Krispy Kreme Says U.S. Attorney Joins Probe

Federal investigators turned up the heat on Krispy Kreme Doughnuts (KKD Quote) Thursday amid scrutiny of the company's accounting practices and a cash crunch.

The company said the U.S. Attorney's Office for the Southern District of New York will interview some of its current and former officers and employees. Krispy Kreme said the interviews will likely be related to the matters currently under formal investigation by the Securities and Exchange Commission, and it intends to cooperate with the probe.

Questions about Krispy Kreme's corporate governance have revolved around the legality of its franchise accounting practices.

Shares of Krispy Kreme were recently down 34 cents, or 5.9%, to $5.41. After being one of the biggest losers on Wall Street in 2004, shedding about two-thirds of its value on news of collapsing sales and legal issues, the company recently said it could need fresh cash.

It is currently forbidden to draw on its $150 million credit facility while it restates recent financial results. Meanwhile, the company previously said it sees the need for additional funding, which might indicate it is being forced to honor guarantees of debt owed by its franchisees. It recently put its total guaranteed debt at about $52 million.

Despite all its problems, some strong-stomached investors view Krispy Kreme's situation as a potential opportunity due to its strong brand and deflated stock price. The company recently ousted its chief executive, Scott Livengood, and hired Kroll Zolfo Cooper LLC, a turnaround firm, to repair the damage. Stephen Cooper, the firm's chairman who acts as interim chief executive, president and chief restructuring officer for Enron, replaced Livengood.

Under the new leadership, the company said earlier this month it would cut a quarter of its doughnut-making and distributing workforce in a bid to conserve a dwindling money supply, and it also sold a corporate jet.