Krispy Kreme Doughnuts, Inc

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Krispy Kreme Doughnuts, Inc. FIN 5201 2M Case in Corporate Finance Section: Tuesday 1pm-4pm Instructor: Steve Ng Krispy Kreme Doughnuts, Inc. Krispy Kreme Doughnuts (KKD) is one of the most popular brands of doughnuts in the United States. The company built doughnut shops that offered customers the unique experience of seeing the doughnuts being made while they were in the shop purchasing the product. As the company grew in popularity, it proceeded to expand at a rapid rate. In April 2000, the CEO, Scott Livengood, took the company public and it had one of the largest initial public offerings (IPO) at that time. After a few years of success, however, the company ran into serious troubles. On May 25th of 2003, the Wall Street Journal published a story on Krispy Kreme (KKD) that tarnished their reputation. The article described the questionable accounting practices that the company employed when recording the purchase of struggling stores they franchised in the state of Michigan. The franchised stores owed the company several million dollars for equipment and interest. The article revealed that KKD booked the purchase cost as an intangible asset and failed to properly account for amortization expenses. Typically, the accounting treatment for reacquired franchise rights is to amortize the value of the acquisition over its legal life. The aggressive accounting practices of the company triggered the U.S. Securities and Exchange Commission (SEC) to investigate KDD in January of 2005. KKD’s Board of Directors decided to restate the financial statement to correct previous errors. However, the failure to provide the new financial statement on time damaged the reputation of the company even further. The company’s shares fell below $10 a share and it put itself at risk of paying credit-facility default and being delisted from the New York Stock Exchange

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