By: Brian Louis, Journal Reporter

July 2, 2005, Winston-Salem Journal (Winston Salem, NC)

Kroll Zolfo Cooper LLC, a turnaround company, and Krispy Kreme Doughnuts Inc. are taking longer than they expected in negotiating a "success fee," but the delay does not surprise outside observers.

In January, Krispy Kreme, beset by troubles, hired the company and two Kroll Zolfo Cooper officials, Stephen Cooper, its chairman, and Steven Panagos, a managing director, to revive it.

Cooper is the chief executive of Krispy Kreme, and Panagos is the president and chief operating officer.

As part of their compensation, Kroll Zolfo Cooper will receive a "success fee." However, the term "success" has not been spelled out, and no fee has been determined, according to a regulatory filing.

The deadline for negotiating the "success fee" was extended for the fourth time this week.

A Krispy Kreme official declined to comment. Kroll Zolfo Cooper's general counsel has said twice in letters attached to Krispy Kreme regulatory filings that it has been too busy with restructuring work at Krispy Kreme to negotiate the fee.

Rebecca Randall, a spokeswoman for Kroll Zolfo Cooper reiterated that reason Thursday.

"Our focus is the company's restructuring," Randall said. "We've jointly elected to extend the timeframe for finalizing a success fee given the numerous other priorities and deadlines involved with the restructuring. That's all there is to it."

Experts said that it does not surprise them that Kroll Zolfo Cooper is too swamped to negotiate the fee because of the numerous legal, regulatory and business problems Krispy Kreme faces.

"It's probably pretty understandable that they haven't been able to negotiate it," said Peter Tourtellot, a certified turnaround professional and a managing director of the ALTMA Group, a turnaround management company.

Tourtellot, who works in ALTMA's Greensboro office, speculated that if there was a large gulf between the two sides over the success fee, Kroll Zolfo Cooper would have probably walked away by now.

"If there was this huge schism between the board and them, you would think they would resign the work," Tourtellot said.

Krispy Kreme is the subject of an accounting investigation by the Securities and Exchange Commission, and federal prosecutors in New York are also investigating the company. The company is the subject of shareholder lawsuits, and its business has been in a slump.

Turnaround experts said that there are a host of definitions of "success" when outside consultants come in and try to rescue a troubled company.

For example, "success" in a turnaround situation could be measured by a decrease or a refinancing of debt, or avoiding bankruptcy, said Jim Shein, the counsel for the law firm McDermott Will & Emery LLP in Chicago and a professor of management and strategy at Northwestern University's Kellogg School of Management.

It is not unusual for a turnaround company to agree to negotiate a "success fee" after it is hired by a struggling company, Shein said.

Krispy Kreme agreed to pay Kroll Zolfo Cooper a monthly fee of $400,000, according to a regulatory filing. The fee is adjusted above or below the $400,000 figure based on actual hourly charges and expenses.

A "success fee" can run into the millions of dollars and is typically paid in cash and not stock.

"Most of the people shy away from taking it in the form of equity," Shein said. "Usually it's cash."

He said that by taking cash instead of equity, turnaround specialists do not risk losing money in the stock if the company messes up their work after they leave and the price of the stock falls.

Krispy Kreme is also late in filing quarterly financial reports and its latest annual report with the SEC. On Thursday it said it would be late in filing a report on its annual employee retirement-savings plan.