3. Some red flags in the income statement including enormous reduction in interest income from $1.

97 million in 2003 to as low as $.18 million in 2004, and tremendous amount of interest expense accrued from $.34 million in 2002 to $4.41 million in 2004, the reduction in the interest income might mean that the company was not performing as well as they have expected and they had to take the money from their short term investment therefore result in less interest income accumulated. On the other hand, they had to borrow money to offset lack of internal cash in the company even when they have this positive income generated the previous years, it might an indication of that the companys capital structure was not well managed. One of the most worth noticing red flags was that the negative 24 million dollars in net income and negative diluted earnings per share. The negative net income and diluted earnings per share was a result of the companys divest Montana Mill, in this case the company take a charge of $35 million against its earnings. First red flag in the balance sheet standing out to me was that the reacquired franchise rights, goodwill, other intangibles account increased from $49 million in 2003 to $175 million the next year. According to the Wall Street Journals article, the underlying cause of this aggressive accounting treatment for franchise acquisitions made by Krispy Kreme was that they reacquired those underperforming franchise with slightly higher price in return Krispy Kreme asked the franchisee to pay the accrued interest on past due loans and close down two stores, and then KK recorded under the reacquired franchise right, without amortize them. SEC had launched an investigation related to that problem which is another red flag that caused Krispy Kremes shares fell another 15% to $15.71 a share. Another red flag caught my attention was the notes receivable account which increased from 0 in 2003 to as high as $5.4 million in 2004, that might be cause by the selling of asset on Feb 1, 2004. Other receivable was also climbing; this might indicate that the company recognizes revenues differently than before to make the balance sheet look better. The total long term liabilities almost doubled its size from 2003-2004, it is moving opposite direction as its earnings, so that might be an indication of red flag, and this might cause because top managements want to make balance sheet look better in order to attract more investors. As I have questioned Krispy Kremes interest expense were too high in the income statement, and as it turns out that in the financial ratios the times interest earned in 2002 were 124.29, and declined to 23.15 in 2004, which is an indication of the company s ability of repaying debts have decreased dramatically, still not bad ratio, but red flag. Krispy Kremes cash turnover ratio have decreased almost every year, this could be cause by the speedy expansion of the company over the years which indicates the unproductive use of working capital. Even the inventory ratio have lowered by comparing 2004s to 2000s, the low inventory ratio indicates that the company has been keeping excess inventory, according its balance sheet their sales have been increasing, but the low inventory ratio cannot keep up with the sales, this could be a indication of red flag.

4. Apparently, Krispy Kreme did not do so well in 2006, their revenue decrease by almost $150 million by comparing to the year before, and operating income, operating margin, earning per share, and net income were still negative. The reason behind this is that the companys top management has stepped down, and with those unsolved questions still bothers most of investors. It would make it harder for investors to keep capitalize and hold stocks in the company, there were reduction of new stores which the company have preannounce to open 500 stores in next five years in 2000 and have not been achieved which could lead to investor reflect about the poor future prospects the company has. With those unsolved question, and the industry is very competitive, the new management of the company might have hard time to get the business to right track. It would be really difficult for Krispy Kreme to recover from their downfall, because they relied for a significant chunk of profits on high profit margin equipment that it required franchisees to buy for each new store, and at their current position, there would be less likely that anybody would want to enter as franchisee therefore the net income would decrease in the future. Even though the company once had competitive advantage, they have lost their chance to remain competitive in the market as those issues have delayed their steps to move forward therefore hard to catch up with its competitors.