Market Overview

Troubles Continue to Mount for Green Mountain After Chairman's Ouster

The last year has been very tough on a certain Waterbury, Vermont-based coffee company that for half a decade was the darling of Wall Street. Green Mountain Coffee Roasters (NASDAQ: GMCR) shares have fallen from an all-time high of $115.98 in September 2011 to today's price of just above $26.00. Even despite the Netflix-like collapse, GMCR shares are still up more than 1,300% over the last decade and the stock was actually the top-performer in the 2000-2010 time period.

Nevertheless, disappointing earnings reports, accounting questions, attacks from short-sellers and questions about Green Mountain's future have all taken their toll on the stock. On May 2, after the closing bell, Green Mountain released its fiscal second-quarter earnings results. Net income for the period was in-line with Street consensus, but revenues were light.

Looking ahead, the company also provided third-quarter and full-year guidance which was well below analysts' consensus estimates. As a result of the disastrous quarter, GMCR shares registered their biggest decline ever, falling more than 40% on May 3.

The report was the last in a long line of issues which have been plaguing the stock. Other major headwinds over the last year have included accounting issues and an October presentation from noted hedge fund manager David Einhorn who revealed he is shorting the stock.

This week, the news has gotten even worse as the company's founder and Chairman, Robert Stiller, was stripped of his Chairman role and board committee assignments after making restricted stock sales to cover a margin call. Stiller had previously borrowed against his stake in Green Mountain to buy a 164-foot yacht and to invest in his Heritage Aviation business.

When Green Mountain shares plunged as a result of the poor Q2 results and forward-looking guidance, Stiller's lenders demanded that he put up more collateral for his loans or pay them down as the value of his GMCR shares was no longer sufficient. As a result, Stiller sold around $125.5 million in stock.

The problem was that the sales came at a time when company rules prohibited him from trading in GMCR shares. According to Bloomberg, the SEC is looking into the stock sales, but just because they violated company policy, does not mean that they were in any way illegal. “A violation of company policy isn't necessarily a securities law violation,” said Peter Henning, a former SEC attorney who is now a securities law professor at Wayne State University in Detroit. “You're allowed to use your shares as collateral, though you'd hope that the company had some indication that they had pledged such a large percentage of their shares.”

Stiller will remain on the board of the company which he founded in 1981 when he bought a small Vermont cafe. For his part, Stiller has said that he was "stunned" by his dismissal as Chairman. "I didn't think the consequences for what happened would be as great,” he said. “Certainly, I did violate some company policy and we do take that policy very seriously.”

The stock sales brought Stiller's stake in his company down to around 8.39 million shares from 13.4 million as of March 27, according to Bloomberg. Stiller is now the fifth largest holder of GMCR stock. In another transaction that was likely related to Stiller's outstanding loans and the plunge in GMCR shares, the executive sold his stake in Krispy Kreme Doughnuts (NYSE: KKD) for around $50 million on May 7.

Despite the controversy, and Green Mountain's sagging fortunes, Stiller has vowed to remain involved with the company. He told Bloomberg, “We have a strong history of being innovative and that will continue. I love it, and I will very much be a part of everything going forward.”

Another board member, lead director William Davis, was also forced to sell Green Mountain shares after the stock plunge in order to meet margin calls related to loans which were backed by his stake in GMCR. Former SEC Chairman Arthur Levitt criticized the practice of executives borrowing against their stakes in the companies they run. He said, "The perception of management borrowing against their own holdings is so bad. I would encourage shareholders to push companies to implement such protections where they don't currently exist."

Green Mountain, in fact, had done just this, but the loans taken out by Stiller and Davis had been grandfathered in while instituting a policy prohibiting new loans. According to the Chicago Tribune, some of Davis' loans were taken out in violation of the new policy as he borrowed more money using GMCR shares as collateral.

Posted-In: Earnings News Entrepreneurship Guidance Movers & Shakers Asset Sales Legal Management

 

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