Another kind of dough-nut at Krispy Kreme…

February 7, 2011

Krispy Kreme Doughnuts (KKD) holds a special place here at footnoted, and not just because of their signature melt-in-the-mouth-sugary glazed doughnuts (sickeningly delicious as those are). The Winston-Salem, N.C., purveyor of fried dough was an early subject of these pages, and has popped up regularly since — it looks like this post will take its appearances to an even baker’s dozen — on everything from cozy related-party transactions to doughnut sludge and sewer problems. Most recently, we looked at the puffed-up pay and incentives offered to company management.

Well, they’re back, and this time with revisions to the company’s stock incentive plan, originally adopted in 2000 and modified since then, and filed with an 8-K on Thursday. At first, the company’s summary of the changes sounds almost as pleasing for investors as Hot Doughnuts Now — after all, the filing says the amendments were made

“in order to (a) add a minimum vesting requirement for stock options and stock appreciation rights … (b) provide that underwater stock options and stock appreciation rights may not be exchanged for cash without shareholder approval; and (c) make certain minor technical changes.”

All well and good, and it does seem to do that. However, the hitch is in the fine print (much as it is [PDF] with all those lovely doughnuts), in the plan itself, where the company says that, yes, underwater awards can no longer be replaced with cash without shareholder approval. And, yes, minimum vesting will be 3 years (including graduated vesting), or 1 year for awards tied to performance criteria other than continued service. Yet there are a couple big exceptions:

“[T]he Plan’s administrator may provide for (a) acceleration of vesting of all or a portion of an award in the event of a participant’s death, disability or retirement, or upon the occurrence of a change in control of the Company; and (b) the grant of an award without a minimum vesting period (or the acceleration of vesting of all or a portion of an award for any reason), but only with respect to awards for no more than an aggregate of 10% of the total number of shares authorized for issuance under the Plan.”

For one thing, that 10% limit for minimum-vesting-free awards doesn’t impress us as much as it might: The plan itself specifies that it can deliver a a minimum of 12.5 million shares in various ways. That’s a full 18.5% of the 67.5 million shares outstanding as of the 10-Q that the company filed December 1. Being able to grant options, SARs or restricted stock covering 1.25 million shares, or $9 million (almost 2% of the company’s market-cap) at recent prices, seems like plenty.

Presumably, with the company’s shares on a roll over the last year, company executives figure it’s no big deal. We’ll see.

Image source: House of Sims— via Flickr.

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