VideoKrispy Kreme's repurchase of its northern California stores from a group of investors is also under scrutiny. In February 2004, the company paid $16.8 million to buy the 33 percent of Golden Gate Doughnuts LLC it did not already own. One of the beneficiaries of the buyout was the ex-wife of CEO Scott Livengood. The company failed to disclose this fact, although Adrienne Livengood's stake was valued at approximately $1.5 million. While the decision not to reveal the connection looks bad, "this is only a significant legal issue if it somehow could be established that [Livengood] was seeking some kind of personal profit or gain through his ex-wife, as opposed to truly serving the company's interest," says Carl Metzger, a partner with Goodwin Procter LLP in Boston.
In its December 8-K, Krispy Kreme revealed that there would need to be adjustments made to the accounting for the Golden Gate Doughnuts purchase as well — a total of $3.5 million to correct improperly recorded compensation expenses and management fees that had been included in the purchase price. The company will also make a similar correction to fix errors made in the acquisition of a franchise in Charlottesville, Virginia.
On top of the questionable accounting and the lack of disclosure, Krispy Kreme may have paid inflated prices for some of the franchises it bought back. In 2003, the company spent $67 million to repurchase six stores in Dallas and rights to stores in Shreveport, Louisiana, that were owned in part by former Krispy Kreme board member and chairman and CEO Joseph A. McAleer Jr. Another longtime director, Steven D. Smith, was also part owner. Compared with the $32.1 million paid for the Michigan stores that same year, the number sounds high — $11.2 million versus $4.6 million per store. A civil suit filed by another former franchisee alleges that a higher bid was offered but ignored.
"I asked a lot of questions about why they paid so much for those acquisitions," says one analyst. "I don't think I ever truly got an answer. They told me it was a different time in terms of valuation, but those were pretty exorbitant prices." The SEC, presumably, will insist on an answer in the course of its investigation.
Who Minded the Store?
The company's own investigation, as detailed in an April notification to the SEC, has turned up accounting problems in other areas, too, involving derivatives, leases, equipment sales, and the consolidation of a bankrupt subsidiary. Even if these turn out to be mostly peccadilloes, they raise a question: Who was minding the store in the finance department?
As it turns out, a lot of people. From 2000 to 2004, Krispy Kreme employed three different CFOs. John Tate joined just after the company went public, in October 2000, after 18 months at kitchenware retailer Williams-Sonoma Inc. Tate was promoted to chief operating officer in 2002, and Randy Casstevens, the company's longtime controller, took the top finance spot. Casstevens, who had spent most of his career at Krispy Kreme, had never been CFO of a public company before. After adding the chief governance officer role to his duties, Casstevens left in December 2003 in a move he then called "purely voluntary," just five months before the company announced its first earnings miss. (Now working as a career counselor at Wake Forest University in Winston-Salem, Casstevens declined to be interviewed for this story.)
To replace Casstevens, Krispy Kreme brought in current finance chief Michael Phalen, who had worked with Krispy Kreme as an investment banker for CIBC World Markets and Deutsche Banc Alex. Brown, but had never held a CFO post before. The company declined to make Phalen available for an interview. John Tate, meanwhile, departed in August 2004, and is now the operations head at Restoration Hardware, working once again with his former boss from Williams-Sonoma. Tate did not return phone calls for comment.
Company watchers come to different conclusions about the meaning of the CFO churn. Ric Marshall, chief analyst at governance watchdog The Corporate Library, says the turnover may mean the CFOs were trying to raise red flags about the company's financial state. "To me, this says the real numbers the CFOs were coming up with were numbers that the rest of management didn't want to hear. They were looking for a CFO who was going to tell them good news." Adds Goodwin Procter's Metzger, "It may be that a particular CFO is the one who brought these issues to the company's attention. You just don't know." But the fact that Tate and Casstevens were both promoted before leaving indicates that they were on good terms with the board and their fellow managers. All three CFOs answered to Livengood, whose 27 years at the company gave him far greater tenure than any of the finance chiefs.
Stephen Mader, vice chairman of executive recruiter Christian & Timbers, says the CFOs simply may not have been up to the task of guiding a high-growth franchise through the public markets. "This happens a lot with companies that enter the public arena that had done well under earlier conditions, but don't have the experience in the public markets," he says. "You could simply have nothing more here than a lot of marginal competence for running a company of that magnitude."
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