-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N9As7a1qap1paJxcgCGYEgShy53JdCgJS2qzMeWuROgfqhXPqgHRXMAXX8elkXCL CxG9vg6vDKLyZkYbhlki9w== 0000950144-01-501229.txt : 20010430 0000950144-01-501229.hdr.sgml : 20010430 ACCESSION NUMBER: 0000950144-01-501229 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010128 FILED AS OF DATE: 20010427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRISPY KREME DOUGHNUTS INC CENTRAL INDEX KEY: 0001100270 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 562169715 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-30209 FILM NUMBER: 1613775 BUSINESS ADDRESS: STREET 1: 370 KNOLLWOOD ST. STREET 2: SUITE 500 CITY: WINSTON SALEM STATE: NC ZIP: 27103 BUSINESS PHONE: 3367222981 MAIL ADDRESS: STREET 1: 370 KNOLLWOOD ST STREET 2: SUITE 500 CITY: WINSTON SALEM STATE: NC ZIP: 27103 10-K 1 g68654e10-k.txt KRISPY KREME DOUGHNUTS, INC. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 28, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 000-30209 KRISPY KREME DOUGHNUTS, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NORTH CAROLINA 56-2169715 - --------------------------------------------- ---------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 370 KNOLLWOOD STREET, WINSTON-SALEM, NORTH CAROLINA 27103 - --------------------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (336) 725-2981 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE ------------------------------- (Title of class) PREFERRED SHARE PURCHASE RIGHTS ------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting and non-voting common equity of the registrant held by nonaffiliates of the registrant, as of April 10, 2001: $713,159,552 Number of shares of Common Stock, no par value, outstanding as of April 10, 2001: 26,697,794. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Annual Report to Shareholders for the fiscal year ended January 28, 2001 have been incorporated by reference into Parts II and IV of this Annual Report on Form 10-K. Portions of the definitive Proxy Statement for the registrant's Annual Meeting to be held on May 18, 2001 have been incorporated by reference into Part III of this Annual Report on Form 10-K. ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. Business............................................................................................2 ITEM 2. Properties.........................................................................................16 ITEM 3. Legal Proceedings..................................................................................16 ITEM 4. Submission of Matters to a Vote of Security Holders................................................17 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................17 ITEM 6. Selected Financial Data............................................................................18 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation...............18 ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk..........................................18 ITEM 8. Financial Statements and Supplementary Data........................................................18 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............18 PART III ITEM 10. Directors and Executive Officers of the Registrant.................................................18 ITEM 11. Executive Compensation.............................................................................18 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.....................................19 ITEM 13. Certain Relationships and Related Transactions.....................................................19 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................19 SIGNATURES.......................................................................................................27
3 PART I REFERENCES CONTAINED HEREIN TO FISCAL 1997, FISCAL 1998, FISCAL 1999, FISCAL 2000 AND FISCAL 2001 MEAN THE FISCAL YEARS ENDED FEBRUARY 2, 1997, FEBRUARY 1, 1998, JANUARY 31, 1999, JANUARY 30, 2000 AND JANUARY 28, 2001, RESPECTIVELY. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, "KRISPY KREME", THE "COMPANY", "WE" OR "US" REFERS TO KRISPY KREME DOUGHNUTS, INC. AND ITS SUBSIDIARIES. THIS ANNUAL REPORT ON FORM 10-K (THIS "FORM 10-K") CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS PROJECTED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "ITEM 1. BUSINESS," AND IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," WHICH IS INCORPORATED BY REFERENCE INTO THIS FORM 10-K FROM THE COMPANY'S FISCAL 2001 ANNUAL REPORT TO SHAREHOLDERS. ALL REFERENCES TO SHARE AMOUNTS AND PER SHARE AMOUNTS IN THIS FORM 10-K, UNLESS OTHERWISE NOTED, HAVE BEEN ADJUSTED TO REFLECT A TWO-FOR-ONE STOCK SPLIT PAID ON MARCH 19, 2001 IN THE FORM OF A DIVIDEND TO SHAREHOLDERS OF RECORD AS OF MARCH 5, 2001. ITEM 1. BUSINESS. OVERVIEW Krispy Kreme is a leading branded specialty retailer of premium quality doughnuts. We have established Krispy Kreme as a leading consumer brand with a loyal customer base through our longstanding commitment to quality and consistency. The combination of our well-established brand, our one-of-a-kind doughnuts, a unique retail experience featuring our stores' fully displayed production process, or doughnutmaking theater, our vertical integration and our strong franchise system creates significant opportunities for continued growth. In the mid-1990s, we began repositioning Krispy Kreme from a wholesale bakery business model to a specialty retail concept. Initiatives supporting the repositioning included increasing the size of our doughnuts, redesigning our stores to enhance the total customer experience and adding channels of distribution where our products are displayed in a manner consistent with our on-premises presentation. As a result of the success of these initiatives, we began expanding nationwide primarily through franchising with experienced, well-capitalized area developers. We believe that Krispy Kreme has significant opportunities for continued growth. Our sales growth has been driven by new store openings, as well as systemwide comparable store sales growth of 9.7% in fiscal 1999, 14.1% in fiscal 2000 and 17.1% in fiscal 2001. We believe our success is based on the strengths described below. COMPETITIVE STRENGTHS THE UNIVERSAL APPEAL OF OUR PRODUCT. Our market research indicates that Krispy Kreme's breadth of appeal extends across major demographic groups, including age and income. In addition to their taste, quality and simplicity, our doughnuts are an affordable indulgence. This has contributed to many of our customers' purchasing doughnuts by the dozen for their offices, clubs and families. Demand for our doughnuts occurs throughout the day, with approximately half of our on-premises sales occurring in the morning and half in the afternoon and evening. A PROVEN CONCEPT. Krispy Kreme is a focused yet versatile concept. Each of our distinctive Krispy Kreme stores is a doughnutmaking theater with the capacity, depending on equipment size, to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Our stores serve as our primary retail outlets. They are also designed to create a multi-sensory experience around our unique product and production process, which is important to our brand-building efforts. In addition to these on-premises sales, we have developed multiple channels of sales outside our stores, which we refer to as off-premises sales. -2- 4 These sales channels improve the visibility of our brand, increase the convenience of purchase and capture sales from a wide variety of settings and occasions. Additionally, the ability to generate sales outside of our stores, utilizing the stores' existing production capacity, minimizes the risk of an underperforming on-premises sales location. STRONG GROWTH POTENTIAL. With only 174 stores as of January 28, 2001, we believe that we are in the infancy of our growth. Our highest priority expansion plans focus on markets with over 100,000 households. These markets are most attractive because of their dense population characteristics, which enable us to achieve economies of scale in local operations infrastructure and brand-building efforts. We also believe our universal product appeal, combined with our strategy that utilizes multiple sales channels, will facilitate our expansion into smaller markets. THE INGREDIENTS FOR MARKET LEADERSHIP. The doughnut industry, with sales of approximately $4.7 billion in 1999, is highly fragmented and characterized by low-volume outlets with undifferentiated product quality. We believe that we have the ability to become the recognized leader in every market we enter through our unique combination of: o A strong brand o A highly differentiated product o High-volume production capacity o A market penetration strategy using multiple sales channels A PROVEN FRANCHISE SYSTEM. Krispy Kreme is committed to growth through franchising. Our franchisees consist of associates who operate under our original franchising program developed in the 1940s and area developers who operate under our franchising program developed in the mid-1990s. See "-- Store Ownership." We intend to continue to strengthen our franchise system by attracting and retaining experienced and well-capitalized area developers who have the management capacity to develop multiple stores. Our development strategy permits us to grow in a controlled manner and enables us to ensure that each area developer strictly adheres to our high standards of quality and service. We prefer that area developers have ownership and successful operating experience in multi-unit food operations within the territory they propose for development. To ensure a consistent high quality product, we require each franchisee to purchase our proprietary mixes and doughnutmaking equipment. We devote significant resources to providing our franchisees with assistance in site selection, store design, employee training and marketing. Many of our franchisees are also our shareholders. Additionally, we intend to continue to acquire equity positions in selected franchisee businesses. We believe that common ownership of equity will serve to further strengthen our relationships and align our mutual interests. DIRECT STORE DELIVERY CAPABILITIES. Krispy Kreme has developed a highly effective direct store delivery system, or DSD, for executing off-premises sales. We deliver fresh doughnuts, both packaged and unpackaged, to a variety of retail customers, such as supermarkets, convenience stores and other food service and institutional accounts. Through our company and franchised store operations, our route drivers are capable of taking customer orders and delivering products directly to our customers' retail locations, where they are typically merchandised from Krispy Kreme branded displays. We have also developed national account relationships and implemented electronic invoicing and payment systems with some large DSD customers. We believe these competencies, coupled with our premium products, will provide us with significant sales opportunities by allowing us to assume the role of category manager for doughnut products in both the in-store bakery and food service distribution channels. A CONTROLLED PROCESS ENSURING CONSISTENT HIGH QUALITY. Krispy Kreme has a vertically integrated, highly automated system designed to create quality, consistency and efficiency. Our doughnutmaking process starts well before the store-level operations with: -3- 5 o Our owned and operated manufacturing plant, which produces our proprietary mixes o Our state-of-the-art laboratory that tests all key ingredients and each batch of mix produced o Our self-manufactured, custom stainless steel doughnutmaking equipment Additionally, at the store level, we provide a 13-week manager training program covering the critical skills required to operate a Krispy Kreme store and a comprehensive training program for all positions in the store. The manager training program includes classroom instruction, computer-based modules and in-store training. The comprehensive training program for store personnel includes procedures for producing and finishing our doughnuts. A BALANCED FINANCIAL MODEL. Krispy Kreme generates sales and income from three distinct sources: company stores, franchise fees and royalties and a vertically integrated supply chain, which we refer to as Krispy Kreme Manufacturing and Distribution (KKM&D, formerly Support Operations). In addition to lowering the cost of goods sold for our stores, KKM&D generates attractive margins on sales of our mixes and equipment. Our franchising approach to growth minimizes our capital requirements and provides a highly attractive royalty stream. We believe this financial model provides increased stability to our revenues and earnings and improves our return on investment. Our Company Store Operations, Franchise Operations and KKM&D comprise three reportable segments under generally accepted accounting principles. You can review financial data for these segments in Note 14 to our audited consolidated financial statements. BUSINESS MODEL Krispy Kreme is a vertically integrated company structured to support and profit from the high volume production and sale of high quality doughnut products. "High volume with high quality" has always been the foundation of our business strategy. Our business is driven by two complementary business units: Store Operations, both company and franchise, and KKM&D. Independently, each is designed to ensure quality and to benefit from economies of scale. Collectively, both function as an integrated, cost-efficient system. STORE OPERATIONS. Our principal source of revenue is the sale of doughnuts produced and distributed by Store Operations. As part of our unique business model, our stores are both retail outlets and highly automated, high volume producers of our doughnut products and can sell their products through our multiple sales channels. o ON-PREMISES SALES. Each of our stores offers at least 15 of our more than 20 varieties of doughnuts, including our signature Hot Original Glazed and nine other prescribed varieties. We also sell our special blend Krispy Kreme coffee, other beverages, other bakery items and collectible memorabilia such as tee shirts, sweatshirts and hats. Fundraising sales, described in "-- Marketing," are another component of on-premises sales. In order to establish our brand identity with the total store experience and because of the higher margins associated with on-premises sales, we typically focus our initial sales efforts in new markets on this channel. o OFF-PREMISES SALES. We accomplish off-premises sales through our direct store delivery system which is designed to: - Generate incremental sales - Increase market penetration and brand awareness - Increase customer convenience - Optimize our stores' production capacity -4- 6 - Improve our stores' return on investment As of January 28, 2001 approximately 123 of our stores sold to major grocery store chains, including Kroger (which accounted for 10.2% of our total revenues in fiscal 2000 and 9.4% in fiscal 2001), Food Lion, Giant Food and Acme Markets, and to local and national convenience stores, as well as to select co-branding customers. KKM&D. The mission of KKM&D is to create competitive advantages for our stores while operating as a profitable business enterprise. We have developed important operating competencies and capabilities, which we use to support our stores, including: o Strong product knowledge and technical skills o Control of all critical production and distribution processes o Collective buying power The basic raw materials used in our products are flour, sugar, shortening and packaging materials. We obtain most of these materials under long-term purchase agreements and in the commodity spot markets. Although we own the recipe to our glaze flavoring -- a key ingredient in many of our doughnuts - -- we are currently dependent on a sole source for our supply. However, we are in the process of establishing an alternative source. We implement the mission of KKM&D through three strategic business units: o MIX MANUFACTURING. We produce all of our proprietary doughnut mixes at our manufacturing facility in Winston-Salem, North Carolina. We control production of this critical input in order to ensure that our products meet quality expectations and to maximize our profit potential. Manufacturing and selling our own mixes allows us to capture the profit that normally would accrue to an outside supplier and is more cost effective than purchasing from third party vendors. Our mixes are produced according to our high quality standards, which include: - Requiring each carefully selected supplier to meet or exceed industry standards - Receiving truckloads of our main ingredients daily - Testing each incoming key ingredient - Testing each batch of mix In March 2001, we announced our intention to build an additional mix and distribution facility in Effingham, Illinois. o EQUIPMENT MANUFACTURING. We manufacture proprietary doughnutmaking equipment, which our franchisees are required to purchase. Our carefully engineered equipment, when combined with our proprietary mixes, produces doughnuts with uniform consistency and high quality. Manufacturing our equipment results in several advantages including: - FLEXIBILITY. We manufacture several models, with varying capacities, which are capable of producing multiple products and fitting unusual store configurations. - COST-EFFECTIVENESS. We believe our costs are lower than if we purchased our equipment from third parties. -5- 7 - EFFICIENCY. We continually refine our equipment design to ensure maximum automation in order to manage labor costs and/or improve consistency. o DISTRIBUTION CENTERS. We also operate two distribution centers (Winston-Salem, NC and greater Los Angeles, CA), which are capable of supplying our stores with all of their key supplies, including all food ingredients, juices, Krispy Kreme coffee, signage, display cases, uniforms and other items. Stores must use our doughnut mixes and special blend coffee exclusively. In addition, all store operators have agreed contractually through our Supply Chain Alliance Program to purchase all of their requirements for the critical areas of their business through 2002. We believe that our ability to distribute supplies to our operators produces several advantages including: - ECONOMIES OF SCALE. We are able to purchase at volume discount prices, which we believe are lower than those that would be available to our operators individually. In addition, we are selective in choosing our suppliers and require that they meet certain standards with regard to quality and reliability. Also, inventory is controlled on a systemwide basis rather than at the store level. - CONVENIENCE. Our