Krispy Kremed

Krispy Kreme Ousts 6 Execs In Housecleaning

CHARLOTTE (Dow Jones)--Krispy Kreme Doughnuts Inc. (KKD) removed six veteran executives Tuesday as the doughnut maker continues to investigate past accounting practices and tries to separate itself from a troubled history.

The Winston-Salem, N.C., company said in a press release Tuesday that five unidentified officers had resigned and one retired after a special committee of directors looking into legal and ethical matters recommended on June 15 that the officers be discharged. Krispy Kreme didn't provide a reason for their recommended dismissal.

The moves are the latest under the tenure of Kroll Zolfo Cooper LLC, the turnaround firm and crisis-management adviser that has been operating the company since January, when Krispy Kreme's long-time chairman and chief executive, Scott Livengood, retired amid financial and legal investigations.

J.P. Morgan analyst John Ivankoe said the sudden removal of six executives "points to far-reaching abuse within the former management ranks of this company."

"We also see this announcement increasing the likelihood of significant findings from current SEC and Department of Justice investigations," Ivankoe said in a research note. He doesn't own shares, but Krispy Kreme has been a JP Morgan client.

The company said Tuesday that it continues to cooperate with the SEC and the U.S. Attorney for the Southern District of New York in their respective investigations.

A spokeswoman for Krispy Kreme said she could not comment beyond the release, which identified four of the departed executives as senior vice presidents in the areas of operations, finance, business development and manufacturing and distribution.

According to the company's Web site, Krispy Kreme has nine senior vice presidents. Those with titles matching the functions mentioned in the press release include Fred W. Mitchell, senior vice president of Krispy Kreme's manufacturing and distribution operations; Sherry Polonsky, senior vice president of finance; and Robert H. Vaughn Jr., senior vice president of business development.

Two officers are listed as being in charge of operations: Stephen Hendrix, who oversees company stores and older franchisees, and Jimmy Strickland, a former area developer who handles operations of newer franchisees.

An operator at the company said Hendrix had retired recently, but none of the individuals could be reached immediately for comment. Hendrix had been employed by Krispy Kreme since 1978.

Emails sent to Mitchell, Polonsky and Vaughn were quickly returned with messages saying their email accounts do not exist. Mitchell joined Krispy Kreme in 1992, while Polonsky joined the company in January 2002. Vaughn's biographical information was not on the company's web site.

Stan L. Parker, senior vice president of marketing, reached by telephone, said he continues to work for the company and that Chief Financial Officer Michael Phalen also remains at Krispy Kreme. Phalen was hired in 2004.

Krispy Kreme shares were halted in early trading, pending the release of the news, but recently traded down 3 cents, or 0.4% to $7.64.

Once a Wall Street darling, Krispy Kreme shares have dropped 76% since last spring when the company issued a profit warning blaming low-carb diets for slowing sales even as outsiders questioned whether rapid expansion was putting a damper on results and enthusiasm for the chain's doughnuts.

Meanwhile, questions about company purchases of franchisees linked to insiders prompted Krispy Kreme's audit committee in August to hire an outside law firm. The company in December said the firm found no intentional misconduct by the company or its employees, although Krispy Kreme at the time also announced plans to restate some financial results for accounting errors tied to acquisitions of franchises in Michigan and Northern California.

Also last year, the company hired a former SEC accountant and a lawyer with an Atlanta firm as independent directors to investigate matters raised by the SEC and lawsuits. It is those directors who earlier this month recommended the officers be discharged.

Krispy Kreme hasn't filed a quarterly report with the SEC since September and has told investors not to rely on financial statements issued since it went public five years ago in a wildly successful debut.

(END) Dow Jones Newswires
06-21-05 1302ET