On March 7, 2007, the plaintiffs filed a Notice of Appeal in the U.S. Court of Appeals for the Fourth Circuit as to the Order granting the motion for attorney’s fees and reimbursement of expenses.
On November 16, 2006, the Court entered the Order preliminarily approving the settlement and providing for notice. On January 31, 2007, the plaintiffs filed a motion for settlement was filed. On February 15, 2007, the Court entered several Orders approving the plan of allocation, attorney’s fees and reimbursement of expenses, and the proposed settlement. The Court entered the Final Judgment and Order of Dismissal with Prejudice.
According to a press release dated October 31, 2006, Krispy Kreme Doughnuts, Inc. announced that the Company, acting with the approval of the Special Committee of its Board of Directors, has entered into a Stipulation and Settlement Agreement (the "Stipulation") with the lead plaintiffs in the pending securities class action , the plaintiffs in the pending derivative action and all defendants named in the class action and derivative action, except for the Company's former Chairman and Chief Executive Officer, providing for the settlement of the securities class action and the derivative action on the terms described below. Both the class action and derivative action settlements are subject to preliminary and final approval of the United States District Court for the Middle District of North Carolina.
With respect to the securities class action , the Stipulation provides for the certification of a class consisting of all persons who purchased the Company's publicly-traded securities between March 8, 2001 and April 18, 2005, inclusive. The settlement class will receive total consideration of approximately $75 million, consisting of a cash payment of $34,967,000 to be made by the Company's directors' and officers' insurers, a cash payment of $100,000 to be made by the Company's former Chief Operating Officer, John W. Tate, a cash payment of $100,000 to be made by the Company's former Chief Financial Officer, Randy Casstevens, a cash payment of $4,000,000 to be made by the Company's independent registered public accounting firm, and common stock and warrants to purchase common stock to be issued by the Company having an aggregate value of $35,833,000 (based on the current market price of the Company's common stock). All claims against defendants will be dismissed with prejudice; however, claims that the Company may have against Scott A. Livengood, the Company's former Chairman and Chief Executive Officer, that may be asserted by the Company in the derivative action for contribution to the securities class action settlement or otherwise under applicable law are expressly preserved. The Stipulation contains no admission of fault or wrongdoing by the Company or the other defendants.
On May 23, 2005, a Second Amended Class Action Complaint was filed, and the defendants responded by filing various motions to dismiss in October 2005.
On October 7, 2004, the Court entered the Order granting the motion to appoint the National Retirement Funds as Lead Plaintiff and for approval of Lead Plaintiffs’ Selection of Lead and Liaison counsel. On December 14, 2004, an Amended Consolidated Class Action Complaint was filed. On February 4, 2005, the Court entered the Order of Consolidation. According to the Order, Bond Nichols, on behalf of himself and all others similarly situated v. Scott Livengood and Michael Phalen, 1:05cv42, shall be consolidated with other proceedings heretofore consolidated by the order of 6/14/04. On February 15, 2005, a First Amended Class Action Complaint was filed.
The complaint filed on January 14, 2005, Bond Nichols, et al. v. Krispy Kreme Doughnuts, Inc. , et al., alleges that Krispy Kreme is a specialty retailer of doughnuts and charges Krispy Kreme and certain of its officers and directors with violating the Securities Exchange Act of 1934. Specifically, the complaint alleges that Krispy Kreme misrepresented its financial condition to the investing public. The complaint further charges that Company improperly accounted for its reacquisition of certain of its franchisees, thereby artificially inflating its pre-tax income for fiscal year 2004 by as much as $8.1 million. As the complaint charges, in a press release dated January 4, 2005, the last day of the Class Period, the Company conceded that it would have to make $8.1 million in write-downs. The day prior to the release, the Company stock traded at an intra-day high of almost $13.00 per share. On the day after the release, KKD stock traded at an intra-day low of $9.36 per share, down a full twenty-eight percent (28%) from its intra-day high just two days earlier. According to the U.S. District Court Civil Docket, this case was selected for mediation on January 18, 2005. In connection with this decision, a petition was filed with the US Government as a "Motions to vacate sentence," which is actually a request (habeas corpus petition) to have the sentence vacated or set aside in the case of McDaniel v. USA 1:02CR388-1 (Criminal Action). In connection with the civil action no further action has been taken.
The original complaint filed in 2004, charges Krispy Kreme and certain of its officers and directors of violating the Securities Exchange Act of 1934. The complaint alleges that, during the Class Period, Krispy Kreme touted its strong operational growth, reporting substantial increases in revenues, income and earnings per share and representing that the Company would continue to grow. The complaint further alleges that, unbeknownst to investors, defendants failed to disclose that, as a result of the trend toward low-fat, low carbohydrate diets, such as the South Beach and Atkins diets, Krispy Kreme had been suffering from increasingly poor sales performance. The complaint alleges that there were other undisclosed reasons for the Company's poor performance: While the opening of new Krispy Kreme stores created initial consumer excitement and a corresponding surge in sales, sales at those newly-opened stores quickly tapered off. This was especially damaging to the Company in smaller markets with a limited number of potential new customers. Rather than cultivate a base of steady customers, the Company instead attempted to capitalize on Krispy Kreme's "fad appeal" and adopted a business model and strategy for increasing sales that was predicated on the perpetual addition of new stores and the hyping of the Company's entry into new markets ---- a tactic that resulted in unsustainable surges in sales that fell off once the hype ceased and the novelty of the new store wore off. The complaint further alleges that the Company's strategy of offsetting slowing retail sales with wholesale shipments to supermarkets was not working because the Company's wholesale business was more expensive to operate and, therefore, resulted in a lower profit margin than in-store sales and because the Company's wholesale business was saturating the market with Krispy Kreme products, cannibalizing the company's retail operations, perhaps undermining them as well, and decreasing the Company's overall profit margin.
The complaint alleges that on or around May 7, 2004, defendants issued a news release in which they announced that Krispy Kreme's expected fiscal 2005 diluted earnings per share from continuing operations, excluding charges, to be 10% lower than previously announced, and that Krispy Kreme was closing certain company-owned stores and reducing plans to open new ones. Krispy Kreme also announced that it was closing its Montana Mills bread stores, an operation that it had bought a year ago, and that it was going to write-off as much as $40 million on the venture; as recently as mid- April, defendants had said they intended to refine and expand the operation.
On this news, shares of Krispy Kreme fell $9.29, or 29%, to close at $22.51, a new 52-week low and more than 50% below Krispy Kreme's 52-week high of $49.74.
The trading volume was 20.5 million shares, the largest ever for Krispy Kreme and amounting to a third of the shares outstanding.