Central District Of California
Notice of Electronic Filing
The following transaction was received from Duarte, Tina entered on 6/25/2009 at 4:22 PM PDT and filed on 6/25/2009
Case Name:
Great Circle Family Foods, LLC
Case Number:
8:07-bk-12600-ES
Document Number:
436
Docket Text: Order Confirming Debtors' Second Amended Chapter 11 Plan of Reorganization, as Modified Signed on 6/25/2009 (RE: related document(s)[319] Granting Amended Chapter 11 Plan filed by Debtor Great Circle Family Foods, LLC). (Duarte, Tina)


From August 22, 2007 until June 25, 2009 (my son Robert's birthday), GCFF operated in a Chapter 11. This plan goes effective in a few days, when the pared down Krispy Kreme franchisee will emerge from a reorganization that should enable it to prosper in a very difficult environment.

This did not happen by operation of law alone. Krispy Kreme, the franchisor, played a positive role. Without the support of the company's new leadership team, this would not have happened. GE was enormously helpful in working with management. For both these public companies and strategic partners, GCFF has strong praise. The Creditors' Committee asked hard questions, and caused there to be amendments to the Plan, but always with the intention of keeping GCFF alive. The attorneys for the Committee and GCFF contributed to a positive outcome, especially Ron Bender. But the professionals' performance was secondary.

Hard work by 250 employees kept the company profitable and cash flowing, without the need for debtor in possession financing. Brett Garlinghouse, Rudy Ramirez, and Roger and Wendy Glickman, a dedicated and vastly pared down admin team, and experienced, intelligent, and hardworking store managers operated 11 restaurants successfully, one transaction at a time. Sales are up in 2009 over 2008 because of these people.

And GCFF will emerge as a viable enterprise because of them. Reorganizations do work. Chapter 11 of the Bankruptcy Act gave the team the time to establish a better business model, terminate leases that could not be sustained, and preserve 250 jobs. $5M in wages were paid to hard working people each year of this odyssey. These are jobs that might have been lost. The folks in these stores are not unemployment statistics as a result of a system that is well conceived and people willing to work in concert for the better good.

This did not happen without challenges, and some remain. GCFF filed for protection at the insistence of Krispy Kreme. The franchisor signed an agreement that it would buy the principal assets within a few months of the August filing and the lion's share of the proceeds would have gone to GE. By November, the original plan was entirely scrapped by KKD, like Henry Paulson and his TARP. This meant a change in direction by the management team and by GE, the principal secured lender. Other secured lenders and lessors were cooperative. That original plan might have left next to nothing for the creditors, but by withdrawing, KKD created an opportunity to restructure and create an unexpected opportunity for the unsecured creditors.

The new ownership of the company includes those unsecured creditors. Just how much they end up owning depends on the avarice of a set of plaintiffs' employment lawyers who filed class action lawsuits making meritless claims, and how the bankruptcy court finally evaluates those claims. These still have to be adjudicated. The costs are horrendous, but that's the legal system. If they win, which I doubt, and the claim awarded is anything significant, their claim dilutes the claims of people who really did take a loss.

(Consider how important a "loser pays" system would be. These wage and hour claims are typical of claims I see filed everyday, where the lawyer is the true plaintiff. If those same lawyers had to pay when they lose, they would think twice before attacking every restaurant and every large employer in America. If you are taking names of those who have been real contributors to what's wrong with the economy, include these lawyers.)

The opportunity for the unsecured creditors to be equity owners, even reduced by legal shenanigans, would not have existed but for the aborted KKD plan, secured creditors' cooperation, and the fact that the company continues to make money because employees produce a great product and provide excellent service. As that continues, the opportunity to grow the business, by boot strap financing, is exciting. GCFF has the greatest market in America. It only scratches the surface as it emerges from bankruptcy.

Growth potential, moderated by the awful lessons of 2001-2004, but nurtured by honest, intelligent leadership in Winston-Salem, will be exploited by the management team. Krispy Kreme in Southern California is a big success story now. It survived all the ills that the US economy struggles with today, and like Cher, is still a star, albeit a bit older and more seasoned, and done over.

Could GCFF be a $50M company in five years? Without doubt.

Stay tuned.

Regard.

[Dear Protector]

Thanks for the thoughtful response. You clearly understand the playing field well and hold a number of insights that are hard for us in academics to ascertain. I have used the KK^ case as a regular portion of my undergraduate Marketing course, and students are consistently baffled as why 20,000 retail outlets were bad for a company with only 427 franchises. I think you said it well.

