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WINSTON-SALEM, NC-A special investigation into KrispyKreme Doughnuts Inc.’s corporate governance andfinancial operations has produced a report that blamesthe company’s former executive team for efforts to”manage earnings,” which will result in therestatement of financial statements from 2001 to 2005.The initial audit for the restatement indicates thatKrispy Kreme’s pre-tax income for the four-year periodwill decrease by $25.6 million.

The investigation was conducted by a special committee comprised of two Krispy Kreme independent directors. The committee is co-chaired by Michael H. Sutton, formerly chief accountant of the United States Securities and Exchange Commission, and Lizanne Thomas, a senior corporate partner in the Atlanta office of Jones Day, a global law firm. Krispy Kreme’s legal counsel, Weil, Gotshal & Manges LLP and Smith Moore LLP, as well as a forensic accounting team from Navigant Consulting Inc., assisted the Committee.

The special committee said in a statement: “In ourview, Scott A. Livengood, former chairman of the boardand chief executive officer, and John W. Tate, formerchief operating officer, bear primary responsibilityfor the failure to establish the management tone,environment and controls essential for meeting thecompany’s responsibilities as a public company. KrispyKreme and its shareholders have paid dearly for thosefailures, as measured by the loss in market value ofthe company’s shares, a loss in confidence in thecredibility and integrity of the company’s managementand the considerable costs required to address thosefailures.”

However, the committee has decided not to sue presentand former Krispy Kreme directors and officers.

Krispy Kreme’s troubles emerged in late 2004 after itssales decreased significantly because of the low-carbdiet craze. The stock price dropped, causing WallStreet and investors to take a closer look at thecompany’s performance.

Soon after, irregularities in Krispy Kreme’saccounting compelled an audit, and in January 2005 theBoard of Directors ousted chairman, president and CEOScott A. Livengood and named Stephen F. Cooper,chairman of financial consulting group Kroll ZolfoCooper (KZF) LLC, as interim CEO, and Steven G.Panagos, also of KZF, as president and COO.

The company currently operates about 370 stores in the US, Australia, Canada, Mexico, the Republic of South Korea and the United Kingdom.

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