

   $ —        $ 1,533   

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

 

-7-


Green Mountain Coffee Roasters, Inc.

Notes to Unaudited 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 week period ended December 25, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 24, 2011.

The September 25, 2010 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 25, 2010. Throughout this presentation, we refer to the consolidated company as the “Company” and, unless otherwise noted, the information provided is on a consolidated basis.

The Company has revised the classification of certain information presented in its fiscal 2010 audited consolidated financial statements to conform to its fiscal 2011 presentation.

2010 Restatement

As described in our Annual Report on Form 10-K for the year ended September 25, 2010, we have restated our financial statements and other information. For details on the effects of the restatements on certain line items within our previously reported Statement of Operations for the thirteen weeks ended December 26, 2009, please refer to the following sections in our Annual Report on Form 10-K: Overview of Restatement ; Part II, Item 8, Financial Statements and Supplementary Data , Note 3, Restatement of Previously Issued Financial Statements and Note 24, Unaudited Quarterly Financial Data .

 

2. Segment Reporting

The Company manages its operations through three operating segments, Specialty Coffee business unit (“SCBU”), Keurig business unit (“Keurig”) and Canadian business unit (“CBU”) created primarily from the former Van Houtte business recently acquired as a result of the Company’s recent acquisition of LJVH Holdings, Inc. (“LJVH” and together with its subsidiaries, “Van Houtte”).

SCBU sources, produces and sells coffee, cocoa, teas and other beverages in K-Cup ® portion packs and coffee in more traditional packaging including whole bean and ground coffee selections in bags and ground coffee in fractional packs. These varieties are sold primarily to wholesale channels, including supermarkets and convenience stores, restaurants and hospitality, office coffee distributors and directly to consumers in North America. In addition, SCBU sells Keurig ® single-cup brewing systems and other accessories directly to consumers and supermarkets.

 

-8-


Keurig, a pioneer and leading manufacturer of gourmet single-cup brewing systems, targets its premium patented single-cup brewing systems for use both at-home (“AH”) and away-from-home (“AFH”), mainly in North America. Keurig sells AH single-cup brewers, accessories and coffee, tea, cocoa and other beverages in K-Cup ® portion packs produced mainly by SCBU and CBU to retailers by principally processing its sales orders through fulfillment entities for the AH channels. Keurig sells AFH single-cup brewers to distributors for use in offices. Keurig also sells AH brewers, a limited number of AFH brewers and K-Cup portion packs directly to consumers. Keurig earns royalty income from K-Cup portion packs when shipped by its licensed roasters, except for shipments of K-Cup portion packs by third party roasters to Keurig, for which the royalty is recognized as a reduction to the carrying cost of the inventory and as a reduction to cost of sales when sold through to third parties by Keurig.

CBU sources, produces and sells coffees in a variety of packaging formats, including K-Cup portion packs, whose brands include Van Houtte ® , Brûlerie St. Denis ® , Brûlerie Mont-Royal ® and Orient Express ® and its licensed Bigelow ® and Wolfgang Puck ® brands. These varieties are sold primarily to wholesale channels, including supermarkets and retail, and through office coffee services to offices, convenience stores and restaurants mainly throughout Canada. CBU also manufactures brewing equipment and is responsible for all Company coffee brand sales in the grocery channel in Canada.

The Company evaluates performance based on several factors, including business segment income before taxes. The operating segments do not share any significant manufacturing or distribution facilities, except for brewer fulfillment at the Company’s Knoxville facility. Administrative functions such as accounting and information services are decentralized but moving toward centralization through an enterprise shared services group. 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 and CBU segments while the Keurig segment does not have manufacturing facilities and purchases its saleable products from third parties, including the SCBU and CBU. The Company’s inventory and accounts receivable are captured and reported discretely within each operating segment.

Expenses related to certain centralized administrative functions including Finance, Human Resources, IST and Legal are allocated to the SCBU and Keurig operating segments. 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 certain of the Company’s senior executive officers and other selected employees who perform duties related to our entire enterprise. Corporate expenses also include interest expense, foreign exchange gains or losses, certain corporate legal and acquisition-related expenses and compensation of the board of directors. Corporate assets include cash, short-term investments and deferred tax assets.

Goodwill and intangibles related to the Frontier, Tully’s, Timothy’s and Diedrich acquisitions are included in the SCBU segment. Keurig related goodwill and intangibles are included in the Keurig segment. Van Houtte related goodwill and intangibles are included in the CBU segment.

The Company analyzes its business on a segment basis, records net sales on a segment basis and eliminates intersegment sales as part of its financial consolidation. Intersegment sales primarily consist of the SCBU and CBU selling K-Cup portion packs to Keurig, and Keurig sells brewers and records royalty income from K-Cup portion packs when shipped by the SCBU and CBU.

 

-9-


Selected financial data for segment disclosures for the thirteen weeks ended December 25, 2010 and December 26, 2009 are as follows:

 

    Thirteen weeks ended December 25, 2010
(Dollars in thousands)
 
    SCBU      Keurig     CBU     Corporate     Eliminations     Consolidated  

Sales to unaffiliated customers

  $ 219,401       $ 345,101      $ 10,525      $ —        $ —        $ 575,027   

Intersegment sales

  $ 137,728       $ 68,653      $ 602      $ —        $ (206,983   $ —     

Net sales

  $ 357,129       $ 413,754      $ 11,127      $ —        $ (206,983   $ 575,027   

Income before taxes

  $ 59,748       $ (1,955   $ (1,321   $ (36,021   $ (8,030   $ 12,421   

Total assets

  $ 1,127,605       $ 420,161      $ 1,048,951      $ 91,189      $ (148,653   $ 2,539,253   

Stock compensation

  $ 738       $ 501      $ —        $ 961        $ 2,200   

Interest expense

  $ —         $ —        $ —        $ 6,023      $ —        $ 6,023   

Property additions

  $ 31,519       $ 5,083      $ 1,047      $ —        $ —        $ 37,649   

Depreciation and amortization

  $ 14,619       $ 2,263      $ 1,442      $ —        $ —        $ 18,324   
    Thirteen weeks ended December 26, 2009
(Dollars in thousands)
(As Restated)
 
    SCBU      Keurig     CBU     Corporate     Eliminations     Consolidated  

Sales to unaffiliated customers

  $ 133,186       $ 211,966      $ —        $ —        $ —        $ 345,152   

Intersegment sales

  $ 58,619       $ 34,140      $ —        $ —        $ (92,759   $ —     

Net sales

  $ 191,805       $ 246,106      $ —        $ —        $ (92,759   $ 345,152   

Income before taxes

  $ 27,578       $ 5,954      $ —        $ (11,080   $ (4,581   $ 17,871   

Total assets

  $ 476,166       $ 289,715      $ —        $ 138,630      $ (26,637   $ 877,874   

Stock compensation

  $ 684       $ 507      $ —        $ 737      $ —        $ 1,928   

Interest expense

  $ —         $ —        $ —        $ 1,048      $ —        $ 1,048   

Property additions

  $ 17,220       $ 2,322      $ —        $ —        $ —        $ 19,542   

Depreciation and amortization

  $ 6,345       $ 1,651      $ —        $ —        $ —        $ 7,996   

 

-10-


3. Acquisitions

LJVH Holdings, Inc. (including subsidiaries - Van Houtte)

On December 17, 2010, the Company acquired Van Houtte through the purchase of all of the outstanding capital stock of LJVH Holdings, Inc., a specialty coffee roaster headquartered in Montreal, Quebec, for approximately USD $907.9 million, net of cash acquired. The acquisition was financed with cash on hand and a new $1.45 billion credit facility (see Note 9, Long-Term Debt) . The purchase price is subject to a working capital adjustment based upon a balance sheet audit prepared as of December 17, 2010 and to be completed on or before February 14, 2011. Van Houtte’s functional currency is the Canadian dollar.

Van Houtte specializes in sourcing, producing, and selling coffees in a variety of packaging formats, including K-Cup ® portion packs whose brands include Van Houtte ® , Brûlerie St. Denis ® , Brûlerie Mont-Royal ® and Orient Express ® and its licensed Bigelow ® and Wolfgang Puck ® brands.

As previously announced, the Company is conducting a strategic review of the Van Houtte U.S. Coffee Service business (“Filterfresh”) in contemplation of a potential divestiture of Filterfresh. As a result, the Company has accounted for all the assets relating to the Filterfresh business as held-for-sale. See Note 7, Assets Held for Sale , for further information.

 

-11-


The acquisition was accounted for under the acquisition method of accounting. The total preliminary purchase price was USD $907.9 million, net of cash acquired. The total estimated purchase price was allocated to Van Houtte’s net tangible assets and identifiable intangible assets based on their estimated fair values as of December 17, 2010. The preliminary fair value assigned to indefinable intangible assets acquired was determined primarily by using an income approach. The preliminary allocation of the purchase price is based upon management’s preliminary valuation and the Company’s estimates and assumptions and is subject to change within the measurement period as the valuation is finalized. Prior to the end of the measurement period for finalizing the purchase price allocation, any changes will be included in the purchase price allocation retrospectively. The table below represents the allocation of the preliminary purchase price to the acquired net assets of Van Houtte (in thousands):

 

     Total     Van Houtte
Canadian
Operations
    Filterfresh Assets
Held For Sale
 

Restricted cash

   $ 500      $ 500      $ —     

Accounts receivable

     55,265        41,598        13,667   

Inventories

     42,744        36,477        6,267   

Deferred income taxes

     7,079        4,666        2,413   

Other current assets

     3,267        2,914        353   

Fixed assets

     137,621        104,601        33,020   

Intangible assets

     381,220        357,820        23,400   

Goodwill

     418,585        380,565        38,020   

Other long-term assets

     1,068        151        917   

Accounts payable and accrued expenses

     (42,793     (35,411     (7,382

Other short-term liabilities

     (1,446     (521     (925

Income taxes payable

     (1,708     (628     (1,080

Deferred income taxes

     (80,603     (79,064     (1,539

Notes payable

     (2,883     (1,739     (1,144

Other long-term liabilities

     (4,815     (4,815     —     

Non-controlling interests

     (5,206     (3,477     (1,729
                        
   $ 907,895      $ 803,637      $ 104,258   
                        

Acquisition costs were expensed as incurred and totaled approximately $8.8 million for the thirteen weeks ended December 25, 2010 and are included in general and administrative expenses for the Company.

The preliminary estimates for definite lived amortizable intangible assets acquired include approximately $277.0 million for customer relationships, $10.4 million for trademarks and trade names, $1.2 million for franchises and $0.3 million for technology. The preliminary estimates for indefinite lived intangible assets acquired include approximately $92.3 million for the Van Houtte trademark which is not amortized. The estimates for definite lived intangible assets classified as held-for-sale are not amortized and approximated $23.4 million. Amortizable intangible assets are amortized on a straight-line basis over their respective useful live, and the preliminary weighted-average amortization period is 10.7 years.

The preliminary estimate of the cost of the acquisition in excess of the fair market value of tangible and intangible assets acquired less liabilities assumed represents acquired goodwill of approximately $418.6 million. The acquisition provides the Company with an expanded Canadian presence and manufacturing and distribution synergies, which provide the basis of goodwill recognized. Goodwill and intangible assets are reported in the CBU segment. The goodwill and intangible assets recognized are not deductible for tax purposes.

At December 25, 2010, approximately $29.3 million of the purchase price is held in escrow and is included in restricted cash with corresponding amounts of $20.2 million and $9.1 million in other current liabilities and other long-term liabilities, respectively.

The acquisition was completed on December 17, 2010 and accordingly results of operations from such date have been included in the Company’s Statement of Operations. For the thirteen weeks ended December 25, 2010, the Van Houtte acquisition resulted in an additional $9.6 million of consolidated revenue and $1.6 million of consolidated loss before income taxes.

 

-12-


Diedrich Coffee, Inc.

On May 11, 2010, the Company acquired all of the outstanding common stock of Diedrich Coffee, Inc. (“Diedrich”) a specialty coffee roaster and wholesaler located in central California for approximately $305.3 million, net of cash acquired. The acquisition was financed with cash on hand and a term loan of $140.0 million. Diedrich is a wholly-owned subsidiary of the Company with operations integrated into the SCBU.

Diedrich specializes in sourcing, roasting, and selling specialty coffee in a variety of packaging formats, including K-Cup ® portion packs whose brands include Diedrich Coffee ® , Coffee People ® and its licensed Gloria Jean’s ® brand.

The allocation of the purchase price based on the fair value of the acquired assets and liabilities assumed was as follows (in thousands):

 

Restricted cash

   $ 623   

Accounts receivable

     10,361   

Inventories

     6,732   

Deferred income taxes

     1,733   

Other current assets

     2,543   

Fixed assets

     11,741   

Intangibles

     100,200   

Goodwill

     217,519   

Other long-term asset

     156   

Accounts payable

     (3,836

Accrued compensation costs

     (8,670

Accrued expenses

     (3,480

Deferred income taxes, long-term

     (30,361
        

Total

   $ 305,261   
        

Acquisition costs were expensed as incurred and totaled approximately $3.2 million for the thirteen weeks ended December 26, 2009, and are included in general and administrative expenses of the Company.

Amortizable intangible assets acquired include approximately $83.3 million for customer relationships and $16.9 million for product names. The weighted-average amortization period for these assets is 10 years and will be amortized on a straight-line basis over their respective useful lives.

The cost of the acquisition in excess of the fair market value of assets acquired less liabilities assumed represents acquired goodwill of approximately $217.5 million. The acquisition provides the Company with an expanded West Coast presence and manufacturing and distribution synergies, which provide the basis of goodwill recognized. Goodwill and intangible assets related to this acquisition are reported in the SCBU segment of the Company. The goodwill and intangible assets recognized are not deductible for tax purposes.

The acquisition was completed on May 11, 2010 and accordingly results of operations from such date have been included in the Company’s Statement of Operations. Effective September 26, 2010, the beginning of the Company’s fiscal year 2011, Diedrich was migrated onto the Company’s common information technology platform. As a result, it is impracticable to disclose separately Diedrich’s contributions to revenue and income before taxes for the thirteen weeks ended December 25, 2010.

 

-13-


Timothy’s Coffee of the World Inc.

On November 13, 2009, the Company acquired all of the outstanding capital stock of Timothy’s Coffee of the World Inc. (“Timothy’s”), which included its brand and wholesale coffee business. Timothy’s is as a wholly-owned Canadian subsidiary, with operations integrated into the SCBU segment. Timothy’s functional currency is the U.S. dollar.

