Krispy Kreme

Krispy Kreme Doughnuts Inc.'s chief executive, Scott A. Livengood, ended his functions as a chairman of the company Jan. 18, during the time when company's legal and financial troubles are at their peak. The company began experiencing trouble a while ago and the factors leading to current situation are numerous. People watching the industry, are not optimistic about future prospects of Krispy Kreme. One of the major issues facing the company today is Federal investigations concerning their accounting practices. The manner in which company performs its accounting does not correspond with current laws and GAAP standards. Krispy Kreme repurchases franchises and according to earnings quality analyst Rob Miceli of Camelback Research Alliance Inc. in Scottsdale, Ariz., Krispy Kreme does not amortize, in other words reduce the value, of those bought assets on its books over time. Clearly the company is violating the industry norm. On the other hand, in case if company would follow the law, the value of its purchased franchised units would reduce the total assets carried by Krispy Kreme on its balance sheet and thus make profits look smaller, as the items being amortized are considered a spending against earnings. The federal search has to look into the company's purchases of formerly franchised doughnut shops and figure out in what way the company accounted those operations for.

Bad signs of company's failing health were showing during the first quarter of the current fiscal year which ended last May 2 when the company informed about its first quarterly loss since going public in 2000. Krispy Kreme booked a net deficit of $24.4 million for the period stated, that amount included a $34.3 million charge related to the company's spending on purchase of Montana Mills bakery-cafe chain, in 2003 for $39 million. For the vivid comparison we should look at the following figures: quarter, ended Oct. 31, Krispy Kreme reported a net loss of $3 million, meaning- 5 cents a share,...