distribution centers offer our operators the convenience of one-stop shopping. We are able to supply our operators with all of the key items they need to operate their stores, which enables them to focus their energies on running their stores, rather than managing supplier relationships. In March 2001, we announced our intention to build an additional mix and distribution facility in Effingham, Illinois. KRISPY KREME BRAND ELEMENTS Krispy Kreme is a blend of several important brand elements which has created a special bond with many of our customers. The key elements are: o ONE-OF-A-KIND TASTE. The taste experience of our doughnuts is the foundation of our concept and the common thread that binds generations of our loyal customers. Our doughnuts are made from a secret recipe that has been in our company since 1937. We use only premium ingredients, which are blended by our custom equipment, to create this unique and very special product. o DOUGHNUTMAKING THEATERS. Each of our stores showcases our doughnutmaking process. Our goal is to provide our customers with a unique entertainment experience and, in addition, visibly reinforce our commitment to quality and freshness. o HOT DOUGHNUTS NOW. The Hot Doughnuts Now sign, when illuminated, is a signal that our Hot Original Glazed are being made. The Hot Doughnuts Now sign is a strong impulse purchase generator and an integral contributor to our brand's mystique. Our Hot Original Glazed are made for several hours every morning and evening, and at other special times during the day. o DESTINATION LOCATIONS. Our full-service stores incorporate doughnutmaking theaters, which are designed to produce a multi-sensory customer experience and establish a strong brand identity. Our research indicates that many of our stores have the geographic drawing power comparable to a regional shopping mall and that our customers, on average, drive 14 miles from their homes to our stores. -6- 8 o AFFORDABLE INDULGENCES. Our doughnuts are reasonably priced to ensure that they are affordable for the widest audience possible. o COMMUNITY RELATIONSHIPS. We are a national company, yet we are committed to strong local community relationships. Our store operators support their local communities through fundraising programs and the sponsorship of charitable events. Many of our loyal customers have warm memories of selling Krispy Kremes to raise money for their schools, clubs and community organizations. INDUSTRY OVERVIEW The doughnut industry is highly fragmented and, according to industry sources, had sales of approximately $4.7 billion in 1999. We expect doughnut sales to grow due to a variety of factors, including the growth in two-income households and corresponding shift towards foods consumed away from home and increased snack food consumption. We view the fragmented competition in the doughnut industry as an opportunity for our continued growth. We also believe that the premium quality of our products and the strength of our brand will help enhance the growth and expansion of the overall doughnut market. GROWTH STRATEGY Krispy Kreme is a proven concept with an established heritage. The strength of our brand and our attractive unit economics position us very well for growth. We plan to increase our revenues and profits by expanding our store base, improving on-premises sales at existing stores, and increasing off-premises sales. EXPAND OUR STORE BASE. We view our stores as platforms from which we pursue on-premises as well as off-premises sales opportunities. In fiscal 2002, we anticipate opening approximately 36 new stores under existing agreements, the majority of which are expected to be franchise stores. Our franchisees, including the area developer in Northern California in which we have a majority ownership interest, are contractually obligated to open over 250 new stores in the period fiscal 2002 through fiscal 2006. The addition of new stores will be accomplished primarily through franchising with area developers following a prescribed development plan for their respective territories. An initial development plan has been created to optimally penetrate territories with over 100,000 households. The plan assumes stores will be built in high density, prime-retailing locations in order to maximize customer traffic and on-premises sales volumes. We believe a territory-based development strategy creates substantial benefits to both Krispy Kreme and our area developers. These benefits include: - Real estate procurement and development - Scale to cost-justify a strong local support infrastructure - Brand building and advertising - Ability to make marketwide commitments to chain store customers With respect to new store growth, we believe that secondary markets in the United States with less than 100,000 households also offer additional sales and profit growth opportunities. Although we operate successfully in some secondary markets today, we believe that our primary expansion territories are sufficient to achieve our intermediate growth objectives. In contemplation of our future international expansion, on December 28, 2000 we announced the hiring of Donald Henshall as President of Krispy Kreme International effective February 2001. Mr. Henshall is developing our global strategy as well as the capabilities and infrastructure necessary to support our expansion outside the United States. -7- 9 IMPROVE EXISTING STORES' ON-PREMISES SALES. Our area developers have demonstrated that a store employing our updated design located in a densely populated area is capable of generating and sustaining high volume on-premises sales. Many of our stores built prior to 1997 were designed primarily as wholesale bakeries and their formats and site attributes differ considerably from newer stores. In order to improve the on-premises sales of some of these stores, we plan to remodel selected company stores and, in some limited instances, close or relocate certain stores to more dynamic locations within their territories. Finally, we consistently evaluate improvements or additions to our product line in order to increase same store sales levels and balance seasonality of sales. INCREASE OFF-PREMISES SALES. In new markets, we typically focus our initial efforts on on-premises sales and then use the store platform to capitalize on off-premises opportunities. We intend to secure additional grocery and convenience store customers, as well as increase sales to our existing customer base by offering premium quality products, category management and superior customer service. In addition, we believe the food service and institutional channel of sales offers Krispy Kreme significant opportunity to extend our brand into colleges and universities, business and industry complexes and sports and entertainment venues. In new markets where capacity utilization remains high from servicing on-premises sales, we may develop commissary production facilities to service off-premises sales. We believe that once high brand awareness has been established in a market, a commissary has the potential to improve market penetration and profitability. UNIT ECONOMICS We believe that Krispy Kreme unit economics represent an attractive investment opportunity for our area developers and as such are a significant factor contributing to the growth and success of the Krispy Kreme concept. We estimate that the investment for a new store, excluding land and pre-opening costs, is $550,000 for a building of approximately 4,000 square feet and $500,000 for equipment, furniture and fixtures. The following table provides certain financial information relating to company and franchised stores. Average weekly sales per store are calculated by dividing store revenues by the actual number of sales weeks included in each period. Company stores' operating cash flow is store revenues less all direct store expenses other than depreciation expenses.
YEAR ENDED --------------------------------------------- JANUARY 31, JANUARY 30, JANUARY 28, 1999 2000 2001 ----------- ----------- ------------ (DOLLARS IN THOUSANDS) Average weekly sales per store: Company..................................... $47 $54 $69 Franchised.................................. 28 38 43 Company stores' operating cash flow as a percentage of store revenues........................... 20.3% 23.2% 26.1%
Average weekly sales for company stores are higher than for franchised stores due to lower average weekly sales volumes of older associate stores that are included in the franchised stores' calculations. However, franchised stores' average weekly sales have been increasing as higher-volume area developer stores become a larger proportion of the franchised store base. Additionally, new area developer stores' sales are principally on-premises sales, which have higher operating margins than off-premises sales. Company and associate stores generate a significant percentage of revenues from lower-margin off-premises sales. STORE DEVELOPMENT AND OPERATIONS SITE SELECTION. Our objective is to create highly visible destination locations. Our comprehensive site selection process focuses on: -8- 10 o High volume traffic o High household density o Proximity to both daytime employment and residential centers o Proximity to other retail traffic generators We work closely with our franchisees to assist them in selecting sites. A site selection team visits each site and the surrounding area before approving a store location. We believe that this process ensures that each new store will comply with our standards. STORE OPERATIONS. Our new stores are approximately 4,000 square feet. They are equipped with automated doughnutmaking equipment capable of making approximately 200 dozen doughnuts per hour. This capacity can support sales in excess of $100,000 per week. We outline uniform specifications and designs for each Krispy Kreme store and require compliance with our standards regarding the operation of the store, including, but not limited to: o Varieties of products o Product specifications o Sales channels o Packaging o Sanitation and cleaning o Signage o Furniture and fixtures o Image and use of logos and trademarks o Training o Marketing and advertising We also require the use of a computer and cash register system with specified capabilities to ensure the collection of sales information necessary for effective store management. All of our franchisees provide us with weekly sales reports and periodic financial statements. We routinely assist our franchisees with issues such as: o Operating procedures o Advertising and marketing programs o Administrative, bookkeeping and accounting procedures o Public relations o Generation of sales and operating data We also provide an opening team, which consists of up to nine people, to provide on-site training and assistance during the first two weeks of operation for each initial store opened by a new franchisee. The number of opening team members providing this assistance is reduced with each subsequent store opening for an existing franchisee. Our stores which engage in off-premises sales typically operate on a 24-hour schedule. Other stores generally operate from 5:30 a.m. to 1:00 a.m., seven days a week, excluding some major holidays. Traditionally, our sales have been slower during the Christmas holiday season and the summer months. QUALITY STANDARDS AND CUSTOMER SERVICE. We encourage all of our employees to be courteous, helpful, knowledgeable and attentive. We emphasize the importance of performance by linking a portion of both a company store -9- 11 manager's and an assistant store manager's incentive compensation to profitability and customer service. We also encourage high levels of customer service and the maintenance of our high quality standards by frequently monitoring our stores through a variety of methods, including periodic quality audits and "mystery shoppers." In addition, our Customer Experience Department handles customer comments and also conducts routine satisfaction surveys of our off-premises customers. MANAGEMENT AND STAFFING. It is important that our corporate staff and store managers work as a team. Our Senior Vice President, Company Store and Associate Operations, and Senior Vice President, Area Developer Operations, report to our Chief Executive Officer. Together, they are responsible for corporate interaction with our store operations division and store management. Through our divisional directors, each of whom is responsible for a specific geographic region, we communicate frequently with all store managers and their staffs using: store audits; weekly communications by telephone or e-mail; and scheduled and surprise store visits. We offer a comprehensive 13-week training program, conducted both at our headquarters and at designated stores, which provides store managers the critical skills required to operate a Krispy Kreme store. The program includes classroom instruction, computer-based training modules and in-store training. Our staffing varies depending on a store's size, volume of business, and number of sales channels. Stores with sales through all sales channels have approximately 35 employees handling on-premises sales, processing, production, bookkeeping and sanitation and between 2-15 delivery personnel. Area developers frequently hire employees from leasing agencies and employ staff based on store volume and size. Hourly employees, along with delivery personnel, are trained by local store management through hands-on experience and training manuals. We believe that our success is a natural result of the growth and development of our people. We are developing a career model for both management and non-exempt employees, which will focus on personal development and career growth. The program will link an individual's economic, career and personal goals with our corporate and store-level goals. STORE OWNERSHIP We divide our stores into three categories of ownership: company stores, associate stores and area developer stores. We refer to associates and area developers as franchisees, collectively. COMPANY STORES. Krispy Kreme owned 63 stores as of January 28, 2001. Most of these stores were developed between 1937 and 1996 and: o Were designed as wholesale bakeries o Generate a majority of their sales volume through off-premises sales o Are located in the Southeast o Are larger than new Krispy Kreme stores Company stores as of January 28, 2001 included five stores in Northern California operated by an area developer joint venture in which Krispy Kreme has a majority ownership interest. The terms of our arrangements with area developers described below also are applicable to our agreement with this joint venture. ASSOCIATES. We had 27 associates who operated 52 stores as of January 28, 2001. Associate stores have attributes which are similar to those of company stores. This group generally concentrates on growing sales within the current base of stores rather than developing new stores or new territories. With two exceptions, associates are not obligated to develop additional stores within their territories. We cannot grant licenses to other franchisees or sell -10- 12 products bearing the Krispy Kreme brand name within an associate's territory during the term of the license agreement. Associates are typically parties to 15-year licensing agreements, which generally permit them to operate stores using the Krispy Kreme system within a specific territory. Associates pay royalties of 3.0% of on-premises sales and 1.0% of all other sales, with the exception of private label sales for which there are no royalties. They are not currently required to contribute to the public relations and advertising fund. Our associates who were shareholders prior to our initial public offering in April 2000 have franchise agreements which were extended automatically for a period of 20 years following that offering and thereafter are renewed automatically for five-year periods, unless previously terminated by either party. We do not plan to license any new Krispy Kreme franchisees under the terms of the associate license agreement. AREA DEVELOPERS. In the mid-1990s, we began to strategically expand nationally to new territories through area developers. Under this structure, we license territories, usually defined by metropolitan statistical areas, to area developers who are capable of developing a prescribed number of stores within a specified time period. Area developer stores typically are designed and developed in locations favorable to achieving high volume on-premises sales, although they are also equipped to generate off-premises sales. As of January 28, 2001, we had 20 area developers operating 59 stores with contractual commitments to open over 225 stores in their territories during their initial development schedule. We currently have a minority interest in several area developer territories, including two new area developer joint ventures we announced on December 28, 2000, one for the development of 32 stores in Eastern Canada and one for the development of 16 stores in Massachusetts, Rhode Island and Connecticut between fiscal 2003 and fiscal 2008. We will participate in the Eastern Canada joint venture as a 34% equity partner. We will participate in the New England joint venture as a 49% equity partner and may consolidate this joint venture's performance into our financial results. We believe equity investments in our area developer territories more closely align our interests with our area developers and also create greater financial opportunity for the company. Preferred area developer candidates are multi-unit food operators with a high level of knowledge about the local territory or territories they will develop. They must have a proven financial capability to fully develop their territories. Our strategy is to grow primarily through area developers. Our area developer program includes a royalty and fee structure that is more attractive to Krispy Kreme than that of our associate program, as well as territory development requirements. Each of our area developers is required to enter into two types of agreements: a development agreement which establishes the number of stores to be developed in an area and a franchise agreement for each store opened. Area developers typically pay franchise fees ranging from $20,000 to $40,000 for each store which they develop. Our current standard franchise agreement provides for a 15-year term. The agreement is renewable subject to our discretion and can be terminated for a number of reasons, including the failure of the franchisee to make timely payments within applicable grace periods, subject to state law. Area developers pay a 4.5% royalty fee on all sales and are required to contribute 1.0% of all sales to a company-administered public relations and