Timothy’s wholesale business produces specialty coffee, tea and other beverages in a variety of packaged forms, including K-Cup ® portion packs whose brands are Timothy’s ® and its licensed brand Emeril’s ® . The acquisition provided the Company with a Canadian presence, the Timothy’s brand name and a coffee roasting and packaging facility in Toronto.

Total consideration under the terms of the share purchase agreement amounted to approximately USD $155.7 million. The share purchase agreement contains customary representations, warranties and covenants given by the parties. The total cash disbursement was $154.2 million and the Company assumed liabilities of $1.5 million which were 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 (in thousands):

 

Accounts receivable

   $ 8,732   

Inventory

     6,911   

Other current assets

     83   

Fixed assets

     7,827   

Intangibles

     98,300   

Goodwill

     69,297   

Accounts payable

     (6,852

Accrued compensation costs

     (132

Accrued expenses

     (966

Capital lease

     (186

Deferred income taxes

     (27,274
        

Total

   $ 155,740   
        

Acquisition costs were expensed as incurred and totaled approximately $1.9 million for the thirteen weeks ended December 26, 2009 and are included in general and administrative expenses of the Company. There were no acquisition costs incurred with respect to the Timothy’s acquisition in the thirteen weeks ended December 25, 2010.

Amortizable intangible assets acquired include approximately $83.2 million for customer relationships with an estimated life of 16 years, approximately $8.9 million for the Timothy’s trade name with an estimated life of 11 years and approximately $6.2 million for supply agreements with an estimated life of 11 years. The weighted-average amortization period for these assets is 15.2 years and will be amortized on a straight-line basis over their respective useful lives.

The cost of the acquisition in excess of the fair market value of assets acquired less liabilities assumed represents acquired goodwill of approximately $69.3 million. The acquisition provided the Company with a Canadian presence and manufacturing and distribution synergies, which provide the basis of goodwill recognized. Goodwill and intangible assets related to this acquisition are reported in the SCBU segment of the Company. The goodwill recognized is not deductible for tax purposes.

 

-14-


The acquisition was completed on November 13, 2009 and accordingly results of operations from such date have been included in the Company’s Statement of Operations. For the thirteen weeks ended December 25, 2010, the Timothy’s acquisition resulted in an additional $12.0 million of revenue and $6.8 million of income before income taxes. For the thirteen weeks ended December 26, 2009, the Timothy’s acquisition resulted in an additional $4.1 million of revenue and $0.0 million of income before income taxes.

Supplemental Pro Forma Information

The following information reflects the Van Houtte, Diedrich and Timothy’s acquisitions as if the transactions had occurred as of the beginning of the Company’s fiscal 2010. The unaudited pro forma information does not necessarily reflect the actual results that would have occurred had the Company, Van Houtte, Diedrich and Timothy’s been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.

The following table represents select unaudited consolidated pro forma data (in thousands):

 

     Thirteen
weeks ended
December 25,
2010
     Thirteen
weeks ended
December 26,
2009
 

Unaudited Consolidated proforma revenue

   $ 690,790       $ 448,548   

Unaudited Consolidated proforma net income

   $ 6,545       $ 4,851   

Unaudited Consolidated proforma diluted earnings per share

   $ 0.04       $ 0.04   

 

4. Inventories

Inventories consisted of the following (in thousands):

 

     December 25,
2010
     September 25,
2010
 

Raw materials and supplies

   $ 65,930       $ 46,328  

Finished goods

     203,202         216,150   
                 
   $ 269,132       $ 262,478   
                 

Inventory values above are presented net of $3.2 and $3.0 million of obsolescence reserves at December 25, 2010 and September 25, 2010, respectively.

At December 25, 2010, the Company had approximately $240.2 million in green coffee purchase commitments, of which approximately 40% had a fixed price. These commitments extend through 2013. The value of the variable portion of these commitments was calculated using an average “C” price of coffee of $2.31 per pound at December 25, 2010. In addition to its green coffee commitments, the Company had approximately $69.2 million in fixed price brewer inventory purchase commitments and $147.7 million in production raw materials commitments at December 25, 2010. The Company believes based on relationships established with its suppliers that the risk of non-delivery on such purchase commitments is remote.

 

-15-


5. Fixed Assets

Fixed assets consist of the following (in thousands):

 

     Useful Life in Years      December 25,
2010
    September 25,
2010
 

Production equipment

     1-15       $ 253,944      $ 160,080   

Equipment on loan to wholesale customers

     3-7         193,308        11,013   

Computer equipment and software

     1-10         73,663        41,923   

Land

     Indefinite         4,089        1,743   

Building and building improvements

     4-30         45,268        23,954   

Furniture and fixtures

     1-15         21,822        11,413   

Vehicles

     4-5         19,188        1,020   

Leasehold improvements

    
 
 
1-20 or remaining
life of lease, whichever
is less
  
  
  
     31,896        17,224   

Construction-in-progress

        60,171        72,161   
                   

Total fixed assets

        703,349        340,531   

Accumulated depreciation

        (313,741     (81,608
                   
      $ 389,608      $ 258,923   
                   

Total depreciation expense relating to all fixed assets was $12.2 million and $5.9 million for the thirteen weeks ended December 25, 2010 and December 26, 2009, 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 December 25, 2010 are expected to be in productive use within the next twelve months.

The Company capitalized $0.3 million of interest expense in each of the thirteen week periods ended December 25, 2010 and December 26, 2009.

 

6. Goodwill and Intangible Assets

The following represents the change in the carrying amount of goodwill by segment for the thirteen weeks ended December 25, 2010 (in thousands):

 

     SCBU      CBU      Keurig      Total  

Balance at September 25, 2010

   $ 314,042       $ —         $ 72,374       $ 386,416   

Acquisition of Van Houtte

     —           382,985         —           382,985   
                                   

Balance at December 25, 2010

   $ 314,042       $ 382,985       $ 72,374       $ 769,401   
                                   

 

-16-


The Company has not recognized any impairment loss associated with goodwill.

Definite-lived intangible assets consist of the following (in thousands):

 

     December 25, 2010     September 25, 2010  
     Gross Carrying
Amount
     Accumulated
Amortization
    Gross Carrying
Amount
     Accumulated
Amortization
 

Intangible assets subject to amortization

          

Acquired technology

   $ 21,616       $ (11,967   $ 21,317       $ (11,464

Customer and roaster agreements

     27,092         (11,426     25,900         (10,688

Customer relationships

     434,318         (13,095     176,867         (8,915

Trade names

     37,504         (3,077     29,256         (2,338

Non-compete agreements

     374         (309     374         (304
                                  

Total

   $ 520,904       $ (39,874   $ 253,714       $ (33,709
                                  

Definite-lived intangible assets are amortized on a straight-line basis over the period of expected economic benefit. Total amortization expense was $6.2 million and $2.1 million for the thirteen weeks ended December 25, 2010 and December 26, 2009, respectively.

Indefinite-lived intangible assets were $92.9 million at December 25, 2010 and consisted of trademarks.

The estimated useful lives of the intangible assets subject to amortization are 4 to 10 years for acquired technology, 8 to 11 years for customer and roaster agreements, 7 to 16 years for customer relationships, 9 to 11 years for trade names and 2 to 5 years for non-compete agreements.

The estimated aggregate amortization expense for the remainder of fiscal 2011, for each of the next five years and thereafter, is as follows (in thousands):

 

2011

   $ 35,361   

2012

   $ 46,973   

2013

   $ 46,763   

2014

   $ 46,155   

2015

   $ 44,661   

2016

   $ 43,972   

Thereafter

   $ 217,145   

 

7. Assets Held for Sale

In conjunction with the acquisition of Van Houtte (see Note 3, Acquisitions ), the Company is conducting a strategic review of the Van Houtte U.S. Coffee Service business (“Filterfresh”) in contemplation of a potential divestiture of Filterfresh. Management expects to complete the sale within a year of the acquisition date of December 17, 2010. As a result, as of December 25, 2010, all the assets and liabilities relating to the Filterfresh business have been reported in the Consolidated Balance Sheets as assets and liabilities held-for-sale. The preliminary fair value of Filterfresh was estimated using a market-based multiple approach.

 

-17-


The following is a summary of the major classes of assets and liabilities of Filterfresh included as assets and liabilities held-for-sale as of December 25, 2010 (in thousands):

 

Cash

   $ 3,638   

Accounts receivable

     13,914   

Inventories

     6,484   

Deferred income taxes

     1,499   

Other current assets

     304   
        

Total current assets

     25,839   
        

Fixed Assets

     32,996   

Intangibles

     23,400   

Goodwill

     38,019   

Other long-term assets

     1,847   
        

Total long-term assets

   $ 96,262   
        

Current portion of long-term debt

     698   

Accounts payable

     3,191   

Accrued compensation

     3,332   

Accrued expenses

     2,097   

Income taxes payable

     1,210   

Other current liabilities

     653   
        

Total current liabilities

     11,181   
        

Deferred income taxes

     1,539   

Long-term debt

     438   
        

Total long-term liabilities

   $ 1,977   
        

 

8. Stockholder’s Equity

On September 28, 2010, the Company sold 8,566,649 shares of its common stock, par value $0.10 per share, to Luigi Lavazza S.p.A., an Italian corporation (“Lavazza”), for an aggregate purchase price of $250.0 million. The sale was recorded to stockholders’ equity net of transaction related expenses of approximately $0.5 million. The shares were sold pursuant to a Common Stock Purchase Agreement which contains a five-and-one-half-year standstill period, during which Lavazza is prohibited from increasing its ownership of Common Stock or making any proposals or announcements relating to extraordinary Company transactions. The standstill is subject to certain exceptions after a one-year period, including Lavazza’s right to purchase additional shares up to 15% of the Company’s outstanding shares.

 

-18-


9. Long-Term Debt

Debt outstanding consists of the following (in thousands):

 

     December 25,
2010
     September 25,
2010
 

Revolving credit facility, USD

   $ 100,000       $ —     

Revolving credit facility, multicurrency

     188,792         —     

Term loan A

     250,000         —     

Term loan B

     544,500         —     

Other

     1,725         13   

Revolving credit facility

     —           173,000   

Term loan A facility

     —           45,000   

Term loan A1 facility

     —           136,500   
                 

Total long-term debt

     1,085,017         354,513   

Less current portion

     8,476         19,009   

Long-term portion

   $ 1,076,541       $ 335,504   
                 

On December 17, 2010, in conjunction with the Van Houtte acquisition, the Company entered into a new $1.45 billion senior secured Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. and other lenders consisting of (i) a $450.0 million U.S. revolving credit facility, (ii) a $200.0 million alternative currency revolving credit facility, (iii) a $250.0 million term loan A facility, and (iv) a $550.0 million term loan B facility.

The term loans A and B require quarterly principal repayments and have maturities of December 2015 and December 2016, respectively. The revolving credit facilities mature in December 2015. The term loans and revolving credit facilities bear interest at a rate equal to an applicable margin plus, at the Company’s option, either (a) a eurodollar rate determined by reference to the cost of funds for deposits for the interest period relevant to such borrowing, adjusted for certain costs, or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 0.50%, (2) the prime rate announced by Bank of America, N.A. from time to time and (3) the eurodollar rate plus 1.00%. The applicable margin with respect to the term loan A and revolving credit facilities is a percentage per annum varying from 1.0% to 2.5% for base rate loans and 2.0% to 3.5% for eurodollar rate loans, based upon the Company’s leverage ratio. The applicable margin with respect to the term loan B is a percentage per annum equal to 3.0% for base rate loans and 4.0% for eurodollar rate loans. With respect to the term loan B, the eurodollar rate is deemed not to be less than 1.50% per annum. The average effective interest rate at December 25, 2010 and September 25, 2010 was 5.2% and 2.7%, respectively, excluding amortization of deferred financing charges. The Company also pays a commitment fee on the average daily unused portion of the revolving credit facilities. The term loan B is net of a 1% original issue discount that is recorded as a contra-debt liability and will be amortized to interest expense over the contractual life of the loan using the effective interest rate method.

The Credit Agreement is secured by substantially all assets of the Company. The Credit Agreement contains customary negative covenants, including limitations on: liens; investments; indebtedness; fundamental changes; asset sales; dividends and distributions or repurchases of the Company’s capital stock; transactions with affiliates; certain burdensome agreements; and changes in the Company’s lines of business.

The Credit Agreement requires the Company to maintain compliance with certain financial ratios, including a consolidated leverage ratio, a consolidated interest coverage ratio and a capital expenditures covenant. At December 25, 2010, the Company was in compliance with these covenants. In addition, the Credit Agreement contains certain mandatory prepayment requirements, including a percentage of annual excess cash flow.

At December 25, 2010 and September 25, 2010, respectively, the Company had $1.7 million and $0.7 million in outstanding letters of credit under the Credit Agreement and former credit facility, respectively.

 

-19-


In connection with the new Credit Agreement, the Company incurred debt financing costs of $41.4 million. These costs are included in Other Long-Term Assets on the Consolidated Balance Sheet and are amortized as interest expense over the life of the respective loan using the effective interest rate method. Interest expense for the thirteen weeks ended December 25, 2010 also includes $2.6 million related to debt financing costs that were written-off due to the extinguishment of the former credit facility.

The Company enters into interest rate swap agreements to limit the interest rate exposure to a fixed rate. In accordance with the swap agreements and on a monthly basis, interest expense is calculated based on the floating 30-day Libor rate and the fixed rate. If interest expense calculated is greater based on the 30-day Libor rate, the swap counterparty pays the difference to the Company; if interest expense as calculated is greater based on the fixed rate, the Company pays the difference to the swap counterparty. The following table summarizes the interest rate swaps outstanding (in thousands):

 

Hedged Transaction

   Notional Amount of
Underlying Debt
     Fixed Rate
Received
    Maturity      Fair Value of Swaps  
           December 25,
2010
    September 25,
2010
 

30-day LIBOR

   $ 19,800         5.44     2011       $ (390   $ (647

30-day LIBOR

   $ 40,000         1.38     2012       $ (486   $ (670

30-day LIBOR

   $ 20,000         3.87     2013       $ (1,212   $ (1,416
                              
   $ 79,800            $ (2,088   $ (2,733
                              

Under the terms of the Credit Agreement, the Company is required to enter into additional interest rate hedging agreements within 90 days of the Credit Agreement to mitigate interest rate risk on approximately $400.0 million of outstanding debt.

For the thirteen weeks ended December 25, 2010 and December 26, 2009, the Company paid approximately $0.5 million and $0.7 million, respectively, in additional interest expense pursuant to swap agreements.

