Green Mountain Coffee Roasters is the leader in the US single serve coffee market.

The company owns the Keurig

system and owns the patent protected right to produce and license K-Cups for the Keurig system. Green Mountain
operates in two business segments: the Specialty Coffee Business Unit (SCBU) and the Keurig business unit. The
company primarily competes in the “At Home” market and the “Away from Home” market. The company’s
principal strategy has been to grow the single serve Keurig system with a razor/razorblade strategy by selling the
brewer at cost and selling the higher priced, high-margin K-cups. Green Mountain has been wildly successful in
implementing this strategy as it has expanded its network to over 19,000 retailers and 13,500 supermarkets.

Green Mountain Coffee Roasters Target Price $ 19.43

Market Data (11/7/2010) Key Financials¹
Time Period YE 2008 YE 2009 YE 2010 (E) YE 2011 (E) YE 2012 (E)
Price $34.00 DCM Revenue 500.28 803.0 1,354.0 1,876.8 2,586.1

52 Week Range $19.86-$37.97 Growth Over Prior Year 60.5% 68.6% 38.6% 37.8%

Diluted Share Count 137.90 Consensus Revenue 500.3 803.0 1,345.6 2,025.3 2,945.0

Market Cap (Mil) 4688.60 Gross Profit 176.9 249.8 447.5 648.2 824.1

Enterprise Value (Mil) 4719.22 M argin % 35.36% 31.10% 33.0% 34.5% 31.9%

Dividend Yield 0.00% EBITDA 60.7 102.2 224.1 376.3 441.6

Insider Ow nership 12.86% M argin % 12.1% 12.7% 16.6% 20.1% 17.1%

Institutional Ow nership 84.03% EBIT 42.4 78.7 171.4 309.0 356.9

Short Interest 22.118 M argin % 8.5% 9.8% 12.7% 16.5% 13.8%

Net Incom e 22.3 55.8 97.2 176.9 206.1

DCF Target Price $ 17.37 M argin % 4.46% 6.95% 7.18% 9.43% 7.97%

Forw ard Multiple Price $ 21.49 DCM Diluted EPS Estim ates 0.19 0.46 0.70 1.20 1.38
Growth Over Prior Year - 142.1% 53.2% 69.7% 15.4%

Bull Case $ 33.98 Diluted EPS Excl. Extra Item s-Consensus 0.19 0.46 0.71 1.18 1.63
53.9% 66.9% 37.5%

Price to DCM Earnings Ratio 73.91 48.24 28.43 24.65

Enterprise Value to EBITDA 46.18 21.06 12.54 10.69

PT Assuming 17x Forw ard PE 21.49

Investment Thesis

I believe Green Mountain makes a compelling short due to looming patent issues, a shortening growth
runway, due to fewer channels available to open in the future and a declining tie-rate to the Keurig unit,
as well as potential accounting issues.

Recommendation

It is our recommendation that Green Mountain share be sold as the company faces numerous
challenges from competitors, slowing growth, declining tie-rate, and an SEC investigation that calls the
previous growth into question. Assuming the investigation is finds Green Mountain innocent of
wrongdoing; I estimate that shares are worth about $20 per share.

Positives to the Short Thesis

Looming Patent Issues: Green Mountain operates in a competitive environment for coffee producers.
The company enjoys a competitive advantage from the closed Keurig system. The advantage is
specifically patent protection giving them a monopoly on the lucrative K-Cup business. This advantage is
unsustainable as the patent that protects Green Mountain’s exclusive right to produce, license, and sell
the K-Cup expires in Dec 2012. At this point, larger, stronger competitors with better brand recognition
and distribution capabilities are free to produce and sell K-Cups. This will effectively open a previously
closed system, resulting in a loss of market share and price competition.

Shortened Runway for Growth: The company’s impressive growth the past several years has mainly
taken in the “At Home” market. Green Mountain has been extremely successful in opening new doors
to sell its system to consumers growing from 11,000 locations in 2007 to over 32,000 today (19,000
Retailer and 13,500+ Supermarkets). The company has already saturated retailers and should saturate
supermarkets (about 15,000 locations) over the next year or two. As such, the growth runway should
end and at that time the company will need to increase “same store sales”. It has been unclear up to
this point if GMCR can increase “same store sales” of K-cups. See detailed analysis below:

Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010
Retail 10000 10000 10000 10000 13800 14,000 16800 16800 16900 18000 18000 18000
SuperMarket 1200 1200 1200 1200 2600 2600 3800 3800 8500 10800 12000 13450
Club Stores 0 0 0 0 320 320 320 757 1000 1000 1000 1000
Total Outlets 11,200 11,200 11,200 11,200 16,720 16,920 20,920 21,357 26,400 29,800 31,000 32,450
YoY % Increase 60.00% 60.00% 60.00% 60.00% 49.29% 51.07% 86.79% 90.69% 57.89% 76.12% 48.18% 51.94%

Total K-Cups Sold 168,000,000 230,000,000 278,880,000 298,000,000 272,160,000 356,500,000 451,785,600 533,420,000 417,129,600 650,000,000 720,000,000 683,000,000
YoY % Increase 50.00% 57.53% 68.00% 49.00% 62.00% 55.00% 62.00% 79.00% 53.27% 82.33% 59.37% 28.04%
Same Store Sales -10.00% -2.47% 8.00% -11.00% 12.71% 3.93% -24.79% -11.69% -4.63% 6.21% 11.18% -23.90%

The end of this runway should coincide with the patent expiration which will make it extremely difficult
to deliver on the massive growth expectations embedded in the stock price.

