Tar Heel Tattler - March 2005

New CEO won't do an Enron on Krispy
By Frank Maley

A few weeks into 2005, Krispy Kreme Doughnuts directors followed a New Year’s resolution that investors had long been wanting them to make: Boot CEO Scott Livengood. The Winston-Salem-based doughnut maker’s shares had fallen from about $50 in August to less than $10. Accounting problems had resulted in flawed financial statements and a U.S. Securities and Exchange Commission investigation.

Even so, the board shocked some investors and observers by summoning a brain surgeon for what many had supposed was just a migraine. Stephen Cooper, the new interim CEO, is a turnaround specialist with New York-based Kroll Zolfo Cooper. His most recent big job: liquidating Houston-based Enron, the scandal-wracked energy trader. Here’s how Duncan Yin, an analyst for Stamford, Conn.-based CRT Capital Group, read it: “It basically says there are serious problems here and we need a guy who’s experienced in dealing with crisis situations.”

The company says Livengood, 52, retired, but it’s unlikely that was entirely his or the board’s idea. By missing its deadline for filing third-quarter financial statements, Krispy Kreme risked defaulting on a $150 million credit line. Creditors could have demanded the balance, which stood at $91 million at the end of October, and forced the company into bankruptcy, experts say.

Usually, though, unless a company muffs a payment, creditors don’t want to suffer through a bankruptcy. So the threat mainly gave them leverage. “They were involved in picking a new management team — how involved is hard to say,” says Tony Plath, associate professor of finance at UNC Charlotte.

A week after hiring Cooper, Krispy Kreme received a two-month extension for filing its financial statements. Many took it as a sign that creditors endorsed the new management team and that the company can still pull itself out of the hole. But first, it needs to fix its accounting and operational problems. Even if it stumbles into bankruptcy, Krispy Kreme is unlikely to follow Enron’s path, Yin says. A bankrupt energy trader has a hard time finding customers, but the marketplace’s sweet tooth is less fickle. “No consumer is going to say, ‘I’m not going to buy a doughnut because the manufacturer of this doughnut is bankrupt.’”