Krispy Kreme Doughnuts, Inc. Essay

1742 Words Feb 2nd, 2013 7 Pages
Case Study in Corporate Finance Krispy Kreme Doughnuts, Inc. Presented by – Group A2

Timeline

Krispy Kreme Doughnuts, Inc. Ratio Analysis Liquidity Ratios As shown in Exhibit 1, quick ratio for Krispy Kreme gradually rose from 1.05 to 2.72, during 2000 to 2004. And current ratio changed with the similar pattern. Generally, a quick ratio of 1 is considered good in most industries. As for Krispy Kreme, the quick ratio is always higher than 1, and the highest point is 3.25 in 2004. This means that the company had good liquidity. However, on May 2 , 2004 just about the time Krispy Kreme announced adverse results, both the quick ratio and the current ratio of the company decreased. From the Krispy Kreme’s balance sheets we can see that
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Casstevens lasted less than eighteen months and turned in a “purely voluntary” resignation just five months before the company’s first quarterly earnings shortfall. To replace Casstevens, the company brought in Michael Phelan, a key member of the investment banking team that executed Krispy Kreme’s IPO and follow-on offering, who in turn lasted less than two years in the position. Insider Share Dumping When Krispy Kreme went public in 2000, about 75% of its shares were “locked up” – insiders who owned them were not permitted to sell for an eighteen-month period. As soon as the lockup period expired, executives and board members sold 1.85 million shares, or 20% of the shares subject to the lock-up agreement. By 2004 CEO Livengood had sold over 1 million shares (about 40% of his holdings) for net proceeds of over $40 million, despite having previously made pledges that he wouldn’t sell company stock. The high level of stock sales by insiders while the company was issuing glowing financial reports should have alerted shareholders to a potential problem. Synthetic Leasing Soon after it went public, Krispy Kreme arranged to finance a new $35 million factory in Effingham, Illinois with a synthetic bank-financed lease, which would allow them to keep a large long-term debt off their balance sheet and avoid raising their debt ratio

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