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Krispy Kreme to Revise 2004 Profit to Fix Accounting Error

Times Staff Writer

Krispy Kreme’s stunning decline got even worse Tuesday when the company said it planned to revise downward its fiscal 2004 profit to correct errors in how it accounted for payments to franchisees in Northern California and Michigan.

Krispy Kreme Doughnuts Inc.'s battered stock plunged 15%.

The earnings restatement, which would delay the delivery of accurate financial results, might result in Krispy Kreme stock being delisted from the New York Stock Exchange, the once-hot doughnut retailer said. The restatement might also put it in default on a $150-million line of credit, and the company said it had asked lenders for a waiver.

Krispy Kreme said in a statement that it believed that cash on hand, “combined with cash generated from operations,” would be sufficient to fund its business.

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But the restatement, the company said, would shrink profit for the 2004 fiscal year. The decline would be $3.8 million to $4.9 million. Krispy Kreme had said earlier that it earned $56.8 million on sales of $665.6 million in the fiscal year, which ended Feb. 1.

The restatement would be the latest blow for Krispy Kreme, a 67-year-old company based in Winston-Salem, N.C. It owns and franchises 440 doughnut stores in 45 states and four other countries; there are 31 stores in Southern California.

Long a Southern favorite, Krispy Kreme and its hot “original glazed” doughnuts developed a cult-like following and a torrent of publicity in the 1990s as the company moved aggressively into new markets. One was Southern California, which Krispy Kreme entered in 1999 with a store in La Habra.

In mid-2000, Krispy Kreme went public, drawing added attention -- and Wall Street raves -- when its stock soared.

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But last year, Krispy Kreme stumbled. The company posted its first losses since going public as its sales growth slowed dramatically. Questions also were raised about its accounting methods.

Chairman and Chief Executive Scott Livengood blamed the slowdowns in good part on the low-carb diet craze. Critics said that Krispy Kreme -- whose gooey treats also are sold in many supermarkets and convenience stores -- expanded too quickly and diluted the brand’s appeal. Shareholder lawsuits were filed against the chain as the stock plummeted, and the Securities and Exchange Commission began an investigation.

It tumbled $1.83 to $10.48 on Tuesday. It has dropped 70% from a year ago, when it stood at $36 a share. It hit a high of $49.37 in August 2003.

The planned earnings restatement for the last three quarters of fiscal 2004 are related to payments made to former owners of franchises in Northern California and Michigan. In some cases, Krispy Kreme, which originally recorded the payments as part of the purchase prices of the franchises, revised them to be compensation expenses paid to the individuals.

There are multiple probes underway of Krispy Kreme accounting and corporate-governance practices, including by the SEC. Those probes spawned the restatement announced Tuesday, and the company said more revisions could be coming. Indeed, Krispy Kreme said certain of its franchisees aren’t in compliance with their own credit agreements and that the company might be liable to cover some of those debts as well.

What Krispy Kreme said Tuesday raised “many more questions than answers, especially given concerns regarding company liquidity,” analyst John Ivankoe of J.P. Morgan & Co. said in a note to clients. He predicted “down earnings are likely for the next several quarters.”


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