Krispy Kreme serves up quarterly profit for short of expectations

Shares of Krispy Kreme fell 10 per cent on the news….Shares plummeted, stores closed, shareholders sued and executives confirmed that Krispy Kreme is the subject of an "informal, non-public inquiry" by the U.S. Securities and Exchange Commission on its franchise reacquisitions and its earnings guidance.

The Globe and Mail
August 27, 2004

Krispy Kreme serves up quarterly profit far short of expectations
Doughnut maker's stock drops 10%
Associated Press

With Canadian cigarette maker JTI-Macdonald Corp. swaddled in bankruptcy protection, its current Japanese and former U.S. owners disagree on who will bear the loss if Quebec succeeds in a quest for a fortune in unpaid tobacco taxes on smuggled cigarettes.

But they agree that a five-year-old purchase contract could decide the matter.

The former owner is RJ Reynolds Tobacco Holdings Inc. of Winston-Salem, N.C., once part of the RJR Nabisco Inc. empire and now owned by New York Stock Exchange-listed Reynolds American Inc., whose biggest shareholder is British American Tobacco PLC of London, the world's No. 2 cigarette company. (BAT owns Imperial Tobacco Canada Ltd., No. 1 in this country.)

The current owner is an erstwhile state monopoly and the world's No. 3 cigarette maker, Tokyo-based Japan Tobacco Inc. It bought JTI-Macdonald (then called RJR-Macdonald) in 1999 as part of a deal for all of the RJR tobacco interests outside the United States, including the Camel, Winston and Salem brands. It is unclear how much thought went into the acquisition of the Canadian operation and its Export A brand.

The sums at stake are substantial, even for corporate giants. Quebec's claim for $1.36-billion in taxes, penalties and interest sent JTI-Macdonald into shelter under the Companies' Creditors Arrangement Act on Tuesday. Other provinces may follow Quebec's lead and the federal government is already suing the company for $1.5-billion.

Nor is there any doubt that millions of cartons of Export A's were shipped to the United States and smuggled back into Canada tax free in the 1990s, chiefly through border-straddling native reserves. The question is whether the maker can be held responsible for the unpaid taxes and, if so, which owner will be left holding the bag.

Details of the purchase deal have not been made public, but RJR has said in U.S. securities filings that it retained responsibility for "any liabilities, costs and expenses incurred by Japan Tobacco or any of its affiliates arising out of certain activities of Northern Brands."

That is a reference to a U.S.-based RJR subsidiary, Northern Brands International Inc., whose 1998 guilty plea in U.S. federal court stands as a key law enforcement victory in the smuggling war. It paid penalties of $15-million (U.S.) after admitting its role in an operation pumping cigarettes exported by RJR-Macdonald back across the border through the Akwesasne reserve near Cornwall, Ont.

In Winston-Salem, RJR officials are cagey about the terms of the deal.

"We have a contractual agreement with JT that covers certain things, doesn't cover other things," said Seth Moskowitz, communications director of operating subsidiary RJ Reynolds Tobacco Co., without naming anything that is covered.

"It's our understanding that a number of steps need to be taken before this would reach the point that JT would even seek to be indemnified by RJR," he said. "First the courts have to find out if indeed any tax is owed. If they determined that, then they would need to determine what entity actually owes the tax.

"Procedurally, JT cannot seek indemnification from RJR under the terms of the agreement until it's actually made payments, which is obviously a long way from being determined. And, as I said before, we do not believe that we would be obligated to make any payments under the terms of the agreement."

Separately, Reuters reported from Tokyo that Japan Tobacco said the CCAA filing is not an acknowledgment of Quebec's claims and the Canadian unit will take all possible steps to protect its business. It also said it is entitled to seek indemnification from RJR for costs arising from the matter.


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