Green Mountain Coffee Roasters (GMCR)

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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

33

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.

At March 28, 2009, we had $118.7 million outstanding under our Credit Facility subject to variable interest rates. However, the interest rate on $75.7 million of this debt was fixed through interest rate swap agreements, as discussed further below. Therefore, $43.0 million outstanding under our Credit Facility remains subject to variable interest rates. Should interest rates (LIBOR and Prime rates) increase by 100 basis points, we would incur additional interest expense of $430,000 annually. At September 27, 2008 we had $45.0 million subject to variable interest rates.

On March 28, 2009, the effect of our interest rate swap agreements was to limit the interest rate exposure on the outstanding balance of the Credit Facility to a fixed rate versus the 30-day Libor rate as follows: 5.4% on $25.7 million; 2.4% on $30 million; and 3.9% on $20 million. The total notional amount covered by these swaps will decrease progressively in future periods and terminates on various dates from June 2010 through December 2012.

Commodity price risks

The “c” price of coffee is subject to substantial price fluctuations caused by multiple factors, including weather and political and economic conditions in coffee-producing countries. Our gross profit margins can be significantly impacted by changes in the “c” price of coffee. We enter into fixed coffee purchase commitments in an attempt to secure an adequate supply of coffee. These agreements are tied to specific market prices (defined by both the origin of the coffee and the time of delivery) but we have significant flexibility in selecting the date of the market price to be used in each contract. We generally fix the price of our coffee contracts three to nine months prior to delivery, so that we can adjust our sales prices to the market. At March 28, 2009, the Company had approximately $50.0 million in green coffee purchase commitments, of which approximately 61% had a fixed price. At September 27, 2008, the Company had approximately $73.2 million in green coffee purchase commitments, of which approximately 59% had a fixed price.

In addition, we regularly use commodity-based financial instruments to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point they are added to cost of sales. At March 28, 2009 we held outstanding futures contracts covering 1,500,000 pounds of coffee with a fair market value of ($24,000), gross of tax. At September 27, 2008, we held outstanding futures contracts covering 1,162,500 pounds of coffee with a fair market value of $(39,000), gross of tax. If we had terminated these contracts on March 27, 2009, we estimate that we would have incurred a loss of $24,000, gross of tax, which represented the fair market value on such date. The average contract price used to calculate the fair value of the contracts outstanding was $1.22 per pound as compared to the weighted average “c” price of $1.21 at March 28, 2009. If the “c” price were to drop on average by 10%, the loss incurred in fiscal 2009 will be approximately $180,000, gross of tax. However, this loss, if realized, would be offset by lower costs of coffee purchased during fiscal 2010.

34

Item 3.         Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to our operations result primarily from changes in interest rates and commodity prices (the “C” price of coffee). To address these risks, we enter into hedging transactions as described below. We do not use financial instruments for trading purposes. For purposes of specific risk analysis, we use sensitivity analysis to determine the impacts that market risk exposures may have on our financial position or earnings.

Interest rate risks

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

At June 28, 2008, we had $17.3 million subject to variable interest rates. Should interest rates (LIBOR and Prime rates) increase by 100 basis points, we would incur additional interest expense of $173,000 annually.

The Company has interest rate swap agreements with Bank of America N.A. (“Bank of America”) and Sovereign Bank. The total notional amount of the swap agreements at June 28, 2008 and September 29, 2007 was $78,466,667 and $65,466,667, respectively. The swap agreements terminate between June 2010 and December 2012.

On June 28, 2008, the combined effect of the swap agreements was to limit the interest rate exposure to an average fixed rate of 3.86% versus the 30-day LIBOR rate on $78,466,667of the Company’s debt.

At June 28, 2008 and September 29, 2007, the Company estimates it would have paid $440,000 and $871,000 (gross of tax), respectively, had it terminated its swap agreements. The Company designates the swap agreements as a cash flow hedges and the changes in the fair value of the swaps are classified in accumulated other comprehensive income.

For the thirteen weeks and thirty-nine weeks ended June 28, 2008, the Company paid $475,000 and $765,000, respectively, pursuant to the swap agreements, which increased interest expense. For the thirteen weeks and thirty-nine weeks ended June 30, 2007, the Company paid $20,000 and $58,000 pursuant to the swap agreement, which increased interest expense. The Company is exposed to credit loss in the event of nonperformance by the other party to the swap agreement; however, nonperformance is not anticipated.

Commodity price risks

Green coffee prices are subject to substantial price fluctuations, generally caused by multiple factors including weather, and political and economic conditions in certain coffee-producing countries. Our gross profit margins can be significantly impacted by changes in the price of green 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. At July 28, 2008, the Company had approximately $67.5 million in green coffee purchase commitments, of which approximately 45% had a fixed price.

