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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 28, 2004
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KRISPY KREME DOUGHNUTS, INC.
(Exact name of registrant as specified in its charter)
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North Carolina 001-16485 56-2169715
(State or other jurisdiction (Commission File Number) (I.R.S. Employer Identification No.)
of incorporation)
370 Knollwood Street, Winston-Salem, North Carolina 27103
(Address of principal executive offices)
Registrant's telephone number, including area code: (336) 725-2981
Not Applicable
(Former name or former address, if changed since last report)
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Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
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Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review.
(a)
On January 4, 2005, Krispy Kreme Doughnuts, Inc. (the "Company") issued
a press release announcing that the Board of the Directors of the Company has
concluded that the Company's previously issued financial statements for the
fiscal year ended February 1, 2004 and the last three quarters of such fiscal
year should be restated to correct certain errors contained therein, and,
accordingly, such financial statements should no longer be relied upon. A copy
of that press release (the "Press Release") is attached hereto as Exhibit 99.1
and is incorporated in this Item 4.02(a) by reference.
Item 8.01. Other Events.
The Press Release also updates the Company's ongoing comprehensive
effort to comply fully with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, and a copy of the Press Release is incorporated in
this Item 8.01 by reference.
Item 9.01. Financial Statements and Exhibits.
(c) Exhibits. The following exhibit is filed herewith:
Exhibit No. Description
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99.1 Press release ("Krispy Kreme Announces Decision to
Restate Financial Statements") dated January 4, 2005.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
KRISPY KREME DOUGHNUTS, INC.
Dated: January 4, 2005
By: /s/ Michael C. Phalen
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Michael C. Phalen
Chief Financial Officer
EXHIBIT 99.1
Investor Contact: Mike Phalen
Chief Financial Officer
Krispy Kreme Doughnuts, Inc.
336.733.3707
Financial Media Contact: Robbin E. Moore
Investor Relations Director
Krispy Kreme Doughnuts, Inc.
336.726.8857
KRISPY KREME ANNOUNCES DECISION TO RESTATE FINANCIAL STATEMENTS
Winston-Salem, NC (January 4, 2005) - Krispy Kreme Doughnuts, Inc. (NYSE:KKD)
(the "Company") today filed a Form 8-K with the Securities and Exchange
Commission (the "Commission") disclosing that the Board of Directors of the
Company has concluded that the Company's previously issued financial statements
for the fiscal year ended February 1, 2004 ("fiscal 2004") and the last three
quarters of such fiscal year should be restated to correct certain errors
contained therein. Accordingly, such financial statements should no longer be
relied upon. The Board of Directors reached this conclusion on December 28,
2004, in consultation with, and upon the recommendation of, its Audit Committee
and management of the Company, and with the concurrence of its Special Committee
of independent directors, following receipt of preliminary conclusions of the
Special Committee with respect to certain of these matters. Set forth below is
additional information concerning the restatement decision and the circumstances
giving rise to it, as well as information concerning other matters relating to
the Company's financial reporting for the fiscal year ending January 30, 2005
("fiscal 2005") and earlier years. The Audit Committee and management have
discussed the matters disclosed in this press release with the Company's
independent auditors. The Company reported the formation and purpose of the
Special Committee in a Current Report on Form 8-K dated October 4, 2004.
In its Current Report on Form 8-K filed December 16, 2004, the Company disclosed
that certain errors had been identified with respect to the Company's fiscal
2004 financial statements and that the Company was reviewing potential
adjustments to correct such errors, the amounts of which were, in certain
instances, subject to judgment and interpretation. On December 28, 2004, the
Board of Directors determined that adjustments totaling between $6.2 million and
$8.1 million should be made to reduce pre-tax income for fiscal 2004. The
principal adjustments, which relate to the Company's accounting for the
acquisitions of certain franchisees, are as follows:
o a pre-tax adjustment of between $3.4 million and $4.8 million to
record as compensation expense, rather than as purchase price, some or
all of the disproportionate consideration paid to a former owner of
the Michigan franchise, who was its operating manager and who
subsequently worked for the Company for a short period of time
o a pre-tax adjustment of approximately $0.5 million to reverse certain
income and to record as expense amounts that were improperly accounted
for as part of the Company's acquisition of the Michigan franchise
o a pre-tax adjustment of between $0.5 million and $1.0 million to
record as compensation expense, rather than as purchase price, some or
all of the disproportionate consideration paid to a former owner of
the Northern California franchise, who was its former operating
manager and who worked for the Company for a short period of time
o a pre-tax adjustment of approximately $0.8 million to record as
expense, rather than as purchase price, part of the consideration paid
to another former owner of the Northern California franchise; this
adjustment was proposed subsequent to the Company filing its Current
Report on Form 8-K filed December 16, 2004
o a pre-tax adjustment of approximately $0.6 million to reverse income
recorded as a management fee prior to the Company's acquisition of the
minority interest in the Northern California franchise
o a pre-tax adjustment of approximately $0.5 million to record as
expense, rather than as purchase price, part of the consideration
in the Company's acquisition of the Charlottesville franchise
The first and third adjustments listed above, with a combined pre-tax effect of
$3.9 million to $5.8 million, reflect the application of judgment and
interpretation in determining the amount of compensation or other expense
embedded within acquisitions in which a selling shareholder was employed by the
Company for a short period of time and/or received a disproportionately higher
purchase price compared to other sellers.