Maturities

Scheduled maturities of long-term debt are as follows (in thousands):

 

Fiscal Year

      

Remainder 2011

   $ 5,845   

2012

     11,010   

2013

     14,137   

2014

     20,377   

2015

     26,593   

Thereafter

     1,007,055   
        
   $ 1,085,017   
        

 

-20-


10. Noncontrolling Interests in Consolidated Subsidiaries

In conjunction with the acquisition of Van Houtte (see Note 3, Acquisitions ), the Company became the parent of the following subsidiaries:

 

Subsidiary Owned

   Business Purpose    Majority  

L’Authentique Pose Café, Inc.

   Coffee Services      50

Automates Alouette, Inc.

   Coffee Services      75

Pause Café Estrie, Inc.

   Coffee Services      50

Gestion GHMR s.e.n.c.

   License      50

Corporate Coffee Systems, LLC

   U.S. Coffee Services      56

The noncontrolling interests in the subsidiaries are presented in the consolidated balance sheets as a separate component of shareholders’ equity along with the shareholders’ equity of the controlling interest. The net income attributable to noncontrolling interest is classified in the Consolidated Statements of Operations as part of consolidated net earnings with the net earnings attributable to the noncontrolling interests deducted from total consolidated net earnings. If a change in ownership of a consolidated subsidiary results in a loss of control or deconsolidation, any retained ownership interests are remeasured with the gain or loss reported to net earnings.

 

11. Derivative Financial Instruments

Cash Flow Hedges

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 had previously entered 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, other than those assumed from Van Houtte, as cash flow hedges and 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 (“OCI”). 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.

The Company has interest rate swap agreements with Bank of America N.A. and Sovereign Bank. During the thirteen weeks ended December 25, 2010 and December 26, 2009, the Company paid $0.5 million and $0.7 million, respectively, pursuant to the swap agreements, which increased interest expense.

The following table summarizes the fair value of the Company’s derivatives included in the Consolidated Balance Sheets (in thousands):

Fair Value of Derivative Instruments (Gross of Tax)

 

     December 25,
2010
    September 25,
2010
    Balance Sheet
Classification
 

Interest Rate Swaps

   $ (2,088   $ (2,733     Other short-term liabilities   
                  

Total

   $ (2,088   $ (2,733  
                  

 

-21-


The following tables summarizes the effect of the Company’s financial instruments included in the Consolidated Statement of Operations (in thousands):

Effect of Derivative Instruments on Earnings (Gross of Tax)

for the thirteen weeks ended December 25, 2010

 

     Amount of
Gain or (Loss)
in OCI
     Location of
Gain or (Loss)
Reclassified from
OCI into Income
     Amount of Gain
or (Loss)
Reclassified from

OCI into
Income
 

Interest Rate Swaps

   $ 645         Interest Expense       $ —     
                    

Total

   $ 645          $ —     
                    

Effect of Derivative Instruments on Earnings (Gross of Tax)

for the thirteen weeks ended December 26, 2009

 

     Amount of
Gain or (Loss)
in OCI
     Location of
Gain or (Loss)
Reclassified from
OCI into Income
     Amount of Gain
or (Loss)
Reclassified

from OCI into
Income
 

Coffee Futures

   $ 66         Cost of Sales       $ 63   

Interest Rate Swaps

   $ 413         Interest Expense       $ —     
                    

Total

   $ 479          $ 63   
                    

The Company is exposed to credit loss in the event of nonperformance by the counterparties to these financial instruments, however nonperformance is not anticipated.

Other Derivatives

The Company is also exposed to certain foreign currency risks and enters into derivatives to mitigate this exposure. The Company has entered into a five year, $150.0 million Canadian cross currency swap to mitigate the remeasurement risk of foreign exchange rate fluctuations on an intercompany note. Gains and losses from this instrument are largely offset by the financial impact of remeasuring the intercompany note that is denominated in Canadian currency. This cross currency swap is not designated as a hedging instrument for accounting purposes and is recorded at fair value, with the changes in fair value recognized in the Consolidated Statements of Operations. The Company does not use derivatives for trading or speculative purposes.

The following table summarizes this derivative contract outstanding at December 25, 2010 (in thousands):

 

Type of Derivative

   Fair Value     Balance Sheet Classification      Gains
(losses)
recognized
in income
    Income Statement Classification  

Cross currency swap

   $ (3,652     Other short-term liabilities       $ (3,652     Gain (loss) on financial instruments, net   
                     

Total

   $ (3,652      $ (3,652  
                     

 

-22-


The Company recorded net foreign currency transaction gains of $1.6 million for the thirteen weeks ended December 25, 2010. During the thirteen weeks ended December 25, 2010 and December 26, 2009, the Company incurred net losses of $6.4 million and $0.4 million, respectively on financial instruments not designated as hedges for accounting purposes as follows (in thousands):

 

     December 25,
2010
    December 26,
2009
 

Net loss on cross currency swap

   $ (3,652   $ —     

Net gains on coffee futures

     495        —     

Net losses on foreign currency option and forward contracts

     (3,220     (354
                
   $ (6,377   $ (354
                

The foreign currency contracts were entered into to mitigate the risk associated with the Canadian denominated purchase price of Van Houtte.

Van Houtte Derivatives

In conjunction with the acquisition of Van Houtte (see Note 3, Acquisitions ), the Company assumed certain derivative financial instruments entered into by Van Houtte prior to the acquisition. These derivatives include foreign currency forward contracts and coffee futures contracts and were established to mitigate certain foreign currency and commodity risks. These derivatives were not designated as hedging instruments for accounting purposes and are recorded at fair value, with the changes in fair value recognized in the Consolidated Statements of Operations.

The following table summarizes the derivative contracts outstanding at December 25, 2010 (in thousands):

 

Type of Derivative

   Fair Value     Balance Sheet Classification      Gains
(losses)
recognized
in income
     Income Statement Classification  

Foreign currency forwards

   $ (187     Other short-term liabilities         $(26)        
 
Gain (loss) on financial
instruments, net
  
  

Coffee futures

   $ 784        Other current assets         $495        
 
Gain (loss) on financial
instruments, net
  
  
                      

Total

   $ 597         $ 469      
                      

 

12. Fair Value Measurements

The Company measures 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 by the Financial Accounting Standards Board 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 – Inputs other than quoted prices that are observable, either directly or indirectly, for identical or similar assets and liabilities in active or non-active markets.

 

-23-


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

The following table discloses the level used by fair value measurements at December 25, 2010:

 

Financial Instrument

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

Derivatives

   $ —         $ 784      $ —           Other current assets   

Derivatives

     —           (5,927     —           Other short-term liabilities   
                      

Total

   $ —         $ (5,143   $ —        
                            

The following table discloses the level used by fair value measurements at September 25, 2010:

 

Financial Instrument

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

Derivatives

   $ —         $ 1,717      $ —           Other current assets   

Derivatives

   $ —         $ (4,377   $ —           Other short-term liabilities   
                            

Total

   $ —         $ (2,660   $ —        
                            

Derivative financial instruments include coffee futures contracts, interest rate swap agreements and foreign currency option contracts. To determine fair value, the Company utilizes the market approach valuation technique for coffee futures and foreign currency options and the income approach for the interest rate swap agreements.

Level 2 derivative financial instruments use inputs that are based on market data of identical (or similar) instruments, including forward prices for commodities, interest rates curves and spot prices, that are in observable markets. Derivatives recorded on the balance sheet are at fair value with changes in fair value recorded in other comprehensive income for cash flow hedges and in the Consolidated Statements of Operations for other derivatives.

 

13. Product Warranties

The Company offers a one-year warranty 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. Recently, the Company experienced higher-than-anticipated warranty claims associated with its reservoir brewer models. Management’s analysis of these claims led to the diagnosis of a later-stage performance issue caused by a component failing at higher-than-anticipated rates. While not a safety concern, when manifested, brewers with this issue operate inconsistently or cease operation at a later stage of the warranty life. This issue is not presenting itself consistently across all units, and whether or not it occurs seems to depend on a number of variables including brewer usage rate and water quality. Management believes that they have identified the root cause of the component failure and units produced beginning in January 2011 incorporate an improved component that is expected to substantially eliminate the issue. While the Company maintains a reserve for product warranty costs based on certain estimates that include the findings relating to this component failure, because this is a later-stage issue, actual warranty costs may exceed the reserve, and there can be no assurance that the Company will not need to increase the reserve or experience additional warranty expense related to this quality issue in future periods.

 

-24-


The changes in the carrying amount of product warranties for the thirteen weeks ended December 25, 2010 and December 26, 2009 are as follows (in thousands):

 

     Thirteen
weeks ended
December 25,
2010
    Thirteen
weeks ended
December 26,
2009
 

Balance, beginning of period

   $ 6,694      $ 724   

Provision charged to income

     16,625        2,332   

Usage, net of recoveries

     (5,628     (1,379
                

Balance, end of period

   $ 17,691      $ 1,677   
                

 

14. Earnings Per Share

The following table illustrates the reconciliation of the numerator and denominator of basic and diluted earnings per share computations (dollars in thousands, except per share data):

 

     Thirteen
weeks ended
December 25,
2010
     Thirteen
weeks ended
December 26,
2009

(As Restated)
 

Numerator for basic and diluted earnings per share:

     

Net income

   $ 2,229       $ 10,060   
                 

Denominator:

     

Basic weighted average shares outstanding

     141,374,327         130,969,293   

Effect of dilutive securities - stock options

     5,661,745         6,517,038   
                 

Diluted weighted average shares outstanding

     147,036,072         137,486,331   
                 

Basic net income per share

   $ 0.02       $ 0.08   

Diluted net income per share

   $ 0.02       $ 0.07   

For the thirteen weeks ended December 25, 2010 and December 26, 2009, options to purchase 451,531 and 13,023 shares of common stock, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.

 

15. Compensation Plans

Stock Option Plans

The grant-date fair value of employee stock options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued in the first quarter of fiscal 2011: an expected life averaging 6 years; an average volatility of 49%; no dividend yield; and a risk-free interest rate averaging 2.3%. The weighted-average fair value of options granted during the thirteen weeks ended December 25, 2010 was $15.61 per share.

The grant-date fair value of employee stock options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued in the first quarter of fiscal 2010: an expected life averaging 6 years; an average volatility of 51%; no dividend yield; and a risk-free interest rate averaging 2.8%. The weighted-average fair value of options granted during the thirteen weeks ended December 26, 2009 was $12.59 per share.

Employee Stock Purchase Plan

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 first quarter of fiscal 2011: an expected life averaging 6 months; an average volatility of 43%; no dividend yield; and a risk-free interest rate averaging 0.2%. The weighted-average fair values of purchase rights granted during the thirteen weeks ended December 25, 2010 was $10.21 per share.

 

-25-


For the purchase rights granted in the first quarter of fiscal 2010, the following assumptions were used: an expected life averaging 6 months; an average volatility of 57%; no dividend yield; and a risk-free interest rate averaging 0.2%. The weighted-average fair values of purchase rights granted during the thirteen weeks ended December 26, 2009 was $7.13 per share.

For the thirteen weeks ended December 25, 2010 and December 26, 2009, income before income taxes was reduced by a stock compensation expense of $2.2 and $1.9 million (gross of tax), respectively.

Employee Stock Ownership Plan

The Company maintained an Employee Stock Ownership Plan (the “ESOP”), which terminated at the end of the 2010 calendar year. The ESOP is qualified under sections 401(a) and 4975(e)(7) of the Internal Revenue Code. In the thirteen weeks ended December 26, 2009, the Company recorded compensation costs of $0.3 million to accrue for anticipated stock distributions under the ESOP. The Company recorded no compensation costs for the thirteen weeks ended December 25, 2010 and there were no unearned shares remaining in the ESOP at December 25, 2010.

Deferred Compensation Plan

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 thirteen week periods ended December 25, 2010 and December 26, 2009, $61,000 and $49,000 of compensation expense was recorded under this Plan, respectively.

 

16. Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax benefits or 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.

As of December 25, 2010, the Company had net operating loss carryforwards of $10.6 million and $21.0 million, respectively, for federal and state, as well as a $26.0 million combined federal and state capital loss carryforward available to be utilized against future taxable income for years through fiscal year 2029, subject to an annual limitation pertaining to change in ownership rules under the Internal Revenue Code. Based upon earnings history, the Company has concluded that it is more likely than not that the net operating loss carryforwards will be utilized prior to their expiration, but the capital loss carryforward will not. The Company has recorded a valuation allowance against the entire deferred tax asset balance for the capital loss carryforward.

The total amount of unrecognized tax benefits at December 25, 2010 and September 25, 2010 was $22.1 million and $5.4 million, respectively. The amount of unrecognized tax benefits at December 25, 2010 that would impact the effective tax rate if resolved in favor of the Company is $0.5 million. Note the Company is indemnified for $21.6 million of the total reserve balance. If resolved in favor of the Company, the associated indemnification receivable, recorded in Other Long-Term Assets , would be reduced accordingly. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.

 

-26-


17. Legal Proceedings

On October 1, 2010, Keurig filed suit against Sturm Foods, Inc. (“Sturm”) in the United States District Court for the District of Delaware (Civil Action No. 1:10-CV-00841-SLR) for patent and trademark infringement, false advertising, and other claims, related to Sturm’s sale of “Grove Square” beverage cartridges that claim to be compatible with Keurig brewers. The suit alleges that the “Grove Square” cartridges contain instant rather than fresh-brewed coffee, improperly use Keurig’s trademark, and do not work safely or effectively, in addition to violating Keurig patents. Keurig seeks an injunction prohibiting Sturm from selling these cartridges, as well as money damages. On October 18, 2010, Keurig requested that the court issue a preliminarily injunction on the trademark and false advertising claims pending final resolution of the case. The court is considering such request.

As previously disclosed on a Current report on Form 8-K dated September 28, 2010, the staff of the Securities and Exchange Commission’s (“SEC”) Division of Enforcement informed the Company that it was conducting an inquiry into matters at the Company. The Company, at the direction of the audit committee of the Company’s board of directors, continues to cooperate fully with the SEC staff’s inquiry.

The Company and certain of its officers and directors are currently subject to a consolidated putative securities fraud class action and a consolidated putative stockholder derivative action, each pending in the United States Court for the District of Vermont, and a putative stockholder derivative action pending in the Superior Court of the State of Vermont for Washington County.