Regards,
Tim

Tim Smith, PhD
Adjunct Prof. of Marketing, DePaul University
Managing Principal, Wiglaf Pricing
Mobile: 312 953 9831
http://www.wiglafpricing.com/


Sent: Thursday, April 09, 2009 5:40 PMTo: tsmith@wiglafjournal.comSubject: Wiglaf Inquiry

Dr. Smith:

I read with considerable interest your April article comparing Starbucks to Krispy Kreme ("Is Starbucks in an Existential Wilderness?)

As Krispy Kreme's largest franchisee from 1999 until 2005, our company, Great Circle Family Foods, enjoyed the amazing rush of initial success, as we opened 31 stores and a commissary, bought 51 trucks, created more than 1B media impressions (according to Hill & Knowlton), panicked about how to get all that cash deposited in the bank, responded to police concerns about traffic queuing, trained literally thousands of people, and cared for our various constituents. It was a total rush.

Then, as noted, we hit a wall. More aptly, a locomotive, engineered by our franchisor and hauling our creditors, hit us. The intersection was Main and Wall, something very much at the center of the problem. Krispy Kreme had an IPO on April 6, 2000, and its relations with franchisees deteriorated considerably in the months and years to follow. The inescapable conclusion is that there is a nexus between that event and the eventual bankruptcy or liquidation of KK franchisees in Canada, New England, New York, Philadelphia, Houston, Colorado/Wisc./Minn., Illinois/Missouri, Arizona/New Mexico, Hong Kong, and right here in Southern California (GCFF filed for Ch. 11 protection Aug. 22, 2007). Decimation of shareholder value was sure to follow.

Your reference to loss of focus is critical to any study of KK's debacle and, I'd agree, appropriate to an analysis of Starbucks' current malaise. KK never figured out if it was a restaurant or a bakery. Hubris was a primary corporate value. "Fresh" and "Hot" were confusing terms, and definitions were elusive. Emerging markets were treated much the same as Heritage Markets. These and other factors dragged a brand form the jaws of certain victory (Cover of 2002 Fortune Magazine "Krispy Kreme: the Hottest Brand in America), to ignominious defeat (CEO Livengood denominated the Worst CEO in America, 2004, by CBS MarketWatch's Herb Greenberg). When it got really hot, the brand singed its handlers.

The commonality, however, isn't much deeper. As opposed to current management, at that time, KK suffered from inexperienced and unqualified management, no strategic planning of any kind, a misalignment of short term interests in Winston-Salem with long term interests throughout the rest of America, a dependence on abundant debt financing, a mandated growth irrespective of demand and controls, poorly constructed communications systems with strategic partners, and an unfortunate penchant for deception (as the SEC recently confirmed).

Starbucks' concept of 3rd Place hurt it as much as KK's insistence upon expanding into supermarkets (and car washes). The over saturation of market place appearance destroys cache. Instead of being ambassadors of goodwill, the availability of Starbucks in so many locations cheapened the brand. In KK's case, the quality of the off premises products was so poor, that those little angels were ambassadors of ill will. They turned customers away from the factory stores. And each new marketplace appearance cannibalizes the stores. Why travel to a Starbucks when you can buy coffee at your supermarket or drink it in your office?

The experience is critical, as you point out, but so is the competition. (KK benefitted from a lack of competition in emerging markets - no Dunkin's west of Miss.) Starbucks' competitors have been growing and adapting very adequately. The 3rd Place environment is no longer unique to Starbucks. Why don't Starbucks stores still smell like coffee? The product offering has definitely lost cache as others have developed very comparable beverages. The company seems to think that the differentiator is advertising and music. This has led to a problematic value proposition, helped along by the economic crisis and a very robust, lower priced competitor which can advertise Starbucks under the table.

Starbucks has some superb personnel and I'm confident that the company will find its way. I hope that KK can do the same. It has a dedicated and talented management team with core values far removed from those embraced by the now disgraced ex-CEO and ex-COO. GCFF is about to emerge from bankruptcy with 11 stores and increasing sales - and an absolute first rate, experienced crew that has ridden a character building, focus fostering roller coaster.

Regards.

November 17, 2005:

"Dear Zoomgirl53:

The focus of your accounting questions is the potential for abuse by capitalizing expenses, regardless of the tax implications. I understand that point. My response related in part to the broader fiduciary duties of management to accurately report and pay taxes.

As to the purchase of Dallas [Kansas City and Northern California], the questions raised by the accounting treatment, let alone the motivation, for those transactions are significant. We expected the SC to delve into these issues and, subsequently, the SEC and DOJ."

3 and 1/3 years later. What an investigative team! Still didn't get it right. See posts about Michigan.

Regards.

