Governance

Krispy Kreme Files Late Reports

The embattled doughnut chain moves—albeit slowly—to tidy up its loose accounting ends.
Stephen TaubJanuary 22, 2007

Krispy Kreme has finally filed its delayed financials for the second and third quarters of its fiscal 2007 year. However, the doughnut retailer, which held a gastronomic mystique over many of its customers until it got caught up in a major accounting scandal, still has not filed its three-month report for the third quarter of fiscal 2005, the reports the Associated Press.

The company reported a loss of $4.6 million for the fiscal quarter ended July 30, much smaller than the $14.9 million loss reported for the comparable period the prior year. Revenues fell to $112 million from nearly $140 million in the year-earlier period. For the fiscal third quarter ending October 29, Krispy Kreme reported a loss of $7.2 million compared with a loss of $29.7 million the year before. Revenues came in at $117 million, down from nearly $129 million in the corresponding quarter in fiscal 2006.

Embroiled in an accounting scandal and shrinking in size, the retail doughnut chain is currently being investigated by the Securities and Exchange Commission and the U.S. Attorney’s Office for the Southern District of New York. In August, a report filed by a special board committee accused former Krispy Kreme executives of intentionally managing earnings, adding that the company “failed to meet its accounting and financial reporting obligations to its shareholders and the public.” The report continued: “Krispy Kreme and its shareholders have paid dearly for those failures, as measured by the loss in market value of the company’s shares, a loss in confidence in the credibility and integrity of the company’s management and the considerable costs required to address those failures.”

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By November, the company settled a $75 million shareholder lawsuit. As part of the agreement former CFO Randy Casstevens will shell out $100,000 in cash, as will ex-Chief Operating Officer, John Tate. As part of a derivative settlement, Tate also agreed to cancel his interest in 6,000 shares of Krispy Kreme common stock, and like Casstevens agreed to limit to specified amounts their claims for indemnity from the company in connection with future proceedings before the SEC and U.S. Attorney’s office.

All claims against them were dismissed with prejudice, according to the announcement. Under the settlement, the company and the individuals did not admit to fault or wrongdoing.

Nevertheless, Krispy Kreme’s accounting scandal has taken a tremendous toll on the company’s stock, which had once traded at nearly $50. Today, it is hovering around $11.48 after dropping below $5. As of October 29, there were 381 Krispy Kreme stores operated system-wide, of which 114 were owned by the company, and 267 were owned by franchisees.