advertising fund. In addition to a franchise agreement, all area developers have signed development agreements which require them to develop a specified number of stores on or before specific dates. Generally, these agreements have a five-year term. If area developers fail to develop their stores on schedule, we have the right to terminate the agreement and develop company stores or develop stores through new area developers or joint ventures. Generally, we have a policy of not providing loans to our franchisees. We do, however, make equity investments in some of our franchisees as described above. In the past, we had a program permitting franchisees to lease proprietary Krispy Kreme equipment from -11- 13 our primary bank, and we guaranteed the leases. One franchisee took advantage of this program. We no longer offer this financing arrangement. MARKETING Krispy Kreme's approach to marketing is a natural extension of our brand equity, brand attributes, relationship with our customers, and our values. We believe we have a responsibility to our customers to engage in marketing activities that are consistent with, and further reinforce, their confidence and strong feelings about Krispy Kreme. Accordingly, we have established certain guiding brand principles, which include: o We will not attempt to define the Krispy Kreme experience for our customer o We prefer to have our customers tell their Krispy Kreme stories and share their experiences with others o We will focus on enhancing customer experiences through product-focused, value-added activities o We will develop local, community-based relationships in all Krispy Kreme markets To build our brand and drive our comparable store sales in a manner aligned with our brand principles, we have focused our marketing activities in the following areas: STORE EXPERIENCE. Our stores are where customers first experience a Hot Original Glazed. Customers know that when our Hot Doughnuts Now sign in the store window is illuminated, they can see our doughnuts being made and enjoy a Hot Original Glazed within seconds after it passes through the glaze waterfall. We believe this begins a lifetime relationship with our customers and forms the foundation of the Krispy Kreme experience. RELATIONSHIP MARKETING. Most of our brand-building activities are grassroots-based and focus on developing relationships with various constituencies, including consumers, schools, communities and businesses. Specific initiatives include: o Product donations to local radio and television stations, schools, government agencies and other community organizations o Good neighbor product deliveries to create trial uses o Sponsorship of local events and nonprofit organizations o A "Good Grades Program," which recognizes scholastic achievement with certificates and free doughnuts o Our "Krispy Kreme Ambassador Program," which enlists our fans as ambassadors in new markets to generate awareness and excitement around a new store opening FUNDRAISING SALES. Fundraising sales are high volume sales to local charitable organizations at discounted prices. Charities in turn resell our products at prices which approximate retail. We believe that providing a fundraising program to local community organizations and schools helps demonstrate our commitment to the local community, enhances brand awareness, increases consumer loyalty and attracts more customers into our stores. PRODUCT PLACEMENT. Since fiscal 1997, as we began growing nationally, there has been a significant increase in our product placements and references to our products on television programs and in selected films, including NBC -12- 14 TODAY SHOW, ROSIE O'DONNELL, THE TONIGHT SHOW WITH JAY LENO, ALLY MCBEAL, NYPD BLUE, THE PRACTICE and PRIMARY COLORS. We have been mentioned in more than 50 movies and television shows during the year ended January 28, 2001 and more than 80 television shows during the prior two years. We have also been featured or mentioned in over 2,500 print publications during 2001 and 1,000 print publications during 1998 and 1999, including THE WALL STREET JOURNAL, THE NEW YORK TIMES, the WASHINGTON POST, the LOS ANGELES TIMES, FORBES and FAST COMPANY. We believe the increasing number of placements and references are a reflection of the growing interest in our product and brand. ADVERTISING. Relationship marketing and product placement have been central to building our brand awareness. Although our marketing strategy has not historically employed traditional advertising, we intend to develop and test media advertising in a manner consistent with our brand principles. MANAGEMENT INFORMATION SYSTEMS Krispy Kreme has a management information system that allows for the rapid communication of extensive information among our corporate office, support operations, company stores, associates and area developers. Our franchisees and other affiliates connect to this system through our Intranet and have access to e-mail and the ability to provide financial reporting. Our management information systems strategy centers around our "Krispy Kreme Information Exchange," which leverages intranet, extranet and internet environments. We have adopted a balanced scorecard approach for measuring key performance drivers in each of our business units. Scorecard data are generated internally through our management information system. An enterprise resource planning system supports all major financial and operating functions within the corporation including financial reporting, inventory control and human resources. A comprehensive data warehouse system supports the financial and operating needs of our Store Operations and KKM&D. All company stores have been retrofitted with a Windows NT-based point of sale, or POS, system. This POS system provides each store with the ability to more closely manage on-premises and off-premises sales while providing a kiosk into our Intranet. We poll the sales information from each store's POS system, which gives us the ability to analyze data regularly. Daily two-way electronic communication with our stores permits sales transactions to be uploaded and price changes to be downloaded to in-store POS servers. Direct store delivery sales operations have access to an internally-developed route accounting system networked into the corporate Intranet. Information from these systems is polled weekly and aggregated into the corporate manufacturing data warehouse. The majority of our information technology hardware, including POS systems, is leased. COMPETITION Our competitors include retailers of doughnuts and snacks sold through supermarkets, convenience stores, restaurants and retail stores. We compete against Dunkin' Donuts, which has the largest number of outlets in the doughnut retail industry, as well as against regionally and locally owned doughnut shops. We compete on elements such as food quality, concept, convenience, location, customer service and value. Customer service, including frequency of deliveries and maintenance of fully stocked shelves, is an important factor in successfully competing for shelf space in grocery stores and convenience stores. We believe that our controlled process, which ensures the high volume production of premium quality doughnuts, makes us strong competitors in both food quality and value. Through our comprehensive site selection process and uniform store specifications and designs, we identify premier locations that are highly visible and increase customer convenience. -13- 15 We believe that in the in-store bakery market, many operators are looking for cost-effective alternatives to making doughnuts on-site. With a quality product and recognized brand name, Krispy Kreme has been able to provide a turnkey program that is profitable for the grocer. In addition, we also believe that we compete effectively in convenience stores. There is an industry trend moving towards expanded fresh product offerings during morning and evening drive times, and products are either sourced from a central commissary or brought in by local bakeries. Krispy Kreme provides fresh daily delivery, merchandised in an attractive branded display which retailers must use to participate in the program. Through effective signage and merchandising, operators are able to draw customers into the store, thus gaining add-on sales. As category management increases in this segment, growth should come from increased market penetration and enhanced display opportunities for our products. In the packaged doughnut market, we offer a full product line of doughnuts and snacks that are sold on a consignment basis and are typically merchandised on a free-standing branded display. We compete primarily with other well known producers of baked goods, such as Hostess and Dolly Madison, and some regional brands. TRADEMARKS Our doughnut shops are operated under the Krispy Kreme name, and we use over 45 federally registered trademarks, including "Krispy Kreme" and "Hot Doughnuts Now" and the logos associated with these marks. We have also registered some of our trademarks in approximately 18 other countries. We license the use of these trademarks to our franchisees for the operation of their doughnut shops. We also license the use of certain trademarks to convenience stores and grocery stores in connection with the sale of some of our products at those locations. Although we are not aware of anyone else who is using "Krispy Kreme" or "Hot Doughnuts Now" as a trademark or service mark, we are aware that some businesses are using "Krispy" or a phonetic equivalent, such as "Crispie Creme," as part of a trademark or service mark associated with retail doughnut stores. There may be similar uses we are unaware of which could arise from prior users. We aggressively pursue persons who unlawfully and without our consent use our trademarks. GOVERNMENT REGULATION LOCAL REGULATION. Our stores are subject to licensing and regulation by a number of government authorities, which may include health, sanitation, safety, fire, building and other agencies in the states or municipalities in which our doughnut shops are located. Developing new doughnut stores in particular areas could be delayed by problems in obtaining the required licenses and approvals or by more stringent requirements of local government bodies with respect to zoning, land use and environmental factors. Our standard development and franchise agreements require our area developers and associates to comply with all applicable federal, state and local laws and regulations, and indemnify us for costs we may incur attributable to their failure to comply. FOOD PRODUCT REGULATION. Our doughnut mixes are produced at our manufacturing facility in Winston-Salem, North Carolina. The North Carolina Department of Agriculture has regulatory power over food products shipped from this facility, as well as from Krispy Kreme's commissary in Charlotte, North Carolina. Similar state regulations may apply to products shipped from our doughnut shops to grocery or convenience stores. Many of our grocery and convenience store customers require us to guarantee our products' compliance with applicable food regulations. As is the case for other food producers, numerous other government regulations apply to our products. For example, the ingredient list, product weight and other aspects of our product labels are subject to state and federal regulation for accuracy and content. Most states will periodically check the product for compliance. The use of various product ingredients and packaging materials is regulated by the U.S. Department of Agriculture and the Federal Food and Drug Administration. Conceivably, one or more ingredients in our products could be banned, and substitute ingredients would then need to be found. -14- 16 FRANCHISE REGULATION. We must comply with regulations adopted by the Federal Trade Commission, or the FTC, and with several state laws that regulate the offer and sale of franchises. The FTC's Trade Regulation Rule on Franchising, or the FTC Rule, and certain state laws require that we furnish prospective franchisees with a franchise offering circular containing information prescribed by the FTC Rule and applicable state laws and regulations. We also must comply with a number of state laws that regulate some substantive aspects of the franchisor-franchisee relationship. These laws may limit a franchisor's ability to: terminate or not renew a franchise without good cause; prohibit interference with the right of free association among franchisees; disapprove the transfer of a franchise; discriminate among franchisees with regard to charges, royalties and other fees; and place new stores near existing franchises. To date, these laws have not precluded us from seeking franchisees in any given area and have not had a material adverse effect on our operations. Bills intended to regulate certain aspects of franchise relationships have been introduced into Congress on several occasions during the last decade, but none has been enacted. EMPLOYMENT REGULATIONS. We are subject to state and federal labor laws that govern our relationship with employees, such as minimum wage requirements, overtime and working conditions and citizenship requirements. Many of our on-premises and delivery personnel are paid at rates related to the federal minimum wage. Accordingly, further increases in the minimum wage could increase our labor costs. Furthermore, the work conditions at our facilities are regulated by the Occupational Safety and Health Administration and subject to periodic inspections. OTHER REGULATIONS. We have several contracts to serve United States military bases, which require compliance with certain applicable regulations. The stores which serve these military bases are subject to health and cleanliness inspections by military authorities. These accounts are not material to our overall business. We are also subject to federal and state environmental regulations, but we currently believe that these will not have a material effect on our operations. EMPLOYEES As of January 28, 2001 we had 3,200 employees. Of these, 228 were employed in our administrative offices and 130 were employed in our manufacturing and distribution centers. In our company stores and commissaries, we had 2,842 employees. Of these, 2,645 were full-time, including 220 managers and administrators. These numbers do not include persons employed by our Northern California joint venture. None of our employees is a party to a collective bargaining agreement, although we have experienced occasional unionization initiatives. We believe our relationships with our employees are good. OUR CORPORATE REORGANIZATION Krispy Kreme Doughnuts, Inc. was incorporated in North Carolina in 1999 to be the holding company for our predecessor, Krispy Kreme Doughnut Corporation, which was incorporated in 1982, and its other subsidiaries. This was effected through a corporate reorganization in the form of a merger in which each outstanding share of common stock of Krispy Kreme Doughnut Corporation was converted into the right to receive 40 shares of common stock of Krispy Kreme Doughnuts, Inc. and $7.50 in cash. This merger occurred concurrently with our initial public offering on April 5, 2000. As a result of the merger, Krispy Kreme Doughnut Corporation became a wholly-owned subsidiary of Krispy Kreme Doughnuts, Inc., and all the shareholders of Krispy Kreme Doughnut Corporation became shareholders of Krispy Kreme Doughnuts, Inc. We believe that the holding company structure provides greater organizational flexibility and broadens the alternatives available for future financings. The holding company structure also creates a framework for future growth, promotes new business opportunities and facilitates the formation of joint ventures or other business combinations with third parties. -15- 17 ITEM 2. PROPERTIES. STORES. As of January 28, 2001, there were 174 Krispy Kreme stores operating in 28 states, 63 of which were company stores, 59 of which were owned by area developers and 52 of which were owned by associates. o All of our stores, except for our commissary manufacturing facilities, have on-premises sales, and 123 stores also engage in off-premises sales. o Of the 58 stores we operated ourselves as of January 28, 2001, we owned the land and buildings for 39 stores. We leased both the building and the land for 17 stores and leased only the land for 2 stores. SATELLITE STORES. Our franchisees operated 13 satellite locations as of January 28, 2001. A satellite location is a retail doughnut store that does not produce doughnuts on site. Satellite locations are supplied with doughnuts from another local Krispy Kreme store that has production capability. KKM&D FACILITIES. We own a 137,000 square foot manufacturing plant and distribution center in Winston-Salem and lease a 29,000 square foot distribution center near Los Angeles. We also own a manufacturing facility in Charlotte, North Carolina, which produces doughnuts and other bakery items, such as honey buns, fruit pies, dunkin sticks and miniature doughnuts for off-premises sales. In February 2001, we acquired a 100,000 square foot facility in Winston-Salem, which we intend to use primarily as our equipment manufacturing facility and also as our training facility. In March 2001, we announced our intention to build a mix and distribution facility in Effingham, Illinois. OTHER PROPERTIES. Our corporate headquarters is located in Winston-Salem, North Carolina. We occupy approximately 35,000 square feet of this facility under a lease that expires on January 31, 2010, with one five-year renewal option. We have leased an additional 17,000 square feet in this facility under three leases which expire between August 31, 2003 and January 31, 2005. ITEM 3. LEGAL PROCEEDINGS. On March 9, 2000, we, our Chairman, President and Chief Executive Officer and other persons were named as defendants in a lawsuit (KEVIN L. BOYLAN AND BRUCE NEWBERG V. GOLDEN GATE DOUGHNUTS, LLC, KRISPY KREME DOUGHNUTS CORPORATION, KRISPY KREME DOUGHNUTS, INC., SCOTT LIVENGOOD, BRAD BRUCKMAN, AND DOES 1 THROUGH 20, Superior Court for the County of Los Angeles, California, Case No. RC226214). The plaintiffs allege that we and other defendants breached an agreement regarding plaintiffs' participation in a franchise operation in Northern California. The complaint, which asserts breach of contract, promissory estoppel, intentional interference with contract and business relations and breach of fiduciary duty claims, seeks unspecified money damages in an amount to be proven at trial, but not less than $10 million. The complaint also seeks punitive damages. Although we had been in discussions with the plaintiffs with respect to their participation in the Northern California franchise, numerous material differences regarding the terms and conditions of their participation were never resolved. As a result, no oral agreement was ever reached and no written agreement was executed. On September 22, 2000, after the case was transferred to the Sacramento Superior Court, that court granted our motion to compel arbitration of the action and stayed the action pending the outcome of arbitration. On November 3, 2000, the plaintiffs petitioned for a writ of mandate overruling the Superior Court. On December 21, 2000, the Court of Appeals summarily denied the writ petition. Plaintiffs failed to petition the California Supreme Court for review of the lower Court's discussion within the time permitted by law. Plaintiffs may now initiate arbitration proceedings in North Carolina. Regardless of how plaintiffs may proceed, we believe the complaint has no merit and will vigorously defend the lawsuit either in the California courts or before an arbitrator, as the case may be. The lawsuit against Mr. Livengood was dismissed by the California court for lack of personal jurisdiction. Plaintiffs have not appealed this judgment and their time for doing so has expired. -16- 18 From time to time, we are subject to other claims and suits arising in the course of our business, none of which we believe is likely to have a material adverse effect on our financial condition or results of operations. We maintain customary insurance policies against claims and suits which arise in the course of our business, including insurance policies for workers' compensation and personal injury, some of which provide for relatively large deductible amounts. