Krispy Kreme Panel Recommends Earnings Restatement

Krispy Kreme Doughnuts Inc. (KKD) needs to restate its past earnings downward by $25.6 million over the past several years, according to a report issued Wednesday by a special committee examining the finances of the troubled snack maker.

Former Chief Executive Scott Livengood (search) and his aide, John Tate, bear most of the responsibility for the once high-flying company's problems, said the report from independent directors who have been examining the company's finances since last fall.

"The Krispy Kreme story is one of a newly public company, experiencing rapid growth, that failed to meet its accounting and financial reporting obligations to its shareholders and the public," according to the report. "While some may see the accounting errors discussed in our summary as relatively small in magnitude, they were critical in a corporate culture driven by a narrowly focused goal of exceeding projected earnings by a penny (per share) each quarter."

No one interviewed by committee members acknowledged such manipulation, but the committee remained cautious.

"The number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings," the report said. "But we never received credible explanations for transactions that appear to have been structured or timed to allow for the improper recognition of revenue or improper reduction of expense."

The doughnut maker based in Winston-Salem, N.C., is under criminal inquiry by a federal prosecutor in New York and is the target of a Securities and Exchange Commission (search) probe into financial irregularities.

Several lawsuits have been filed against Krispy Kreme, including one that alleges workers lost millions of dollars in retirement savings because executives at the company hid evidence of declining sales and profits.

The report recommended restating earnings downward by $22.2 million for 2001-2004 and by $3.4 million for previous years.

The special investigative committee was co-chaired by Michael Sutton, formerly chief accountant of the SEC, and Lizanne Thomas of the Jones Day law firm.

"The completion of the special committee report represents an important step forward for Krispy Kreme, both in understanding what occurred and in providing the framework for our upcoming restatement of our financial statements," Krispy Kreme Chairman James Morgan said in a prepared statement.

"Krispy Kreme is a powerful brand, and we believe we are making progress every day in getting the company back on track to realizing its full potential."

The report said company executives made key errors that led to its problems, including significant losses to its shareholders. The company's stock, which sold for as much as $105 in November 2000 before a pair of two-for-one stock splits, was up 41 cents Wednesday to $7.56 on the New York Stock Exchange (search).

Krispy Kreme officers and other employees who had substantial involvement in the accounting errors have left the company, according to the report. The committee also concluded that the company should not sue any current or former directors or executives.

In January, Krispy Kreme forced out Livengood, turning to turnaround specialists Stephen Cooper and Steven Paganos to try to overcome sinking profits.

Cooper previously led the turnaround at Boston Chicken (search), which declared bankruptcy in 1998. That was just five years after the restaurant chain went public with fanfare similar to that surrounding Krispy Kreme's initial public offering in 2000.

"While the company still faces serious challenges, we believe we are addressing the critical issues," Cooper said in a statement issued Wednesday.