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Krispy Kreme Doughnuts, Inc. Message Board

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  • pos_stock pos_stock Feb 19, 2005 9:09 AM Flag

    Tangible Book Value May Be Negative

    I have somewhere to go and am not going to address this all....but here are a few quick points....

    Book value isn't important. The discounted value of future earnings determines the value of the company. Therefore, your entire analysis is flawed from the beginning because it assumes that the market value of KKD is tied to the book value, whatever that happens to be.

    Prepaid expenses can't be worthless because they already paid it. That's what "prepaid" means. The cash was already spent and the expense paid. How can that be worthless?

    Deferred income taxes are typically a liability, not an asset. They are an estimate of income tax that would be due if the company sold inventory, franchises, machinery, etc. The benefit of deferred income tax is that it reduces equity and increses liabilities to more accurately reflect equity. Removing deferred income tax (worthless according to you) would have the effect of INCREASING equity and DECREASING liabilities, which is just the opposite of what you would want to see in a conservative accounting system. Not only that, but the only way that deferred income tax could be an asset instead of a liability is if the deferred income tax has already been paid. IOW, if they paid it in

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

    Assets held for sale...I would assume is machinery targeted for a new franchisee and already has a home. 100% Worthless? bullshit

    Investments in unconsolidated joint ventures...all of it is worthless? bullshit. some of it is worthless, but not all of it.

    Account Receivable...you assert that ~~30% is worthless. I say bullshit. The A/R carried on the balance sheet is NET A/R. Net means that it has already been reduced for doubtful accounts. The amount over and above the NET amount might be more like 5% IMO, but 30%....That's crap.

    Inventory....you say that they aren't opening new stores. Wrong. They are reportedly opening 10 new stores in the 4th quarter and 5 in the 2nd Q 2006.

    Property Plant & Equip...you say "how much would used doughnut making equipment sell for on the secondary market?." That isn't the right question. First, PP&E is depreciated. Second, your question is only applicable if they are planning to sell the equipment, which they are not. If the did sell any equipment for a loss, it would reduce their future tax liability, which would be an asset.

    Leases....you say that they don't have leases on the balance sheet. Wrong, they show the current portion of leases due and long term leases IAW GAAP. I cut/pasted the following from KK's 2004 annual report... "As of February 1, 2004, we had lease guarantee commitments totaling $104,000 and loan guarantees totaling $15.3 million. These amounts do not include guarantees of debt of our consolidated joint ventures, as the entire amount of the debt of these joint ventures is shown as a liability in our consolidated balance sheet, nor does it include guarantees of leases of our consolidated joint ventures, as the gross amount of lease commitments for these joint ventures is included in the amounts reported above and in Note 9� Lease Commitments in the notes to our consolidated financial statements. Of the total guaranteed amount of $15.4 million, $14.8 million are for franchisees in which we have an ownership interest and $541,000 are for franchisees in which we have no ownership interest."

    Goodwill....KK reviews goodwill annually for impairment and makes adjustments if necessary. Goodwill is only worthless in a total liquidation of the company, but that is true of ANY company.

    I need to run but would say that your analysis is worth less than the assets you claim are worthless.

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    • you wrote:

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

      ---

      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.

      ---

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

      ---

      you wrote:

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

      ---

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

      ---

      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.

      ---

      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.

      ---

      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).

      ---

      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).

      ---

      you wrote:

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

      ---

      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).

      • 1 Reply to di_vur_se_fi
      • 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.

    • you wrote:

      Book value isn't important. The discounted value of future earnings determines the value of the company. Therefore, your entire analysis is flawed from the beginning because it assumes that the market value of KKD is tied to the book value, whatever that happens to be.

      ---

      Tangible Book Value is only important in that it provides a decent estimate of a FLOOR valuation (as I previously stated) when an entity is not a going concern, i.e. it's a proxy for a worst case scenario valuation for longs.

      The adjusted (Tangible Book Value) balance sheet is also a better source for the simplistic bankruptcy determinants that you plopped down (quick ratio, etc...); I only made that post to show that the numbers you were using are likely garbage (for example, did you notice the current liability "Book Overdraft"; why don't you explain to everyone exactly what that account represents).

      ---

      you wrote:

      Prepaid expenses can't be worthless because they already paid it. That's what "prepaid" means. The cash was already spent and the expense paid. How can that be worthless?

      ---

      You are assuming that kkd's books are accurate. Given the 6 month plus multi-million dollar investigations (SEC, Special Committee, independent law firm, auditors, Pooper Scooper, etc...) don't you think that maybe kkd was capitalizing expenses all along? What is an easy account to dump capitalized expenses? Prepaid expenses.

      ---

      kkd's $20 million in Current Deferred Tax ASSETS represent

      from the most recent 10-k:

      Income tax payments, net of refunds, were $6,616,000 in fiscal 2002 and
      $5,298,000 in fiscal 2003. In fiscal 2004, the Company received a refund, net of
      income tax payments, of $2,763,000.

      kkd has paid approximately $9 million in income tax over the 3 year period fy02-04; in fy05 the balance sheet entries indicate that much of that was refunded, i.e. they have little remaining refundable income taxes so the deferred tax assets (assuming the entity is not a going concern) have no significant market value.

 
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