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock began trading on the Nasdaq National Market under the symbol KREM on April 5, 2000. Prior to that time, there was no trading market for our common stock. The following table sets forth for the periods indicated the high and low closing sales price of our common stock on the Nasdaq National Market. Our common stock has been approved for listing, and will begin trading, on The New York Stock Exchange effective May 17, 2001 under the symbol "KK." FISCAL YEAR ENDED JANUARY 28, 2001: HIGH LOW ---- --- First Quarter (beginning April 5).................. $ 23.00 $ 18.50 Second Quarter..................................... 39.75 20.25 Third Quarter...................................... 49.91 29.53 Fourth Quarter..................................... 52.50 31.78 DIVIDEND POLICY We intend to retain our earnings to finance the expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination regarding cash dividend payments will be made by our board of directors and will depend upon the following factors: o Earnings o Capital requirements o Financial condition o Restrictions in financing agreements o Other factors deemed relevant by the board of directors Dividend payments are restricted by our loan agreement to 50% of our net income for the immediately preceding fiscal year. We routinely declared cash dividends on our common stock prior to our initial public offering in April 2000. In addition, on April 5, 2000, we distributed $7,005,000, or $0.375 per share, to our then existing shareholders as part of our corporate reorganization which took effect immediately prior to our initial public offering. The following table shows total and per share cash dividends we have declared on the shares of our common stock during the periods indicated: -17- 19
YEAR ENDED JANUARY 31, 1999 JANUARY 30, 2000 JANUARY 28, 2001 ---------------- ---------------- ---------------- Total cash dividends declared........... $1,517,787 $ -- $7,005,000 Per share............................... $0.08 $ -- $0.375
ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is incorporated herein by reference to the section entitled "Selected Financial Data" in the Company's fiscal 2001 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's fiscal 2001 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosure about Market Risks" in the Company's fiscal 2001 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto in the Company's fiscal 2001 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Refer to the information in the Company's definitive Proxy Statement filed with the Securities and Exchange Commission on April 16, 2001 for the Annual Meeting of Shareholders to be held on May 18, 2001 (the "Proxy Statement"), under the captions "Election of Directors" and "Executive Officers," which information is incorporated herein by reference. For information concerning Section 16(a) of the Securities Exchange Act of 1934, refer to the information under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Refer to the information under the captions "Executive Compensation" and "Election of Directors -- Directors' Compensation" of the Proxy Statement, which is incorporated herein by reference. -18- 20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Refer to the information under the caption "Voting Securities and Principal Shareholders" of the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Refer to the information under the caption "Related Party Transactions" of the Proxy Statement, which information is incorporated herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) FINANCIAL STATEMENTS AND SCHEDULES 1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements of Krispy Kreme Doughnuts, Inc. and the Report of Independent Accountants are incorporated by reference to the corresponding sections of the in the Company's fiscal 2001 Annual Report to Shareholders filed as an exhibit to this Form 10-K. DESCRIPTION Report of Independent Accountants Consolidated Balance Sheets as of January 30, 2000 and January 28, 2001 Consolidated Statements of Operations for Years Ended January 31, 1999, January 30, 2000 and January 28, 2001 Consolidated Statements of Shareholder's Equity for the Years Ended January 31, 1999, January 30, 2000 and January 28, 2001 Consolidated Statements of Cash Flows for the Years Ended January 31, 1999, January 30, 2000 and January 28, 2001 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule is included in this Part IV of this Form 10-K. SCHEDULE PAGE -------- ---- Schedule II - Consolidated Valuation and Qualifying 25 Accounts and Reserves Report of Independent Accountants 26 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. (b) REPORTS ON FORM 8-K None -19- 21 (c) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 2.1 -- Agreement and Plan of Merger among the Company, Krispy Kreme Doughnut Corporation and KKDC Reorganization Corporation dated December 2, 1999 (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 3.1 -- Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999 and Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 (Commission File No. 333-47326) filed with the Commission on October 4, 2000) 3.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 4.1 -- Form of Certificate for Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 4 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on April 3, 2000) 4.2 -- Rights Agreement between the Company and Branch Banking and Trust Company, as Rights Agent, dated as of January 18, 2000 (incorporated by reference to Exhibit 4.2 to the Registrant's Amendment No. 4 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on April 3, 2000) 10.1 -- Amended and Restated Loan Agreement, dated December 21, 1998, between Krispy Kreme Doughnut Corporation and the subsidiaries thereof and Branch Banking and Trust Company (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 10.2 -- Form of Associates License Agreement (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 10.3 -- Form of Development Agreement (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 10.4 -- Form of Franchise Agreement (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 10.5 -- Letter Agreement, dated April 12, 1994, between Krispy Kreme Doughnut Corporation and Mr. Scott A. Livengood (incorporated by reference to Exhibit 10.5 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.6 -- Letter Agreement, dated February 15, 1994, between Krispy Kreme Doughnut Corporation and Mr. Joseph A. McAleer, Jr. (incorporated by reference to Exhibit 10.6 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000)
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 10.7 -- Guaranty of Payment Agreement, dated September 18, 1998, by Krispy Kreme Doughnut Corporation for the benefit of Beattie F. Armstrong and Beattie F. Armstrong, Inc. (incorporated by reference to Exhibit 10.7 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.8 -- Collateral Repurchase Agreement, dated March 31, 1998 by and among Krispy Kreme Doughnut Corporation, the Bank of Blue Valley and Midwest Doughnuts, LLC (incorporated by reference to Exhibit 10.8 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.9 -- Guaranty by Krispy Kreme Doughnut Corporation, dated December 31, 1998, in favor of the Bank of Blue Valley with respect to the obligations of Midwest Doughnuts, LLC (incorporated by reference to Exhibit 10.9 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.10 -- Collateral Repurchase Agreement, dated January 30, 1998, by and among Krispy Kreme Doughnut Corporation, Mackk, L.L.C. and Branch Banking and Trust Company (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 10.11 -- Collateral Repurchase Agreement, dated January 30, 1998, by and among Mr. Joseph A. McAleer, Jr., Mackk, L.L.C., Krispy Kreme Doughnut Corporation and Branch Banking and Trust Company (incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 10.12 -- Collateral Repurchase Agreement, dated January 2, 1998, by and among Mrs. Bonnie Silvey Vandegrift, Brevard Tennis and Athletic Club Incorporated, Krispy Kreme Doughnut Corporation and Branch Banking and Trust Company (incorporated by reference to Exhibit 10.12 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.13 -- Collateral Repurchase Agreement, dated October 15, 1997, by and among Krispy Kreme Doughnut Corporation, Midwest Doughnuts, LLC, and the Bank of Blue Valley (incorporated by reference to Exhibit 10.13 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.14 -- Guaranty by Krispy Kreme Doughnut Corporation, dated October 15, 1997, in favor of the Bank of Blue Valley with respect to the obligation of Midwest Doughnuts, LLC (incorporated by reference to Exhibit 10.14 to the Registrant's Amendment No. 4 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on April 3, 2000) 10.15 -- Collateral Repurchase Agreement, dated October 22, 1996, by and among Robert L. McCoy, Gulf Florida Doughnut Corporation, Krispy Kreme Doughnut Corporation and Branch Banking and Trust Company (incorporated by reference to Exhibit 10.15 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000)
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 10.16 -- Collateral Repurchase Agreement, dated May 29, 1996, among Krispy Kreme Doughnut Corporation, Midwest Doughnuts, LLC and The First National Bank of Olathe (incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on December 16, 1999) 10.17 -- Guaranty by Krispy Kreme Doughnut Corporation, dated May 29, 1996, in favor of the First National Bank of Olathe with respect to the obligations of Midwest Doughnuts, LLC (incorporated by reference to Exhibit 10.17 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.18 -- Collateral Repurchase Agreement, dated July 7, 1995 by and among Robert J. Simmons, Simac, Inc., Krispy Kreme Doughnut Corporation and First National Bank of Ohio (incorporated by reference to Exhibit 10.18 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.19 -- Collateral Repurchase Agreement, dated February 25, 1994, by and among Mr. William J. Dorgan, Mrs. Patricia M. Dorgan, Krispy Kreme Doughnut Corporation and Southern National Bank of North Carolina (incorporated by reference to Exhibit 10.19 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.20 -- Promissory Note, dated March 13, 1997, of Midwest Doughnuts, LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties payable to the order of Krispy Kreme Doughnut Corporation (incorporated by reference to Exhibit 10.20 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.21 -- Promissory Note, dated October 13, 1997, of Midwest Doughnuts, LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties payable to the order of Krispy Kreme Doughnut Corporation (incorporated by reference to Exhibit 10.21 to the Registrant's Amendment No. 4 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on April 3, 2000) 10.22 -- Trademark License Agreement, dated May 27, 1996, between HDN Development--Corporation and Krispy Kreme Corporation (incorporated by reference to Exhibit 10.22 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.23 -- Stock Option Plan dated August 6, 1998 (incorporated by reference to Exhibit 10.23 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.24 -- Long-Term Incentive Plan dated January 30, 1993 (incorporated by reference to Exhibit 10.24 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000)
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 10.25 -- Form of Promissory Note relating to termination of Long-Term Incentive Plan (incorporated by reference to Exhibit 10.25 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.26 -- Form of Restricted Stock Purchase Agreement (incorporated by reference to Exhibit 10.26 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.27 -- Form of Promissory Note relating to restricted stock purchases (incorporated by reference to Exhibit 10.27 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.28 -- Employment Agreement dated August 10, 1999 between Krispy Kreme Doughnut Corporation and John N. McAleer (incorporated by reference to Exhibit 10.28 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.29 -- Employment Agreement dated August 10, 1999 between Krispy Kreme Doughnut Corporation and Scott A. Livengood (incorporated by reference to Exhibit 10.29 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.30 -- Employment Agreement dated August 10, 1999 between Krispy Kreme Doughnut Corporation and J. Paul Breitbach (incorporated by reference to Exhibit 10.30 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.31 -- Kingsmill Plan (incorporated by reference to Exhibit 10.31 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed with the Commission on February 22, 2000) 10.32 -- 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 (Commission File No. 333-47326), filed with the Commission on October 4, 2000) 10.33 -- Loan Agreement dated December 29, 1999 among Branch Banking and Trust Company, Krispy Kreme Doughnut Corporation, Thornton's Flav-O-Rich Bakery, Inc., Krispy Kreme Distributing Company, Inc., Krispy Kreme Support Operations Company, HD Capital Corporation, HDN Development Corporation and Krispy Kreme Doughnuts, Inc. (incorporated by reference to Exhibit 10.33 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-53284), filed with the Commission on January 18, 2001) 10.34* -- Employment Agreement dated February 1, 2001 between the Registrant and John W. Tate 13* -- Portions of the Registrant's Fiscal 2001 Report to Shareholders
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EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------ ----------------------- 21.1* -- List of subsidiaries 23.1* -- Consent of PricewaterhouseCoopers LLP 24.1* -- Powers of Attorney of certain officers and directors of the Company (included on the signature page of this Form 10-K)
- --------- * Filed herewith. -24- 26 SCHEDULE II Consolidated Valuation and Qualifying Accounts and Reserves
ADDITIONS ADDITIONS CHARGED BALANCE AT CHARGED TO BALANCE AT BEGINNING TO OTHER END RESERVE FOR DOUBTFUL ACCOUNTS OF PERIOD OPERATIONS ACCOUNTS DEDUCTIONS(1) OF PERIOD - ----------------------------- --------- ---------- -------- ------------- --------- For the year ended January 31, 1999 $373,388 $2,101,099 $ -- $1,499,487 $975,000 ======== ========== ==== ========== ======== For the year ended January 30, 2000 $975,000 $832,506 $ -- $483,644 $1,323,862 ======== ========== ==== ========== ======== For the year ended January 28, 2001 $1,323,862 $1,349,000 $ -- $1,371,067 $1,301,795 ======== ========== ==== ========== ========
- -------------------- (1) Amounts represent net write-off of uncollectible receivable balances. -25- 27 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Krispy Kreme Doughnuts, Inc. Our audits of the consolidated financial statements referred to in our report dated March 8, 2001, except as to the last paragraph of Note 1 for which the date is March 19, 2001, appearing in the 2001 Annual Report to Shareholders of Krispy Kreme Doughnuts, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Greensboro, North Carolina March 8, 2001 -26- 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: /s/ Scott A. Livengood ------------------------------ Name: Scott A. Livengood Title: Chairman of the Board, President and Chief Executive Officer Date: April 27, 2001 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Scott A. Livengood and Randy S. Casstevens, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Form 10-K and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Form 10-K and any amendments or supplements hereto, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on April 27, 2001.
SIGNATURE TITLE - --------- ----- /s/ Scott A. Livengood Chairman of the Board of Directors, President and Chief - -------------------------------------------- Executive Officer (Principal Executive Officer) Scott A. Livengood /s/ John N. McAleer Vice Chairman of the Board of Directors and Executive Vice - -------------------------------------------- President, Concept Development John N. McAleer /s/ John W. Tate Chief Financial Officer (Principal Financial and - -------------------------------------------- Accounting Officer) John W. Tate /s/ Frank E. Guthrie Director - -------------------------------------------- Frank E. Guthrie /s/ Mary Davis Holt Director - -------------------------------------------- Mary Davis Holt /s/ William T. Lynch Director - -------------------------------------------- William T. Lynch
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SIGNATURE TITLE - --------- ----- /s/ Joseph A. McAleer, Jr. Director - -------------------------------------------- Joseph A. McAleer, Jr. /s/ Robert L. McCoy Director - -------------------------------------------- Robert L. McCoy /s/ James H. Morgan Director - -------------------------------------------- James H. Morgan /s/ Steven D. Smith Director - -------------------------------------------- Steven D. Smith /s/ Robert L. Strickland Director - -------------------------------------------- Robert L. Strickland /s/ Togo D. West, Jr. Director - -------------------------------------------- Togo D. West, Jr.
