Doughnut chain Krispy Kreme, whose shares took a hit Tuesday after a financial publication called the company's accounting of a lease on a new $30 million mixing plant an "off-balance-sheet trick," abandoned the controversial plan while also saying it backed previous earnings guidance.
An article in the Feb. 18 edition of Forbes magazine said Krispy Kreme's doughnut-mix plant and warehouse in Effingham, Ill., "is being financed with something called a 'synthetic lease,' an off-balance-sheet trick in which a corporation has all the practical effects of a heavily mortgaged piece of real estate but tells its shareholders that it neither owns the property nor owes debt on it."
The chain said it will use conventional on-balance-sheet financing for the $35 million facility rather than the synthetic lease. It said its banks have approved conventional financing for the facility without use of the company's cash or unused credit line.
Investors have been taking a closer look at off-balance-sheet financing since the collapse of Enron Corp. Such instruments can make it more difficult for investors to determine a company's financial health.
"In the current economic climate, investors understandably are paying closer attention to the financial strength of their companies,'' Scott Livengood, president and chief executive, said in a statement. "There is no reason for us to do anything that could be misinterpreted, regardless of how legal and acceptable it may be.''
Krispy Kreme chief operating officer John Tate said the company had taken extraordinary measures to make sure the use of the synthetic lease was legal and fully disclosed to investors. The company reported the synthetic lease when its addressed analysts after its first-quarter earnings and in filings with the Securities and Exchange Commission, he said.
"We want to be considered a model for disclosure,'' he said. "We don't want to be lumped in the group of those who are not.''
BB&T Capital Markets analyst Andrew Wolf said he doubted Krispy Kreme was involved in any questionable accounting practices.
"Their cash flow is tremendous,'' he said. "They do not need to do sneaky things.''
Tate said the company was "very comfortable'' with its earnings guidance. Krispy Kreme has said previously it expects to earn 44 cents per diluted share in fiscal 2002 and 61 cents a share in fiscal 2003. Those estimates match the average posted by analysts on Thomson Financial/First Call.
The company said it expected to open 59 new stores and 10 to 15 new doughnut-and-coffee shops in fiscal 2003. That compares with 48 new stores in fiscal 2002 and three doughnut-and-coffee shops.
Reuters and the Associated Press contributd to this report.