01:56 PM CST on Thursday, February 9, 2006

Bloomberg News

Krispy Kreme Doughnuts Inc., the second-largest U.S. doughnut chain, will close all six stores in Houston to end a dispute with a franchisee.

The closings are part of a legal settlement with store operator Lone Star Doughnuts Ltd., which sued the company last year saying Krispy Kreme refused to sell it ingredients. Krispy Kreme claimed it was owed $1 million by Lone Star. The doughnut chain said today it plans to reopen stores in Houston.

Krispy Kreme is shedding stores and restructuring operations amid a probe by the U.S. Securities and Exchange Commission and federal prosecutors into how the company accounted for the repurchases of factory stores. Winston-Salem, North Carolina-based Krispy Kreme hasn't reported earnings in five quarters.

Lone Star's six locations will not be operated as Krispy Kreme stores beginning March 8. Krispy Kreme is still committed to the Houston market and plans to open stores in that area at the "appropriate time," Chief Operating Officer Steve Panagos said in a statement.

Krispy Kreme's franchisee for Colorado, Minnesota and Wisconsin filed for bankruptcy last week. That followed bankruptcy filings last year by franchisees in Canada and Philadelphia.

Shares of Krispy Kreme, which has about 320 locations, rose 10 cents to $6.41 at 12:09 p.m. in New York Stock Exchange composite trading. The stock has fallen 11 percent in the past 12 months.