Decreased Tie-Rate: Green Mountain’s profitability is driven by K-Cup sales. A key driver of this is
consumption per brewer, which the company states is 2.2-2.3 cups/machine/day. After careful analysis
of the company’s results the last 18 quarters and reconstructing their install base in both the “AH”
market and “AFH” market, it is clear that consumption doesn’t come anywhere near that mark and has
been declining rapidly over the last eight quarters. This implies that brewers purchased more recently
aren’t be used as frequently and the product has some faddish elements, or perhaps the company is
stuffing the channel with brewers. Neither of these implications is desirable. See below:
Away from Home Consumption 117,000,000 117,000,000 117,000,000 117,000,000 117,000,000 117,000,000 117,000,000 117,000,000
At Home Consumption 155,160,000 239,500,000 334,785,600 416,420,000 300,129,600 533,000,000 603,000,000 566,000,000
Implied K-cup/AH machine/Day 1.13 1.37 1.48 1.56 0.96 1.33 1.23 1.01
GMCR's Stated AH K-cup/AH Machine/Day 2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.25
Variance (1.12) (0.88) (0.77) (0.69) (1.29) (0.92) (1.02) (1.24)

Assumed AFH Usage/machine/day 12.50

GMCR Stated Avg AH Usage 2.25
Implied Avg AH Usage 1.26

Avg Variance in Co's #'s vs Implied #'s/day (0.99)

Accounting Issues: Combined with the patent issue, shorter growth runway, and declining tie-rate, there
is reason to believe the company has issues related to revenue recognition and potential channel
stuffing that call historic growth into question. The section related to revenue recognition from the
company’s 2009 10k is revealing:

“Revenue from wholesale and consumer direct sales is recognized upon product delivery, and in some
cases upon product shipment.”

This can be translated to mean that they recognize revenue whenever they please.

It is also worth noting that the company’s business units (SCBU and Keurig) also do a significant amount
of business with one another, creating an opportunity manage earnings.

Potential Channel Stuffing: Furthermore, the company has a significant vendor relationship (M. Block
and Sons) that is ambiguous and has changed in nature. This relationship has gone from being
insignificant in 2007 to representing 35% of the GMCR’s revenue and 51% of the accounts receivable in
2009. It also appears, prior to 2009, the company’s relationship with M. Block was primarily order
fulfillment for Green Mountain. It appears that M. Block became a customer of Green Mountain’s at
some point in 2009. The impact of this change in the company’s financials is difficult to examine, but if
this is the case, inventory sitting at M. Block for fulfillment purposes can easily become a sale to M.
Block.

It is important to note that on September 20, 2010 the SEC began an investigation into both the
company’s revenue recognition policies and its relationship with M. Block.

Risks to the Short Thesis

A large CPG firm purchases GMCR: This is, in my mind, the biggest risk to the short. The single serve
coffee market, with its high margins, is attractive to a CPG firm. Acquiring GMCR ahead of the patent
expiration would give a CPG firm a head start on the competition. The actual probability of this
occurring is unknowable.
It should be noted that GMCR’s hefty price tag (upon completion of the Van Houtte acquisition, GMCR
will have >$6 billion in Enterprise Value), combined with the real threat of new entrants, and relatively
small capital investment required to compete, a competitor would be better served by allowing Green
Mountain to continue to establish the install base, then exploiting it when the patent expires.

The Patent Expiration is a Non-Event: This is possible and sales of Green Mountain’s K-Cups could
continue to rise and GMCR could continue to enjoy their nearly 70% market share. In our opinion this is
unlikely. GMCR would have you believe that it’s very difficult and expensive to run a production line for
K-Cups and distribute them, perhaps it is, for a small company, but not for Kraft/Starbucks, Sara Lee,
Peet’s, or Dunkin Donuts.

Furthermore, the company’s actions, by buying up original licensees at absurd valuations, indicate
otherwise. The bidding war over Dietrich and the all-debt $900m acquisition of Van Houtte (at 10x
EBITDA) are geared towards closing the Keurig system to potential outsiders. This is because the original
licenses were very liberally written, liberal to the extent that an original licensee could sell that license
to another producer. Expensive acquisitions to close the system and prevent this are indicative of just
how important the K-Cup patent is to Green Mountain.

Other Patents Protect the System: The company has numerous patents, however the most important
ones related to the current K-Cup expire in December of 2012. The company may be able to leverage
other patents related to the K-Cup in an effort to keep the system closed. If successful, the company will
have put a moat around its business and will be able to maintain market share and pricing power. It
may also be an attractive acquisition target for a potential suitor.

The other patents specifically relate to bar coding technology. This technology was also the subject of a
patent infringement lawsuit that GMCR filed against Kraft (Tassimo) that was subsequently settled. In
my opinion it is unlikely that Green Mountain will successfully utilize this patent in a meaningful way
prior to expiration of the old patents, as current brewers are not equipped with bar code reading
technology and turnover of the installation base is slow (20%/Year).

The Company is Successful in Building its Brands: Green Mountain has spent over $1 billion building out
the portfolio of brands by buying up other original K-Cup licensees. A successful portfolio of brands with
loyal customers would allow the company to hold market share and compete effectively post-patent
expiration.

The Market for Single Serve Coffee is Larger than Estimated: In our analysis, we feel we sized the
potential market for the single-serve brewer opportunity generously at roughly 20 million units installed.
This represents almost 30% of regular coffee drinking US households (66M) and over 20% of all
households with a coffee maker (90M). However, if we materially underestimated the market
penetration rate of single serve brewers the runway for growth could be longer.