increase fiscal 2005 third quarter pre-tax earnings by approximately $0.2 million
Restatement of the Company's financial statements to reflect all of the adjustments referred to above and certain other minor adjustments is expected to reduce net income for fiscal 2004 by between approximately $5.2 million and $6.2 million (between 9.2% and 10.9%). The adjustments are expected to reduce diluted earnings per share for fiscal 2004 by between approximately $0.09 and $0.10. Certain restatement adjustments the Company has identified but not enumerated above will affect reported earnings for interim periods within fiscal years but have an immaterial effect on earnings for the full fiscal year.
The Company also has concluded that under the provisions of FIN46(R), it should have consolidated the financial statements of KremeKo Inc. ("KremeKo"), its area developer for Central and Eastern Canada, effective as of the end of the first quarter of fiscal 2005 rather than as of the end of the third quarter of fiscal 2005. The Company currently expects that restatement adjustments to previously issued interim financial information for fiscal 2005 to correct this error will not have a material effect on pre-tax earnings for such interim periods. On April 15, 2005, the Company announced that KremeKo was commencing a financial restructuring. The Company is in the process of assessing the impact of the pending restructuring on the carrying value of KremeKo's assets and liabilities.
The Company also believes it is likely that additional restatement adjustments to previously issued financial statements for fiscal 2004 and earlier years, and potentially to interim financial information for fiscal 2005, will be required to correct the timing of revenue recognition with respect to certain sales of equipment to franchisees. While the Company's analysis of this matter is not complete, the Company expects that adjustments will be recorded to recognize revenue from certain equipment sales on or after the installation of
the equipment rather than when the equipment was either shipped or delivered. The Company currently is reviewing the accounting and quantifying the effects of such potential adjustments which, if necessary and recorded, are expected to affect principally fiscal 2004 and earlier years.
The Company currently is conducting impairment testing of the reported amounts of goodwill, and anticipates that it will conclude that goodwill is impaired and that an impairment charge will be reflected in fiscal 2005 earnings; however, the Company has not concluded in which interim period or periods of fiscal 2005 such charge or charges, if any, should be recorded. The interim financial information previously published by the Company for fiscal 2005 does not reflect any such impairment charges.
Because the investigation by the Special Committee of independent directors of the Company (discussed in the Company's Current Report on Form 8-K dated December 15, 2004) is ongoing, there can be no assurance that, upon completion of the investigation, the Special Committee will not conclude, either for quantitative or qualitative reasons, that the Company's historical financial statements require restatement with respect to matters beyond those discussed above. In such event, there can be no assurance that the amount of any additional adjustments will not be material individually or in the aggregate.
In addition, the previously disclosed investigations of the Company by the Division of Enforcement of the Commission and the United States Attorney's Office for the Southern District of New York are ongoing.
In order that all restatements of previously issued financial statements be accomplished at one time, the Company has concluded that the completion of the fiscal 2005 financial statements and the filing of its annual report on Form 10-K for fiscal 2005 (as well as the quarterly report on Form 10-Q for the period ended October 31, 2004) should await the completion of the Company's analyses discussed above, the conclusion of the Special Committee's investigation and the conclusion of the Company's discussions with the Commission staff regarding accounting matters. The completion of such ongoing work could result in adjustments of previously issued financial statements in addition to the adjustments described herein and such adjustments could, individually or in the aggregate, be material.
As a result of the foregoing, the Company was not able to file its annual report on Form 10-K by April 15, 2005, and it does not expect to be able to file its Form 10-K by April 30, 2005. The Company is not at this time able to predict when the Form 10-K will be filed, but intends to file the report at the earliest practicable date.
The Company's failure to file timely its quarterly report on Form 10-Q or its annual report on Form 10-K may constitute failure to comply with the continued listing requirements of the New York Stock Exchange (the "Exchange"), on which the Company's common stock is listed. The Company has communicated informally with the Exchange regarding the filing of the Company's periodic reports; however, the Company cannot predict what action, if any, the Exchange may take regarding the Company's failure to file its required reports on a timely basis.