FRANCHISEE COMMENT

"Wow-traveling today and coming home I get to read this wonderful news tonight -

Wow-the SEC announces that - Today they can finally 'close the book' on this investigation -

Wow-just imagine the party at Nobles tonight - and the fine wine being enjoyed - the North Carolina boys . . . - and the collective price to pay for [redacted]- at the expense of the shareholders - oh and you think - the franchisees!!- a few hundred thousand bucks!!  So after all this time this is finally announced as SEC justice served??

. . . and the biggest toasts and laughs among the rogues gallery are for the franchisees - the ones that had the biggest cause of action - but did nothing - just imagine how Livengood is laughing at the franchisees tonight . . . "

KRISPY KREME SETTLES WITH SEC
Winston-Salem Journal

By Richard Craver Journal Reporter
Published: March 4, 2009
Updated: 03/04/2009 04:29 pm

"Three former top Krispy Kreme officials, including one-time chairman Scott Livengood, have been ordered to pay more than $783,000 for violating accounting laws and fraud in connection with their management of the company."
This amounts to less than the attorneys' fees to defend against the charges. If Madoff gets off next week with 10 years in prison and a $100M fine, we can say that the leniency trend started right here in Winston-Salem.

"The U.S. Securities and Exchange Commission said today that it has reached a settlement with Krispy Kreme Doughnuts Inc. and the three former officials: Livengood, who was chairman, chief executive and president; John Tate, chief operating officer; and Randy Casstevens, chief financial officer.

Livengood, Casstevens and Tate were found in violation of several sections of the Securities Act. Their actions took place in 2004."

"Livengood was found in violation of fraud, reporting provisions and false certifications. Tate was found in violation of fraud, reporting provisions, record keeping and internal controls. Casstevens was found in violation of fraud, reporting provisions, record keeping, internal controls and false certifications."
The fraudulent acts sound relatively mild (see below) as compared to Ponzi schemes and back-dating options. No wonder the fines were so low. What the gumshoes in Atlanta found these folks to have done wrong was to buy a franchisee and book the purchase price as the cost of acquisition, knowing that the recipient of the payment would then pay an outstanding obligation to Krispy Kreme, which then booked that payment as income.  Joe Nachtrab said that in 2004 and it was reported in the Wall St. Journal in that year.  The SEC figured it out five years later.  What an efficient group.  Christopher Cox, your team has made us all proud.   

"Krispy Kreme received a cease-and-desist order from committing or causing violations of several sections of the Securities Act. 

Neither the executives nor the company admitted or denied wrongdoing in agreeing to resolve the SEC civil lawsuit in the Middle District of North Carolina."
Where is Lewis Carroll when you need him? SEC finds Livengood, Tate and Casstevens committed fraudulent acts and violations of the Securities Act and other laws. Those found to have committed the wrongs don't admit it of deny it.  Ok, what do they say about it?  Do we care what these folks admit or deny? You might when it came to sentencing, but the sentence here is freedom and riches.  Done.

"However, Livengood's settlement required him to pay about $542,000, which included $467,000 of what the SEC considered as the "disgorgement of ill-gotten gains and prejudgment interest" and $75,000 in civil penalties, according to Katherine Addleman, a regional director for the SEC's office in Atlanta."
Katherine might save the taxpayers some money and give up her day job. Did these guys make $$ on stock options, the price of which was positively impacted by statements of earnings that never happened? I don't know the answer, but you might.  For sure Katherine doesn't and never will.  

"Tate's settlement required him to return $96,549 and pay $50,000 in civil penalties, while Casstevens had to return $68,964 and pay $25,000 in civil penalties."
Now how will Tate pay the deductible on his fire insurance policy?

"Disgorgement is not always returned, as the primary purpose is to disgorge or take away the ill-gotten gain from the wrongdoers," Addleman said. "In this instance, the funds will go to the Treasury Department."
I'm sure that the writer of this article left something out. Disgorgement is supposed to benefit those harmed. Those harmed are so numerous that distributing this paltry sum would cost more than the benefit thus conferred. Moreover, shareholders and employees who were members of class actions settled and released the identified officers. People who were not members of those classes might want to call Katherine and ask for their share. Good luck.  Maybe they can get a copy of her notes on this case and use them some other way.

"Barry Goldsmith, an attorney for Livengood, said that Livengood "is pleased to have resolved this technical accounting case involving events that happened more than 5½ years ago."
Ronald Davis, an attorney for Casstevens, said his client "is pleased that the SEC's fraud allegation against him is premised on negligence in application of accounting judgments, as opposed to intentional misconduct or intentionally fraudulent activity."
Mr. Goldsmith might want to call Eric Sidurdson or Jim Morrissey or Jim Cosentino or Rocco Fiorentino or me and explain to us the "technical accounting" involved. Then we will call the thousands of employees we had to fire and tell them about the "technical accounting". This is a pretty solid slap in the face of those who have an interest in justice. "Slap in the face" vs. "Slap on the wrist" - but the latter is an overstatement. This was a slap on the pinky.