The consolidated putative securities fraud class action, organized under the caption Horowitz v. Green Mountain Coffee Roasters, Inc. , Civ. No. 2:10-cv-00227, is pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III. The underlying complaints in the consolidated action allege violations of the federal securities laws in connection with the Company’s disclosures relating to its revenues and its forward guidance. The complaints include counts for violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 against all defendants, and for violation of Section 20(a) of the Exchange Act against the officer defendants. The plaintiffs seek to represent all purchasers of the Company’s securities between July 28, 2010 and September 28, 2010 or September 29, 2010. The complaints seek class certification, compensatory damages, equitable and/or injunctive relief, attorneys’ fees, costs, and such other relief as the court should deem just and proper. Pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(a)(3), plaintiffs had until November 29, 2010 to move the court to serve as lead plaintiff of the putative class. On December 20, 2010, the court appointed Jerzy Warchol, Robert M. Nichols, Jennifer M. Nichols, Marc Schmerler and Mike Shanley lead plaintiffs and approved their selection of Glancy Binkow & Goldberg LLP and Robbins Geller Rudman & Dowd LLP as co-lead counsel and the Law Office of Brian Hehir and Woodward & Kelley, PLLC as liaison counsel. On December 29, 2010 and January 3, 2011, two of the plaintiffs in the underlying actions in the consolidated proceedings, Russell Blank and Dan M. Horowitz, voluntarily dismissed their cases without prejudice. Pursuant to a stipulated motion granted by the court on November 29, 2010, the lead plaintiffs are to file an amended consolidated complaint no later than February 18, 2011, and defendants will move to dismiss that complaint 60 days thereafter’.

 

-27-


The stockholder derivative actions consist of the following: a consolidated action captioned Himmel v. Robert P. Stiller, et al. , Civ. No. 2:10-cv-00233, pending in the United States District Court for the District of Vermont before the Honorable William K. Sessions, III; and M. Elizabeth Dickenson v. Robert P. Stiller, et al. , Civ. No. 818-11-10, pending in the Superior Court of the State of Vermont for Washington County. The derivative complaints are asserted nominally on behalf of the Company against certain of its directors and officers and are premised on the same allegations asserted in the putative securities class action complaints described above. The derivative complaints assert claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The complaints seek compensatory damages, injunctive relief, restitution, disgorgement, attorneys’ fees, costs, and such other relief as the court should deem just and proper. On November 29, 2010, the federal court entered an order consolidating the two federal actions and appointing the firms of Robbins Umeda LLP and Shuman Law Firm as co-lead plaintiffs’ counsel. No scheduling order has been entered in either the state or federal stockholder derivative actions.

The Company and the other defendants intend to vigorously defend the pending lawsuits. Additional lawsuits may be filed and, at this time, the Company is unable to predict the outcome of these lawsuits, the possible loss or range of loss, if any, associated with the resolution of these lawsuits or any potential effect they may have on the Company or its operations.

 

18. Related Party Transactions

The Company uses travel services provided by Heritage Flight, a charter air services company owned by Mr. Robert P. Stiller, the Company’s former CEO and current Chairman of the Board. During the thirteen weeks ended December 25, 2010 and December 26, 2009, Heritage Flight billed the Company the amounts of $0.1 million and $0.1 million, respectively, for travel services to various employees of the Company.

 

19. Revision to Fiscal 2010 Year-End Consolidated Statement of Cash Flows

In preparing the consolidated financial statements for the thirteen weeks ended December 25, 2010, management identified that certain amounts previously disclosed within the Consolidated Statement of Cash Flows for the fiscal year ended September 25, 2010 required reclassification. These misstatements had no effect on the Company’s cash and cash equivalents. Specifically, the supplemental disclosure of fixed asset purchases included in accounts payable and not disbursed was overstated by approximately $8.2 million. This resulted in an $8.2 million understatement on the capital expenditures for fixed assets line and net cash used for investing activities category for fiscal 2010 and a corresponding understatement of the change in accounts payable line and an overstatement of net cash used in operating activities. The Company will make this immaterial correction when the 2010 financial statements are next issued.

 

-28-


20. Pending Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board issued an update to accounting guidance for business combinations related to the disclosure of supplementary pro forma information. Accounting guidance for business combinations requires a public entity to disclose pro forma revenue and earnings for the combined entity as though the combination occurred at the beginning of the reporting period. This update clarifies that if a public entity presents comparative financial statements, the pro forma information for all business combinations occurring during the current year should be reported as though the combination occurred at the beginning of the prior annual reporting period. This update also expands the disclosure requirement to include the nature and amount of pro forma adjustments made to arrive at the disclosed pro forma revenue and earnings. This update is effective for business combinations for which the acquisition date is on or after annual reporting periods beginning after December 15, 2010, which is fiscal 2012 for the Company. The effect of adoption will depend primarily on the Company’s acquisitions occurring after such date, if any.

 

-29-


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” or “We”). You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere in this report.

2010 Restatement

As discussed in the 2010 Restatement section on page 2 and further described in Note 1, Basis of Presentation, of the Notes to Consolidated Financial Statements, we have restated our financial statements and other information.

In this Quarterly Report on Form 10-Q, we are reporting net income of $10.1 million for the thirteen weeks ended December 26, 2009, compared to $12.5 million that we reported in our Form 10-Q dated February 4, 2010. This decrease results from the restatement and errors of the same type that gave rise to the restatement.

In light of the restatement, readers should no longer rely on our previously filed financial statements and other financial information for the years and for each of the quarters in the fiscal years 2009, 2008, 2007 and 2006 and for the first three quarters of fiscal 2010.

Overview

We are a leader in the specialty coffee and coffee maker businesses. We roast high-quality Arabica bean coffees including single-origin, Fair Trade Certified TM , certified organic, flavored, limited edition and proprietary blends offered in K-Cup ® portion packs, whole bean and ground coffee selections, as well as other specialty beverages including tea and cocoa also offered in K-Cup portion packs. In addition, we manufacture and sell the Keurig ® single-cup brewing system for use with K-Cup portion packs. K-Cup portion pack brands that are packaged and sold by us include:

 

   

Barista Prima TM

 

   

Bigelow ®

 

   

Café Escapes ®

 

   

Caribou Coffee ®

 

   

Celestial Seasonings ®

 

   

Coffee People ®

 

   

Diedrich Coffee ®

 

   

Donut House ®

 

   

Emeril’s ®

 

   

Gloria Jean’s ®

 

   

Green Mountain Coffee ®

 

   

Green Mountain Naturals TM

 

   

Kahlua ®

 

   

Newman’s Own ® Organics

 

   

Timothy’s ®

 

   

Tully’s ®

 

   

revv ®

 

   

Van Houtte ®

 

   

Wolfgang Puck ®

 

-30-


The Newman’s Own ® Organics, Caribou Coffee ® , Celestial Seasonings ® , Kahlua ® , Emeril’s ® , Gloria Jean’s ® , Bigelow ® and Wolfgang Puck ® brands are licensed to us or to one of our wholly-owned subsidiaries, for exclusive use in the Keurig ® single-cup brewing system.

Business Segments

The Company manages its operations through three operating segments, Specialty Coffee business unit (“SCBU”), Keurig business unit (“Keurig”) and Canadian business unit (“CBU”) as a result of the Company’s recent acquisition of LJVH Holdings, Inc. (“LJVH” and together with its subsidiaries, “Van Houtte”). We evaluate performance primarily based on segment income before taxes. Expenses not specifically related to either operating segment are recorded in the “Corporate” segment.

SCBU sources, produces and sells more than 200 varieties of coffee, cocoa, teas and other beverages in K-Cup ® portion packs and coffee in more traditional packaging, including whole bean and ground coffee selections in bags and ground coffee in fractional packs, for use both at-home (“AH”) and away-from-home (“AFH”). These varieties are sold primarily in North American wholesale channels, including supermarkets and convenience stores, in restaurants and hospitality, to office coffee distributors and directly to consumers via its website www.greenmountaincoffee.com . In addition, SCBU sells Keurig single-cup brewers and other accessories directly to consumers and supermarkets.

Keurig is a pioneer and leading manufacturer of gourmet single-cup brewing systems, and also targets its premium patented single-cup brewing systems for use both AH and AFH, mainly in North America. Keurig sells AH single-cup brewers, accessories and coffee, tea, cocoa and other beverages in K-Cup portion packs produced mainly by SCBU and CBU to retailers by principally processing its orders through fulfillment entities for the AH channels. Keurig sells AFH single-cup brewers to distributors for use in offices. Keurig also sells AH brewers, a limited number of AFH brewers and K-Cup portion packs directly to consumers via its website, www.keurig.com .

CBU sources, produces and sells coffees in a variety of packaging formats, including K-Cup portion packs, whose brands include Van Houtte ® , Brûlerie St. Denis ® , Brûlerie Mont-Royal ® and Orient Express ® and its licensed Bigelow ® and Wolfgang Puck ® brands. These varieties are sold primarily to wholesale channels, including supermarkets and retail, and through office coffee services to offices, convenience stores and restaurants mainly throughout Canada. CBU also manufactures brewing equipment and is responsible for all Company coffee brand sales in the grocery channel in Canada.

Cost of sales for the Company consists of the cost of raw materials including coffee beans, cocoa, flavorings and packaging materials; a portion of our rental expense; production, warehousing and distribution costs which include salaries; distribution and merchandising personnel; leases and depreciation on facilities and equipment used in production; the cost of brewers manufactured by suppliers; fulfillment charges (including those paid to third-parties or to fulfillment entities); 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, as well as certain acquisition-related expenses.

Corporate expenses are comprised mainly of the compensation and other related expenses of certain of the Company’s senior executive officers and other selected employees who perform duties related to our entire enterprise. Corporate expenses also include interest expense, foreign exchange gains or losses, certain corporate legal expenses and compensation of the board of directors. In addition, corporate expenses include acquisition-related costs. Corporate assets include cash, short-term investments and deferred income taxes.

 

-31-


Goodwill and intangibles related to the Frontier, Tully’s, Timothy’s and Diedrich acquisitions are included in the SCBU segment. Keurig related goodwill and intangibles are included in the Keurig segment. Van Houtte related goodwill and intangibles are included in the CBU segment.

The Company analyzes its business on a segment basis, records net sales on a segment basis and eliminates intersegment sales as part of its financial consolidation. Intersegment sales primarily consist of the SCBU and CBU selling K-Cup ® portion packs to Keurig, and Keurig sells brewers and records royalty income from K-Cup ® portion packs when shipped by the SCBU and CBU.

Basis of Presentation

Included in this presentation are discussions and reconciliations of income before taxes, net income and diluted earnings per share in accordance with generally accepted accounting principles (“GAAP”) to income before taxes, net income and diluted earnings per share excluding certain expenses and losses, which we refer to as non-GAAP income before taxes, non-GAAP net income and non-GAAP diluted earnings per share. These non-GAAP measures exclude transaction expenses related to the Company’s acquisitions, legal and accounting expenses related to the SEC inquiry, the Company’s internal investigation and pending litigation, foreign exchange impact of hedging the risk associated with the Canadian dollar purchase price of the Van Houtte acquisition, and non-cash related items such as amortization of identifiable intangibles. These non-GAAP measures are 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.

Acquisitions

On December 17, 2010, the Company acquired Van Houtte through the purchase of all of the outstanding capital stock of LJVH Holdings, Inc., a specialty coffee roaster headquartered in Montreal, Quebec, for approximately USD $907.9 million, net of cash acquired. The acquisition was financed with cash on hand and a new $1.45 billion credit facility. The purchase price is subject to a working capital adjustment based upon a balance sheet audit prepared as of December 17, 2010 and completed on or before February 14, 2011. The CBU consists of the operations of Van Houtte.

On May 11, 2010, the Company acquired all of the outstanding common stock of Diedrich Coffee, Inc. (“Diedrich”) for approximately $305.3 million, net of cash acquired. The acquisition was financed using available cash on hand, the then existing credit facility and a term loan of $140.0 million.

 

-32-


On November 13, 2009, the Company acquired all of the outstanding stock of Timothy’s Coffee of the World Inc. (“Timothy’s”), which included its brand and wholesale coffee business for an aggregate cash purchase price of approximately USD $155.7 million. The acquisition was financed using available cash on hand.

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  
     December 25,
2010
    December  26,
2009

(As Restated)
 

Net sales

     100.0     100.0

Cost of sales

     74.9     72.3
                

Gross profit

     25.1     27.7

Selling and operating expenses

     13.6     15.5

General and administrative expenses

     7.5     6.7
                

Operating income

     4.0     5.5

Other income (expense)

     0.0     0.1

Gain (loss) on financial instruments, net

     (1.1 )%      (0.1 )% 

Gain (loss) on foreign currency, net

     0.3     0.0

Interest expense

     (1.0 )%      (0.3 )% 
                

Income before income taxes

     2.2     5.2

Income tax expense

     (1.8 )%      (2.3 )% 
                

Net Income

     0.4     2.9

Less: Net income attributable to noncontrolling interests

     0.0     0.0
                

Net income attributable to GMCR

     0.4     2.9
                

 

-33-


Segment Summary

Net sales and income before taxes for each of our operating segments are summarized in the tables below (in millions):

 

     Net sales (in millions)  
     Thirteen
weeks ended
December 25,
2010
    Thirteen
weeks ended
December 26,
2009 (As Restated)
 

SCBU

   $ 219.4      $ 133.2   

Keurig

     345.1        212.0   

CBU

     10.5        —     

Corporate

     —          —     
                

Total Company

   $ 575.0      $ 345.2   
                
     Income before taxes (in millions)  
     Thirteen
weeks ended
December 25,
2010
    Thirteen
weeks ended
December 26,
2009 (As Restated)
 

SCBU

   $ 59.7      $ 27.6   

Keurig

     (2.0     6.0   

CBU

     (1.3     —     

Corporate

     (36.0     (11.1

Inter-company eliminations

     (8.0     (4.6
                

Total Company

   $ 12.4      $ 17.9   
                

Revenue

Company Summary

Net sales for the first quarter of fiscal 2011 increased 67% to $575.0 million, up from $345.2 million reported in the first quarter of fiscal 2010 (“the prior year period”). The two primary drivers of the increase in the Company’s net sales were the 89%, or $156.7 million, increase in total K-Cup ® portion pack net sales and the 58%, or $68.6 million, increase in Keurig ® brewer and accessories sales. Approximately 91% of consolidated sales this past quarter were from the Keurig brewing system and its recurring K-Cup portion pack revenue.

In September 2010, the Company announced a price increase on all K-Cup portion packs on October 11, 2010. The Company expects the price increase will be fully implemented by the end of February 2011. In the first quarter of fiscal 2011, the price increase resulted in increased net sales dollars of approximately 4% over the prior year period.

SCBU

SCBU segment net sales increased by $86.2 million or 65%, to $219.4 million in the first quarter of fiscal 2011 as compared to $133.2 million in the prior year period with the primary driver being the continued growth in K-Cup net sales.

