- The Washington Times - Tuesday, January 18, 2005

CHARLOTTE, N.C. - Chief Executive Officer Scott Livengood was ousted yesterday as head of Krispy Kreme Doughnuts Inc., the once-trendy chain whose stock price has plummeted amid a federal securities investigation and claims of padded sales figures. Krispy Kreme shares yesterday rose 89 cents, or 10.21 percent, to close at $9.61 on the New York Stock Exchange.

The Winston-Salem, N.C., company’s board of directors announced the retirement of Mr. Livengood, who has been criticized for his handling of the company’s recent financial problems, as one of “a number of important actions to address the company’s current situation.”

Mr. Livengood, 52, who has been at the helm for seven years and led the company’s rapid rise, was replaced as CEO by Stephen Cooper, a turnaround specialist who most recently shepherded the Enron Corp. bankruptcy reorganization. Replacing Mr. Livengood as president will be Stephen Panagos.

Mr. Cooper and Mr. Panagos both are associated with Kroll Zolfo Cooper LLC, which Krispy Kreme has retained to be its financial adviser and interim management consultant. Mr. Cooper now acts as interim CEO, president and chief operating officer of Enron.

The company also warned that persistent declines in sales may lead to a fourth-quarter loss.

Krispy Kreme said Mr. Livengood also retired from his positions as president, chairman of the board and as a director of the company, and will become a consultant on an interim basis. Mr. Livengood had served as CEO since 1998 and had been with Krispy Kreme since 1977.

James H. Morgan, who served as a director of the company since July 2000 and vice chairman since March 2004, was elected chairman of the board of Krispy Kreme.

“On behalf of the board, I want to thank Scott for his years of dedicated service to the company and for making himself available to Krispy Kreme as a consultant to facilitate the transition,” Mr. Morgan said.

Mr. Livengood made no comment in the company’s prepared statement. According to the company, Mr. Livengood did not receive any severance with his retirement, but will be paid $45,833 a month, the equivalent of his current base salary, for the six-month term of his consulting agreement, which is renewable for an additional six months.

Mr. Livengood’s departure also triggers an option to purchase 330,125 shares of Krispy Kreme stock.

In addition to announcing Mr. Livengood’s ouster yesterday, Krispy Kreme warned that sales have continued to slide in the fourth quarter of the current fiscal year. For the eight weeks ending Dec. 26, average weekly sales per factory store throughout the Krispy Kreme system were down 18 percent.

The company said quarterly results also will be harmed by the substantial costs of dealing with its current legal and regulatory troubles, and it could post a loss for the current quarter.

Analysts surveyed by Thomson First Call had projected a profit of 5 cents per share for the fourth quarter.

Mr. Livengood, a North Carolina native, was instrumental in the company’s rapid growth in the 1990s and early this decade. After becoming president in 1992, he oversaw the opening of Krispy Kreme stores well outside the company’s traditional Southeastern market. Krispy Kreme debuted in New York in 1996 and in Los Angeles three years later.

In 2000, the company went public at $21 a share and the stock price shot up from there. Each time Krispy Kreme opened a new store, it seemed, lines curled around the block.

But even as the company undertook rapid growth, there were underlying problems. Sales began to sag by early 2003, according to a recent filing in a shareholder lawsuit. Officials knew of the problems, but attempted to hide them by routinely padding sales figures by doubling doughnut shipments to wholesale customers at the end of fiscal quarters, according to the suit.

Last May, Krispy Kreme reported its first-ever quarterly loss. At the time, the company blamed its problems on the popularity of low-carbohydrate diets like Atkins and South Beach.

But the shareholder lawsuit and word of a formal probe by the Securities and Exchange Commission (SEC) soon followed, and it became apparent that Krispy Kreme’s problems ran deeper than just a diet fad.

The SEC investigation is probing Krispy Kreme’s accounting for franchise buybacks and its earnings outlooks, and is facing shareholder lawsuits. In November, Krispy Kreme posted a $3 million third-quarter loss.

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