WSJ -- Krispy Kreme Auditor Delays Review.
September 13, 2004
Krispy Kreme Auditor Delays Review
By RICK BROOKS and MARK MAREMONT
Staff Reporters of THE WALL STREET JOURNAL
Krispy Kreme Doughnuts Inc. said its auditor, PricewaterhouseCoopers LLP, refused to complete a review of the company's financial statements for the latest quarter until an outside law firm hired by the company's board is finished performing "certain additional procedures" requested by the auditors.
The Winston-Salem, N.C., doughnut chain didn't specify what the auditors' concerns were, but indicated in a Securities and Exchange Commission filing Friday that they relate to an unspecified acquisition during the fiscal year that ended Feb. 1.
The disclosure could spark new questions about the company's accounting transparency and a string of acquisitions that included the repurchase of several franchises, including two owned by Krispy Kreme insiders. The company, which recently reported a sharp falloff in growth and declining earnings, already faces an informal SEC inquiry focused on its franchise repurchases and a profit warning it gave in May.
In a statement included in its regular quarterly filing, Krispy Kreme said the audit committee of its board of directors hired the outside law firm on Aug. 30 to "perform an investigation regarding a specific matter relating to an acquisition in fiscal 2004." The acquisition wasn't identified, but the company said in the filing that the dollar amount involved in the probe was "immaterial from a quantitative standpoint."
The law firm, which also wasn't identified, concluded its probe in less than two weeks, finding that neither the company nor any of its employees engaged in any "intentional misconduct" related to the matter, according to Krispy Kreme. The company said it and its audit committee didn't believe any additional work was needed, but the committee nevertheless agreed to the extra work.
A Krispy Kreme spokeswoman said yesterday that she didn't know which acquisition was scrutinized by the outside law firm, but added that the company is "hopeful" that the additional work asked for by PricewaterhouseCoopers will be completed soon. A PricewaterhouseCoopers spokesman declined to comment.
The Wall Street Journal published an article on May 25 focused on Krispy Kreme's repurchase last October of the assets of its Michigan franchisee, Dough-Re-Mi Ltd. , for $32.1 million. Part of the price went to pay past-due interest Dough-Re-Mi owed to Krispy Kreme, which the doughnut chain then booked as immediate profit. Some accounting experts have said that was equivalent to Krispy Kreme taking money from one pocket, putting it into another and calling it profit.
Company officials have defended their accounting methods and handling of franchise buybacks. In its filing Friday, Krispy Kreme said it is "fully cooperating" with the SEC in its inquiry.
The company also has faced criticism of its April 2003 purchase of Montana Mills Bread Co., an unprofitable bakery chain, for $37.8 million in stock, because its then-chief operating officer, John W. Tate, was on the board of Montana Mills. Mr. Tate has said he stayed out of any talks tied to the takeover by Krispy Kreme. The company said in May that it would close the majority of the bakery stores and sell off the remaining outlets, resulting in a write-off of $35 million to $40 million. Mr. Tate resigned from Krispy Kreme last month to take a similar post at Restoration Hardware Inc.
In its filing, Krispy Kreme also gave details of a sale-leaseback deal completed in its most recent quarter, saying it had sold six stores for $17.3 million and agreed to lease them back for 20 years. The company had previously confirmed that some proceeds of the deal were used to fund continuing operations, but it had declined to provide the dollar amount of the arrangement. Some accounting experts said the sale-leaseback might be an indication of a cash crunch. Yesterday, the Krispy Kreme spokeswoman said the decision to sell was made by partners of a joint venture owned mostly by the company and that Krispy Kreme executives had no role in the decision. Friday's filing indicates that the transaction generated about $6.8 million in cash, with the rest of the proceeds used to reduce debt. Krispy Kreme had $19.3 million in cash as of Aug. 1, less than a third of what it raised in its 2000 initial public offering.
Write to Rick Brooks at rick.brooks@wsj.com and Mark Maremont at mark.maremont@wsj.com
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