Keurig

Keurig segment net sales increased by $133.1 million, or 63%, to $345.1 million in the first quarter of fiscal 2011 as compared to $212.0 million reported in the prior year period. The increase in Keurig segment net sales was due to a 58% increase in single-cup brewer and accessories sales and a 75% increase in K-Cup sales to retailers and consumers.

CBU

The Van Houtte acquisition was completed on December 17, 2010 and accordingly results of operations from such date have been included in the Company’s Statement of Operations. For the thirteen weeks ended December 25, 2010, Van Houtte revenue was $10.5 million.

 

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Gross Profit

Company gross profit for the first quarter of fiscal 2011 totaled $144.4 million, or 25.1% of net sales, as compared to $95.6 million, or 27.7% of net sales, in the prior year period. First quarter 2011 gross margin was adversely affected primarily by higher brewer warranty expenses, to a lesser degree brewer sales returns in the quarter and higher coffee costs. These adverse effects were partially offset by a price increase on K-Cup portion packs beginning October 11, 2010. The increase in warranty expense reduced the fiscal 2011 first quarter’s gross margin by approximately 230 basis points as compared to last year’s first quarter gross margin. The increased warranty expense is a result of the Company experiencing higher-than-anticipated warranty claims associated with its reservoir brewer models. Management’s analysis of these claims led to the diagnosis of a later-stage performance issue caused by a component failing at higher-than-anticipated rates. While not a safety concern, when manifested, brewers with this issue operate inconsistently or cease operation at a later stage of the warranty life. This issue is not presenting itself consistently across all units, and whether or not it occurs seems to depend on a number of variables including brewer usage rate and water quality. Management believes that they have identified the root cause of the component failure and units produced beginning in January 2011 incorporate an improved component that is expected to substantially eliminate the issue. While the Company maintains a reserve for product warranty costs based on certain estimates that include the findings relating to this component failure, because this is a later-stage issue, actual warranty costs may exceed the reserve, and there can be no assurance that the Company will not need to increase the reserve or experience additional warranty expense related to this quality issue in future periods.

Selling, General and Administrative Expenses

Company selling, general and administrative expenses (“S,G&A”) increased 59% to $121.3 million in the first quarter of fiscal 2011 from $76.5 million in the prior-year period. As a percentage of sales, S,G&A improved to 21.1% in the first quarter of fiscal 2011 from 22.2% in the prior year period. First quarter 2011 general and administrative expenses included approximately $8.7 million of transaction-related expenses for the Van Houtte acquisition, $6.0 million of legal and accounting expenses associated with the SEC inquiry, the Company’s internal investigation and pending litigation, as well as $6.2 million in amortization of identifiable intangibles related to the Company’s acquisitions, as compared to $5.1 million of transaction-related expenses for the Timothy’s and Diedrich acquisitions and $2.1 million of amortization of identifiable intangibles in the prior year period.

Gain (Loss) on Financial Instruments

The Company incurred $6.4 million in net losses on financial instruments not designated as hedges for accounting purposes. The loss was primarily due to a $3.6 million re-measurement of our cross currency swap, which hedges the risk in currency movements on an intercompany note receivable denominated in Canadian currency. In addition, the Company incurred net losses of approximately $3.2 million on derivative instruments that were used to hedge the Canadian dollar purchase price of the Van Houtte acquisition.

Foreign Currency Exchange Gain (Loss), Net

In conjunction with the acquisition of Van Houtte, the Company has certain assets and liabilities that are denominated in Canadian currency. During the thirteen weeks ended December 25, 2010 we incurred a net foreign currency gain of approximately $1.6 million primarily related to re-measurement of these assets and liabilities.

Interest Expense

Company interest expense was $6.0 million in the first quarter of fiscal 2011, as compared to $1.0 million in the prior year period due to an increase in outstanding borrowings related to the Van Houtte acquisition combined with the write-off of approximately $2.6 million of deferred financing fees associated with our former credit facility.

 

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Income Taxes

The Company’s income tax rate for the first quarter of fiscal 2011 was 81.9% as compared to 43.7% in the prior year period reflecting the tax effect of the recognition of the non-deductible acquisition-related expenses incurred during the Company’s fourth quarter of fiscal 2010 and first quarter of fiscal 2011 for the Van Houtte acquisition which closed during the Company’s first quarter of fiscal 2011.

Net Income, Non-GAAP Net Income and Diluted Earnings Per Share (“EPS”)

Company net income in the first quarter of fiscal 2011 decreased 78% to $2.2 million, as compared to $10.1 million in the prior year period. Non-GAAP net income for the thirteen weeks ended December 25, 2010, when excluding transaction-related expenses including write-off of deferred financing expenses as part of the new debt financing, amortization of identifiable intangibles related to the Company’s acquisitions, foreign exchange impact of hedging the risk associated with the Canadian dollar purchase price of the Van Houtte acquisition, and legal and accounting expenses related to the SEC inquiry, the Company’s internal investigation and pending litigation in the quarter, increased 73% to $26.1 million from $15.1 million non-GAAP net income in the prior year period which excludes transaction-related expenses for Timothy’s and Diedrich acquisitions and amortization of identifiable intangibles related to the Company’s acquisitions.

Diluted weighted average shares outstanding increased 6.9% primarily due to the issuance of approximately 8.6 million shares of common stock to Luigi Lavazza S.p.A on September 28, 2010.

Company diluted EPS was $0.02 in the first quarter of fiscal 2011, as compared to $0.07 per share in the prior year period. Non-GAAP diluted EPS was $0.18 in the first quarter of fiscal 2011, as compared to $0.11 per share in the prior year period.

 

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The following tables show a reconciliation of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS for the thirteen weeks ended December 25, 2010 and December 26, 2009 (in thousands):

 

     Thirteen weeks ended December 25, 2010  
     GAAP     Acquisition-related
Transaction
Expenses
    SEC Inquiry
Expenses
    Amortization of
Identifiable
Intangibles
    Non-GAAP  

Net sales

   $ 575,027      $ —        $ —        $ —        $ 575,027   

Cost of sales

     430,613        —          —          —          430,613   
                                        

Gross profit

     144,414        —          —          —          144,414   

Selling and operating expenses

     78,448        —          —          —          78,448   

General and administrative expenses

     42,887        (8,668     (5,989     (6,160     22,070   
                                        

Operating income

     23,079        8,668        5,989        6,160        43,896   

Other income (expense)

     137        —          —          —          137   

Gain (loss) on financial instruments, net

     (6,377     6,846        —          —          469   

Gain (loss) on foreign currency, net

     1,605        (1,524     —          —          81   

Interest expense

     (6,023     2,555        —          —          (3,468
                                        

Income before income taxes

     12,421        16,545        5,989        6,160        41,115   

Income tax expense

     (10,167     (163     (2,309     (2,376     (15,015
                                        

Net Income

     2,254        16,382        3,680        3,784        26,100   

Less: Net income attributable to noncontrolling interests

     25        —          —          —          25   
                                        

Net income attributable to GMCR

   $ 2,229      $ 16,382      $ 3,680      $ 3,784      $ 26,075   
                                        

Basic income per share:

          

Weighted average shares outstanding

     141,374,327        141,374,327        141,374,327        141,374,327        141,374,327   

Net income

   $ 0.02      $ 0.12      $ 0.03      $ 0.03      $ 0.18   

Diluted income per share:

          

Weighted average shares outstanding

     147,036,072        147,036,072        147,036,072        147,036,072        147,036,072   

Net income

   $ 0.02      $ 0.11      $ 0.03      $ 0.03      $ 0.18   

 

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     Thirteen weeks ended December 26, 2009  
     GAAP     Acquisition-related
Transaction
Expenses
    Amortization of
Indentifiable
Intangibles
    Non-GAAP  
     (As Restated)                    

Net sales

   $ 345,152      $ —        $ —        $ 345,152   

Cost of sales

     249,575        —          —          249,575   
                                

Gross profit

     95,577        —          —          95,577   

Selling and operating expenses

     53,375        —          —          53,375   

General and administrative expenses

     23,172        (5,058     (2,143     15,971   
                                

Operating income

     19,030        5,058        2,143        26,231   

Other income (expense)

     243        —          —          243   

Gain (loss) on financial instruments, net

     (354     —          —          (354

Gain (loss) on foreign currency, net

     —          —          —          —     

Interest expense

     (1,048     —          —          (1,048
                                

Income before income taxes

     17,871        5,058        2,143        25,072   

Income tax expense

     (7,811     (1,239     (937     (9,987
                                

Net Income

     10,060        3,819        1,206        15,085   

Less: Net income attributable to noncontrolling interests

     —          —          —          —     
                                

Net income attributable to GMCR

   $ 10,060      $ 3,819      $ 1,206      $ 15,085   
                                

Basic income per share:

        

Weighted average shares outstanding

     130,969,293        130,969,293        130,969,293        130,969,293   

Net income

   $ 0.08      $ 0.03      $ 0.01      $ 0.12   

Diluted income per share:

        

Weighted average shares outstanding

     137,486,331        137,486,331        137,486,331        137,486,331   

Net income

   $ 0.07      $ 0.03      $ 0.01      $ 0.11   

Liquidity and Capital Resources

We principally have funded our operations, working capital needs and capital expenditures from operations, borrowings under our credit facility and equity offerings. At December 25, 2010, we had $1.1 billion in debt outstanding under our credit facility, $32.9 million in cash and cash equivalents and $347.7 million of working capital. At September 25, 2010, we had $354.5 million in debt outstanding, $4.4 million in cash and cash equivalents and $257.2 million of working capital. The increase in debt, cash and cash equivalents and working capital at December 25, 2010 as compared to September 25, 2010 was primarily attributable to additional borrowings used to finance the acquisition of Van Houtte for $907.9 million, net of cash acquired.

Operating Activities:

Net cash provided by operations is principally comprised of net income and is primarily affected by the net change in working capital and non-cash items relating to depreciation and amortization, deferred taxes and excess tax benefits from equity-based compensation plans.

Net cash provided by operating activities during the thirteen weeks ended December 25, 2010 was $49.7 million as compared to $18.1 million for the same period last year. The increase in cash provided by operating activities was primarily attributed to a decline in inventory levels coming off the fiscal 2011 holiday season along with lower accounts receivable, net of sales returns, as a percentage of sales .

 

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Investing Activities:

Investing activities primarily include acquisitions of businesses along with expenditures for equipment.

Cash flows used in investing activities for the first quarter of fiscal 2011 included $907.9 million used in the acquisition of Van Houtte. Capital expenditures were $47.4 million for the first quarter of fiscal 2011 as compared to $23.7 million for the same period last year. The increase in capital expenditures was primarily related to manufacturing and information technology infrastructure. We currently expect to invest approximately $198.0 million to $243.0 million in capital expenditures during the remainder of fiscal 2011.

Financing Activities:

Cash provided by financing activities for the thirteen weeks ended December 25, 2010 totaled $937.5 million that included term loan borrowings under our new credit facility totaling $794.5 million along with net borrowings under our new credit facility revolver of $288.1 million. Repaid borrowings principally related to our old credit facility totaled $354.5 million. In conjunction with our new credit facility we incurred $41.4 million in direct financing fees. We received $249.5 million, net of transaction related expenses, from the issuance of 8,566,649 shares of common stock to Lavazza and $0.4 million from the exercise of employee stock options. In addition, cash flows from operating and financing activities included $0.9 million tax benefit from the exercise of non-qualified options and disqualifying dispositions of incentive stock options. As stock options 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.

We maintain a senior secured Credit Agreement (“Credit Agreement”) with Bank of America, N.A. and other lenders consisting of (i) a $450.0 million U.S. revolving credit facility, (ii) a $200.0 million alternative currency revolving credit facility, (iii) a $250.0 million term loan A facility, and (iv) a $550.0 million term loan B facility. The $550.0 million term loan B contained a 1% original issue discount netting proceeds to the Company of $544.5 million. At December 25, 2010, $250.0 million and $550.0 million was outstanding under term loans A and B, respectively and $288.8 million was outstanding under the revolver ($100.0 million USD and $190.0 million CDN) with $360.0 million was available for borrowing.

Term loans A and B require quarterly principal repayments and have maturities of December 2015 and December 2016, respectively. The revolving credit facilities mature in December 2015. The term loans and revolving credit facilities bear interest at a rate equal to Libor or prime, plus a margin. The applicable margin with respect to the term loan A and revolving credit facilities is a percentage per annum varying from 1.0% to 2.5% for prime rate loans and 2.0% to 3.5% for Libor rate loans, based upon the Company’s the leverage ratio. The applicable margin with respect to the term loan B is a percentage per annum equal to 3.0% for prime rate loans and 4.0% for Libor rate loans. With respect to the term loan B, the Libor rate is deemed not to be less than 1.50% per annum. The average effective interest rate at December 25, 2010 was 5.2%, up from 2.7% at September 25, 2010, excluding the amortization of deferred financing charges.

The Credit Agreement requires us to comply, on a quarterly basis, with a consolidated leverage ratio, a consolidated interest coverage ratio and a capital expenditures covenant. We were in compliance with these covenants at December 25, 2010. In addition, the Credit Agreement contains customary negative covenants, including limitations on: liens; investments; indebtedness; fundamental changes; asset sales; dividends and distributions or repurchases of the Company’s capital stock; transactions with affiliates; certain burdensome agreements; and changes in the Company’s lines of business.

 

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The Company is party to interest rate swap agreements, the effect of which is to limit the interest rate exposure on a portion of the Credit Agreement to a fixed rate versus the 30-day Libor rate as follows: 5.4% on $19.8 million; 1.4% on $40.0 million; and 3.9% on $20.0 million. The total notional amounts of these swaps at December 25, 2010, and September 25, 2010, was $79.8 million. Under the terms of the Credit Agreement, the Company is required to enter into additional interest rate hedging agreements within 90 days of the Credit Agreement to mitigate interest rate risk on approximately $400.0 million of outstanding debt subject to variable interest rates.

The fair market value of the interest rate swaps is the estimated amount that we would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the credit worthiness of the counterparty. At December 25, 2010, and September 25, 2010, we estimate we would have paid $2.1 million and $2.7 million (gross of tax), respectively, if we terminated the agreements. We designate the swap agreements as cash flow hedges and the changes in the fair value of the swaps are classified in accumulated other comprehensive income (a component of equity).

For the thirteen weeks ended December 25, 2010, we paid $0.5 million in additional interest expense pursuant to the swap agreements, compared to $0.7 million for the same period last year.

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, and opportunities including potential acquisitions or increased capital expenditure requirements, could cause us to need to raise additional capital through equity and/or debt financing .