-28- EX-10.34 2 g68654ex10-34.txt EMPLOYMENT AGREEMENT DATED FEBRUARY 1, 2001 1 EXHIBIT 10.34 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (THE "AGREEMENT") is made this 1st day of February, 2001, and is effective the 1st day of February, 2001, by and between KRISPY KREME DOUGHNUTS, INC., a North Carolina corporation (the "Company"), and JOHN W. TATE (the "Executive"). RECITAL The Executive is being hired as Chief Financial Officer and President of Krispy Kreme Manufacturing and Distribution, and the parties have negotiated this Agreement in consideration of the Executive's valuable services and leadership. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties do hereby agree as follow: 1. EFFECTIVE DATE. This Agreement shall be effective upon, and from and after, the date set forth above. 2. DEFINITIONS. As used herein, the following terms shall have the following meanings: (a) "Disability" shall mean the Executive becoming disabled and unable to continue his employment with the Company as defined in the Company's then applicable disability policy for the Senior Management of the Company. (b) "Discharge" shall mean the termination by the Company of the Executive's employment during the Period of Employment for any reason other than (i) Good Cause, (ii) death of the Executive, (iii) Disability of the Executive, or (iv) Retirement of the Executive. (c) "Expiration Date" means the date that the Period of Employment (as it may have been extended) expires. (d) "Good Cause" has its meaning as defined in Section 6 hereof. (e) "Period of Employment" shall be for a term of three years beginning February 1, 2001 and ending February 1, 2004; provided, however, that commencing February 1, 2002, the Executive's Period of Employment shall automatically be extended for successive one-year periods each year as of February 1st of each year unless the Company gives Executive written notice of nonextension on or before that date. (f) "Retirement" shall mean a time when the sum of the Executive's age and employment with the Company equals or exceeds 65. 2 (g) "Senior Management" shall mean the senior executive management of the Company currently consisting of the chief executive officer, the president, and the executive vice presidents. (h) "Stock Option Plan" shall mean the Krispy Kreme Doughnut Corporation 1998 Stock Option Plan and/or the Krispy Kreme Doughnuts, Inc. 2000 Stock Incentive Plan. (i) "Termination Date" shall mean: (i) If the Executive's employment is terminated by reason of death, the Executive's date of death; (ii) If the Executive's employment is terminated by reason of Retirement, the date of his Retirement; (iii) If the Executive's employment is terminated by reason of Disability, the date of his Disability; (iv) If the Executive's employment is terminated for Good Cause, the date specified in the written notice of termination given by the Company pursuant to Section 6(a); (v) If the Executive's employment is terminated by reason of a Discharge, the effective date of Discharge; (vi) If the Executive's employment is terminated by reason of non-extension of the Period of Employment, the Expiration Date; and (vii) If the Executive voluntarily terminates his employment as permitted by Section 6(b), the effective date of his termination of employment. 3. EMPLOYMENT; PERIOD OF EMPLOYMENT. The Company hereby employs the Executive, and the Executive hereby accepts employment by the Company, for the Period of Employment, in the position and with the duties and responsibilities set forth in Section 4, upon the terms and subject to the conditions of this Agreement. 4. POSITION, DUTIES AND RESPONSIBILITIES. During the Period of Employment, the Executive shall (a) serve as Chief Financial Officer and President of Krispy Kreme Manufacturing and Distribution or in such other Senior Management position as may be assigned to him by the Board of Directors. The Executive shall be employed hereunder in Forsyth County, North Carolina -2- 3 and he shall not be required to relocate his residence or principal office to any place outside Forsyth County, North Carolina without his consent; and (b) devote his best efforts to the furtherance of the interest of the Company and the performance of his duties hereunder and agrees not to engage in any competition whatsoever, either directly or indirectly, with the Company or any of its subsidiaries or affiliates. The Executive shall be allowed holiday and vacation periods, leaves for periods of illness or incapacity and personal leaves in accordance with the Company's regular practices for members of Senior Management. 5. COMPENSATION, COMPENSATION PLANS AND BENEFITS. During the Period of Employment, the Executive shall be compensated as follows: (a) He shall receive an annual base salary equal to $330,000, with annual increases in accordance with the Company's regular practices for members of Senior Management. In addition, he shall receive certain non-incentive compensation (including automobile allowance). Such compensation shall be paid in accordance with the Company's regular schedule for payment of salaried employees. (b) He shall receive such other bonuses as are afforded the Company's Senior Management and be eligible to participate in all of the Company's executive compensation plans provided to members of Senior Management of the Company from time to time. (c) He shall be entitled to participate in and receive other employee benefits, which may include, but are not limited to, benefits under any life, health, accident, disability, medical, dental and hospitalization insurance plans, use of a Company automobile or an automobile allowance, and other perquisites and benefits, as are provided to members of Senior Management of the Company from time to time. (d) He shall be entitled to be reimbursed for the reasonable and necessary out-of-pocket expenses, including entertainment, travel and similar items, incurred by him in performing his duties hereunder upon presentation of such documentation thereof as the Company may normally and customarily require of the members of Senior Management. (e) The Company agrees to pay the Executive's dues and assessments for membership in either Forsyth Country Club or Oldtown Club, and in the Piedmont Club. 6. TERMINATION OF EMPLOYMENT. During the Period of Employment, Executive's employment may be terminated in the following manner: (a) Termination for Good Cause. (i) The Company may terminate the Executive's employment for Good Cause. Termination of employment shall be deemed to have been for Good Cause if (i) the Executive habitually neglects or refuses to do his duties and fails to cure such neglect within ten (10) days after having received -3- 4 written notice of same from the Company or (ii) the Executive commits (a) acts constituting a felony or (b) acts of gross negligence or willful misconduct to the material detriment of the Company. (ii) Termination by the Company for Good Cause may be made only by written notice of termination from the Company to the Executive that has been specifically approved in advance by the Board of Directors. Such notice shall set forth all acts constituting such neglect or refusal to do duties or gross negligence or willful misconduct as is applicable. (b) Voluntary Termination. The Executive may voluntarily terminate his employment with the Company upon 30 days prior written notice. (c) Termination by Reason of Death, Disability, or Retirement. The employment of the Executive shall be terminated by death, Disability or Retirement of the Executive. 7. EFFECT OF TERMINATION. (a) If the Executive's employment is terminated by reason of death, Retirement or voluntary termination of employment, the Company shall pay the Executive (or his estate in the case of his death) his base salary, non-incentive compensation (including automobile allowance), bonuses and benefits as provided in Section 5 through the Termination Date and (in the case of his death) a death benefit of $5,000. Any payments and benefits due to the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested if the Executive's employment is terminated by reason of death or Retirement. (b) If the Executive's employment is terminated by reason of Disability, the Company shall pay the Executive his base salary, non-incentive compensation, bonuses and benefits for a period of six months following the date of Disability. Thereafter, this Agreement terminates and the Executive shall receive those benefits payable to him under the applicable disability insurance plan provided by the Company. Any payments and benefits due to the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Executive's termination of employment by reason of Disability. (c) In the event of the Executive's Discharge by the Company, -4- 5 (i) the Company shall pay the Executive A. his then current annual base salary and non-incentive compensation (including automobile allowance) and provide the Executive with his then current benefits (as provided in Section 5) through the Expiration Date pursuant to Section 2(e) to the extent permitted by law and unless Executive elects a lump sum payment pursuant to subparagraph (f); and B. within thirty (30) days from the Termination Date (1) a lump sum equal to Executive's then current monthly base salary amount multiplied by the number of months that have elapsed between the month of Discharge and the preceding February, and (2) a lump sum amount equal to the sum of adding three times the Executive's bonus calculated at 50% of his annualized base salary for the then current fiscal year, discounted at the rate of six percent (6%) per annum. The latter payment is full and final satisfaction of all the Company's obligations for bonus and/or other incentive payments. (ii) Any payments and benefits due to executive under the employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Termination Date. (d) In the event of the Company's nonextension of the Employment Period, Executive shall continue to be employed by the Company pursuant to this Agreement through the Expiration Date, and his employment shall be terminated as of the Expiration Date. Then, the following provisions shall apply: (i) within thirty (30) days from the Termination Date, the Company shall pay Executive (1) a lump sum equal to Executive's then current annual base salary, and (2) a lump sum amount equal to three times the Executive's bonus calculated at 50% of his base salary for the then current fiscal year discounted at the rate of six percent (6) per annum. The latter payment is full and final satisfaction of all the company's obligations for bonus and/or other incentive payments. (ii) Any payments and benefits due to Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Expiration Date. It is further provided, however, that within sixty (60) days of the date of notification by the Company to the Executive of -5- 6 its intention not to extend the Period of Employment, the Executive may, at his option, elect to have the non-extension treated as a Discharge with an effective date thirty (30) days after the Executive's notification to the Company of his election. (e) In the event of the Executive's Termination For Cause by the Company, the Company shall pay the Executive his then current base salary and non-incentive compensation (including automobile allowance) and provide the Executive with his then current benefits (as provided in Section 5) through the Termination Date. Any payments and benefits due the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs. (f) In the event the Executive's employment is terminated by reason of Discharge or nonextension of the Employment Period, the Executive may, at his option, elect to receive a lump sum amount equal to the base salary and non-incentive compensation due, discounted at a rate of six percent (6%) per annum. (g) In the event the Executive's employment is terminated by reason of Discharge, the Company shall furnish the Executive, for a period of six (6) months subsequent to the Termination Date, outplacement services, reasonable office space, and secretarial assistance. (h) If any of the payments provided for in this Agreement, together with any other payments which the Executive has the right to receive from the Company or any corporation which is a member of an "affiliated group" as defined in Section 1504(a) of the Code (without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute an "excess parachute payment" as defined in Section 280G(b)(1) of the Code as it presently exists, such that any portion of such payments are subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalty with respect to such excise tax (such excise tax, together with any such interest or penalty, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (an "Excise Tax Restoration Payment"). The amount of the Excise Tax Restoration Payment shall be the amount necessary to fund the payment by the Executive of any Excise Tax on the total payments, as well as all income taxes imposed on the Excise Tax Restoration Payment, any excise tax imposed on the Excise Tax Restoration Payment, and any interest or penalties imposed with respect to taxes on the Excise Tax Restoration Payment or any Excise Tax. 8. TERMINATION FOR GOOD REASON. In the event of a "Change in Control" of the Company (as hereinafter defined), the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following events during the twelve (12) months immediately preceding or following the effective date of a Change in Control of the Company: -6- 7 (a) a material change in the scope of the Executive's assigned duties and responsibilities from those in effect immediately prior to a Change in Control of the Company or the assignment of duties or responsibilities that are inconsistent with the Executive's status in the Company; (b) a reduction by the Company in the Executive's base salary or incentive compensation as in effect on the date of a Change in Control; (c) the Company's requirement that the Executive be based anywhere other than the Company's office in Forsyth County, North Carolina, at which he was based prior to the Change in Control of the Company; or (d) the failure by the Company to continue to provide the Executive with benefits substantially similar to those specified in Section 5 of this Agreement. For purposes of Section 8(c) above, the Company shall be deemed to have required the Executive to be based somewhere other than the Company's office at which he was based prior to the Change in Control if the Executive is required to spend more than two days per week on a regular basis at a business location not within 50 miles of the Executive's primary business location as of the effective date of a Change in Control. If the Executive terminates his employment for Good Reason, this shall be treated as the Discharge of the Executive by the Company. Accordingly, the Company shall pay the amounts and provide the benefits to the Executive specified in Section 7 above, applicable in the event of Discharge. The Executive shall not be obligated in any way to mitigate the Company's obligations to him under this Section 8 and any amounts earned by the Executive subsequent to his termination of employment shall not serve as an offset to the payments due him by the Company under this Section. For purposes of this Agreement, a "Change in Control" means the date on which the earlier of the following events occur: (a) the acquisition by any entity, person or group of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 30% of the outstanding capital stock of the Company entitled to vote for the election of directors ("Voting Stock"); (b) the merger or consolidation of the Company with one or more corporations as a result of which the holders of outstanding Voting Stock of the Company immediately prior to such a merger or consolidation hold less than 60% of the Voting Stock of the surviving or resulting corporation; (c) the transfer of substantially all of the property of the Company other than to an entity of which the Company owns at least 80% of the Voting Stock; or -7- 8 (d) the election to the Board of Directors of the Company of three or more directors during any twelve (12) month period without the recommendation or approval of the incumbent Board of Directors of the Company. Upon a Change in Control, as defined above in this Section 8, all outstanding stock options shall become 100% vested and immediately exercisable, regardless of whether the Executive terminates employment or not. If the Executive terminates employment with Good Reason within twelve (12) months of a Change in Control, to the extent permitted by law, the Company shall continue the medical, disability and life insurance benefits which Executive was receiving at the time of termination for a period of 36 months after termination of employment or, if earlier, until Executive has commenced employment elsewhere and becomes eligible for participation in the medical, disability and life insurance programs, if any, of his successor employer. Coverage under Employer's medical, disability and life insurance programs shall cease with respect to each such program as Executive becomes eligible for the medical, disability and life insurance programs, if any, of his successor employer. 9. CONFIDENTIALITY. During the Period of Employment and following termination for any reason, the Executive covenants and agrees that he will not divulge any trade secrets or other confidential information pertaining to the business of the Company. It is understood that the term "trade secrets" as used in this Agreement is deemed to include any information which gives the Company a material and substantial advantage over its competitors but that such term does not include knowledge, skills or information which is otherwise publicly disclosed. 10. NON-COMPETITION. In the event of Termination For Good Cause, or Voluntary Termination of the Executive, the Executive agrees that for a period of two years following the Termination Date, Executive shall not directly or indirectly, personally or with other employees, agents or otherwise, or on behalf of any other person, firm, or corporation, engage in the business of making and selling doughnuts and complementary products (a) within a 100 mile radius of any place of business of the Company (including franchised operations) or of any place where the Company (or one of its franchised operations) has done business since the Effective Date of this Agreement, (b) in any county where the Company is doing business or has done business since the Effective Date, or (c) in any state where the Company is doing business or has done business since the Effective Date. Notwithstanding the above, ownership by Executive of an interest in any licensed franchisee of the Company shall not be deemed to be in violation of this Section 10. In the event of an actual or threatened breach of this -8- 9 provision, the Company shall be entitled to an injunction restraining Executive from such action and the Company shall not be prohibited in obtaining such equitable relief or from pursuing any other available remedies for such breach or threatened breach, including recovery of damages from Executive. 11. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, their heirs, personal representatives, successors and assigns. (b) The Company shall require any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used herein, "Company" shall mean the Company as defined in the preamble to this Agreement and any successor to its business or assets which executes and delivers (or is required to execute and deliver) the agreement provided for in this Section 11(b), or which otherwise becomes bound by the terms and provisions of this Agreement or by operation of law. 12. ARBITRATION. Except as hereinafter provided, any controversy or claim arising out of or relating to this Agreement of any alleged breach thereof shall be settled by arbitration in the City of Winston-Salem, North Carolina in accordance with the rules then obtaining of the American Arbitration Association and any judgment upon any award, which may include an award of damages, may be entered in the highest State or Federal court having jurisdiction. Nothing contained herein shall in any way deprive the Company of its claim to obtain an injunction or other equitable relief arising out of the Executive's breach of the provisions of Paragraphs 9 and 10 of this Agreement. In the event of the termination of Executive's employment, Executive's sole remedy shall be arbitration as herein provided and any award of damages shall be limited to recovery of lost compensation and benefits provided for in this Agreement. 13. NOTICES. For the purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: John W. Tate 161 Wing Haven Circle Winston-Salem, NC 27106 IF TO THE COMPANY: Krispy Kreme Doughnut Corporation P.O. Box 83 Winston-Salem, NC 27102-0083 (for mail) -9- 10 370 Knollwood Street Suite 500 Winston-Salem, NC 27103 (for delivery) Attn: Randy S. Casstevens, Corporate Secretary 14. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Carolina. 15. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of other provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 16. SEPARABILITY. The invalidity or lack of enforceability of a provision of this Agreement shall not affect the validity of any other provision hereof, which shall remain in full force and effect. 17. WITHHOLDING OF TAXES. The Company may withhold from any benefits payable under this Agreement all federal, state and other taxes as shall be required pursuant to any law or governmental regulation or ruling. 18. SURVIVAL. The provisions of Sections 9 and 10 of the Agreement shall survive the termination of this Agreement and shall continue for the terms set forth in Sections 9 and 10. 19. CAPTIONS. Captions to the sections of this Agreement are inserted solely for the convenience of the parties, are not a part of this Agreement, and in no way define, limit, extend or describe the scope hereof or the intent of any of the provisions. 20. NON-ASSIGNABILITY. This Agreement is personal in nature and neither and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by will or by the laws of descent or distribution. In the event of any attempted assignment or transfer contrary to this section, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and delivered under its seal pursuant to the specific authorization of its board of directors and the Executive has hereunto set his hand and seal on the day and year first above written. -10- 11 KRISPY KREME DOUGHNUTS, INC. By: -------------------------------------------- Scott A. Livengood, CEO and President [CORPORATE SEAL] EXECUTIVE (Seal) ------------------------------------------------ John W. Tate -11- EX-13 3 g68654ex13.txt PORTIONS OF THE FISCAL 2001 ANNUAL REPORT 1 EXHIBIT 13 SELECTED FINANCIAL DATA The following table shows selected financial data for Krispy Kreme. The selected historical statement of operations data for each of the years ended, and the selected historical balance sheet data as of February 2, 1997, February 1, 1998, January 31, 1999, January 30, 2000 and January 28, 2001 have been derived from our audited consolidated financial statements. Please note that our fiscal year ended February 2, 1997 contained 53 weeks. Systemwide sales include the sales by both our company and franchised stores and exclude the sales by our KKM&D business segment. Our consolidated financial statements appearing elsewhere in this annual report exclude franchised store sales, include the results of the area developer in Northern California in which Krispy Kreme has a majority ownership interest and include royalties and fees received from our franchisees. You should read the following selected financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and accompanying notes and the other financial data included elsewhere herein. All references to per share amounts and any other reference to shares in "Selected Financial Data," unless otherwise noted, have been adjusted to reflect a two-for-one stock split paid in the form of a stock dividend on March 19, 2001 to shareholders of record as of March 5, 2001.