"Krispy Kreme was not required to pay a civil penalty because of its cooperation with the SEC in the case, Addleman said. She also said that Casstevens' penalty was reduced in part because of his cooperation."

"We are pleased that the SEC investigation has concluded on satisfactory terms, with no monetary penalty against the company," said Darryl Marsch, a senior vice president and general counsel for Krispy Kreme.

"Today, we can finally close the book on this investigation into the events that occurred under former Krispy Kreme management."

But analysts said that Krispy Kreme could face more class-action lawsuits regarding the accounting issues, and federal prosecutors are looking at possible criminal wrongdoing.

I'll bet that this threat really tightens sphyncters around town.  Really.

Sherry Polonsky, a former senior vice president of finance, also was named in the settlement.  She received a cease-and-desist order involving her role in improperly recording two round-trip transactions in connection with the purchase of company franchises located in Michigan and California in the third and fourth quarters of Krispy Kreme's 2004 fiscal year."

Now this is actually interesting, but you wouldn't get the point from this article.  Why was she on Doughnut One for these trips?  

"In both transactions, Krispy Kreme paid money to the franchisee with the understanding that the franchisee would pay the money back to Krispy Kreme," according to the settlement. "In each instance, Krispy Kreme recognized additional income in an amount roughly equal to the funds that were paid back to it.
 But wait!! Who were the owners of those franchises? Mr. Craver, did you miss that one?

"As a result, Krispy Kreme filed annual, quarterly and current reports with the commission that contained misstated financial results, failed to have books and records that accurately and fairly reflected its transactions and disposition of assets, and failed to devise and maintain internal accounting controls sufficient to provide reasonable assurances that its accounts were accurately stated in accordance with generally accepted accounting principles."Livengood led Krispy Kreme's expansion across the country and internationally.


"At one time, the company, which went public in April 2000, was also a favorite on Wall Street, with its stock reaching $108.50 a share in November 2000 before being split twice in 2001.  Livengood was also at the helm as sales of the company's doughnuts tumbled and the company became the subject of an accounting investigation by the SEC."

He was also at the helm when the Dallas franchise was purchased from owners including a former KKD Board Chairman for over $63M.  Now that was savvy, we all know.  Is that all?

"Although Krispy Kreme said that Livengood retired from his posts in January 2005, analysts said that he was ousted as part of a major restructuring effort. Tate left in August 2004 and Casstevens in December 2003."
"Analysts"? Who on earth would report a purported fact attested to by an analyst? How about somebody involved in the firing or "retirement"? How about looking at the Kroll Zolfo Cooper Agreement and the date it was negotiated or signed? How about some percipient witness?

"In August 2005, a special committee of the company's board reported to the SEC that Livengood and Tate failed to establish proper financial controls and the company's earnings may have been manipulated to please Wall Street."
This report has never been made public to my knowledge. If you have a copy, send it to me.

The committee also criticized the company's board of directors, which it said was "overly deferential in its relationship with Livengood as CEO" and failed to adequately oversee management decisions."
Worldcom, anyone?

FACT VERIFICATION REQUESTED

So I run into one of a thousand people who, upon hearing my background, say, "I want to tell you a Krispy Kreme story."  Naturally, I'm all ears.   This one is unusual.

My new friend tells me he was on Martha's Vineyard around 2001.  Gets invited to a party by celebrity Jim Belushi.  Belushi is generous host, serving Krispy Kreme doughnuts for dessert.  (Now I'm thinking to myself, "how did Belushi arrange that?", since there was no KK on the island.)  

Anticipating what's whirling around in my brain, friend says that he asked Belushi how the world's most incredible doughnut arrived at the party, and Belushi says, I met the CEO of Krispy Kreme on a flight somewhere and told him about my plans for a party, and he offers to deliver!!  Scott Livengood, then the CEO, couldn't be that star struck, could he?  (Insiders will get that.)

Dispatch Doughnut One to MV, and my friend says 40 dozen boxes get off the plane (my friend worked for P & G, so he knows inventory).  Then he starts to calculate the cost per box.  This has got to be staggering.  

But then it's marketing, and the franchisees are picking up a large part of the cost of that little flight of fantasy, aren't they.  And you can imagine how grateful Belushi was.  In fact, that's all you can do, since I've no idea how - or if - he showed his gratitude.  Think the Janickes knew about this?  (NE Franchisee at the time.)