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

 

Fiscal Year

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

2011

   $ 5,845       $ 11,587       $ 328,705       $ 346,137   

2012

     11,010         13,455         111,902       $ 136,367   

2013

     14,137         10,136         9,342       $ 33,615   

2014

     20,377         8,196         1,575       $ 30,148   

2015

     26,593         7,128         1,875       $ 35,596   

Thereafter

     1,007,055         3,731         3,675       $ 1,014,461   
                                   

Total

   $ 1,085,017       $ 54,233       $ 457,074       $ 1,596,324   
                                   

 

(1) Long-Term Debt includes capital lease obligations.

In addition, we have $22.1 million in unrecognized tax benefits primarily as the result of recent acquisitions.

 

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Pending Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board issued an update to accounting guidance for business combinations related to the disclosure of supplementary pro forma information. Accounting guidance for business combinations requires a public entity to disclose pro forma revenue and earnings for the combined entity as though the combination occurred at the beginning of the reporting period. This update clarifies that if a public entity presents comparative financial statements, the pro forma information for all business combinations occurring during the current year should be reported as though the combination occurred at the beginning of the prior annual reporting period. This update also expands the disclosure requirement to include the nature and amount of pro forma adjustments made to arrive at the disclosed pro forma revenue and earnings. This update is effective for business combinations for which the acquisition date is on or after annual reporting periods beginning after December 15, 2010, which is fiscal 2012 for the Company. The effect of adoption will depend primarily on the Company’s acquisitions occurring after such date, if any.

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.

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 the Company’s acquisitions, the Company’s success in introducing and producing new product offerings, the ability of lenders to honor their commitments under the Company’s 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 At Home and Away from Home businesses, the Company experiencing product liability, product recall and higher than anticipated rates of warranty expense or sales returns associated with a product quality or safety issue, 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, the impact of the inquiry initiated by the SEC and any related litigation or additional governmental investigative or enforcement proceedings, 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 release. The Company does not undertake to revise these statements to reflect subsequent developments, other than in its regular, quarterly earnings releases.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to our operations result primarily from changes in interest rates, the commodity “C” price of coffee (the price per pound quoted by the Intercontinental Exchange) and foreign currency exchange rates. To mitigate these risks, we use derivative instruments 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  
     2011     2012     2013     2014     2015     Thereafter     Total  

Long-term debt:

              

Variable rate (in thousands)

   $ 5,264      $ 10,833      $ 13,958      $ 20,208      $ 26,458      $ 926,770      $ 1,003,491   

Average interest rate

     5.3     5.1     4.9     4.6     4.4     5.1     5.1

Fixed rate (in thousands)

   $ 581      $ 177      $ 179      $ 169      $ 135      $ 80,285      $ 81,526   

Average interest rate

     8.0     8.0     8.2     8.9     10.9     6.5     6.6

At December 25, 2010, we had $1.0 billion outstanding under our Credit Agreement subject to variable interest rates. Should interest rates (Libor and Prime rates) increase by 100 basis points, we would incur additional interest expense of $10.0 million annually. As discussed further under the heading “Liquidity and Capital Resources” the Company is party to interest rate swap agreements. On December 25, 2010, the effect of our interest rate swap agreements was to limit the interest rate exposure on $79.8 million of the outstanding balance of the Credit Agreement to a fixed rate versus the 30-day Libor rate as follows: 5.4% on $19.8 million; 1.4% on $40.0 million; and 3.9% on $20.0 million. Under the terms of the Credit Agreement, the Company is required to enter into additional interest rate hedging agreements within 90 days of the Credit Agreement to mitigate interest rate risk on approximately $400.0 million of outstanding debt subject to variable interest rates.

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 marketplace. At December 25, 2010, the Company had approximately $240.2 million in green coffee purchase commitments, of which approximately 40% had a fixed price.

In conjunction with the Van Houtte acquisition, the Company assumed coffee futures contracts that were entered into by Van Houtte to mitigate the cost risk due to market fluctuations. These derivatives were not designated as hedging instruments for accounting purposes and are recorded at fair value with the changes in fair value recognized in earnings. At December 25, 2010, Van Houtte held outstanding futures contracts covering 2,963,000 pounds of coffee with a fair market value of $0.8 million. The market risk resulting from a hypothetical adverse market price movement of 10% would decrease the average fair value of these contracts from $0.8 million to $0.1 million at December 25, 2010.

 

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Foreign currency exchange rate risk

Internationally we currently operate in Canada. Our international business is subject to risks, including, but not limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. We also source our green coffee and brewers from countries outside the United States; however, most of our green coffee and brewer purchases are transacted in the United States dollar.

The majority of the transactions conducted by our Canadian Business Unit are in the Canadian dollar. As a result, our revenues are adversely affected when the United States dollar strengthens against the Canadian dollar and are positively affected when the United States dollar weakens. Conversely, our expenses are positively affected when the United States dollar strengthens against the Canadian dollar and adversely affected when the United States dollar weakens.

As described in Note 11, Derivative Financial Instruments , in the Notes to Consolidated Financial Statements contained in Item I of this Quarterly Report on Form 10-Q, from time to time we engage in transactions involving various derivative instruments to mitigate our foreign currency rate exposures. More specifically, we hedge, on a net basis, the foreign currency exposure of a portion of our assets and liabilities that are denominated in Canadian dollars. These contracts are recorded at fair value and are not designated as hedging instruments for accounting purposes. As a result, the changes in fair value are recognized in the Gain (loss) on financial instruments, net line in the Consolidated Statements of Operations. We do not engage in speculative transactions, nor do we hold derivative instruments for trading purposes.

At December 25, 2010, we had a 5-year cross-currency swap of CDN $150.0 million that was not designated as a hedging instrument for accounting purposes, which largely offset the financial impact of the re-measurement of an inter-company note receivable denominated in Canadian dollars for the same amount. The cross-currency swap is amortized over 5 years matching the amortization of the repayment on the note receivable. Increases or decreases in the cross-currency swap are generally offset by corresponding decreases or increases in the US dollar value of the Canadian dollar inter-company note. We also have some naturally occurring hedges where increases or decreases in the foreign currency exchange rates on other inter-company balances denominated in Canadian dollars, are largely offset by increases or decreases associated with our alternative currency revolving credit facility that is also denominated in Canadian dollars.

The market risk associated with the foreign exchange contracts resulting from currency exchange rate movements is expected to mitigate the market risk of the underlying obligation being hedged. Our net un-hedged assets denominated in a currency other than the functional currency were approximately $16.3 million at December 25, 2010. A hypothetical 10% movement in the foreign currency exchange rate would increase or decrease net assets by approximately $1.6 million with a corresponding charge to operations. In addition, at December 25, 2010 our net investment in our Canadian subsidiaries was approximately $494.7 million. A hypothetical 10% movement in the foreign currency exchange rate would increase or decrease our net investment in our Canadian subsidiaries by approximately $49.0 million with a corresponding charge to other comprehensive income.

 

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Item 4. Controls and Procedures

Background

As previously disclosed under Part II–Item 9A– Controls and Procedures in the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2010, management concluded that the Company’s internal control over financial reporting was not effective as of September 25, 2010 based on the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) due to material weaknesses related to the Company’s financial statement consolidation process and the Company’s accruals related to marketing and customer incentive programs. Those material weaknesses resulted in the misstatement and audit adjustments of financial statement line items and related financial disclosures to the Company’s previously issued consolidated financial statements.

The Company’s management has been actively engaged in the implementation of remediation efforts to address the material weaknesses. For a complete description of management’s remediation plan, see Part I–Item 9A– Controls and Procedures in its Annual Report on Form 10-K for the fiscal year ended September 25, 2010.

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of December 25, 2010. Based on that evaluation and the material weaknesses referenced above, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of December 25, 2010.

Progress on Plan for Remediation

Management has been actively engaged in the planning for, and implementation of, remediation efforts to address the material weaknesses related to the Company’s financial statement consolidation process and the Company’s accruals related to marketing and customer incentive programs, as well as other identified areas of risk. These remediation efforts, outlined below, are intended both to address the identified material weaknesses and to enhance the Company’s overall financial control environment. Management believes that these material weaknesses arose due to the Company’s rapid growth, both organically and through acquisitions, outpacing the development of the Company’s accounting infrastructure. During the first quarter of fiscal 2011, the following changes to our internal control over financial reporting were made to address the material weaknesses:

 

   

Management has performed an initial review of the processes and procedures used in the Company’s intercompany accounting, and has begun to implement changes to the intercompany sales and profit elimination processes, including:

 

   

introducing a systemic tracking of intercompany sales in the general ledger using specific department codes to identify intercompany sales; and

 

   

implementing a consistent process for the calculation of intercompany profit margin on brewers and K-Cup ® portion packs, which includes reconciliation to the general ledger to ensure completeness of the margin elimination and consistent valuation of brewers and K-Cup portion packs in ending inventories.

 

   

Management has hired a new accounting manager at the Keurig business unit. Responsibilities for this new position include establishing and implementing accounting best practices; reviewing and ensuring the timely reconciliation of general ledger accounts; developing and ensuring adherence to accounting policies; and providing training and support and knowledge of generally accepted accounting principles to technical accounting situations and the Keurig finance team.

 

-44-


   

Management has begun to implement controls related to the accounting for customer incentives at both the Specialty Coffee business unit and the Keurig business unit by:

Specialty Coffee Business Unit

 

   

implementing a more thorough review of unapplied deductions and establishing a new reconciliation process to ensure the accuracy and completeness of the accrual for customer incentives.

Keurig Business Unit

 

   

implementing a centralized process to track all customer incentive programs to provide greater visibility of accruals and discounts and allow management to effectively assess the appropriate accounting treatment of each program;

 

   

requiring that the Vice President of Sales reviews and approves all customer incentive programs and ensures that the terms and conditions of these programs are fully documented;

 

   

requiring that the Vice President of Finance and Controller reviews final program documents to determine the proper accounting treatment for each program;

 

   

instituting a quarterly meeting among the Vice President of Sales, Keurig Controller and all Sales Directors to review all customer incentive program documents and customer communications in order to assure accurate accounting for such programs; and

 

   

requiring that the Vice President of Finance approve any deductions taken by retailers that were not detailed in final program documentation.

Remediation of the material weaknesses continues to be a top priority for management and we will continue to further evaluate opportunities for improvement and work diligently to improve our internal controls over financial reporting. Management has not yet completed its remediation efforts and any remediation actions put in place must be effective over a period of time, fully documented and tested. Due to these material weaknesses being identified during the year end closing process a full remediation plan has not been fully implemented and tested as of the end of the fiscal quarter ended December 25, 2010.

Changes in Internal Control Over Financial Reporting

As a result of the remediation efforts noted above, there were changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 25, 2010 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

 

Item 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in our fiscal 2010 Form 10-K.

 

-45-


Item 6. Exhibits

(a) Exhibits:

 

10.1    Credit Agreement dated as of December 17, 2010 among Green Mountain Coffee Roasters, Inc., Bank of America, N.A., and 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.
101    The following financial statements from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 25, 2010 formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Comprehensive Income (v) the Consolidated Statements of Cash Flows and (vi) related notes, tagged as blocks of text.

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: 02/03/2011

    By:  

/s/ Lawrence J. Blanford

      Lawrence J. Blanford,
      President and Chief Executive Officer

Date: 02/03/2011

    By  

/s/ Frances G. Rathke

      Frances G. Rathke,
      Chief Financial Officer

 

-46-

Exhibit 10.1

Published CUSIP Number: 393124AG7

 

 

 

CREDIT AGREEMENT

Dated as of December 17, 2010

among

GREEN MOUNTAIN COFFEE ROASTERS, INC.,

as the Borrower,

BANK OF AMERICA, N.A.,

as Administrative Agent, U.S. Swing Line Lender and

U.S. L/C Issuer,

The Other Lenders Party Hereto,

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,

as Joint Lead Arranger and Joint Book Manager,

SUNTRUST ROBINSON HUMPHREY, INC.,

Joint Lead Arranger and Joint Book Manager,

SUNTRUST BANK,

as Syndication Agent,

and

COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A.,

“RABOBANK NEDERLAND”, NEW YORK BRANCH

and

SOVEREIGN BANK,

as Co-Documentation Agents

 

 

 


TABLE OF CONTENTS

 

          Page  
ARTICLE I   
DEFINITIONS AND ACCOUNTING TERMS   

1.01.

  

Defined Terms

     1   

1.02.

  

Other Interpretive Provisions

     32   

1.03.

  

Accounting Terms

     32   

1.04.

  

Rounding

     33   

1.05.

  

Exchange Rates; Currency Equivalents

     33   

1.06.

  

Times of Day

     33   

1.07.

  

U.S. Letter of Credit Amounts

     33   

1.08.

  

Currency Equivalents Generally

     33   

1.09.

  

Interpretation Clause (Québec)

     34   
ARTICLE II   
THE COMMITMENTS AND CREDIT EXTENSIONS   

2.01.

  

The Loans

     34   

2.02.

  

Borrowings, Conversions and Continuations of Loans

     35   

2.03.

  

U.S. Letters of Credit

     37   

2.04.

  

U.S. Swing Line Loans

     43   

2.05.

  

Prepayments

     46   

2.06.

  

Termination or Reduction of Commitments

     48   

2.07.

  

Repayment of Loans

     49   

2.08.

  

Interest

     50   

2.09.

  

Fees

     51   

2.10.

  

Computation of Interest and Fees; Retroactive Adjustments of Applicable Rate

     51   

2.11.

  

Evidence of Debt

     52   

2.12.

  

Payments Generally; Administrative Agent’s Clawback

     52   

2.13.

  

Sharing of Payments by Lenders

     54   

2.14.

  

Increase in Commitments

     54   

2.15.

  

Cash Collateral

     57   

2.16.

  

Defaulting Lenders

     58   
ARTICLE III   
TAXES, YIELD PROTECTION AND ILLEGALITY   

3.01.

  

Taxes

     59   

3.02.

  

Illegality

     62   

3.03.

  

Inability to Determine Rates

     62   

3.04.

  

Increased Costs; Reserves on Eurodollar Rate Loans

     62   

3.05.

  

Compensation for Losses

     64   

3.06.

  

Mitigation Obligations; Replacement of Lenders

     64   

3.07.

  

Survival

     64   
ARTICLE IV   
CONDITIONS PRECEDENT TO CREDIT EXTENSIONS   

4.01.

  

Conditions of Initial Credit Extension

     65   

4.02.

  

Conditions to All Credit Extensions

     67   

 

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ARTICLE V   
REPRESENTATIONS AND WARRANTIES   

5.01.

