Krispy Kreme shares plummet on worries

CHARLOTTE, N.C. - Shares of Krispy Kreme Doughnuts Inc. plummeted further Thursday as analysts expressed uncertainty about the struggling company's near-term future.

The latest dropoff - nearly 15 percent off an already all-time low - came after the company disclosed to the Securities and Exchange Commission that it will pay at least $400,000 a month to the turnaround firm Kroll Zolfo Cooper LLC.

But it was not clear whether the sell-off was a result of that relatively innocuous filing or some larger concern stemming from Tuesday's moves to lay off 25 percent of corporate employees and end a lease on a corporate jet.

"My gut is that there is a sense that the b-word (bankruptcy) might be coming next," said analyst Charles Sibilski, who follows Krispy Kreme for Morningstar out of Chicago.

Bill Brandt Jr., a turnaround specialist with Development Specialists Inc. in Chicago, said he has been expecting more dismal news out of the Krispy Kreme camp ever since KZC took over.

"I've been saying all along this is leading to bankruptcy," he said. "They are trying to stretch this out as long as they can to build up a war chest before filing for bankruptcy. That's why they cut the jobs and got rid of the airplane."

Krispy Kreme spokeswoman Amy Hughes did not return a message left at her office Thursday.

Shares of Krispy Kreme fell $1.15, or nearly 16 percent, closing at $6.06 Thursday on the New York Stock Exchange. That is an all-time low for the company's shares, which traded near $50 less than two years ago.

Brandt believes Cooper, with a reptation as a turnaround specialist, was brought in to lead Krispy Kreme through bankruptcy restructuring.

"He's not a food guy," Brandt said Thursday. "If they had a problem with their menu they would have gotten a food guy. But they didn't."

Cooper was instrumental in overhauling Golden, Colo.-based Boston Chicken, which declared bankruptcy in 1998. That was just five years after going public with fanfare similar to the investor fervor that surrounded Krispy Kreme's initial public offering in 2000.

Boston Chicken and its homestyle Boston Market restaurants filed for bankruptcy after what analysts cited as too-rapid expansion - a criticism that has been leveled at Krispy Kreme since it reported its first-ever quarterly loss last May.

In Thursday's SEC filing, Winston-Salem-based Krispy Kreme said its agreement with KZC covers expenses for items including travel and legal counsel. Kroll Zolfo Cooper also will get a $200,000 retainer.

Krispy Kreme also said a "success fee" was being negotiated that would be paid to KZC if chief executive Stephen F. Cooper and his management team can return Krispy Kreme to profitability.

The parties expect to conclude negotiations on the success fee within two months, according to the filing. No details were provided to define what would be viewed as a successful effort.

In January, Krispy Kreme said Cooper - who has served as interim chief executive officer at Enron Corp. for almost three years - is being paid $760 an hour, plus his expenses. Stephen Panagos, Cooper's partner at Kroll Zolfo Cooper, is being paid $695 an hour as president of Krispy Kreme, the company said.

The $400,000 fee - which includes the salaries of Cooper and Panagos- is subject to adjustment after KZC officials provide a monthly statement of actual hourly charges and expenses, according to the filing.

Last month, Krispy Kreme forced out longtime CEO Scott Livengood and turned to Cooper and Paganos to try to overcome sinking profits, a federal securities probe and allegations of corporate deceit.

In Cooper and Paganos' first major move, the company announced Tuesday it is cutting 25 percent of its corporate work force - or about 125 jobs - and getting rid of its corporate plane. The cuts are expected to save the company more than $10 million a year.

Even with the savings, the company has said it needs additional credit to fund operations and capital expenditures.

Lenders who control Krispy Kreme's $150 million credit line agreed last month to extend to March 25 a deadline under which the company will be in default, because it still has not filed quarterly financial statements for the period that ended Oct. 31.

In return, Krispy Kreme agreed not to borrow any more cash without its lenders' consent.

Amid slowing sales, Krispy Kreme has posted losses in two of the last three fiscal quarters. The company is now the target of shareholder lawsuits and a federal probe that helped lead to Livengood's ouster.

Wednesday, Legg Mason analyst Glenn Guard predicted the company will have to close 73 stores over the next two fiscal years. Krispy Kreme currently has 432 stores in 45 states, Australia, Canada, Mexico and the United Kingdom.

On the Net:

Krispy Kreme: http://www.krispykreme.com