Krispy Kreme shares take hit from report on accounting

CHARLOTTE, N.C. - Krispy Kreme Doughnuts Inc.&#39;s shares took a hit Tuesday after a financial publication called the company&#39;s accounting of a lease on a new $30 million mixing plant an &#34;off-balance-sheet trick.&#34; <br> <br> An article in the Feb. 18 edition of Forbes magazine said Krispy Kreme&#39;s doughnut-mix plant and warehouse in Effingham, Ill., &#34;is being financed with something called a &#39;synthetic lease,&#39; an off-balance-sheet trick in which a corporation has all the practical effects of a heavily mortgaged piece of real estate but tells its shareholders that it neither owns the property nor owes debt on it.&#34; <br> <br> A synthetic lease essentially treats the lease payments as a current expense, like employees&#39; salaries, rather than a debt. <br> <br> BB&T Capital Markets analyst Andrew Wolf said the method of accounting is fairly common. <br> <br> &#34;A lot of retailers have been doing this for years,&#34; he said. &#34;It&#39;s like renting an apartment.&#34; <br> <br> Worries about questionable accounting practices have spooked investors recently, fallout from the collapse of energy trader Enron Corp. after off-the-books parnerships that allowed the company to hide debt were revealed. <br> <br> Shares of Winston-Salem-based Krispy Kreme plunged more than 10 percent, to $33 early Tuesday, but regained most of that ground later in the day. The shares closed down 99 cents at $35.90 on the New York Stock Exchange. <br> <br> Krispy Kreme chief operating officer John Tate said the company had taken extraordinary measures to make sure the use of the synthetic lease was legal and fully disclosed to investors. The company reported the synthetic lease when its addressed analysts after its first-quarter earnings and in filings with the Securities and Exchange Commission, he said. <br> <br> &#34;We want to be considered a model for disclosure,&#34; he said. &#34;We don&#39;t want to be lumped in the group of those who are not.&#34; <br> <br> Wolf said he doubted Krispy Kreme was involved in any questionable accounting practices. <br> <br> &#34;Their cash flow is tremendous,&#34; he said. &#34;They do not need to do sneaky things.&#34; <br> <br> Tate said the company was &#34;very comfortable&#34; with its earnings guidance. Krispy Kreme has said previously it expects to earn 44 cents per diluted share in fiscal 2002 and 61 cents a share in fiscal 2003. <br> <br> Krispy Kreme reports its fourth-quarter results March 8. <br> <br>

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