Krispy Kreme Updates Status of Form 10-K Filing

    WINSTON-SALEM, N.C., April 19 /PRNewswire-FirstCall/ -- Krispy Kreme
 Doughnuts, Inc. (NYSE:   KKD) today announced that the Company was unable to
 file its Form 10-K for the fiscal year ended January 30, 2005 ("fiscal 2005")
 within the prescribed time period and provided a financial update.
     (Logo:  http://www.newscom.com/cgi-bin/prnh/19991216/NYTH146 )
 
 
     Annual Report on Form 10-K Update
     The Company has filed a Notification of Late Filing on Form 12b-25 stating
 that its annual report on Form 10-K for fiscal 2005 could not be filed timely
 due to ongoing analysis related to the proper application of generally
 accepted accounting principles to certain transactions which occurred in the
 fiscal year ended February 1, 2004 ("fiscal 2004") and earlier years as well
 as in fiscal 2005. Until such analyses are complete, the Company is unable to
 finalize its financial statements for fiscal 2005.  The Company is also filing
 today a Current Report on Form 8-K reporting that, because of pending
 restatements, the Audit Committee and management have concluded that the
 Company's financial statements for fiscal 2001, 2002 and 2003 and the first
 three quarters of fiscal 2005, in addition to the financial statements for
 fiscal 2004, should no longer be relied upon.
     In a Current Report on Form 8-K dated December 28, 2004, the Company
 disclosed that its Board of Directors had concluded that the Company's
 previously issued financial statements for fiscal 2004 should be restated to
 correct certain errors contained therein. The Company further disclosed that
 the Company was conducting analyses of additional matters which could give
 rise to additional restatement adjustments to previously issued financial
 statements, and that certain investigations were ongoing which also could give
 rise to additional restatement adjustments. The Company's analyses and the
 investigations are ongoing; in addition, the Company is conducting discussions
 with the Staff of the Division of Corporation Finance of the Securities and
 Exchange Commission (the "Commission") regarding the Staff's inquiries
 concerning certain accounting matters, including certain of the matters giving
 rise to the adjustments described below.
     On December 28, 2004, the Board of Directors determined that adjustments
 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:
 
      * 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 an individual who was
        the prior operating manager and one of the former owners of the
        Michigan franchise and who subsequently worked for the Company for a
        short period of time after the acquisition
 
      * 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
 
      * a pre-tax adjustment of $1.0 million (previously estimated at between
        $0.5 million and $1.0 million) to record as compensation expense,
        rather than as purchase price, the disproportionate consideration paid
        to one of the former owners of the minority interest in the Northern
        California franchise, who was its former operating manager and who
        worked for the Company for a short period of time
 
      * a pre-tax adjustment of approximately $1.9 million (previously
        estimated at $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
 
      * a pre-tax adjustment of approximately $0.6 million to reverse income
        recorded as a management fee in connection with the Company's
        acquisition of the minority interest in the Northern California
        franchise
 
      * 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 $4.4 million to $5.8 million, reflect the application of judgment in
 determining the amount of compensation or other expense embedded in the
 payments to the sellers who were employed by the Company for a short period of
 time and/or received a disproportionately higher purchase price compared to
 other sellers.
     In addition to the foregoing adjustments, the Company's ongoing analyses
 have resulted in conclusions that additional restatement adjustments are
 necessary, as follows:
 
      * pre-tax adjustments to increase earnings for fiscal 2004 by
        approximately $1.2 million and to decrease earnings for years prior to
        fiscal 2004 by approximately $0.2 million to record mark-to-market
        adjustments on certain derivative transaction which previously had not
        been recorded; correlative adjustments are expected to reduce fiscal
        2005 first quarter and second quarter pre-tax earnings by approximately
        $0.4 million and $1.0 million, respectively, and increase fiscal 2005
        third quarter pre-tax earnings by approximately $0.2 million
 
      * pre-tax adjustments currently estimated to be approximately $1.4
        million to decrease earnings for fiscal 2004 to correct errors in the
        application of accounting principles to certain leases and leasehold
        improvements; these adjustments are necessary principally to account
        properly 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; the Company estimates that correlative adjustments to the
        first, second and third quarters of fiscal 2005 will reduce pre-tax
        earnings by approximately $0.5 million, $0.5 million and $0.6 million,
        respectively; the Company currently is computing the effects of
        correlative adjustments on years prior to fiscal 2004, and expects the
        annual amount of such adjustments to be significantly less than for
        fiscal 2004.
 
      * a pre-tax adjustment of between $0.6 million and $0.8 million in
        fiscal 2004 to reverse income related to certain equipment sold by the
        Company to its Dallas franchisee prior to the Company's  acquisition of
        such franchise
 
     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 http://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 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.
 
 

SOURCE Krispy Kreme Doughnuts, Inc.

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