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Krispy Kreme Doughnuts, Inc. Message Board

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  • di_vur_se_fi di_vur_se_fi Feb 19, 2005 11:39 AM Flag

    Tangible Book Value May Be Negative

    you wrote:

    Notes receivable and long term notes receivable...all 100% of it is uncollectable and worthless? Bullshit

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    All of these notes receivables and long term notes receivable are loans to franchisees. These "loans" were typically given (to Kremeko, South Florida, etc...) to mask uncollectible receivables, i.e. when a franchisee couldn't pay either kkd bought them out (another story) or "loaned" money so the receivables would be pay, effectively capitalizing (bad debt) expenses.

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    The assets held for sale were the mmx assets. The company has already announced that those assets were sold for an insignificant amount.

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    you wrote:

    Investments in unconsolidated joint ventures...all of it is worthless? bullshit.

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    Yep. Worthless. Nearly all of the franchisees are undercapitalized and unable to be sustained without support from mother kkd.

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    Regarding A/R, do the math. Break it down between offsite generated receivables and franchisee receivables. The franchisee receivables are at about 90 days. A/R has just been another financing tool to prop up unecononomic franchisees. When the franchisees collapse, the A/R will, also. Why didn't the auditors catch this. Because the auditors didn't do their job.

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    Store openings will stop. They just laid off the entire machinery department saying that they won't need any new equipment for at least 2 years. The existing equipment inventory is probably more valuable as scrap. Now, go look at the entry "Purchased merchandise" contained in the distribution centers. What do you think this number represents? Why is it so much greater than "Purchased merchandise" held at the stores. My guess is that this was another way to capitalize expenses, i.e. underreport inventory usage in cogs.

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    kkd can't get tax credits on capex that they themselves built; much of the machinery and equipment was manufactured by kkd (in fact, I would argue that its valuation is bloated because it was a perfect place to capitalize expenses; the valuation was probably determined by the price they sold it to the franchisees (which is bloated); there is no similar equipment sold by a third party which would give a reliable valuation of such equipment).

    Also, kkd likely has no carryover losses as federal income taxes have (net) not been paid for the past 4 years and profitability before that was insignificant (see the original S-1).

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    I don't understand your argument re leases. Operating leases are not shown on the balance sheet. I'm talking about operating leases (not capital leases). Note 9 refers to "The Company conducts some of its operations from leased facilities and, additionally, leases certain equipment under operating leases." These are operating leases (the $155 million which I didn't even use to adjust bv).

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    you wrote:

    Goodwill is only worthless in a total liquidation of the company, but that is true of ANY company

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    kkd's goodwill was created by the purchase of franchisees at obscene valuations. The more obscene valuations, the higher the goodwill. ALL GOODWILL WILL DISAPPEAR SHORTLY. You can take it to the bank (which is something you kan't do with kkd's goodwill).

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    • You wrote:

      much of the machinery and equipment was manufactured by kkd (in fact, I would argue that its valuation is bloated because it was a perfect place to capitalize expenses; the valuation was probably determined by the price they sold it to the franchisees (which is bloated); there is no similar equipment sold by a third party which would give a reliable valuation of such equipment).

      I think you may have just hit on the significance of the unexplained change in KKD's reporting of segment performance. In the more recent filings (before financial reporting stopped altogether), transfers from KKM&D to company stores were shown at cost. In earlier filings, KKM&D booked a profit on these transfers. For doughnut mix, all the change did was make the profit show up in a different segment -- but for equipment the earlier practice would have been a means for creation of paper profits. Expense for opening a new store that was charged off as a capital expense (and depreciated more slowly than it should have been, we now know) would have been in part money transferred to KKM&D where it showed up as profit.

      Maybe you already pointed this out a long time ago, but I must have missed it.

      • 1 Reply to perspicuator
      • The language in recent SEC filings is as follows:

        "All intercompany transactions between the KKM&D business segment and the Company Stores Operations segment are at prices intended to reflect an arms-length transfer price and are eliminated in consolidation. Profit from KKM&D's sales to Company Store Operations is classified as a reduction of Company Store operating expenses, generally based on the proportion of sales to Company Stores relative to total KKM&D sales."

        Let's take this literally -- and why shouldn't we? It says that KKM&D sells capital equipment to Company Store Operations at "arms length" prices -- presumably the same prices it charges to franchisees. The profit earned on these sales is subtracted from Company Stores' OPERATING expenses.

        The net effect is that the consolidated earnings statement reports profits earned when KKD sells capital equipment to itself. And these profits show up as operating profits of the Company Stores segment.

        I find it hard to believe that this is so simple, and reported in a paragraph that I (and others on the board) have stared at many times, yet never understood. Am I missing something?

 
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