In a November 19th research report, NuFact identified several warning signs of impending financial reporting problems at Bearing Point and advised caution regarding an investment in these shares.   

NuFact found evidence that Bearing Point revenues could be overstated;

“The fact that unbilled revenue growth exceeds revenue growth…. We would be concerned that the company may be overly aggressive in its reporting….”

Cash outflows were likely to increase in the future; 

“It appears that the company may be increasingly delaying payments for charges”

Management was becoming less effective in managing assets;

“The company is increasingly finding itself in the uncomfortable position of not being able to increase prices while at the same time enduring higher costs.”

And that investors were being kept in the dark regarding management and financial control issues at the company.

“We are concerned by the sudden unexplained resignation of the CEO and the sudden retirement announcement by the CFO…”

“…. the company filed an amended third quarter 10-Q…. this was the second correction of accounting errors since the company announced third quarter results.”

Four months later (after the NuFact report), Bearing Point issued a release acknowledging financial reporting weaknesses. This news resulted in a downgrading of the company’s debt by a prominent ratings agency and downward revisions in earnings estimates by Wall Street analysts following Bearing Point. 

March 17, 2005
Bearing Point announces it will not meet the March 16th deadline to file its 2004 Annual Report on Form 10-K with the SEC. In the press release, the company notes that it will likely have to restate financial results for prior periods due to material weaknesses it has identified in its internal controls over financial reporting. 

March 21, 2005
Moody’s lowers the debt rating of Bearing Point senior debt to Ba2, citing a negative outlook for the company.

March 23, 2005
The number of earnings estimates revised downward for Bearing Point increases this week, according to Reuters.

In a September 30th research report, NuFact identified 12 warning signs of impeding financial problems at Krispy Kreme Doughnuts.    

NuFact found evidence that revenue and net income growth was of questionable quality:

“With average weekly sales per factory store falling and same store sales rising, this suggests that new stores are performing poorly relative to stores that have been opened at least one year.”

“The company’s store revenues and earnings got a boost from reacquisition (of franchise rights) since prior to acquisition these stores provided only royalty revenue….  The company has managed to boost its net income in the short-term by not amortizing reacquired franchise rights.”

And that the balance sheet was weakening; 

“Cash and cash equivalents as a percentage of total assets plummeted…. We are concerned about this trend in light of the growing liquidity needs of the company.”

NuFact was concerned that earnings would decline sharply as franchise growth slowed;

“A franchisee has to pay an upfront fee and also buy high-margin equipment from Krispy Kreme. A substantial portion of earnings is thus tied to the growth of franchise stores….. The company has announced plans to cut back sharply on the number of new stores so we expect overall revenues and margins to be negatively impacted.”

NuFact also identified as warning signs:

• A reliance on sale leaseback transactions to move financing off the balance sheet;
• Extending credit to franchisees, an action taken to inflate revenues and mask underlying weakness;
• An abundance of related party transactions whereby former board members were awarded franchise stores.

January 4, 2005
Four months later (after the NuFact report), shares of Krispy Kreme plummet when the company announces it will be required to re-state 2004 results to reflect reporting errors relating to franchise acquisitions.
 
January 15, 2005
Krispy Kreme’s Board of Directors fires the CEO and replaces him with a turnaround specialist.

February 8, 2005
Krispy Kreme announces a restructuring plan and lays off 25% of its work force.

February 24, 2005
Federal prosecutors launch a criminal investigation into Krispy Kreme.

In an April 13, 2004 research report, NuFact identified several warning signs of impending financial problems at Martek Biosciences Corporation and advised caution regarding an investment in these shares.

NuFact found evidence that Martek’s gross margins were weakening:

“…cost of sales is growing faster than sales…Increased costs associated with ARA production in Italy (ARA is a key component in the company’s nutritional oils production) seem to be the primary cause…The third-party manufacturer of ARA for the company plans to move production to the US from Italy, but there is no indication as to when this will happen in sufficient volume to reduce upward pressure on cost of sales.”

While at the same time, there was an unusually large decline in operating expenses:

“On an annual basis, SG&A expense has fallen significantly…On a quarterly basis, SG&A expense continued to decline as a percentage of sales…It’s possible that this may indicate capitalization of operating expenses over time, but more likely it indicates that the company’s operating infrastructure has not kept pace with growing sales.”

Even more alarming was the company’s over-reliance on a few customers:

“Three customers accounted for 84% of sales and 75% of accounts receivable in fiscal 2003, and nearly the same proportions in 2004Q1.”

In a July 2, 2004 update, NuFact found continued over-reliance on a few customers”

“Over 85% of their nutritional product sales during the first two quarters of fiscal 2004 were generated by sales of DHA and ARA to 3 customers.  Approximately 60% of these sales were made to Mead Johnson and the remaining 40% were to Wyeth and Abbott combined.  If demand by any of these customers for their nutritional products declines, the company may experience a material decline in its revenues.”

March 9, 2005
Martek issued disappointing earnings guidance, citing production shortages at one of its suppliers.

April 27, 2005
Martek issued additional disappointing guidance, citing “reduced customer demand caused by the build up of inventory by large customers during the past several quarters to protect themselves from supply shortages” resulting in a significant shortfall in sales and earnings.

April 28, 2005
In response to the news of April 27th, Martek’s shares fell from $60.08 per share to close at $32.49 on April 28, 2005

One week later, the first of several class action lawsuits was filed charging the company with “channel stuffing” and issuing misleading financial projections in order to complete an $86 million dollar stock offering.