Krispy Kreme Doughnuts has announced that a special committee composed of two independent directors of the company has presented a report of its investigation to the board of directors.

"In our view, Scott A. Livengood, former chairman of the board and chief executive officer, and John W. Tate, former chief operating officer, bear primary responsibility for the failure to establish the management tone, environment and controls essential for meeting the company's responsibilities as a public company," the committee said. "Krispy Kreme and its shareholders have paid dearly for those failures, as measured by the loss in market value of the company's shares, a loss in confidence in the credibility and integrity of the company's management and the considerable costs required to address those failures."

"The number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings. All those we interviewed have repeatedly and firmly denied having any intent to manage earnings or having given or received any instruction (explicit or otherwise) to do so. But we never received credible explanations for transactions that appear to have been structured or timed to allow for the improper recognition of revenue or improper reduction of expense. While we believe that our investigation was thorough and more than sufficient to support our conclusions, we recognize that government investigators, who have a broader array of investigatory tools than are available in a private investigation such as ours, may uncover additional facts that will better illuminate the intent behind various individuals' actions and the underlying events."

"All officers or employees who we believe had any substantial involvement in or responsibility for the accounting errors have left the company," it said.

The special committee, which 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, was assisted in the investigation by legal counsel Weil, Gotshal & Manges LLP and Smith Moore LLP and a forensic accounting team from Navigant Consulting, Inc.

The special committee was established by Krispy Kreme's Board of Directors in October 2004 to conduct an independent investigation of various matters, and its report is the result of an extensive review conducted over approximately ten months.

The company has filed a copy of a summary prepared by the special committee of its report as an exhibit to a Form 8-K Current Report under the Securities Exchange Act of 1934. As part of its continuing cooperation with ongoing investigations by the Securities and Exchange Commission and the United States Attorney's Office for the Southern District of New York, the special committee has made the report available to such agencies, but is not publicly disclosing the report.

"The completion of the special committee report represents an important step forward for Krispy Kreme, both in understanding what occurred and in providing the framework for our upcoming restatement of our financial statements," said James H. Morgan, chairman of the board of Krispy Kreme. "The company and its board of directors embrace the directives of the special committee and are committed to ensuring that the highest standards of business conduct, financial reporting and internal controls are maintained. Krispy Kreme is a powerful brand, and we believe we are making progress every day in getting the company back on track to realizing its full potential."

"We believe the remedial actions that we are directing the company to take, which include significant changes in corporate culture and governance, provide a foundation on which the company can rebuild public confidence and trust," said Michael Sutton and Lizanne Thomas, co-chairs of the special committee.

Since January 2005, the special committee, the Board of Directors and the new management team have taken, and as a result of the report of the special committee will take, numerous steps to strengthen Krispy Kreme's corporate governance, compliance and internal controls.

"The special committee has concluded that it is in the best interests of the company (i) to reject the demands by shareholders that the company commence litigation against present and former directors and officers of the company and the sellers of certain franchises to the company, (ii) to seek dismissal of shareholder derivative litigation against the outside directors, the sellers of certain franchises and current and former officers other than Scott Livengood, John Tate and Randy S. Casstevens, the company's former chief financial officer, and (iii) not to seek dismissal of shareholder derivative litigation against Messrs Livengood, Tate and Casstevens, although the company will not assist or participate in such litigation," the committee said

As previously announced, management and the board of directors have concluded that certain previously issued financial statements should no longer be relied upon and should be restated. The company is working diligently to complete this restatement, as well as the preparation of its annual financial statements for the fiscal year ended 31 January 2005. The adjustments are currently expected to have the effect of decreasing pre-tax income for periods through the third quarter of fiscal 2005 by an estimated cumulative $25.6m. The adjustments are currently estimated to decrease pre-tax income by $1.1m, $1.9m, $2.1m, $13.9m and $3.2m for fiscal 2001, 2002, 2003 and 2004 and the first nine months of fiscal 2005, respectively, as well as by $3.4m for periods prior to fiscal 2001. The estimates remain subject to revision and the results of the audit of the company's annual financial statements.