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Krispy Kreme Discloses Additional Federal Inquiry

By Paul Nowell
Associated Press
Friday, February 25, 2005; Page E10

CHARLOTTE, Feb. 24 -- Shares of Krispy Kreme Doughnuts Inc. dropped nearly 7 percent Thursday after the company said it is cooperating with an investigation by federal prosecutors who want to interview current and former executives.

Officials of the doughnut chain, based in Winston-Salem, N.C., said the probe by the U.S. attorney for the Southern District of New York is related to matters already under formal investigation by the Securities and Exchange Commission.

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The SEC is looking into Krispy Kreme's franchise buybacks and earnings outlooks. The company is also facing shareholder lawsuits. The SEC investigation was announced in October.

While Thursday's news involved no new accusations against the company, investors continued their year-long flight from once-hot Krispy Kreme shares.

The company's stock fell 39 cents, or 6.8 percent, to close at $5.36 in Thursday trading on the New York Stock Exchange, below its previous 52-week low of $5.50. Less than two years ago, the stock was trading at nearly $50.

Carl Sibilski, an analyst at Chicago-based Morningstar Inc., said the news of yet another investigation was the last thing investors want to hear about Krispy Kreme.

"It doesn't appear to me the New York investigation is focusing on anything we don't already know about," he said, "but it heightens concerns and raises its visibility if more entities are investigating the company."

Allegations included in the lawsuits and being looked into by the SEC include that Krispy Kreme improperly recorded payments to former franchise owners in Michigan and northern California as compensation, rather than as a purchase price in buying back their franchises.

Shareholders have also alleged that executives intentionally padded sales figures to hide the fact that doughnut sales began declining in early 2003.

Krispy Kreme did not elaborate on a short news release it issued to disclose the new investigation. "We will cooperate fully," company spokeswoman Amy Hughes said.

Megan Gaffney, a spokeswoman for the U.S. attorney's office in New York, said she could not provide details on the investigation.

Krispy Kreme has created a special committee of independent directors to investigate all matters being probed, the company said. That committee may conclude that the company's financial statements need to be changed.

In early January, amid allegations in a stockholder lawsuit of padded sales figures, the company restated its fiscal 2004 earnings and warned investors that it was in danger of defaulting on a $150 million credit line.

After posting losses in two of the past three quarters, the company's board last month ousted Scott A. Livengood as chief executive. Krispy Kreme now is being run by turnaround specialist Stephen F. Cooper, who has announced the company will lay off 25 percent of its corporate employees and end a lease on a corporate jet.

Krispy Kreme currently has 432 stores in 45 states, Australia, Canada, Mexico, South Korea and Britain.

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