So the question, from the Protector whom you'd written off, is can you confirm?

Regards.

THE BAILOUT

The automobile industry has been bankrupt, for all intents and purposes, since shortly after the Big 3 made the decision that SUV's were the ticket to profitability. That decision defied the inevitable demand for smaller, cheaper, more fuel efficient autos, as SUV's and trucks generated profits for all three American auto makers. The market for passenger cars, with rare exceptions, was defaulted to other manufacturers. So when the demand for gas guzzlers and new trucks subsided, GM, Chrysler and Ford had no market.

Those years of profitability papered over fundamental flaws in the industry. The business model featured overpaid labor (by almost 50% more than their competitors) and management, throughput disadvantages and an aging infrastructure, mediocre engineering and technology, lackluster design and challenged quality. Old management teams were replaced for failure to adequately address these issues, but their replacements failed as well.

Now, following the financial services and the insurance industries, the Big 3 (this is a misnomer, as they are not the 3 largest automakers) appear before Congress demanding a seat under the TARP. For Chrysler, this is the second go-round. Congress should reject the demand.

The bailout, if there is to be one, must come from Exxon Mobil and the other billion dollar oil profiteers. If the tobacco cartel could pay states hundreds of millions to undertake anti-smoking programs (except in Alaska, where their funds build concert halls), the oil companies can pay auto companies to build more fuel efficient cars. There is a palpable interest to protect for the oil profiteers. We taxpayers can drive to work in American made cars with different names than Chevy, Dodge or Ford. And, frankly, there's really no difference among them except an emotional connection between us and our past.

If it dooms these dinosuars, it's a death of their own making. The Big 3 CEOs flew their private jets to tell Congress in lock step that bankruptcy was not an option. It is a necessity. These guys are no better than United Airlines or Delphi. Once in a Chapter 11, at least one of them will disappear by merger or otherwise. They will "off" the union burdens to get labor more competitive, and they might have bargaining leverage to get legislation to help them totally re-tool. That could be accomplished with tax incentives, instead of hand outs. The re-tooling will mean many lost jobs. No pain, no gain. Right?

If the taxpayer is to hand over money to the auto industry, it ought to be to retrain people put out of work so they can build better streets, bridges, sewers, electric grids, and other badly needed elements of our national infrastructure. A new WPA. Recognize that jobs that are propped up by an artificial stimulus (not business revenue, but tax revenue) are not really jobs. In effect, if Congress buckles, auto workers will be working for the government. Reality demands these jobs end and that those put out of work find a job that produces goods or services people want and are willing to pay for.

The public already bailed out Chrysler once. It is now owned by Cerberus, principally the Quayle family. How much more money do we need to waste on the Quayle family? GM and Ford have no more compelling story to tell than Chrysler, you or I.

And think how unclever these execs are. Everyone who wants under the TARP is following a 3 page memo from Treasury on how to become a bank holding company, and those who follow the instructions are buying little banks and applying for some of the remaining $700B as a financial institution. GMAC has been smarter than GM; that company will soon be a bank holding company and get its bailout the old fashioned way: finding a loophole. (Cerberus has its fine finger in that one too.)

Which leads me, finally, to the unavoidable conclusion that these failing companies, whose ridiculous business strategy is plant closure, will get our money. Plant closure is not a strategy. No matter, it's in the bag.

Michiganers are too plentiful among the President-elect's advisors. Union members helped elect this Democrat (and in so doing switched parties, believe it or not). A Democratic Congress, perhaps kicking and screaming, will pay-up for that support in December. There may be caveats to appease us, such as strings on how the money is spent, curtailing exec bonus programs, and, most importantly, Union give backs lowering the fully loaded labor cost, but those sweeteners for the taxpayers will be window dressing.

Cash is needed by GM, especially, right now. While the President-elect might just have the moxie to say "NO" to this, he is only the President-elect. He can influence the Congressional Committee members who focus on this, and that bears watching. That thought is something to cling to. But the forces aligned against massive lay-offs are too great. Even if that means keeping folks working for automakers, instead of repairing our roads and bridges, the Dems do not have the strength to reject this. Somebody is going to remind them about Lehman Bros., which was a botched Republican decision, and the Dems will say, "We don't want the decision to turn automakers down on our hands. Wiser and safer to give the money away."

It's becoming obvious that the biggest challenges this new President will face will come from his own party. That will be evident if Obama's advisors are seen pressuring Democrats to resist this plea, and my prediction is realized that these companies will not leave DC empty handed.

Your thoughts?

Regards.