  

Existence, Qualification and Power

     68   

5.02.

  

Authorization; No Contravention

     68   

5.03.

  

Governmental Authorization; Other Consents

     68   

5.04.

  

Binding Effect

     69   

5.05.

  

Financial Statements; No Material Adverse Effect

     69   

5.06.

  

Litigation

     69   

5.07.

  

No Default

     69   

5.08.

  

Ownership of Property; Liens; Investments

     70   

5.09.

  

Environmental Compliance

     70   

5.10.

  

Insurance

     71   

5.11.

  

Taxes

     71   

5.12.

  

ERISA Compliance

     72   

5.13.

  

Subsidiaries; Equity Interests; Loan Parties

     72   

5.14.

  

Margin Regulations; Investment Company Act

     73   

5.15.

  

Disclosure

     73   

5.16.

  

Compliance with Laws

     73   

5.17.

  

Intellectual Property; Licenses, Etc.

     73   

5.18.

  

Solvency

     73   

5.19.

  

Casualty, Etc.

     73   

5.20.

  

Rights in Collateral; Priority of Liens

     74   

5.21.

  

Anti-Money Laundering and Economic Sanctions Laws

     74   

5.22.

  

Senior Debt

     74   
ARTICLE VI   
AFFIRMATIVE COVENANTS   

6.01.

  

Financial Statements

     74   

6.02.

  

Certificates; Other Information

     75   

6.03.

  

Notices

     77   

6.04.

  

Payment of Obligations

     77   

6.05.

  

Preservation of Existence, Etc.

     77   

6.06.

  

Maintenance of Properties

     77   

6.07.

  

Maintenance of Insurance

     77   

6.08.

  

Compliance with Laws

     78   

6.09.

  

Books and Records

     78   

6.10.

  

Inspection Rights

     78   

6.11.

  

Use of Proceeds

     78   

6.12.

  

Covenant to Guarantee Obligations and Give Security

     78   

6.13.

  

Compliance with Environmental Laws

     81   

6.14.

  

Remediation of Material Weakness

     81   

6.15.

  

Further Assurances

     81   

6.16.

  

[Reserved]

     81   

6.17.

  

Interest Rate Hedging

     81   

6.18.

  

Post-Closing Matters

     81   
ARTICLE VII   
NEGATIVE COVENANTS   

7.01.

  

Liens

     81   

7.02.

  

Indebtedness

     84   

7.03.

  

Investments

     85   

7.04.

  

Fundamental Changes

     88   

 

-ii-


7.05.

  

Dispositions

     88   

7.06.

  

Restricted Payments

     90   

7.07.

  

Change in Nature of Business

     91   

7.08.

  

Transactions with Affiliates

     91   

7.09.

  

Burdensome Agreements

     91   

7.10.

  

Use of Proceeds

     92   

7.11.

  

Financial Covenants

     92   

7.12.

  

Capital Expenditures

     92   

7.13.

  

Amendments of Certain Documents

     93   

7.14.

  

Accounting Changes

     93   

7.15.

  

Prepayments, Etc. of Indebtedness

     93   

7.16.

  

Designation of Senior Debt

     93   
ARTICLE VIII   
EVENTS OF DEFAULT AND REMEDIES   

8.01.

  

Events of Default

     93   

8.02.

  

Remedies upon Event of Default

     95   

8.03.

  

Application of Funds

     95   
ARTICLE IX   
ADMINISTRATIVE AGENT   

9.01.

  

Appointment and Authority

     96   

9.02.

  

Rights as a Lender

     97   

9.03.

  

Exculpatory Provisions

     97   

9.04.

  

Reliance by Administrative Agent

     97   

9.05.

  

Delegation of Duties

     98   

9.06.

  

Resignation of Administrative Agent

     98   

9.07.

  

Non-Reliance on Administrative Agent and Other Lenders

     99   

9.08.

  

No Other Duties, Etc.

     99   

9.09.

  

Administrative Agent May File Proofs of Claim

     99   

9.10.

  

Collateral and Guaranty Matters

     99   

9.11.

  

Secured Cash Management Agreements and Secured Hedge Agreements

     100   

9.12.

  

Tax Indemnification

     100   
ARTICLE X   
MISCELLANEOUS   

10.01.

  

Amendments, Etc.

     101   

10.02.

  

Notices; Effectiveness; Electronic Communications

     103   

10.03.

  

No Waiver; Cumulative Remedies; Enforcement

     104   

10.04.

  

Expenses; Indemnity; Damage Waiver

     105   

10.05.

  

Payments Set Aside

     106   

10.06.

  

Successors and Assigns

     106   

10.07.

  

Treatment of Certain Information; Confidentiality

     110   

10.08.

  

Right of Setoff

     110   

10.09.

  

Interest Rate Limitation

     111   

10.10.

  

Counterparts; Integration; Effectiveness

     111   

10.11.

  

Survival of Representations and Warranties

     111   

10.12.

  

Severability

     111   

10.13.

  

Replacement of Lenders

     112   

10.14.

  

Governing Law; Jurisdiction; Etc.

     112   

10.15.

  

WAIVER OF JURY TRIAL

     113   

10.16.

  

No Advisory or Fiduciary Responsibility

     113   

 

-iii-


10.17.

  

Electronic Execution of Assignments and Certain Other Documents

     114   

10.18.

  

USA PATRIOT Act

     114   

10.19.

  

Judgment Currency

     114   

SCHEDULES

 

1.01

  

Existing Letters of Credit

2.01

  

Commitments and Applicable Percentages

5.08(b)

  

Existing Liens

5.08(d)(ii)

  

Leased Real Property (Lessor)

5.12(d)

  

Pension Plan Obligations and Liabilities

6.12

  

Guarantors

6.18

  

Post-Closing Matters

7.02

  

Exiting Indebtedness

7.03(c)

  

Existing Investments

7.09

  

Burdensome Agreements

10.02

  

Administrative Agent’s Office, Certain Addresses for Notices

EXHIBITS

Form of

 

A    Committed Loan Notice

B

   Swing Line Loan Notice

C-1

   Term Note

C-2

   Revolving Credit Note

D

   Compliance Certificate

E-1

   Assignment and Assumption

E-2

   Administrative Questionnaire

F

   Guaranty

G

   Security Agreement

H

   Mortgage

I-1

   Collateral Disclosure Schedule

I-2

   Collateral Disclosure Schedule Supplement

J-1

   United States Tax Compliance Certificate (For Non-U.S. Lenders That Are Not Partnerships For U.S. Federal Income Tax Purposes)

J-2

   United States Tax Compliance Certificate (For Non-U.S. Lenders That Are Partnerships For U.S. Federal Income Tax Purposes)

J-3

   United States Tax Compliance Certificate (For Non-U.S. Participants That Are Not Partnerships For U.S. Federal Income Tax Purposes)

J-4

   United States Tax Compliance Certificate (For Non-U.S. Participants That Are Partnerships For U.S. Federal Income Tax Purposes)

K

   Solvency Certificate

 

-iv-


CREDIT AGREEMENT

This CREDIT AGREEMENT (“ Agreement ”) is entered into as of December 17, 2010, among Green Mountain Coffee Roasters, Inc., a Delaware corporation (the “ Borrower ”), each lender from time to time party hereto (collectively, the “ Lenders ” and individually, a “ Lender ”), and BANK OF AMERICA, N.A., as Administrative Agent, U.S. Swing Line Lender and U.S. L/C Issuer.

PRELIMINARY STATEMENTS:

Pursuant to the Share Purchase Agreement dated September 14, 2010 (the “ Purchase Agreement ”) among LJVH S.à.r.l, Fonds de Solidarité des Travailleurs Du Québec (F.T.Q.), the other sellers party thereto, LJ Coffee Agent, LLC, SSR Acquisition Corp. (the “ Purchaser ”) and the Borrower, the Purchaser, a wholly-owned subsidiary of the Borrower, has agreed to purchase (the “ Acquisition ”) all outstanding equity interests of LJVH Holdings, Inc. (the “ Acquired Business ”).

The proceeds of the borrowings hereunder will be used to fund a portion of the Transaction and provide ongoing working capital and for other general corporate purposes of the Borrower and its Subsidiaries.

In furtherance of the foregoing, the Borrower has requested that the Lenders provide a term A loan facility in an amount of $250,000,000, a term B loan facility in an amount of $550,000,000, and revolving credit facilities in an aggregate amount of $650,000,000, and the Lenders have indicated their willingness to lend and the U.S. L/C Issuer has indicated its willingness to issue letters of credit, in each case, on the terms and subject to the conditions set forth herein.

In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

1.01. Defined Terms . As used in this Agreement, the following terms shall have the meanings set forth below:

Acquired Business ” has the meaning specified in the Preliminary Statements.

Acquisition ” has the meaning specified in the Preliminary Statements.

Administrative Agent ” means Bank of America in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent.

Administrative Agent’s Office ” means, with respect to any currency, the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 10.02 with respect to such currency, or such other address or account as the Administrative Agent may from time to time notify to the Borrower and the Lenders.

Administrative Questionnaire ” means an Administrative Questionnaire in substantially the form of Exhibit E-2 or any other form approved by the Administrative Agent.

Affiliate ” means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

Aggregate Commitments ” means the Commitments of all the Lenders.

Agreement ” means this Credit Agreement.

Agreement Currency ” has the meaning specified in Section 10.19 .


AHYDO Amount ” has the meaning specified in Section 2.05(b)(vi).

AHYDO Payment Date ” has the meaning specified in Section 2.05(b)(vi).

Alternative Currency ” means Canadian Dollars and Euros.

Alternative Currency Equivalent ” means, at any time, with respect to any amount denominated in Dollars, the equivalent amount thereof in the applicable Alternative Currency as determined by the Administrative Agent or the U.S. L/C Issuer, as the case may be, at such time on the basis of the Spot Rate (determined in respect of the most recent Revaluation Date) for the purchase of such Alternative Currency with Dollars.

Alternative Required Revolving Lenders ” means, as of any date of determination, Alternative Revolving Credit Lenders holding more than 50% of the sum of the (a) Total Alternative Revolving Credit Outstandings and (b) aggregate unused Alternative Revolving Credit Commitments; provided that the unused Alternative Revolving Credit Commitment of, and the portion of the Total Alternative Revolving Credit Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Alternative Required Revolving Lenders.

Alternative Revolving Credit Borrowing ” means a borrowing consisting of simultaneous Alternative Revolving Credit Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Alternative Revolving Credit Lenders pursuant to Section 2.01(d) .

Alternative Revolving Credit Commitment ” means, as to each Alternative Revolving Credit Lender, its obligation to make Alternative Revolving Credit Loans to the Borrower pursuant to Section 2.01(d), in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 2.01 under the caption “Alternative Revolving Credit Commitment”, opposite such caption in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as such amount may be adjusted from time to time in accordance with this Agreement.

Alternative Revolving Credit Facility ” means, at any time, the aggregate amount of the Alternative Revolving Credit Lenders’ Alternative Revolving Credit Commitments at such time.

Alternative Revolving Credit Lender ” means, at any time, any Lender that has an Alternative Revolving Credit Commitment at such time.

Alternative Revolving Credit Loan ” has the meaning specified in Section 2.01(d).

Anti-Money Laundering Laws ” means any and all laws, judgments, orders, executive orders, decrees, ordinances, rules, regulations, statutes, case law or treaties applicable to a Loan Party, its Subsidiaries or Affiliates, related to terrorism financing or money laundering including any applicable provision of Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) of 2001 (Title III of Pub. L. 107-56) and The Currency and Foreign Transactions Reporting Act (also known as the “Bank Secrecy Act,” 31 U.S.C. §§ 5311-5330 and 12 U.S.C. §§ 1818(s), 1820(b) and 1951-1959).

Applicable Alternative Revolving Credit Percentage ” means, with respect to any Alternative Revolving Credit Lender at any time, such Alternative Revolving Credit Lender’s Applicable Percentage in respect of the Alternative Revolving Credit Facility at such time.

Applicable Fee Rate ” means, at any time, in respect of the Revolving Credit Facilities, (a) from the Closing Date to the date on which the Administrative Agent receives a Compliance Certificate pursuant to Section 6.02(b) for the fiscal quarter ending March 26, 2011, 0.50% per annum and (b) thereafter, the applicable percentage per annum set forth below determined by reference to the Consolidated Leverage Ratio as set forth in the most recent Compliance Certificate received by the Administrative Agent pursuant to Section 6.02(b) :

 

-2-


Applicable Fee Rate

 

Pricing

Level

  

Consolidated
Leverage Ratio

   Commitment Fee  

1

  

³  3.0:1

     0.500

2

  

< 3.0:1 but  ³  2.5:1

     0.375

3

  

< 2.5:1 but  ³  2.0:1

     0.375

4

  

< 2.0:1

     0.250

Any increase or decrease in the Applicable Fee Rate resulting from a change in the Consolidated Leverage Ratio shall become effective as of the first Business Day immediately following the date a Compliance Certificate is delivered pursuant to Section 6.02(b) ; provided , however , that if a Compliance Certificate is not delivered when due in accordance with such Section, then, upon the request of the U.S. Required Revolving Lenders, in the case of U.S. Revolving Loans, or the Alternative Required Revolving Lenders, in the case of Alternative Revolving Loans, Pricing Level 1 shall apply to the U.S. Revolving Loans or Alternative Revolving Loans, respectively, as of the first Business Day after the date on which such Compliance Certificate was required to have been delivered and shall remain in effect until the date on which such Compliance Certificate is delivered.

Notwithstanding anything to the contrary contained in this definition, the determination of the Applicable Fee Rate for any period shall be subject to the provisions of Section 2.10(b) .

