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Why did Green Mountain Coffee Roasters miss red flags?

I’d like to know how Green Mountain Coffee Roasters (NASDAQ: GMCR) could have missed significant accounting problems in its Timothy’s subsidiary months before it reported an inquiry by the Securities and Exchange Commission into its corporate-wide revenue reporting and months before it claims to have discovered certain accounting errors.


On September 28, 2010, Green Mountain disclosed that the SEC started an informal inquiry into its revenue accounting practices and relationship with a certain fulfillment vendor eight days earlier. On that same day, the company coincidently reported that it discovered an accounting error involving its K-Cup margin percentages during the preparation of its financial report for the period ended September 25, 2010. On November 19, 2010, Green Mountain disclosed that it found four new accounting errors. On that date, the company said it would restate its financial reports issued from 2007 to the thirteen-week period ended June 26, 2010 to correct its errors and conceded that there were material weaknesses in internal controls. Class action lawsuits allege that the company knew about accounting irregularities, but failed to disclose them. The plaintiffs are alleging that the company deliberately manipulated its earnings.

Red flag

Last February, I examined Green Mountain Coffee’s financial reports that were issued before its restatement. I looked for unusual trends in its various subsidiaries such as Timothy's. According to my calculations, Timothy's revenues were $2.298 million and income before taxes was $4.690 million for the thirteen weeks ended June 26, 2010. Timothy’s income before taxes exceeded revenues by $2.392 million in that period.

Note: At that time, Green Mountain Coffee did not report individual thirteen week numbers for Timothy's. I subtracted Timothy’s revenue and income before taxes for the twenty-six weeks ended March 27, 2010 from the totals for thirty-nine weeks ended June 26, 2010 to calculate its numbers for the thirteen weeks ended June 26, 2010.

The only way that income before taxes could exceed revenues is when non-operating income exceeds operating income. That seemed highly unlikely given the company’s reported consolidated numbers and accounting policies for subsidiaries. It is a red flag that should have invited early scrutiny by management.

Revised numbers after restatement show significant changes

In the latest 10-Q for the thirteen weeks ended June 25, 2011, Green Mountain Coffee reported the following revised financial results at Timothy's for the previous year's thirteen week period ended June 26, 2010:

For the thirteen weeks ended June 26, 2010, the Timothy’s operations contributed an additional $10.3 million of revenue and $3.8 million of income before taxes.

Before Green Mountain Coffee restated its financial reports, Timothy’s revenues were $2.298 million and income before taxes were $4.690 million. After the restatement, the company now claims that Timothy's revenues were $10.3 million and income before taxes was $3.8 million for that same period. Timothy’s revised revenues turned out to be about $8 million higher than originally reported (348% higher) and revised income before taxes was about $0.9 million less than originally reported.

Further, the company's revised numbers show that my previous concerns about missing a significant red flag in Timothy's was apparently correct. It turns out that revised numbers for Timothy's show that income before taxes did not exceed revenues in the thirteen weeks ended June 26, 2010. Why did Green Mountain Coffee miss that significant red flag?

Revised numbers still don't add up

Even Timothy's revised income before taxes for each individual thirteen week period does not add up to the year-to-date totals. In the 10-Q report for the thirteen week ended December 25, 2010, the company disclosed the following revised results for Timothy's in the previous year thirteen week period 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. [Emphasis added.]

In the 10-Q report for the thirteen week ended March 26, 2011, the company disclosed the following revised results for Timothy's in the previous year thirteen week period ended March 27, 2010:

...the Timothy’s operations contributed an additional $13.0 million of revenue and $3.8 million of income before taxes. [Emphasis added.]

In that same 10-Q report for the quarter ended March 26, 2011, Green Mountain Coffee reported the following revised financial results for Timothy's in the previous year twenty six week period ended March 27, 2010:

...Timothy’s operations contributed in an additional $17.2 million of revenue and $2.8 million of income before income taxes. [Emphasis added.]

Green Mountain Coffee's revised numbers for Timothy's don't add up. Timothy's revised income for before taxes for the twenty-six weeks ended March 27, 2010 should be $3.8 million, not $2.8 million, if you add up the numbers for each thirteen-week period. That same discrepancy between the individual thirteen week numbers and year to date numbers also carried over in its latest 10-Q report.

Written by:

Sam E. Antar


I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. In addition, I teach about white-collar crime for government entities, professional organizations, businesses, and colleges and universities.

Recently, I exposed GAAP violations by (also known as which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating and its CEO Patrick Byrne for securities law violations.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time. My past sins are unforgivable.

I do not own any Green Mountain Coffee Roasters or securities long or short.


Danthebeast said…
Thing I find sickly funny is that the types of posts you're writing about - are the very same kind that those who predicted the US credit crisis (and even the European debt crisis) - wrote about just leading up the banks getting into trouble, and seeing their stocks and publicly traded debt trade for pennies on the dollar.

An alternative explanation, could be that GMCR is well meaning, but really really incompetent... With money involved, and based on other facts, I'd rather bet that the smoke you're pointing is originating from a great fire.

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