IN THOUSANDS, EXCEPT PER SHARE DATA AND STORE NUMBERS - ------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED FEB. 2, 1997 FEB. 1, 1998 JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------ ------------ ------------- ------------- ------------- STATEMENT OF OPERATIONS DATA: Total revenues $ 132,614 $ 158,743 $ 180,880 $ 220,243 $ 300,715 Operating expenses 116,658 140,207 159,941 190,003 250,690 General and administrative expenses 7,630 9,530 10,897 14,856 20,061 Depreciation and amortization expenses 3,189 3,586 4,278 4,546 6,457 Provision for restructuring -- -- 9,466 -- -- --------- --------- --------- --------- --------- Income (loss) from operations 5,137 5,420 (3,702) 10,838 23,507 Interest expense (income), net, and other 1,091 895 1,577 1,232 (1,698) Equity loss in joint ventures -- -- -- -- 706 Minority interest -- -- -- -- 716 --------- --------- --------- --------- --------- Income (loss) before income taxes 4,046 4,525 (5,279) 9,606 23,783 Provision (benefit) for income taxes 1,619 1,811 (2,112) 3,650 9,058 --------- --------- --------- --------- --------- Net income (loss) $ 2,427 $ 2,714 $ (3,167) $ 5,956 $ 14,725 ========== ========= ========= ========= ========= Net income (loss) per share: Basic $ .17 $ .19 $ (.19) $ .32 $ .60 Diluted .17 .19 (.19) .30 .55 Shares used in calculation of net income (loss) per share: Basic 14,568 14,568 16,498 18,680 24,592 Diluted 14,568 14,568 16,498 19,640 26,828 Cash dividends declared per common share $ .08 $ .08 $ .08 $ -- $ -- OPERATING DATA (UNAUDITED): Systemwide sales $ 167,592 $ 203,439 $ 240,316 $ 318,854 $ 448,129 Number of stores at end of period: Company 61 58 61 58 63 Franchised 55 62 70 86 111 --------- --------- --------- --------- --------- Systemwide 116 120 131 144 174 --------- --------- --------- --------- --------- Average weekly sales per store: Company $ 39 $ 42 $ 47 $ 54 $ 69 Franchised 22 23 28 38 43 BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 10,148 $ 9,151 $ 8,387 $ 11,452 $ 29,443 Total assets 78,005 81,463 93,312 104,958 171,493 Long-term debt, including current maturities 20,187 20,870 21,020 22,902 -- Total shareholders' equity 36,516 38,265 42,247 47,755 125,679
17 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results should be read together with the financial statements and the accompanying notes. This annual report contains statements about future events and expectations that constitute forward-looking statements. Forward-looking statements are based on management's beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to management. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statement. Factors that could contribute to these differences include, but are not limited to: the Company's ability to continue and manage growth; delays in store openings; quality of franchise store operations; price and availability of raw materials needed to produce doughnut mixes and other ingredients; changes in customer preferences and perceptions; risks associated with competition; risks associated with fluctuations in operating and quarterly results; compliance with government regulations; and other factors discussed in more detail under "Risk Factors" in the Company's Prospectus dated January 30, 2001 and filed with the Securities and Exchange Commission. The words "believe," "may," "will," "should," "anticipate," "estimate," "expect," "intend," "objective," "seek," "strive" or similar words, or the negatives of these words, identify forward-looking statements. The Company qualifies any forward-looking statements entirely by these cautionary factors. All references to per share amounts and any other reference to shares in "Management's Discussion and Analysis of Financial Condition and Results of Operations," unless otherwise noted, have been adjusted to reflect a two-for-one stock split paid on March 19, 2001 to shareholders of record as of March 5, 2001. COMPANY OVERVIEW AND INDUSTRY OUTLOOK Our principal business, which began in 1937, is owning and franchising Krispy Kreme doughnut stores where we make and sell over 20 varieties of premium quality doughnuts, including our Hot Original Glazed. Each of our stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Consequently, each store has significant fixed or semi-fixed costs, and margins and profitability are significantly impacted by doughnut production volume and sales. Our doughnut stores are versatile in that most can support multiple sales channels to more fully utilize production capacity. These sales channels are comprised of: - ON-PREMISES SALES. Sales to customers visiting our stores, including the drive-through windows, along with discounted sales to community organizations that in turn sell our products for fundraising purposes. - OFF-PREMISES SALES. Daily sales of fresh doughnuts on a branded, unbranded and private label basis to convenience and grocery stores and select co-branding customers. Doughnuts are sold to these customers on trays for display and sale in glass-enclosed cases and in packages for display and sale on both stand-alone display units and on our customers' shelves. "Branded" refers to products sold bearing the Krispy Kreme brand name and is the primary way we are expanding our off- premises sales business. "Unbranded" products are sold unpackaged from the retailer's display case. "Private label" products carry the retailer's brand name or some other non-Krispy Kreme brand and is not a significant portion of our business. In addition to our retail stores, we are vertically integrated. Our Krispy Kreme Manufacturing and Distribution business unit, KKM&D, formerly known as our Support Operations business unit, produces doughnut mixes and manufactures our doughnutmaking equipment, which all of our stores are required to purchase. Additionally, this business unit currently operates two distribution centers that provide Krispy Kreme stores with essentially all supplies for the critical areas of their business. This business unit is volume-driven, and its economics are enhanced by the opening of new stores. Our vertical integration allows us to: - Maintain the consistency and quality of our products throughout our system - Utilize volume buying power which helps lower the cost of supplies to each of our stores - Enhance our profitability We expect doughnut industry sales to continue growing. We believe growth in the fragmented doughnut market will be aided by a variety of factors, including a shift from food consumed at home to food consumed away from home and increased snack food consumption. We intend to expand our concept primarily through opening new franchise stores in territories across the continental United States and Canada. We also have entered and intend to enter into additional joint ventures with some of our franchisees. As of January 28, 2001, there were a total of 174 Krispy Kreme stores nationwide, consisting of 63 company and 111 franchised stores. In fiscal 2002, we anticipate opening approximately 36 new stores under existing agreements, the majority of which are expected to be franchise stores. Our franchisees, including the area developer in Northern California in which we have a majority ownership interest, are contractually obligated to open over 250 new stores in the period fiscal 2002 through fiscal 2006. As we expand the Krispy Kreme concept, we will incur infrastructure costs in the form of additional personnel to support the expansion, and additional facilities costs to provide mixes, equipment and other items necessary to operate the various new stores. In the course of building this infrastructure, we may incur unplanned costs which could negatively impact our operating results. 18 3 RESULTS OF OPERATIONS In order to facilitate an understanding of the results of operations for each period presented, we have included a general overview along with an analysis of business segment activities. In addition to this analysis, refer to Note 2, "Nature of Business and Significant Accounting Policies," in our Consolidated Financial Statements. A guide to the discussion for each period is presented below. OVERVIEW. Outlines information on total systemwide sales and systemwide comparable store sales. Systemwide sales includes the sales of both our company and franchised stores and excludes the sales and revenues of our KKM&D and Franchise Operations business segments. Our consolidated financial statements include sales of our company stores, including the sales of any consolidated joint venture stores, outside sales of our KKM&D business segment and royalties and fees received from our franchisees; these statements exclude the sales of our franchised stores. We believe systemwide sales data is significant because it shows the overall penetration of our brand, consumer demand for our products and the correlation between systemwide sales and our total revenues. A store is added to our comparable store base in its nineteenth month of operation. A summary discussion of our consolidated results is also presented. SEGMENT RESULTS. In accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," we have three reportable segments. A description of each of the segments follows. - COMPANY STORE OPERATIONS. Represents the results of our company stores and consolidated joint venture stores. Company stores make and sell doughnuts and complementary products through the sales channels discussed above. Expenses for this business unit include store level expenses along with direct general and administrative expenses. - FRANCHISE OPERATIONS. Represents the results of our franchise program. We have two franchise programs: (1) the associate program, which is our original franchising program developed in the 1940s, and (2) the area developer program, which was developed in the mid-1990s. Associates pay royalties of 3.0% of on-premises sales and 1.0% of all other sales, with the exception of private label sales, for which they pay no royalties. Area developers pay royalties of 4.5% of all sales, contribute 1.0% of all sales to our national advertising fund and pay franchise fees ranging from $20,000 to $40,000 per store. Expenses for this business segment include costs incurred to recruit new franchisees and to open, monitor and aid in the performance of these stores and direct general and administrative expenses. - KKM&D. Represents the results of our KKM&D business unit, located in Winston-Salem, North Carolina. This business unit buys and processes ingredients to produce doughnut mixes and manufactures doughnutmaking equipment that all of our stores are required to purchase. Additionally, this business unit purchases and sells essentially all supplies necessary to operate a Krispy Kreme store, including all food ingredients, juices, Krispy Kreme coffee, signage, display cases, uniforms and other items. Generally, shipments are made to each of our stores on a weekly basis by common carrier. All intercompany transactions between KKM&D and Company Store Operations have been eliminated in consolidation. Expenses for this business unit include all expenses incurred at the manufacturing and distribution level along with direct general and administrative expenses. OTHER. Includes a discussion of significant line items not discussed in the overview or segment discussions, including general and administrative expenses, depreciation and amortization expenses, provision for store closings and restructuring, interest expense (income), net, equity income (loss) in joint ventures, minority interest in consolidated joint ventures and the provision for income taxes. 19 4 OUR FISCAL YEAR IS BASED ON A 52 OR 53 WEEK YEAR. THE FISCAL YEAR ENDS ON THE SUNDAY CLOSEST TO THE LAST DAY IN JANUARY. THE TABLE BELOW SHOWS OUR OPERATING RESULTS FOR FISCAL 1999 (52 WEEKS ENDED JANUARY 31, 1999), FISCAL 2000 (52 WEEKS ENDED JANUARY 30, 2000) AND FISCAL 2001 (52 WEEKS ENDED JANUARY 28, 2001) EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES. CERTAIN OPERATING DATA ARE ALSO SHOWN FOR THE SAME PERIODS.
Dollars In Thousands --------------------------------------------- YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ------------- STATEMENT OF OPERATIONS DATA: Total revenues 100.0% 100.0% 100.0% Operating expenses 88.4 86.3 83.4 General and administrative expenses 6.0 6.7 6.7 Depreciation and amortization expenses 2.4 2.1 2.1 Provision for restructuring 5.2 -- -- -------- -------- -------- Income (loss) from operations (2.0) 4.9 7.8 Interest expense (income), net, and other 1.0 0.5 (0.1) -------- -------- -------- Income (loss) before income taxes (3.0) 4.4 7.9 Provision (benefit) for income taxes (1.2) 1.7 3.0 -------- -------- -------- Net income (loss) (1.8)% 2.7% 4.9% -------- -------- -------- OPERATING DATA: Systemwide sales $240,316 $318,854 $448,129 Increase in comparable store sales: Company 11.1% 12.0% 22.9% Systemwide 9.7% 14.1% 17.1%
THE TABLE BELOW SHOWS BUSINESS SEGMENT REVENUES AND OPERATING EXPENSES EXPRESSED IN DOLLARS. KKM&D REVENUES ARE SHOWN NET OF INTERCOMPANY SALES ELIMINATIONS. SEE NOTE 14, "BUSINESS SEGMENT INFORMATION," IN OUR CONSOLIDATED FINANCIAL STATEMENTS. OPERATING EXPENSES EXCLUDE DEPRECIATION AND AMORTIZATION EXPENSES AND INDIRECT (UNALLOCATED) GENERAL AND ADMINISTRATIVE EXPENSES. DIRECT GENERAL AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN OPERATING EXPENSES.