Applicable Percentage ” means (a) in respect of the Term A Facility, with respect to any Term A Lender at any time, the percentage (carried out to the ninth decimal place) of the Term A Facility represented by (i) on or prior to the Closing Date, such Term A Lender’s Term A Commitment at such time, subject to adjustment as provided in Section 2.16 , and (ii) thereafter, the principal amount of such Term A Lender’s Term A Loans at such time, (b) in respect of the Term B Facility, with respect to any Term B Lender at any time, the percentage (carried out to the ninth decimal place) of the Term B Facility represented by (i) on or prior to the Closing Date, such Term B Lender’s Term B Commitment at such time, subject to adjustment as provided in Section 2.16 , and (ii) thereafter, the principal amount of such Term B Lender’s Term B Loans at such time, (c) in respect of the U.S. Revolving Credit Facility, with respect to any U.S. Revolving Credit Lender at any time, the percentage (carried out to the ninth decimal place) of the U.S. Revolving Credit Facility represented by such U.S. Revolving Credit Lender’s U.S. Revolving Credit Commitment at such time, subject to adjustment as provided in Section 2.16 and (d) in respect of the Alternative Revolving Credit Facility, with respect to any Alternative Revolving Credit Lender at any time, the percentage (carried out to the ninth decimal place) of the Alternative Revolving Credit Facility represented by such Alternative Revolving Credit Lender’s Alternative Revolving Credit Commitment at such time, subject to adjustment as provided in Section 2.16 . If the commitment of each Revolving Credit Lender to make Revolving Credit Loans and the obligation of the U.S. L/C Issuer to make U.S. L/C Credit Extensions have been terminated pursuant to Section 8.02 , or if the relevant Revolving Credit Commitments have expired, then the Applicable Percentage of each Revolving Credit Lender in respect of the relevant Revolving Credit Facility shall be determined based on the Applicable Percentage of such Revolving Credit Lender in respect of the relevant Revolving Credit Facility most recently in effect, giving effect to any subsequent assignments. The initial Applicable Percentage of each Lender in respect of each Facility is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable.

Applicable Rate ” means (a) in respect of the Term A Facility and the Revolving Credit Facilities, (i) from the Closing Date to the date on which the Administrative Agent receives a Compliance Certificate pursuant to Section 6.02(b) for the fiscal quarter ending March 26, 2011, 2.5% per annum for Base Rate Loans and 3.5% per annum for Eurodollar Rate Loans and U.S. Letter of Credit Fees and (ii) thereafter, the applicable percentage per annum set forth below determined by reference to the Consolidated Leverage Ratio as set forth in the most recent Compliance Certificate received by the Administrative Agent pursuant to Section 6.02(b) :

Applicable Rate

 

Pricing

Level

   Consolidated
Leverage Ratio
   Eurodollar
Rate
    Base Rate  

1

   ³  3.0:1      3.50     2.50

 

-3-


Applicable Rate

 

2

     < 3.0:1 but  ³  2.5:1      3.00     2.00

3

     < 2.5:1 but  ³  2.0:1      2.50     1.50

4

     < 2.0:1        2.00     1.00

and (b) in respect of the Term B Facility, 3.0% per annum for Base Rate Loans and 4.0% per annum for Eurodollar Rate Loans.

Any increase or decrease in the Applicable Rate resulting from a change in the Consolidated Leverage Ratio shall become effective as of the first Business Day immediately following the date a Compliance Certificate is delivered pursuant to Section 6.02(b) ; provided , however , that if a Compliance Certificate is not delivered when due in accordance with such Section, then, Pricing Level 1 shall apply in respect of the Term A Facility and the Revolving Credit Facilities, in each case as of the first Business Day after the date on which such Compliance Certificate was required to have been delivered and in each case shall remain in effect until the date on which such Compliance Certificate is delivered.

Notwithstanding anything to the contrary contained in this definition, the determination of the Applicable Rate for any period shall be subject to the provisions of Section 2.10(b) .

Applicable Revolving Credit Percentage ” means, as applicable, the Applicable U.S. Revolving Credit Percentage and/or the Applicable Alternative Revolving Credit Percentage.

Applicable Time ” means, with respect to any borrowings and payments in any Alternative Currency, the local time in the place of settlement for such Alternative Currency as may be determined by the Administrative Agent or the U.S. L/C Issuer, as the case may be, to be necessary for timely settlement on the relevant date in accordance with normal banking procedures in the place of payment.

Applicable U.S. Revolving Credit Percentage ” means with respect to any U.S. Revolving Credit Lender at any time, such U.S. Revolving Credit Lender’s Applicable Percentage in respect of the U.S. Revolving Credit Facility at such time.

Appropriate Lender ” means, at any time, (a) with respect to any of the Term A Facility, the Term B Facility, the U.S. Revolving Credit Facility or the Alternative Revolving Credit Facility, a Lender that has a Commitment with respect to such Facility or holds a Term A Loan, a Term B Loan, U.S. Revolving Credit Loan or an Alternative Revolving Credit Loan, respectively, at such time, (b) with respect to the U.S. Letter of Credit Sublimit, (i) the U.S. L/C Issuer and (ii) if any U.S. Letters of Credit have been issued pursuant to Section 2.03(a) , the U.S. Revolving Credit Lenders, and (c) with respect to the U.S. Swing Line Sublimit, (i) the U.S. Swing Line Lender and (ii) if any U.S. Swing Line Loans are outstanding pursuant to Section 2.04(a) , the U.S. Revolving Credit Lenders.

Approved Fund ” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

Arrangers ” means Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc. in their capacity as joint lead arrangers and joint book managers.

Assignee Group ” means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.

Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 10.06(b) ), and accepted by the Administrative Agent, in substantially the form of Exhibit E-1 or any other form approved by the Administrative Agent.

 

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Attributable Indebtedness ” means, on any date, (a) in respect of any Capitalized Lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease or similar payments under the relevant lease or other applicable agreement or instrument that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease or other agreement or instrument were accounted for as a Capitalized Lease and (c) all Synthetic Debt of such Person.

Audited Financial Statements ” means the audited consolidated balance sheet of the Borrower and its Subsidiaries for the fiscal year ended September 25, 2010, and the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal year of the Borrower and its Subsidiaries, including the notes thereto.

Auto-Extension Letter of Credit ” has the meaning specified in Section 2.03(b)(iii) .

Availability ” means the ability to obtain Credit Extensions under the Revolving Credit Facilities pursuant to the terms of this Agreement.

Availability Period ” means in respect of the Revolving Credit Facilities, the period from and including the Closing Date to the earliest of (i) the Maturity Date for the relevant Revolving Credit Facility, (ii) the date of termination of the relevant Revolving Credit Commitments pursuant to Section 2.06 , and (iii) the date of termination of the commitment of each Revolving Credit Lender to make Revolving Credit Loans and of the obligation of the U.S. L/C Issuer to make U.S. L/C Credit Extensions pursuant to Section 8.02 .

Bank of America ” means Bank of America, N.A. and its successors.

Base Rate ” means for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” and (c) the Eurodollar Rate plus 1.00%. The “prime rate” is a rate set by Bank of America based upon various factors including Bank of America’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such prime rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change.

Base Rate Loan ” means a Revolving Credit Loan, a Term A Loan or a Term B Loan that bears interest based on the Base Rate.

BBA LIBOR ” has the meaning specified in the definition of “Eurodollar Rate.”

Borrower ” has the meaning specified in the introductory paragraph hereto.

Borrower Materials ” has the meaning specified in Section 6.02 .

Borrowing ” means Revolving Credit Borrowings, U.S. Swing Line Borrowings, a Term A Borrowing or a Term B Borrowing, as the context may require.

Business Day ” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state of New York or (solely with respect to all notices and determinations in connection with, and payments of principal of interest on, Borrowings made in Alternative Currencies and U.S. Letters of Credit denominated in Alternative Currencies) the jurisdiction where the Administrative Agent’s Office is located and, if such day relates to any Eurodollar Rate Loan, means any such day that is also a London Banking Day.

Canadian Dollar ” and “ C$ ”: lawful currency of Canada.

 

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Capital Expenditures ” means, with respect to any Person for any period, any expenditure in respect of the purchase or other acquisition of any fixed or capital asset (excluding normal replacements and maintenance which are properly charged to current operations). For purposes of this definition, (i) the purchase price of equipment that is purchased simultaneously with the trade-in of existing equipment or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount by which such purchase price exceeds the credit granted by the seller of such equipment for the equipment being traded in at such time or the amount of such insurance proceeds, as the case may be and (ii) any expenditures made as payment of consideration for a Permitted Acquisition shall be excluded.

Capitalized Leases ” means all leases that have been or should be, in accordance with GAAP, recorded as capitalized leases.

Cash Collateralize ” means to pledge and deposit with or deliver to the Administrative Agent, for the benefit of the Administrative Agent, the U.S. L/C Issuer or the U.S. Swing Line Lender (as applicable) and the Lenders, as collateral for any U.S. L/C Obligations, Obligations in respect of any U.S. Swing Line Loans, or obligations of Lenders to fund participations in respect of either thereof (as the context may require), cash or deposit account balances or, if the U.S. L/C Issuer or U.S. Swing Line Lender benefiting from such collateral shall agree in its sole discretion, other credit support, in each case pursuant to documentation in form and substance reasonably satisfactory to (a) the Administrative Agent and (b) the U.S. L/C Issuer or the U.S. Swing Line Lender (as applicable). “ Cash Collateral ” shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.

Cash Equivalents ” means any of the following types of Investments, to the extent owned by the Borrower or any of its Subsidiaries free and clear of all Liens (other than Liens created under the Collateral Documents and other Liens permitted hereunder):

(a) readily marketable obligations issued or directly and fully guaranteed or insured by the United States of America, the Canadian government or any agency or instrumentality thereof having maturities of not more than 360 days from the date of acquisition thereof; provided that the full faith and credit of the United States of America or Canada, in each case, is pledged in support thereof;

(b) time deposits with, or insured certificates of deposit or banker acceptances of, any commercial bank that (i) (A) is a Lender, (B) is organized under the laws of the United States of America, any state thereof or the District of Columbia or is the principal banking subsidiary of a bank holding company organized under the laws of the United States of America, any state thereof or the District of Columbia, and is a member of the Federal Reserve System or (C) is a bank listed in Schedule I of the Bank Act (Canada), (ii) issues (or the parent of which issues) commercial paper rated as described in clause (c) of this definition and (iii) has combined capital and surplus of at least $500,000,000, in each case with maturities of not more than one year from the date of acquisition thereof;

(c) commercial paper issued by any Person organized under the laws of any state of the United States of America and rated at least “Prime-1” (or the then equivalent grade) by Moody’s or at least “A-1” (or the then equivalent grade) by S&P, in each case with maturities of not more than one year from the date of acquisition thereof;

(d) repurchase agreements entered into by any Person with an eligible bank under clause (b) above for direct obligations issued by or fully guaranteed by the United States; and

(e) Investments, classified in accordance with GAAP as current assets of the Borrower or any of its Subsidiaries, in money market investment programs registered under the Investment Company Act of 1940, which are administered by financial institutions that have the highest rating obtainable from either Moody’s or S&P, and the portfolios of which are limited solely to Investments of the character, quality and maturity described in clauses (a), (b), (c) and (d) of this definition.

 

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Cash Management Agreement ” means any agreement to provide cash management services, including treasury, depository, overdraft, credit, debit or purchase card, electronic funds transfer and other cash management arrangements.

Cash Management Bank ” means any Person that, at the time it enters into a Cash Management Agreement, is a Lender or an Affiliate of a Lender, in its capacity as a party to such Cash Management Agreement.

CERCLA ” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980.

CERCLIS ” means the Comprehensive Environmental Response, Compensation and Liability Information System maintained by the U.S. Environmental Protection Agency.

CFC ” means a Person that is a controlled foreign corporation under Section 957 of the Code.

Change in Law ” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided , however , that notwithstanding anything herein to the contrary, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, regulations, guidelines or directives thereunder or issued in connection therewith shall be deemed to be a ‘Change in Law’ regardless of the date enacted, adopted or issued.

Change of Control ” means an event or series of events by which:

(a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) other than Robert P. Stiller becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an “ option right ”)), directly or indirectly, of 35% or more of the equity securities of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully-diluted basis (and taking into account all such securities that such “person” or “group” has the right to acquire pursuant to any option right); or

(b) during any period of 24 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); or

(c) a “change of control” or any comparable term under, and as defined in, any document evidencing any Indebtedness exceeding the Threshold Amount shall have occurred.

Closing Date ” means the first date all the conditions precedent in Section 4.01 are satisfied or waived in accordance with Section 4.01 .

 

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Closing Date Mortgaged Properties ” means the properties located at 3109 Water Plant Rd., Knoxville, TN, and 131 Pilgrim Park Rd, Waterbury, VT.

Code ” means the Internal Revenue Code of 1986, as amended.

Collateral ” means all of the “Collateral” and “Mortgaged Property” or other similar term referred to in the Collateral Documents and all of the other property that is or is intended under the terms of the Collateral Documents to be subject to Liens in favor of the Administrative Agent for the benefit of the Secured Parties; provided , that in no event shall “Collateral” include any Excluded Property.

Collateral Disclosure Schedule ” means the collateral disclosure schedule in the form of Exhibit I-1 or any other form approved by the Administrative Agent, as the same shall be supplemented from time to time by a Collateral Disclosure Schedule Supplement or otherwise.

Collateral Disclosure Schedule Supplement ” means the collateral disclosure schedule supplement in the form of Exhibit I-2 or any other form approved by the Administrative Agent.

Collateral Documents ” means, collectively, the Security Agreement, the Intellectual Property Security Agreements, the Mortgages, each of the mortgages, collateral assignments, Security Agreement Supplements, security agreements, pledge agreements or other similar agreements delivered to the Administrative Agent pursuant to Section 6.12 , and each of the other agreements, instruments or documents that creates or purports to create a Lien in favor of the Administrative Agent for the benefit of the Secured Parties.

Combined Material Adverse Effect ” means a fact, circumstance or condition that (a) has, or is reasonably likely to have, individually or in the aggregate, a material adverse effect on the business, operations, assets, liabilities or financial condition of the Borrower and the Acquired Business, taken as a whole; except to the extent that the material adverse effect results from or is caused by (i) worldwide, national or local conditions or circumstances which impact the Acquired Business, whether they are economic, political, regulatory (including any change in law or Canadian GAAP) or otherwise, including war, armed hostilities, acts of terrorism, emergencies, crises and natural disasters, (ii) changes in the markets or industry in which the Acquired Business operates, (iii) the announcement of the execution of the Purchase Agreement and the transactions contemplated thereby, (iv) the loss of any customer, vendor or distributor (other than the Borrower and its affiliates) by the Acquired Business following the announcement of the Purchase Agreement and the transactions contemplated thereby and (v) the breach by the Borrower or one of its affiliates of their obligations pursuant to the contracts set forth in Schedule 1.1(iii) of the Purchase Agreement, except, with respect to clauses (i) and (ii), conditions, circumstances or changes that have a materially disproportionate effect on the Acquired Business relative to comparable companies and entities operating in the coffee industry or coffee services business in the United States or Canada, as the case may be, or (b) impairs in any material and adverse respect the ability of the sellers under the Purchase Agreement to complete the sale of the shares of the Acquired Business in accordance with the Purchase Agreement.

Commitment ” means a Term A Commitment, a Term B Commitment, a U.S. Revolving Credit Commitment or an Alternative Revolving Credit Commitment, as the context may require.