Employee Compensation Plans (Employee Compensation Plans)

12 Months Ended

Sep. 29, 2012

Employee Compensation Plans

Employee Compensation Plans

Share-based Compensation Disclosures

15.Employee Compensation Plans

Equity-Based Incentive Plans

On March 16, 2006, stockholders of the Company approved the Company’s 2006 Incentive Plan (the “2006 Plan”).  The 2006 Plan was amended on March 13, 2008 and on March 11, 2010 to increase the total shares of common stock authorized for issuance to 13,200,000.  As of September 29, 2012, 5,257,571 shares of common stock were available for grant for future equity-based compensation awards under the plan.

On September 25, 2001, the Company registered on Form S-8 the 2000 Stock Option Plan (the “2000 Plan”).  The plan expired in October 2010.  Grants under the 2000 Plan generally expire ten years after the grant date, or earlier if employment terminates.  As of September 29, 2012, there were no options for shares of common stock available for grant under this plan.

In connection with the acquisition of Keurig, the Company assumed the existing outstanding unvested option awards of the Keurig, Incorporated Fifth Amended and Restated 1995 Stock Option Plan (the “1995 Plan”) and the Keurig, Incorporated 2005 Stock Option Plan (the “2005 Plan”).  No shares under either the 1995 Plan or the 2005 Plan were eligible for post-acquisition awards.  As of September 29, 2012 and September 24, 2011, 2,776 and 6,664 options, respectively, out of the 1,386,909 options for shares of common stock granted were outstanding under the 1995 Plan.  As of September 29, 2012 and September 24, 2011, 37,313 options and 136,119 options, respectively, out of the 1,490,577 options granted for shares of common stock were outstanding under the 2005 Plan.  All awards assumed in the acquisition were initially granted with a four-year vesting schedule.

On May 3, 2007, Mr. Lawrence Blanford commenced his employment as the President and Chief Executive Officer of the Company.  Pursuant to the terms of the employment, the Company made an inducement grant on May 4, 2007, to Mr. Blanford of a non-qualified option to purchase 945,000 shares of the Company’s common stock, with an exercise price equal to fair market value on the date of the grant.  The shares subject to the option vested in 20% installments on each of the first five anniversaries of the date of the grant.

On November 3, 2008, Ms. Michelle Stacy commenced her employment as the President of Keurig, Incorporated.  Pursuant to the terms of the employment, the Company made an inducement grant on November 3, 2008, to Ms. Stacy of a non-qualified option to purchase 157,500 shares of the Company’s common stock, with an exercise price equal to fair market value on the date of the grant.  The shares subject to the option vest in 25% installments on each of the first four anniversaries of the date of the grant, provided that Ms. Stacy remains employed with the Company on each vesting date.

On February 9, 2009, Mr. Howard Malovany commenced his employment as the Vice President, Corporate General Counsel and Secretary of the Company.  Pursuant to the terms of the employment, the Company made an inducement grant on February 9, 2009, to Mr. Malovany of a non-qualified option to purchase 157,500 shares of the Company’s common stock, with an exercise price equal to fair market value on the date of the grant.  The shares subject to the option vest in 25% installments on each of the first four anniversaries of the date of the grant, provided that Mr. Malovany remains employed with the Company on each vesting date.

On December 17, 2010, Mr. Gérard Geoffrion commenced his employment as the President of CBU.  Pursuant to the terms of the employment, the Company made an inducement grant on December 17, 2010, to Mr. Geoffrion of a non-qualified option to purchase 35,000 shares of the Company’s common stock, with an exercise price equal to fair market value on the date of the grant.  The shares subject to the option vest in 25% installments on each of the first four anniversaries of the date of the grant, provided that Mr. Geoffrion remains employed with the Company on each vesting date.

On December 22, 2010, the Company made an inducement grant to Mr. Sylvain Toutant, Chief Operating Officer of CBU, of a non-qualified option to purchase 20,000 shares of the Company’s common stock, with an exercise price equal to fair market value on the date of the grant.  The shares subject to the option vest in 25% installments on each of the first four anniversaries of the date of the grant, provided that Mr. Toutant remains employed with the Company on each vesting date.

On February 17, 2011, Ms. Linda Longo-Kazanova commenced her employment as the Vice President, Chief Human Resources Officer.  Pursuant to the terms of the employment, the Company made an inducement grant on February 17, 2011, to Ms. Longo-Kazanova of a non-qualified option to purchase 30,000 shares of the Company’s common stock, with an exercise price equal to fair market value on the date of the grant.  The shares subject to the option vest in 25% installments on each of the first four anniversaries of the date of the grant, provided that Ms. Longo-Kazanova remains employed with the Company on each vesting date.

Under the 2000 Plan, the option price for each incentive stock option was not less than the fair market value per share of common stock on the date of grant, with certain provisions which increased the option price of an incentive stock option to 110% of the fair market value of the common stock if the grantee owned in excess of 10% of the Company’s common stock at the date of grant.  The 2006 Plan requires the exercise price for all awards requiring exercise to be no less than 100% of fair market value per share of common stock on the date of grant, with certain provisions which increase the option price of an incentive stock option to 110% of the fair market value of the common stock if the grantee owns in excess of 10% of the Company’s common stock at the date of grant.  Options under the 2000 Plan and the 2006 Plan become exercisable over periods determined by the Board of Directors, generally in the range of four to five years.