Restatement of the Company's financial statements to reflect the six principal
adjustments referred to above and certain other minor adjustments are expected
to reduce net income for fiscal 2004 by between approximately $3.8 million and
$4.9 million (between 6.6% and 8.6%) and net income for the fiscal 2004 second,
third and fourth quarters by approximately $0.3 million (2.2%), approximately
$0.3 million (2.1%) and between approximately $3.2 million and $4.3 million
(19.3% and 26.3%), respectively. The adjustments are expected to reduce diluted
earnings per share ("EPS") for fiscal 2004 by between approximately $0.07 and
$0.08 and diluted EPS for the fiscal 2004 second, third and fourth quarters by
approximately $0.01, less than $0.01 and between $0.05 and $0.07, respectively.
As a result of the restatement of the fiscal 2004 financial statements, the
Company also expects to restate its financial statements for the first and
second quarters of fiscal 2005 to reflect the effects of the restatement of the
February 1, 2004 balance sheet; however, the Company's previously reported
results of operations for the first and second quarters of fiscal 2005 are not
expected to be materially affected by this restatement.
Since the Special Committee's investigation (discussed in the Company's Current
Report on Form 8-K filed December 16, 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 or
periods beyond those discussed above. In such event, there can be no assurance
that the amount of those additional adjustments will not be material
individually or in the aggregate.
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In addition, the investigation of the Company by the Commission's Division of
Enforcement is ongoing. The Company also is conducting discussions with the
Commission staff regarding the staff's inquiries concerning certain accounting
matters, including certain of the matters giving rise to the adjustments
described above.
The Company and its joint venture partners lease a substantial number of
properties on which significant improvements have been constructed. The Company
currently is reviewing its accounting practices for leases and depreciation of
related assets to determine whether or not those practices fully comply with
generally accepted accounting principles ("GAAP"). The Company became aware, in
December 2004, as a result of filings made by certain other restaurant
companies, that those companies intend to restate previously issued financial
statements to correct errors in the application of GAAP to certain leases or
leasehold improvements. Insofar as the Company is able to determine, the
restatements generally arise from corrections to properly account for lease
renewal options and/or rent escalations in computing rent expense for operating
leases; to determine properly the depreciable lives of leasehold improvements
when renewal options are present in leases; and to require use of the same lease
term in determining the operating or capital classification of a lease, rent
expense thereunder and depreciable lives of related leasehold improvements.
Based on current reports filed by the certain other restaurant companies, it
appears their restatements generally will reflect increased depreciation and/or
rent expense compared to that previously reported. If the Company determines (as
it presently expects) that its historical accounting practices in this regard do
not fully comply with GAAP, adjustments to fiscal 2004 financial statements will
be required, in addition to the adjustments to such financial statements the
Company has already determined are necessary as discussed herein. If the
restatement of the Company's fiscal 2004 financial statements reflects
adjustments as a result of this review, the Company expects that its previously
issued interim financial statements for fiscal 2005 also would be restated. In
addition, depending on materiality, it is also possible that financial
statements for one or more fiscal years prior to fiscal 2004 may be restated as
a result of this issue.
In its Current Report on Form 8-K filed December 16, 2004, the Company noted
that its quarterly report on Form 10-Q for the period ended October 31, 2004
could not be filed timely with the Commission due to ongoing analyses related to
the accounting treatment of certain franchise matters in the Company's third
fiscal quarter, primarily concerning the Company's consolidation of KremeKo,
Inc., its area developer for Central and Eastern Canada. In that Current Report,
the Company stated its intention to file the quarterly report as soon as
practicable following the completion of those analyses. These analyses have not
yet been completed. Subsequent to December 16, the Company concluded that the
filing of the quarterly report should await not only the completion of the
analyses of the franchise matters, but also the completion of as many as
practicable of the ongoing investigations, inquiries, reviews and other analyses
now underway. 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. Because the Company believes it would be desirable to accomplish all
restatements at one time, the Company currently intends to finalize, at a
minimum, completion of the analyses of franchise matters and the analysis of
lease and depreciation matters before restating the fiscal 2004 financial
statements, the interim fiscal 2005 financial statements and filing the fiscal
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2005 third quarter report on Form 10-Q. Depending upon the status and timing of
completion of the foregoing analyses, the Company may also await the conclusion
of the discussions with the Commission staff and completion of the work of the
Special Committee before restating the fiscal 2004 financial statements, the
interim fiscal 2005 financial statements and filing the fiscal 2005 third
quarter quarterly report. Moreover, the time required to complete such ongoing
work could cause the Company to be unable to file on a timely basis its fiscal
2005 annual report on Form 10-K.
