To: Investors of Krispy Kreme Doughnuts
From: Economic consultant
Date: January 2005
Subject: Caution signals via Krispy Kreme Doughnuts
Historic income assertions show that the revenues and net income elevated continuously via 2000 to 2004. The first caution signal noticed was net loss in-may 2004. Simply by comparing salary statement in May 2003 with income assertion in May 2005, the income increased twenty four percent, but net income came out negative. Krispy Kreme put in $40 million in acquiring Montana Mills in 2003. Montana Mills was closed straight down in mid-2004. It causes around 35 dollars million to be recorded as discontinued procedure in the profits statement. Therefore , the negative net income is produced. In addition , we may find that Krispy Kreme uses collateral method to record joint venture loss. So , total equity reduction in joint ventures is about $5. you million in the four years period. This method of saving loss simply cannot directly affect economic stability of Krispy Kreme. Therefore , there are a few unstable factors in the financial position of Krispy Kreme. In the historical harmony sheets, we are able to observe that intangible assets had been improved massively from 2002 to 2004. Krispy Kreme set up repurchase of operation rights. Repurchase of business rights will be recognized as intangible assets certainly not subject to amortization. Additionally , we cannot find the bad financial debt account as the company data overdue repurchase of franchise rights since intangible advantage to staying away from a bad financial debt loss. Above last four years period, inventories elevated continuously. The growth of products on hand implies that Krispy Kreme are unable to effectively deal with control of stock. This position can restrain income and the firm is likely to encounter a lack of fund. Cash lowered from 2003 to 2005. The growth of account receivable indicates that the company is definitely difficult to control collection of receivables. During 2002-2004 year period, the long-term liabilities improved. This kind of...