Option activity is summarized as follows:

	Number of Shares		Weighted Average Exercise Price (per share)
Outstanding at September 24, 2011	8,057,167		$	9.81
Granted	410,282		$	49.33
Exercised	(940,369	)	$	3.61
Forfeited/expired	(56,105	)	$	33.09
Outstanding at September 29, 2012	7,470,975		$	12.56
Exercisable at September 29, 2012	6,064,763		$	7.01

The following table summarizes information about stock options that have vested and are expected to vest at September 29, 2012:

Number of options outstanding	Weighted average remaining contractual life (in years)	Weighted average exercise price		Intrinsic value at September 29, 2012 (in thousands)
7,459,238	5.29	$	12.50	$	112,697

The following table summarizes information about stock options exercisable at September 29, 2012:

Number of options exercisable	Weighted average remaining contractual life (in years)	Weighted average exercise price		Intrinsic value at September 29, 2012 (in thousands)
6,064,763	4.67	$	7.01	$	106,865

Compensation expense is recognized only for those options expected to vest, with forfeitures estimated based on the Company’s historical employee turnover experience and future expectations.

The Company uses a blend of recent and historical volatility to estimate expected volatility at the measurement date.  The expected life of options is estimated based on options vesting periods, contractual lives and an analysis of the Company’s historical experience.

Total unrecognized share-based compensation costs related to unvested stock options expected to vest were approximately $21.1 million as of September 29, 2012.  This unrecognized cost is expected to be recognized over a weighted average period of approximately 1.2 years at September 29, 2012.  The intrinsic values of options exercised during fiscal years 2012, 2011 and 2010 were approximately $46.6 million, $221.8 million and $49.7 million, respectively.  The Company’s policy is to issue new shares upon exercise of stock options.

The grant-date fair value of employee share options and similar instruments is estimated using the Black-Scholes option-pricing model with the following assumptions for grants issued during fiscal years 2012, 2011 and 2010:

	Fiscal 2012			Fiscal 2011			Fiscal 2010
Average expected life	6 years			6 years			6 years
Average volatility	69		%	52		%	53		%
Dividend yield	—			—			—
Risk-free interest rate	1.31		%	2.37		%	2.73		%
Weighted average fair value	$	30.10		$	29.34		$	15.79

Restricted Stock Units and Awards

The Company awards restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) to eligible employees (“Grantee”) which entitle the Grantee to receive shares of the Company’s common stock as the units vest based on service.  RSUs represent units that are convertible to shares upon vesting.  RSAs represent grants of common stock that are restricted until the shares vest.  In general, the receipt of RSUs and RSAs is subject to the Grantee’s continuing employment.  The fair value of RSUs and RSAs is based on the closing price of the Company’s common stock on the grant date.  Compensation expense is recognized ratably over the Grantee’s service period.  RSUs and RSAs are reserved for issuance under the 2006 Plan and vest over periods determined by the Board of Directors, generally in the range of three to four years.  If a Grantee’s employment terminates as the result of retirement, any unvested RSUs as of the date of retirement continue to vest for the shorter of the period of time remaining in the original vesting period or a period of two years from the retirement date.

The following table summarizes the number and weighted average grant date fair value of unvested RSUs (amounts in thousands except grant date fair value and weighted average remaining contractual life):

	Number of Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (in Years)	Intrinsic Value at September 29, 2012 (in Thousands)
Nonvested, September 24, 2011		—		—		—	—
Granted	82,466			$	39.73
Vested	(315		)	$	53.46
Forfeited	(317		)	$	54.12
Nonvested, September 29, 2012	81,834			$	39.62	3.52	$	1,943

As of September 29, 2012, total RSUs expected to vest totaled 80,892 shares with an intrinsic value of $1.9 million.

Unrecognized compensation expense, net of estimated forfeitures, was $4.4 million as of September 29, 2012 and is expected to be recognized over a weighted average period of approximately 2.3 years.

In addition, in fiscal 2012, the Company issued a grant for 55,432 RSAs with an intrinsic value of $1.3 million as of September 29, 2012, none of which were vested or canceled in fiscal 2012.  As of September 29, 2012, total RSAs expected to vest in fiscal 2013 totaled 55,432 shares.

Employee Stock Purchase Plan

On October 5, 1998, the Company registered on Form S-8 the 1998 Employee Stock Purchase Plan.  On March 13, 2008, the plan was amended and renamed the Amended and Restated Employee Stock Purchase Plan (“ESPP”).  Under this plan, eligible employees may purchase shares of the Company’s common stock, subject to certain limitations, at the lesser of 85 percent of the beginning or ending withholding period fair market value as defined in the plan.  There are two six-month withholding periods in each fiscal year.  At September 29, 2012, and September 24, 2011, options for 1,559,728 and 1,861,699 shares of common stock were available for purchase under the plan, respectively.

The grant-date fair value of employees’ purchase rights granted during fiscal years 2012, 2011 and 2010 under the Company’s ESPP is estimated using the Black-Scholes option-pricing model with the following assumptions:

	Fiscal 2012			Fiscal 2011			Fiscal 2010
Average expected life	6 months			6 months			6 months
Average volatility	70		%	57		%	49		%
Dividend yield	—			—			—
Risk-free interest rate	0.09		%	0.19		%	0.22		%
Weighted average fair value	$	11.61		$	15.97		$	7.90

Equity-Based Compensation Expense

Equity-based compensation expense recognized in the Consolidated Statements of Operations in fiscal years 2012, 2011, and 2010 (in thousands):

	Fiscal 2012		Fiscal 2011		Fiscal 2010
Options	$	12,595	$	8,206	$	6,584
RSUs/RSAs	1,861		—		—
ESPP	3,412		2,155		1,365
Total stock based compensation expense recognized in the Consolidated Statements of Operations	$	17,868	$	10,361	$	7,949
Total related tax benefit	$	6,004	$	3,147	$	2,576