In addition, we regularly use commodity-based financial instruments to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point they are added to cost of sales. At June 28, 2008, the Company held no futures contracts.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to our operations result primarily from changes in interest rates and commodity prices (the “C” price of coffee). To address these risks, we enter into hedging transactions as described below. We do not use financial instruments for trading purposes. For purposes of specific risk analysis, we use sensitivity analysis to determine the impacts that market risk exposures may have on our financial position or earnings.

Interest rate risks

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

At March 29, 2008, we had $32.3 million subject to variable interest rates. Should interest rates (LIBOR and Prime rates) increase by 100 basis points, we would incur additional interest expense of $323,000 annually.

The Company has interest rate swap agreements with Bank of America N.A. (“Bank of America”) and Sovereign Bank. The total notional amount of the swap agreements at March 29, 2008 and September 29, 2007 was $65,466,667. In the twenty-six weeks ended March 29, 2008, the effect of the swap agreements was to limit the interest rate exposure to an average fixed rate of 5.44% versus the 30-day LIBOR rate on $65,466,667 of the Company’s debt. The swap agreements terminate between June 2010 and December 2012.

At March 29, 2008 and September 29, 2007, the Company estimates it would have paid $2,749,000 and $871,000 (gross of tax), respectively, had it terminated its swap agreements. The Company designates the swap agreements as a cash flow hedges and the changes in the fair value of the swaps are classified in accumulated other comprehensive income.

For the thirteen weeks and twenty-six weeks ended March 29, 2008, the Company paid $232,000 and $290,000 pursuant to the swap agreement, which increased interest expense, respectively. For the thirteen weeks and twenty-six weeks ended March 31, 2007, the Company paid $18,000 and $38,000 pursuant to the swap agreement, which increased interest expense, respectively. The Company is exposed to credit loss in the event of nonperformance by the other party to the swap agreement; however, nonperformance is not anticipated.

Commodity price risks

Green coffee prices are subject to substantial price fluctuations, generally caused by multiple factors including weather, and political and economic conditions in certain coffee-producing countries. Our gross profit margins can be significantly impacted by changes in the price of green 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. At March 29, 2008, the Company had approximately $66.4 million in green coffee purchase commitments, of which approximately 54% had a fixed price.

In addition, we regularly use commodity-based financial instruments to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point they are added to cost of sales. At March 29, 2008, the Company held no futures contracts.

Market risks relating to our operations result primarily from changes in interest rates and commodity prices (the "C" price of coffee). To address these risks, we enter into hedging transactions as described below. We do not use financial instruments for trading purposes. For purposes of specific risk analysis, we use sensitivity analysis to determine the impacts that market risk exposures may have on our financial position or earnings.

At January 14, 2006 we had no debt subject to variable interest rates. We entered into an amortizing interest rate swap agreement in June 2004, in order to fix the interest rate on our entire term loan. The effect of the swap is to limit the interest rate exposure to a fixed rate of 3.94% versus the 30-day LIBOR.

In the fiscal 2006 period, we received $116 pursuant to the swap agreement, which reduced interest expense. In the fiscal 2005 period, we paid $111,000 in additional interest expense pursuant to the swap agreement. We are exposed to credit loss in the event of nonperformance by the other party to the swap agreement; however, nonperformance is not anticipated. The fair market value of the interest rate swap is the estimated amount that we would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counterparty. At January 14, 2006 we estimate that we would have received $53,000 (gross of tax) if we terminated the agreement. We designate the swap agreement as a cash flow hedge and the fair value of the swap is classified in accumulated other comprehensive income.

Commodity price risks

Green coffee prices are subject to substantial price fluctuations, generally caused by multiple factors including weather, and political and economic conditions in certain coffee-producing countries. Our gross profit margins can be significantly impacted by changes in the price of green 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 two to six months prior to delivery, so that we can adjust our sales prices to the market. In addition, we maintain an on-hand inventory of approximately 1.5 to 2 months' worth of green coffee requirements. At January 14, 2006, the Company had approximately $25,684,000 in green coffee purchase commitments, of which approximately 76% had a fixed price.

In addition, we regularly use commodity-based financial instruments to hedge price-to-be-established coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. These hedges generally qualify as cash flow hedges. Gains and losses are deferred in other comprehensive income until the hedged inventory sale is recognized in earnings, at which point they are added to cost of sales. At January 14, 2006, we held outstanding futures contracts covering 825,000 pounds of coffee with a fair market value of $204,000, gross of tax. The average settlement price used to calculate the fair value of the contracts outstanding was $1.21. If the settlement price drops on average by 10%, the loss incurred will be approximately $99,000 gross of tax. However, this loss, if realized, would be offset by lower costs of coffee purchased during fiscal 2006.

 

Item 4. Controls and Procedures

As of January 14, 2006, Green Mountain Coffee's management with the participation of its Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 ("the Exchange Act"). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Green Mountain Coffee's disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Exchange Act) are effective to make known to them in a timely fashion material information related to the Company required to be filed in this report.

There have been no significant changes in our internal controls that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

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.