January 5, 2005 in Business

Krispy Kreme restates earnings, may face cash, credit crunch

Associated Press
 
Associated Press photo

Troubled doughnut maker Krispy Kreme will restate earnings for the last three quarters of fiscal 2004, the company announced Tuesday.
(Full-size photo)

RALEIGH, N.C. — Amid allegations of padded sales figures, Krispy Kreme on Tuesday restated its earnings for fiscal 2004, sending its shares tumbling more than 17 percent and threatening the once-trendy doughnut maker with a cash and credit crunch.

In a statement, Krispy Kreme said its revised earnings reports place it in potential default of a $150 million credit line. While the company is negotiating with lenders to avoid being forced to immediately repay almost $91 million in outstanding loans, it warned “there can be no assurance that the lenders will accede.”

The company is currently unable to borrow additional money, and has guaranteed $52.3 million in franchisee debt. Because some franchisees are not in compliance with their credit agreements, Krispy Kreme estimates it is on the hook for $16.7 million that could be subject to a demand for repayment.

Making matters worse, Winston-Salem-based Krispy Kreme said it is still reviewing its accounting practices and expects to make further revisions to past earnings reports.

The company said the bulk of the earnings changes reported Tuesday result from recording payments to former franchise owners in Michigan and northern California as compensation, rather than as a purchase price in buying back their franchises.

Krispy Kreme, which is under investigation by the Securities and Exchange Commission, reported in October that it had formed a special committee of independent directors to look into whether earnings should be restated.

Morningstar analyst Carl Sibilksi, who follows the company, said he views the warning of possible credit problems as more a worst-case scenario than a looming prospect.

“It’s a bad negotiating position to be in, but I don’t think it’s something that will cripple them,” Sibilski said. “It probably means their creditors will negotiate with tougher terms.”

The restated earnings came a day after new allegations surfaced in shareholder lawsuits that claim Krispy Kreme executives tried for more than a year to hide evidence of declining doughnut sales. Two unidentified “confidential witnesses” who are former employees of the company alleged that Krispy Kreme routinely padded sales by doubling the number of doughnuts delivered to wholesale customers at the end of fiscal quarters. Unsold doughnuts were shipped back after the quarters ended.

The company did not immediately respond to a request for comment.

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