Lawyer cleared us of misconduct, says Krispy Kreme

Krispy Kreme, based in Winston-Salem, said the potential adjustments relate primarily to accounting for buying back franchises in Michigan and northern California. Krispy Kreme is under a formal SEC investigation of its franchise buybacks and earnings outlooks and is facing shareholder lawsuits.

The Toronto Star
December 16, 2004

Lawyer cleared us of misconduct, says Krispy Kreme
Tim Whitmire

CHARLOTTE, N.C. — Doughnut maker Krispy Kreme said today that lawyers have concluded for a second time that no one at the company did anything intentionally improper in its acquisition of a Michigan franchise.

In its latest SEC filing, the company said it continues reviewing other errors and proposed adjustments that could result in the company's net income for the year being trimmed by as much as 7.6 per cent, however.

In midday trading today on the New York Stock Exchange, Krispy Kreme shares were trading at $11.90 (all figures U.S.), up $1.27, or almost 12 per cent.

Krispy Kreme, based in Winston-Salem, said the potential adjustments relate primarily to accounting for buying back franchises in Michigan and northern California. If auditors conclude those adjustments should be made, the company said they would reduce net income for fiscal 2004 by 2.7 per cent.

Krispy Kreme said auditors are also looking at whether to treat payments to former franchise operating managers as compensation expenses or purchase prices. If treated as compensation expenses, that change could reduce Krispy Kreme's net income by 7.6 per cent in fiscal 2004, the company said in an 8-K filing with the SEC.

Krispy Kreme is under a formal SEC investigation of its franchise buybacks and earnings outlooks and is facing shareholder lawsuits. The company has created a special committee of two new independent directors to investigate all those matters, Krispy Kreme said, and that committee could conclude that the company's financial statements need to be changed.

The company said yesterday that it will not be able to file its overdue quarterly 10-Q report until it finishes reviewing "franchise matters," including the company's consolidation of KremeKo Inc., which develops Canadian stores for Krispy Kreme.

In the Michigan franchise acquisition probe, Krispy Kreme's audit committee hired an independent firm in August to examine issues stemming from an erroneous figure that was recorded during the acquisition.

In September, Krispy Kreme reported the firm concluded that neither the company nor any of its employees engaged in any intentional misconduct.

Krispy Kreme said its independent auditors subsequently went back and asked the firm to do an additional review of some electronic files.

"The independent law firm performed its additional procedures and did not change its conclusion," the company said in today's filing.

The once-high flying company last month posted a $3 million third-quarter loss, its second losing quarter of 2004.

Krispy Kreme has closed a number of stores since May. The company also said it would close a $4.6 million doughnut plant in northeast Ohio due to oversupply problems.


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