The failure of the Company to deliver to its lenders the Company's financial
statements for the quarter ended October 31, 2004 on or before January 14, 2005
(which will not be delivered on or before that date for the reasons discussed
above) will, absent a waiver from the lenders, constitute an event of default
under the Company's $150 million Credit Facility. Additionally, the adjustments
to the Company's fiscal 2004 financial statements described herein may also
constitute an event of default. In the case of an event of default, lenders
representing more than 50% of the financing commitment under the Credit Facility
may direct that the Credit Facility be terminated and all amounts outstanding
thereunder be immediately due and payable. At October 31, 2004, the total amount
outstanding under the Credit Facility was approximately $90.9 million. The
Company has informed the lenders of the matters discussed herein and has
requested a waiver from the lenders. Although the Company is in active
discussions with the lenders regarding the Company's request, there can be no
assurance that the lenders will accede and, if the lenders accede, under what
conditions they will do so. Any such waiver will require the consent of lenders
representing more than 50% of the financing commitment under the Credit
Facility. For the reasons described above, the Company is currently unable to
borrow funds under the Credit Facility. The Company believes that its existing
cash, combined with cash generated from operations, will be sufficient to fund
current operations and presently contemplated capital expenditures. However,
borrowings under the Credit Facility or other additional cash resources may be
required if the Company is called upon to honor its guarantees of franchisee
debt or franchisee operating leases. At October 31, 2004, the total guaranteed
amount was approximately $52.3 million, primarily comprised of $32.1 million
related to consolidated joint ventures and $20.2 million related to franchisees
in which the Company has less than a controlling interest. To date, the Company
has not experienced any losses with respect to these guarantees; however, the
Company has been advised that certain of its franchisees are not in compliance
with certain covenants contained in their credit agreements. At October 31,
2004, the total amount of the debt guaranteed by the Company under such credit
agreements was approximately $16.7 million.
The Company's failure to file timely its quarterly report on Form 10-Q or
potentially its annual report on Form 10-K also 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 not
received any communication from the Exchange in this regard; however, the
Company cannot predict what action, if any, the Exchange may take should the
Company not promptly file its required reports.
Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") requires the Company
to include in its Annual Report on Form 10-K for fiscal 2005 a report of
management on internal control over financial reporting, 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 structure over financial
reporting. The Company's independent auditors are also required to issue a
report on the assessment made by management.
The Company is undertaking a comprehensive effort to comply fully with these
requirements. This effort includes documenting, evaluating the design of and
testing the effectiveness of the Company's internal controls over financial
reporting. During this process, the Company may identify deficiencies in its
system of internal controls over financial reporting that may require
remediation. As described above, the Company has identified certain errors in
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its historical financial statements. Due to the ongoing evaluation and testing
of the Company's internal controls and the adjustments to the historical
financial statements as described above, there can be no assurance that any
deficiencies identified may not be material weaknesses that the Company would be
required to report.
The Company will continue to devote substantial time and incur substantial costs
in connection with the requirements of Section 404 of the Act. Although the
Company has a plan in place to complete the work necessary to present the
required management report and for its independent auditors to issue their
report, management has not yet completed its evaluation. The current formal
investigation of the Commission and the independent investigation of the Special
Committee significantly increase the challenges to the Company in completing the
Section 404 requirements on a timely basis. These ongoing investigations have
put a strain on available resources. In addition, the findings and conclusions
reached in these investigations could raise issues concerning the Company's
internal controls that require remediation and subsequent testing. The Company's
independent auditors have advised the Company that they have concerns regarding
whether management will be in a position to complete its work and provide its
report on a timely basis and thus will be able to obtain the required
attestation report on internal controls on a timely basis, and whether the
independent auditors will be able to issue unqualified attestation reports as to
management's assessment and the operating effectiveness of the Company's
internal controls over financial reporting.
Failure to complete the evaluation in a timely manner or 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
harm the Company's operating results and/or cause the Company to fail to meet
its reporting obligations.
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 440 stores
(comprised of 402 factory stores and 38 satellites) in 45 U.S. states,
Australia, Canada, Mexico and the United Kingdom. Krispy Kreme can be found on
the World Wide Web at www.krispykreme.com.
# # #
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 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, the outcome of the pending formal investigation by the
United States Securities and Exchange Commission, the pending shareholder class
action, the pending shareholder derivative actions, the pending Special
Committee investigation, our auditors' ongoing review of our financial
statements, and numerous other factors discussed in Krispy Kreme's periodic
reports and proxy statements filed with the Securities and Exchange Commission.
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