Daily Archives: January 4, 2005

Krispy Kreme moves closer to the brink

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Krispy Kreme Doughnuts Inc. continued its slide toward chapter 11 as the company announced today that it plans to restate its results for fiscal 2004, that its failure to file financial reports will put it in default on its credit facility by mid-January, and that it has guaranteed payment of money borrowed by franchisees who are also in default of their debt agreements. Here are earlier posts that chronicle Krispy Kreme’s mounting financial problems.
The company said the restatement in earnings would would reduce net income for 2004 by between $3.8 million and $4.9 million, or 6.6% to 8.6%. The restatement is primarily due to improper accounting of the company’s acquisition of its Michigan franchisee, which is a problem that the company had previously acknowledged. Krispy Kreme has borrowed about $91 million under its credit facility, and does not currently have the capacity to borrow any more.
The trendy doughnut retailer has been hammered over the past year by a lethal combination of slowing sales growth, multiple investigations of its accounting and corporate governance practices (including investigations by the Securities and Exchange Commission and a special committee of the Krispy Kreme board), and mounting litigation pressure from various shareholder lawsuits. Today’s news knocked the company’s share price dow 10%, to $11.03 in midmorning trading on the New York Stock Exchange. Krispy Kreme’s stock price topped out at $49.74 during the summer of 2003.
Particularly troubling for creditors was the company’s announcement that about 30% of the $52 million of franchisee debt that the company has guaranteed is held by franchisees who are in default under their debt agreements. Although the company asserts that it has adequate liquidity on hand to pay for current operations, that cash will not be sufficient to pay any meaningful portion of that guaranteed franchisee debt anytime in the near future.
Compounding the company’s problems is an allegation that was made in one of the multiple shareholder lawsuits that has been filed against the company recently. The plaintiffs in that lawsuit — citing confidential former Krispy Kreme employees — contend that the company routinely padded its sales numbers by doubling doughnut shipments to wholesale customers at the end of each fiscal quarter.
It does not look like this is going to end well for Krispy Kreme’s current shareholders. Do you think Krispy Kreme will supply the doughnuts at its First Meeting of Creditors? Stay tuned.

North Texas innovators

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Check out this interesting Cheryl Hall article in the Dallas Morning News that profiles 36 North Texas innovators who have changed the way we live. It’s not your typical place that can produce both the researchers who discovered statin drugs and the fellow who invented the first frozen margarita machine. Hat tip to Virginia Postrel for the pointer.

Posner on planning for unlikely catastrophes

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Seventh Circuit Court of Appeals Judge, law professor, economics and law guru, and author Richard Posner has written — in light of the recent Indian Ocean Tsunami disaster — a timely new book, Catastrophe: Risk and Response (Oxford, Oct. 1, 2004), in which he argues that governmental planning for even unlikely disasters makes economic sense. Peter Singer reviews Judge Posner’s new book here.
Judge Posner summarizes his argument in that regard in this Wall Street Journal ($) op-ed, and makes the following point that should give pause to those who advocate further cuts in NASA’s budget:

An even more dramatic example [of lack of planning for unlikely disasters] concerns the asteroid menace, which is analytically similar to the menace of tsunamis. NASA, with an annual budget of more than $10 billion, spends only $4 million a year on mapping dangerously close large asteroids, and at that rate may not complete the task for another decade, even though such mapping is the key to an asteroid defense because it may give us years of warning. Deflecting an asteroid from its orbit when it is still millions of miles from the earth is a feasible undertaking. In both cases, slight risks of terrible disasters are largely ignored essentially for political reasons.
In part because tsunamis are one of the risks of an asteroid collision, the Indian Ocean disaster has stimulated new interest in asteroid defense. This is welcome. The fact that a disaster of a particular type has not occurred recently or even within human memory (or even ever) is a bad reason to ignore it. The risk may be slight, but if the consequences, should it materialize, are great enough, the expected cost of disaster may be sufficient to warrant defensive measures.

Halliburton’s chapter 11 strategy

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Houston-based Halliburton Co. announced on Monday that it had consummated an innovative $5.1 billion settlement with asbestos claimants.
Halliburton became exposed to about 400,000 asbestos claims through its acquisition of Dresser Industries Inc. in 1998, which was a deal that former Halliburton CEO and current U.S. Vice President Dick Cheney promoted. The claims were asserted against a former Dresser subsidiary, Harbison-Walker Refractories.
The settlement allows two large units of Halliburton to emerge from chapter 11 cases and opens the door for Halliburton to sell its Kellogg Brown & Root (“KBR”) construction and government-contracting unit. The KBR has been the subject of considerable scrutiny this past year over the unit’s handling of a $10 billion contract to provide support services for the military in Iraq.
As with many companies, the liabilty represented by the asbestos claims has been a huge monkey on Halliburton’s back — Halliburton has booked more than $3 billion in asbestos-related charges since 2002. The settlement allows Halliburton to take advantage of the current favorable market for the oil field services industry that is based on strong demand for such services from exploration and production companies. In anticipation of the settlement, Halliburton’s share price has surged by about 25% over the past quarter, closing yesterday at $38.02.
Under its innovative chapter 11 strategy, Halliburton effectively used its profitable oil field service business to support the company’s operations while it promoted a settlement plan that liquidated the amount that Halliburton would have to pay current and future asbestos claimants. Although other companies have used chapter 11 as part of an overall litigation strategy against asbestos claimants, Halliburton’s strategy to dedicate 59.5 million company shares and $2.8 billion in cash to create a $5.1 billion trust fund to pay current and future asbestos claimants faciliated the settlement while most other companies remain locked in settlement negotiations with lawyers for asbestos claimants.
The case has been closely watched as most other companies have elected to try and resolve their unliquidated liability for asbestos claims through the unwieldly and inconsistent civil justice system. More than 70 companies — including large companies such as ABB Ltd., W.R. Grace & Co., Federal-Mogul Corp. and Owens Corning — have filed chapter 11 cases for themselves or a business unit because of huge asbestos claims, but many of those companies continue to fight with the asbestos claimants and have failed to liquidate the amount that the companies will ultimately have to pay current and future claimants. Many of those companies are actively lobbying for federal tort-reform legislation that would limit mass tort lawsuits and create a universal fund to pay asbestos claims.