In Thousands --------------------------------------------- YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ------------- REVENUES BY BUSINESS SEGMENT: Company Store Operations $145,251 $164,230 $213,677 Franchise Operations 3,236 5,529 9,445 KKM&D 32,393 50,484 77,593 -------- -------- -------- Total revenues $180,880 $220,243 $300,715 -------- -------- -------- OPERATING EXPENSES BY BUSINESS SEGMENT: Company Store Operations $129,349 $142,925 $181,470 Franchise Operations 2,731 4,012 3,642 KKM&D 27,861 43,066 65,578 -------- -------- -------- Total operating expenses $159,941 $190,003 $250,690 -------- -------- --------
THE FOLLOWING TABLE SHOWS BUSINESS SEGMENT REVENUES EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES AND BUSINESS SEGMENT OPERATING EXPENSES EXPRESSED AS A PERCENTAGE OF APPLICABLE BUSINESS SEGMENT REVENUES. OPERATING EXPENSES EXCLUDE DEPRECIATION AND AMORTIZATION EXPENSES AND INDIRECT (UNALLOCATED) GENERAL AND ADMINISTRATIVE EXPENSES. DIRECT GENERAL AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN OPERATING EXPENSES.
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ------------- REVENUES BY BUSINESS SEGMENT: Company Store Operations 80.3% 74.6% 71.1% Franchise Operations 1.8 2.5 3.1 KKM&D 17.9 22.9 25.8 ----- ----- ----- Total revenues 100.0% 100.0% 100.0% ----- ----- ----- OPERATING EXPENSES BY BUSINESS SEGMENT: Company Store Operations 89.1% 87.0% 84.9% Franchise Operations 84.4% 72.6% 38.6% KKM&D 86.0% 85.3% 84.5% ----- ----- ----- Total operating expenses 88.4% 86.3% 83.4% ----- ----- -----
20 5 ADDITIONALLY, DATA ON STORE OPENING ACTIVITY ARE SHOWN BELOW. TRANSFERRED STORES REPRESENT STORES SOLD BETWEEN THE COMPANY AND FRANCHISEES.
YEAR ENDED COMPANY FRANCHISED TOTAL - ---------- ------- ---------- ----- YEAR ENDED JANUARY 31, 1999 Beginning count 58 62 120 Opened -- 14 14 Closed -- (3) (3) Transferred 3 (3) -- --- --- --- Ending count 61 70 131 --- --- --- YEAR ENDED JANUARY 30, 2000 Beginning count 61 70 131 Opened 2 19 21 Closed (5) (3) (8) --- --- --- Ending count 58 86 144 --- --- --- YEAR ENDED JANUARY 28, 2001 Beginning count 58 86 144 Opened 8 28 36 Closed (3) (3) (6) --- --- --- Ending count 63 111 174 --- --- ---
Company stores as of January 28, 2001 included five stores in Northern California operated by an area developer joint venture in which Krispy Kreme has a majority ownership interest. Store counts include retail stores and commissaries, which are production facilities used to serve off-premises customers. YEAR ENDED JANUARY 28, 2001 COMPARED WITH YEAR ENDED JANUARY 30, 2000 OVERVIEW Systemwide sales for the fiscal year increased 40.5% to $448.1 million compared to $318.9 million in the prior year. The increase was driven by an increase of 30.1% in company store sales, which increased to $213.7 million, and an increase of 51.6% in franchise store sales, which increased to $234.4 million. During fiscal 2001, the Company opened 28 franchise stores, four stores in Northern California, one commissary in Northern California, two company stores and one commissary in Nashville, Tennessee. Three company stores and three franchise stores were closed, bringing the total number of stores to 174 at the end of the fiscal 2001. We believe increased brand awareness and increased off-premises sales contributed significantly to the 17.1% increase in our systemwide comparable store sales. Total company revenues increased 36.5% to $300.7 million for the fiscal year compared with $220.2 million for the prior fiscal year. This increase was comprised of a Company Store Operations revenue increase of 30.1% to $213.7 million, a Franchise Operations revenue increase of 70.8% to $9.4 million and a KKM&D revenue increase, excluding inter-company sales, of 53.7% to $77.6 million. Net income for fiscal 2001 was $14.7 million versus $6.0 million in the prior year, representing an increase of 147.2%. Diluted earnings per share were $0.55, an increase of 80.3% over the prior year. COMPANY STORE OPERATIONS COMPANY STORE OPERATIONS REVENUES. Company Store Operations revenues increased to $213.7 million in fiscal 2001 from $164.2 million in fiscal 2000, an increase of 30.1%. Comparable store sales increased by 22.9%. The revenue growth was primarily due to strong growth in sales from both our on-premises and off-premises sales channels. Total on-premises sales increased approximately $18.0 million and total off-premises sales increased approximately $31.5 million. On-premises sales grew principally as a result of more customer visits and an increase in brand awareness generated from our national store expansion, as well as a 6% retail price increase which was implemented during the first quarter of fiscal 2001. In addition, Company store on-premises sales were positively impacted by the sales of the five stores in the Northern California market. The Company has a 59% interest in the Northern California market, and as a result, it is consolidated with the Company Store Operations sales and results. Our company stores continued to benefit from both an increase in the number of outlets we serve via our off-premises sales programs and from efforts such as the route management computer assisted ordering system to increase sales per off-premises outlet. 21 6 COMPANY STORE OPERATIONS OPERATING EXPENSES. Company Store Operations operating expenses increased to $181.5 million in fiscal 2001 from $142.9 million in fiscal 2000, an increase of 27.0%. Company Store operating expenses as a percentage of Company Store Operations revenues were 84.9% in fiscal 2001 compared with 87.0% in fiscal 2000. The decrease in Company Store Operations as a percentage of revenues was due to increased operating efficiencies resulting from increased sales levels at our stores. The margin on off-premises sales benefited from the implementation of a new route management system during the second quarter of fiscal 2001. These margin improvements were partially offset by the impact of the stores closed for remodeling and rebuilding. During the period when some of the stores were closed for remodeling or rebuilding, we lost the higher margin on-premises sales, which in turn negatively impacted our margins. We constantly evaluate our store base, not only with respect to our stores' financial and operational performance, but also with respect to alignment with our brand image and how well each store meets our customers' needs. As a result of this review, we make provisions to cover closing or impairment costs for underperforming stores, and for older stores that need to be closed and relocated. We recorded a provision in the amount of $318,000 in operating expenses in fiscal 2001 to cover costs associated with a store that was damaged by fire. After evaluating the location, we decided not to reopen the store. The provision is intended to cover estimated lease liabilities, the net book value of assets disposed of and other miscellaneous costs associated with this decision. In fiscal 2000, we recorded a charge of $1.1 million to cover the closing of two older stores that were replaced on their existing sites in fiscal 2001. FRANCHISE OPERATIONS FRANCHISE OPERATIONS REVENUES. Franchise Operations revenues increased to $9.4 million for fiscal 2001 from $5.5 million in fiscal 2000, an increase of 70.8%. The growth in revenue was primarily due to the opening of 28 franchise stores during fiscal 2001 and the impact of those franchise stores opened in fiscal 2000 being open for the entire year in fiscal 2001. FRANCHISE OPERATIONS OPERATING EXPENSES. Franchise Operations operating expenses decreased to $3.6 million in fiscal 2001 from $4.0 million in the prior year. As a percentage of Franchise Operations revenues, franchise operating expenses were 38.6% in fiscal 2001 compared with 72.6% in fiscal 2000. Consistent with the prior year, the decrease in Franchise Operations operating expenses as a percentage of revenues reflects the continued growth in our franchise system sales with a minimal decrease in related operating expenses. In prior years, we hired and trained personnel to oversee the expansion of our franchise concept across the country. In addition to our management training program, they received field training primarily consisting of working with and learning from existing personnel who were qualified to oversee store operations. As our personnel successfully completed their training, we have been able to open additional stores without incurring significant incremental personnel costs. Additionally, the amount of support that we provide for each Area Developer group's store openings decline with each successive opening. As some of our individual Area Developer groups are now operating multiple stores, our costs associated with their additional store openings have declined. KKM&D KKM&D REVENUES. KKM&D sales to franchise stores increased to $77.6 million in fiscal 2001 from $50.5 million in fiscal 2000, an increase of 53.7%. The primary reason for the increase in revenues was the opening of 28 new franchise stores in fiscal 2001, the impact of franchise stores opened in fiscal 2000 and comparable store sales increases. Increased doughnut sales through both the on-premises and off-premises sales channels by franchise stores translated into increased revenues for KKM&D from sales of mixes, sugar, shortening and other supplies. Also, each of these new stores is required to purchase doughnutmaking equipment and other peripheral equipment from KKM&D, thereby enhancing KKM&D sales. KKM&D OPERATING EXPENSES. KKM&D operating expenses increased to $65.6 million in fiscal 2001 from $43.1 million in fiscal 2000, an increase of 52.3%. KKM&D operating expenses as a percentage of KKM&D revenues were 84.5% in fiscal 2001 compared with 85.3% in fiscal 2000. The decrease in KKM&D operating expenses as a percentage of revenues was due to increased capacity utilization and resulting economies of scale of the mix and equipment manufacturing operations attributable to the increased volume in the facilities. Continued stability in our key ingredient costs also contributed. The effect of these factors was offset in part by startup costs associated with our California distribution center. OTHER GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $20.1 million in fiscal 2001 from $14.9 million in the prior year, an increase of 35.0%. General and administrative expenses as a percentage of total revenues for the fiscal year were 6.7% compared with 6.7% in fiscal 2000. The dollar growth in general and administrative expense was due to increased personnel and related benefit and travel costs needed to support our national expansion. 22 7 DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased to $6.5 million in fiscal 2001 from $4.5 million in fiscal 2000, an increase of 42.0%. Depreciation and amortization expenses as a percentage of total revenues for fiscal 2001 were 2.1% compared with 2.1% in fiscal 2000. The dollar growth in depreciation and amortization expenses increased due to capital asset additions, as well as the accelerated depreciation expense as a result of the shortening of useful lives related to two anticipated store relocations. The amount of accelerated depreciation expense recognized was approximately $690,000. INTEREST INCOME. Interest income increased in fiscal 2001 as a result of the investment of proceeds from our initial public offering. Proceeds from the public offering were received in mid-April 2000. After retiring our debt, we made investments in government securities, short-term commercial paper instruments and corporate bonds. These amounted to approximately $36.0 million at January 28, 2001 and resulted in interest income of $2.3 million for fiscal 2001. There were no investments of this nature during fiscal 2000. INTEREST EXPENSE. Interest expense of $607,000 for fiscal 2001 decreased 60.2% from $1.5 million in fiscal 2000. This decrease is a direct result of paying off substantially all of our debt in mid-April 2000 after the completion of our initial public offering. EQUITY LOSS IN JOINT VENTURES. These expenses consist of our share of operating results associated with our investments in unconsolidated joint ventures to develop and operate Krispy Kreme stores. MINORITY INTEREST. These expenses represent the elimination of the minority interest in a consolidated joint venture to develop and operate Krispy Kreme stores. PROVISION FOR INCOME TAXES. The provision for income taxes is based on the effective tax rate applied to the respective period's pre-tax income. The provision for income taxes is $9.1 million for fiscal 2001 representing a 38.1% effective rate compared to $3.7 million, or 38.0%, in fiscal 2000. YEAR ENDED JANUARY 30, 2000 COMPARED WITH YEAR ENDED JANUARY 31, 1999 OVERVIEW Systemwide sales increased to $318.9 million in fiscal 2000 from $240.3 million in fiscal 1999, an increase of 32.7%. This increase was comprised of company store sales increases of $19.0 million and franchise store sales increases of $59.6 million. Systemwide comparable store sales increased 14.1%. The overall systemwide sales increase was driven by comparable store sales improvement and the opening of new stores. Total company revenues increased to $220.2 million in fiscal 2000 from $180.9 million in fiscal 1999, an increase of 21.7%. This increase was comprised of Company Store Operations revenues increases of $19.0 million, Franchise Operations revenues increases of $2.3 million and KKM&D revenues increases of $18.0 million. Net income increased to $6.0 million in fiscal 2000 from a loss of $3.2 million in fiscal 1999. Fiscal 1999 included a provision for restructuring and store closings of $9.5 million. Absent this provision, net income in fiscal 2000 compared to fiscal 1999 would have been $6.0 million, or 2.7% of total revenues, versus $2.5 million, or 1.4% of total revenues. COMPANY STORE OPERATIONS COMPANY STORE OPERATIONS REVENUES. Company Store Operations revenues increased to $164.2 million in fiscal 2000 from $145.3 million in fiscal 1999, an increase of 13.1%. Comparable store sales increased by 12.0%. The revenue growth was primarily due to strong growth in sales from both our on-premises and off-premises sales channels. On-premises sales increased approximately $3.6 million and off-premises sales increased approximately $15.3 million. On-premises sales grew principally as a result of more customer visits and an increase in brand awareness generated by national publicity and our national store expansion. Our company stores continued to benefit from an increase in the number of stores we serve via our off-premises sales programs. The revenue increase in off-premises sales was due primarily to the addition of new convenience store outlets. COMPANY STORE OPERATIONS OPERATING EXPENSES. Company Store Operations operating expenses increased to $142.9 million in fiscal 2000 from $129.3 million in fiscal 1999, an increase of 10.5%. Company Store Operations operating expenses as a percentage of Company Store Operations revenues were 87.0% in fiscal 2000 compared with 89.1% in fiscal 1999. The decrease in Company Store Operations operating expenses as a percentage of revenues was due to increased operating efficiencies resulting from increased sales levels at our stores. These additional sales have utilized excess production capacity, thereby enhancing the stores' profitability. We constantly evaluate our store base, not only with respect to our stores' financial and operational performance, but also with respect to the brand image portrayed by each store and how well each store meets our customers' needs. As a result of this review, we make provisions to cover closing or impairment costs for stores that perform poorly, and for older stores that need to be closed and relocated. In fiscal 2000, we recorded a provision of $1.1 million to cover the closing of two older stores that were replaced on their existing sites in fiscal 2001. In fiscal 1999, we recorded a charge of $2.3 million as follows: $417,000 related to the write-off of unamortized leasehold improvements for two stores which were closed in the first quarter of fiscal 2000; $283,000 in remaining lease costs on a potential store site that will not be used; and $1.6 million related to the write-down of building and equipment of a facility that will remain open but whose carrying value was determined not to be fully recoverable. 23 8 FRANCHISE OPERATIONS FRANCHISE OPERATIONS REVENUES. Franchise Operations revenues increased to $5.5 million in fiscal 2000 from $3.2 million in fiscal 1999, an increase of 70.9%. The growth in revenue was primarily due to the opening of 19 franchise stores in fiscal 2000 and the impact of 14 franchise stores opened in fiscal 1999 being open for the full year in fiscal 2000. Many of these stores have had company record-setting opening week on-premises sales levels, and their on-premises sales have remained strong in the months following their openings. FRANCHISE OPERATIONS OPERATING EXPENSES. Franchise Operations operating expenses increased to $4.0 million in fiscal 2000 from $2.7 million in fiscal 1999, an increase of 46.9%. Franchise Operations operating expenses as a percentage of Franchise Operations revenues were 72.6% in fiscal 2000 compared with 84.4% in fiscal 1999. The decrease in Franchise Operations operating expenses as a percentage of revenues was due to capitalizing upon the infrastructure we have built in preparing for our expansion. In prior years, we hired and trained personnel to oversee the expansion of our concept across the country. In addition to our management training program, they received field training primarily consisting of working with and learning from existing personnel who were qualified to oversee store operations. As these personnel have successfully completed their training, we have been able to open additional stores without incurring significant incremental personnel costs. KKM&D KKM&D REVENUES. KKM&D sales to franchise stores increased to $50.5 million in fiscal 2000 from $32.4 million in fiscal 1999, an increase of 55.8%. The primary reason for the increase in revenues was the opening of new franchise stores in fiscal 2000, the full-year impact of stores opened in fiscal 1999 and comparable store sales increases. Increased doughnut sales through both the on-premises and off-premises sales channels by franchise stores translated into increased revenues for KKM&D from sales of mixes, sugar, shortening and other supplies. Also, each of these new stores was required to purchase doughnutmaking equipment and other peripheral equipment from KKM&D, thereby enhancing KKM&D sales. An increase in doughnutmaking equipment prices of approximately 20.0% also contributed. KKM&D OPERATING EXPENSES. KKM&D operating expenses increased to $43.1 million in fiscal 2000 from $27.9 million in fiscal 1999, an increase of 54.6%. KKM&D operating expenses as a percentage of KKM&D revenues were 85.3% in fiscal 2000 compared with 86.0% in fiscal 1999. The decrease in KKM&D operating expenses as a percentage of revenues was due to the increased capacity utilization and resulting economies of scale of the mix and equipment manufacturing operations attributable to the increased volume in the facilities. Favorable commodities prices also contributed. OTHER GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $14.9 million in fiscal 2000 from $10.9 million in fiscal 1999, an increase of 36.3%. General and administrative expenses as a percentage of total revenues were 6.7% in fiscal 2000 compared with 6.0% in fiscal 1999. The primary reason for the increase in these expenses was our continued investment in infrastructure to support our expansion. The investment in infrastructure consisted primarily of the hiring of new personnel in corporate support departments. Costs incurred in fiscal 2000 for these personnel, including salaries, benefits and the implementation of our stock bonus plans, increased approximately $3.3 million. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased to $4.5 million in fiscal 2000 from $4.3 million in fiscal 1999, an increase of 6.3%. Depreciation and amortization expenses as a percentage of total revenues were 2.1% in fiscal 2000 compared with 2.4% in fiscal 1999. Depreciation and amortization expenses increased due to capital asset additions. INTEREST EXPENSE. Interest expense of approximately $1.5 million in fiscal 2000 was relatively consistent with interest expense in fiscal 1999. Borrowing amounts were slightly higher in fiscal 2000; however, interest rates were lower in fiscal 2000 compared with fiscal 1999. PROVISION FOR INCOME TAXES. The provision for income taxes is based on the effective tax rate applied to the respective fiscal year's pre-tax income. The provision for income taxes was $3.7 million in fiscal 2000 representing a 38.0% effective rate. The benefit in fiscal 1999 was $2.1 million representing an effective rate of 40.3%. 24 9 QUARTERLY RESULTS The following tables set forth unaudited quarterly information for each of the eight fiscal quarters in the two year period ended January 28, 2001. This quarterly information has been prepared on a basis consistent with our audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year. Net income per share amounts reflect the impact of a two-for-one stock split paid in the form of a stock dividend on March 19, 2001.
