updated 1/6/2006 2:09:40 PM ET 2006-01-06T19:09:40

Krispy Kreme Doughnuts Inc. and its largest franchise operator have settled their dispute over a decision by the doughnut company to terminate the franchisee’s license, which had temporarily barred the firm from selling doughnuts under the famous brand name, both companies said Friday.

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On Thursday, Krispy Kreme said it had terminated the license of Great Circle Family Foods LLC, which operates 28 Krispy Kreme locations with nearly 750 employees in Southern California. Krispy Kreme said it took the action because the company had not paid required royalties and fees.

Great Circle officials announced Friday that the companies had reached an agreement that ends the dispute.

“By this resolution, all franchise agreements are reinstated and the notice of termination is withdrawn,” the company said in a statement. “Shipments of ingredients to permit continuous operations will resume immediately.”

Krispy Kreme spokeswoman Laura Smith confirmed the resolution.

“We are pleased that Great Circle Family Foods has agreed to resume payment of its royalty and brand fund fees, and that the communities of Southern California will continue to enjoy Krispy Kreme doughnuts and coffee,” she said.

Krispy Kreme, which is the target of two federal probes over its finances, has been battling with Great Circle for months over its dealings with the franchisee.

Great Circle partners Richard Reinis and Roger Glickman filed a lawsuit in California state court in September that accused Krispy Kreme of trying to force their company into bankruptcy.

They also charged that Krispy Kreme and its executives made false representations to induce them to personally guarantee the franchise’s financial obligations, systematically inflated its prices and engaged in deceptive business practices.

Krispy Kreme also required Great Circle to contribute to a brand fund used for marketing and advertising. In their suit, Reinis and Glickman contended Krispy Kreme refused to account for the expenditures from the brand fund and may have misappropriated the money.

Krispy Kreme, based in Winston-Salem, N.C., has said it will vigorously defend itself against the claims.

The U.S. Securities and Exchange Commission is investigating Krispy Kreme’s repurchase of franchises and earnings warnings in May 2004 that began the company’s swoon. Krispy Kreme is also the target of a federal criminal inquiry in New York.

There are about 300 Krispy Kreme stores in the U.S. and about 40 other locations where doughnuts are sold but not made.

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