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SEC Investigators Probe Krispy Kreme's Books

Jul 30, 2004 | Bloomberg News

Krispy Kreme Doughnuts Inc. said Thursday the Securities and Exchange Commission is investigating how the company accounted for the repurchase of franchises and earnings forecasts. Shares of the Winston-Salem, N.C.-based company fell 16 percent.

Chief Executive Scott Livengood, 51, has been buying stores back from franchisees, with some investors and analysts questioning the prices.

Krispy Kreme, which had its first loss as a public company in last quarter, cut its annual profit forecast in May, triggering a 30 percent share drop.

"It's just one more blow to their credibility," said Joe Bonner, an analyst at Argus Research in New York.

Livengood, in the statement, said Krispy Kreme is "confident in our practices" and that the company will "cooperate fully" with the SEC inquiry. Krispy Kreme spokeswoman Amy Hughes declined to comment further. SEC spokesman John Heine declined comment.

Shares of Krispy Kreme fell $2.95 to $15.71. They have fallen 57 percent this year.

Some accounting experts say Krispy Kreme may have used questionable accounting to inflate its earnings when it bought back its Michigan franchise last year, the Wall Street Journal reported in its "Heard on the Street" column Thursday. The company didn't disclose, when it acquired its Northern California franchise in January, that Livengood's former wife was one of the sellers, the newspaper said.

"The accounting for the Michigan acquisition was in accordance with generally accepted accounting principles and any assertion to the contrary is false and inaccurate," Livengood said on a May 25 earnings conference call.

Krispy Kreme purchased rights to the Michigan market for $32.1 million and its remaining interest in the Northern California market for $16.8 million, according to the company's regulatory filings.

Krispy Kreme became a Wall Street darling after its April 2000 initial public offering. The shares rose almost 10-fold to $49.74 each by August 2003.


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