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") requires the Company to include "Management's Report on Internal Control over Financial Reporting" in its annual report on Form 10-K for fiscal 2005, which must include, among other things, an assessment of the effectiveness, as of the end of the fiscal year, of the Company's internal control over financial reporting. In making its assessment, management is using the criteria described in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's evaluation of the Company's internal control over financial reporting as of January 30, 2005 is not complete. Audit Standard No. 2 states that a restatement of previously issued financial statements to reflect the correction of an error should be regarded as at least a significant deficiency and as a strong indicator that a material weakness in internal control over financial reporting exists. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The Company believes that, because of the number and magnitude of the restatement adjustments identified to date, it is highly likely that it will conclude that there were one or more material weaknesses in the Company's internal control over financial reporting at January 30, 2005. If the Company's management concludes that one or more material weaknesses existed, it will be unable to conclude that the Company maintained effective internal control over financial reporting as of January 30, 2005. Also, if one or more material weaknesses existed, the Company's independent registered public accounting firm will issue an adverse opinion with respect to the effectiveness of the Company's internal control over financial reporting as of January 30, 2005.
Failure to comply fully with Section 404 might subject the Company to sanctions or investigation by regulatory authorities, such as the Commission or the Exchange. Any such action could adversely affect the Company's financial results and the market price of the Company's common stock. In addition, any failure to implement new or improved controls, or difficulties encountered in their implementation, could adversely affect the Company's operating results and/or cause the Company to fail to meet its reporting obligations.
Financial Update
Results for fiscal 2005 were adversely impacted by significant sales declines. For the full fiscal year, systemwide and Company average weekly sales per factory store decreased approximately 13% and 19%, respectively, compared to fiscal 2004. For the fourth fiscal quarter ended January 30, 2005, systemwide and Company average weekly sales per factory store decreased approximately 20% and 27%, respectively, compared to the fourth quarter of fiscal 2004.
On a preliminary basis, the Company expects to report fiscal fourth quarter revenues of approximately $153 million, representing a 16% decrease from the prior year comparable period, and fiscal 2005 revenues of approximately $685 million, representing a 4% increase from fiscal 2004. The annual revenue increase was primarily attributable to an increase in Company store revenues, which was due to sales from new stores as well as the inclusion of sales from New England Dough, LLC, the Company's consolidated joint venture partner in Connecticut, Maine, Massachusetts, Rhode Island, Vermont and New Hampshire, which was consolidated in May 2004 pursuant to FIN 46(R) and the inclusion of sales from the
Michigan market, which was acquired in October 2003, partially offset by decreased sales from existing stores. The Company expects to report a net loss for the fourth fiscal quarter ended January 30, 2005. The Company's financial results are also being adversely impacted by the substantial costs associated with the legal and regulatory matters previously disclosed by the Company.
Systemwide average weekly sales per factory store is a non-GAAP financial measure. Systemwide sales data include sales at all company and franchise stores. The Company believes systemwide sales information is useful in assessing the Company's market share and concept growth.
Founded in 1937 in Winston-Salem, North Carolina, Krispy Kreme is a leading branded specialty retailer of premium quality doughnuts, including the Company’s signature Hot Original Glazed. Krispy Kreme currently operates approximately 400 stores in 45 U.S. states, Australia, Canada, Mexico, the Republic of South Korea and the United Kingdom. Krispy Kreme can be found on the World Wide Web at www.krispykreme.com.
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Information contained in this press release, other than historical information, should be considered forward-looking. Forward-looking statements are subject to various risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on Krispy Kreme’s operating results, performance or financial condition are the outcome of the pending formal investigation by the United States Securities and Exchange Commission and the investigation by the United States Attorney’s Office for the Southern District of New York, the pending shareholder class action, the pending shareholder derivative actions, the pending ERISA class action, the pending Special Committee investigation, our auditors’ ongoing review of our financial statements, actions taken by lenders to the Company and its joint ventures, its dependence on franchisees to execute its store expansion strategy, supply issues, changes in consumer preferences and perceptions, the failure of new products or cost saving initiatives to contribute to financial results in the timeframe or amount currently estimated and numerous other factors discussed in Krispy Kreme’s periodic reports and proxy statements filed with the Securities and Exchange Commission.
