More Trouble May Lie Ahead for Krispy Kreme

Krispy Kreme Doughnuts Inc.'s (KKD) ouster of six executives suggests more negative news may be ahead, according to analysts who follow the snack-maker.

A special committee of the company's independent directors decided the six unnamed company officers should be fired, Krispy Kreme said Tuesday. Five of the executives have resigned and one has retired.

The committee was appointed in October to investigate issues raised by a Securities and Exchange Commission (search) inquiry and by the company's auditors about accounting and financial statements, as well as claims of negligence in a shareholders' lawsuit was filed last year.

"The sudden removal of these executives points to far-reaching abuse within the former management ranks of this company," John Ivankoe, an analyst with J.P. Morgan Securities Inc., wrote in a report to investors. "We also see this announcement increasing the likelihood of significant findings from current SEC and Department of Justiceinvestigations."

The SEC is investigating the company's repurchase of franchises and the earnings warnings in May 2004 that started the company's swoon. The company is also under investigation by the U.S. Attorney's Office (search) for the Southern District of New York.

Krispy Kreme declined to comment beyond its brief news release.

"That specific statement by the company is a powerful message that they're going to do everything possible to get ahead of the investigations and right the ship before it goes down," said Jacob Frenkel, a former enforcement lawyer for the SEC now in private practice in Rockville, Md.

Krispy Kreme removed the names of five senior vice presidents from its Web site on Tuesday.

They included chief information officer Frank Hood; Fred Mitchell of manufacturing and distribution; Sherry Polonsky of finance; Jimmy Strickland of area developer operations; and Robert H. Vaughn Jr. of business development.

Vaughn had been serving as the chief restructuring officer of KremeKo Inc. (search) , a Krispy Kreme franchise in Canada operating since April under that country's equivalent of bankruptcy protection.

Krispy Kreme shares fell 3 cents to $7.63 on the New York Stock Exchange (search) after being halted early Tuesday. The stock has steadily declined from its year-ago high of $21, hitting a 52-week low of $5.05 in February. Shares are down about 39 percent this year.

Last week, Krispy Kreme said it will miss a deadline for filing financial results for the first quarter ended May 1, and expects to post a loss when it does file the report. In a filing with the SEC, Krispy Kreme said it was unable to complete the quarterly report because of the ongoing internal review of its accounting practices for fiscal 2005 and earlier years.