IN THOUSANDS, EXCEPT PER SHARE DATA ---------------------------------------------------------------------------------- MAY 2, AUG. 1, OCT. 31, JAN. 30, APR. 30, JUL. 30, OCT. 29, JAN. 28, THREE MONTHS ENDED 1999 1999 1999 2000 (2000)* (2000)* (2000)* (2001)* - ------------------ -------- -------- -------- -------- -------- -------- -------- -------- Total revenues $ 53,328 $ 51,356 $ 56,849 $ 58,710 $ 70,870 $ 70,060 $ 77,897 $ 81,888 Operating expenses 45,724 44,356 48,464 51,459 59,164 58,286 65,316 67,924 General and administrative expenses 3,139 3,933 3,837 3,947 4,435 4,566 5,059 6,001 Depreciation and amortization expenses 1,101 1,159 1,237 1,049 1,595 1,581 1,811 1,470 -------- -------- -------- -------- -------- -------- -------- -------- Income from operations 3,364 1,908 3,311 2,255 5,676 5,627 5,711 6,493 Interest (income) expense, net 308 331 210 383 249 (507) (720) (740) Other expenses -- -- -- -- 493 358 216 375 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes 3,056 1,577 3,101 1,872 4,934 5,776 6,215 6,858 Provision for income taxes 1,163 599 1,178 710 1,901 2,192 2,363 2,602 -------- -------- -------- -------- -------- -------- -------- -------- Net income $ 1,893 $ 978 $ 1,923 $ 1,162 $ 3,033 $ 3,584 $ 3,852 $ 4,256 -------- -------- -------- -------- -------- -------- -------- -------- NET INCOME PER SHARE: Basic $ .10 $ .05 $ .11 $ .06 $ .15 $ .14 $ .15 $ .16 Diluted .10 .05 .10 .06 .13 .13 .14 .15
* Amounts presented for the first three quarters of fiscal 2001 have been restated for a change in accounting policy for revenue recognition, as discussed in "Recent Accounting Pronouncements" in Note 2 to the Consolidated Financial Statements. The change has an insignificant impact on annual sales and net income but does result in a shift in sales and earnings among the quarterly periods. The change has no effect on earnings per share in any of the quarterly periods. The effect of this change for each quarter of fiscal 2001 follows:
IN THOUSANDS --------------------------- TOTAL REVENUES NET INCOME -------------- ---------- First quarter $ (131) $ (19) Second quarter 66 9 Third quarter (12) (1) Fourth quarter (130) (16) ------ ------ $ (207) $ (27) ------ ------
OUR OPERATING RESULTS FOR THESE EIGHT QUARTERS EXPRESSED AS PERCENTAGES OF APPLICABLE REVENUES WERE AS FOLLOWS:
MAY 2, AUG. 1, OCT. 31, JAN. 30, APR. 30, JUL. 30, OCT. 29, JAN. 28, THREE MONTHS ENDED 1999 1999 1999 2000 2000 2000 2000 2001 ------ ------- -------- -------- -------- -------- -------- -------- Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses 85.7 86.4 85.3 87.6 83.5 83.2 83.9 82.9 General and administrative expenses 5.9 7.6 6.7 6.8 6.3 6.5 6.5 7.3 Depreciation and amortization expenses 2.1 2.3 2.2 1.8 2.2 2.3 2.3 1.8 ----- ----- ----- ----- ----- ----- ----- ----- Income from operations 6.3 3.7 5.8 3.8 8.0 8.0 7.3 8.0 Interest (income) expense, net 0.6 0.6 0.3 0.6 0.3 (0.7) (0.9) (0.9) Other expenses -- -- -- -- 0.7 0.5 0.3 0.5 ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes 5.7 3.1 5.5 3.2 7.0 8.2 7.9 8.4 Provision for income taxes 2.2 1.2 2.1 1.2 2.7 3.1 3.0 3.2 ----- ----- ----- ----- ----- ----- ----- ----- Net income 3.5% 1.9% 3.4% 2.0% 4.3% 5.1% 4.9% 5.2% ===== ===== ===== ===== ===== ===== ===== =====
HISTORICALLY, WE HAVE EXPERIENCED SEASONAL VARIABILITY IN OUR QUARTERLY OPERATING RESULTS, WITH HIGHER PROFITS PER STORE IN THE FIRST AND THIRD QUARTERS THAN IN THE SECOND AND FOURTH QUARTERS. THE SEASONAL NATURE OF OUR OPERATING RESULTS IS EXPECTED TO CONTINUE. 25 10 LIQUIDITY AND CAPITAL RESOURCES Because management generally does not monitor liquidity and capital resources on a segment basis, this discussion is presented on a consolidated basis. We funded our capital requirements for fiscal 1999, 2000 and 2001 primarily through cash flow generated from operations, through borrowings under our line of credit and term loan facility and through the proceeds from our April 2000 initial public offering. A private stock offering in fiscal 1999 also contributed to funding our cash needs. Net cash flow from operations was $11.7 million in fiscal 1999, $9.0 million in fiscal 2000 and $30.6 million in fiscal 2001. Operating cash flow has benefited from an improvement in our net income, net of the impact of the provision for restructuring in fiscal 1999. Operating cash flow has been negatively impacted by additional investments in working capital, primarily accounts receivable and inventories, as a result of the expansion of our off-premises sales programs and the opening of new stores that we either own or supply. Offsetting the additional investments in accounts receivable and inventories have been increases in accounts payable, accrued income taxes and accrued expenses due to the timing of payments associated with each of these items. Net cash used for investing activities was $11.8 million in fiscal 1999, $10.0 million in fiscal 2000 and $67.3 million in fiscal 2001. Investing activities primarily consist of capital expenditures for property, plant and equipment and purchases of investments. These capital expenditures primarily relate to expenditures to support our off-premises sales programs, maintenance capital expenditures for existing stores and equipment, development of new stores and the acquisition of stores from existing franchisees. Net cash used for investing activities was also used for investments in area developer joint ventures. Investing activities for fiscal 2001 also included approximately $35.4 million of purchases of marketable securities with a portion of the proceeds from the initial public offering and cash flow generated from operations. Net cash provided by (used for) financing activities was $1.5 million in fiscal 1999, ($84,000) in fiscal 2000 and $40.6 million in fiscal 2001. Fiscal 1999 financing activities consisted primarily of proceeds from a private stock offering, payment of cash dividends and the issuance of notes. Our financing activities in fiscal 2000 consisted primarily of borrowings under our line of credit and payment of cash dividends declared in fiscal 1999. Financing activities in fiscal 2001 consisted primarily of the completion of our initial public stock offering, repayment of borrowings and a capital distribution to our shareholders existing prior to our initial public offering. We entered into a new loan agreement on December 29, 1999. This agreement, which is unsecured, provides a $40 million revolving line of credit and provided a $12 million term loan. The remaining amount of the term loan was repaid in full with a portion of the net proceeds of our April 2000 initial public offering. The loan agreement expires on July 10, 2002. Under the terms of the loan agreement, interest on the revolving line of credit is payable monthly and charged at either the lender's prime rate less 110 basis points or at one-month LIBOR plus 100 basis points. There is no interest, fee or other charge for the unadvanced portion of the revolving line of credit. A provision of the loan agreement allows us to convert, prior to the expiration date of the agreement, all or a portion of the outstanding principal balance of the revolving line of credit to a term loan for a period of 60, 84 or 120 months. Concerning interest on the term loan, we have the option of either a variable prime rate based method, a variable LIBOR based method or a swap rate based method with a ceiling tied to the prime rate at the time of conversion. As of January 28, 2001, $91,000 is outstanding under the $40 million revolving line of credit facility and no amount under that facility has been converted to a term loan. We have an outstanding letter of credit as of January 28, 2001, which reduces our available line of credit by $2.7 million. On January 31, 2000, we repurchased the New York City territory from an area developer for $6.9 million using funds available under our line of credit. Subsequently, on April 17, 2000, we sold 77.67% of this market. The $12 million term loan entered into on December 29, 1999 was a continuation of the $12 million term loan contained in a previous loan agreement. Interest on the $12 million term loan was computed on the same basis as the revolving line of credit, except that the floor and ceiling rates were 5.500% and 8.125%, respectively. Repayment of this loan began on July 20, 1996, in the amount of monthly principal payments of $200,000 plus interest and was repaid in full with a portion of the net proceeds of our April 2000 initial public offering. The loan agreement entered into on December 29, 1999, requires us to maintain a consolidated tangible net worth of $41 million through January 28, 2001. For each fiscal year thereafter, the agreement requires us to maintain a consolidated tangible net worth of $41 million plus (1) an amount equal to 75% of the net proceeds from our April 2000 initial public offering, and (2) 50% of our net income for each fiscal year. Capital expenditures for each fiscal year are limited to $35 million. The loan agreement also contains covenants which place various restrictions on sales of properties, our ability to enter into collateral repurchase agreements and guaranties, the payment of dividends and other customary financial and nonfinancial covenants. As of January 28, 2001, $3,435,000 was outstanding under a $4.5 million revolving line of credit facility of our Northern California joint venture. Krispy Kreme has guaranteed 84% of the line of credit. The line of credit bears interest at one-month LIBOR plus 125 basis points and matures on January 15, 2002. There will be no interest, fee or other charge for the unadvanced portion of the revolving line of credit. 26 11 In the next five years, we expect to use cash primarily for the following activities: - Adding mix production and distribution capacity to support expansion - Remodeling and relocating selected older company stores - Expanding our equipment manufacturing and operations training facilities - Investing in all or part of franchisees' operations - Working capital and other corporate purposes Our capital requirements for the items outlined above may be significant. These capital requirements will depend on many factors, including our overall performance, the pace of store expansion and company store remodels, the requirements for joint venture arrangements and infrastructure needs for both personnel and facilities. Prior to our April 2000 initial public offering, we primarily relied on cash flow generated from operations and our $40 million revolving line of credit to fund our capital needs. We believe that the proceeds from our April 2000 initial public offering and our follow-on public offering completed in February 2001, cash flow generated from operations and our borrowing capacity under our line of credit will be sufficient to meet our capital needs for at least the next 24 months. If additional capital is needed, we may raise such capital through public or private equity or debt financings or other financing arrangements. Future capital funding transactions may result in dilution to shareholders. However, there can be no assurance that additional capital will be available or be available on satisfactory terms. Our failure to raise additional capital could have one or more of the following effects on our operations and growth plans over the next five years: - Slowing our plans to remodel and relocate older company stores - Reducing the number and amount of our joint venture investments in area developers - Slowing the building of our infrastructure of both personnel and facilities We conduct some of our corporate and store operations from leased facilities and lease certain equipment under operating leases. Generally, our leased facilities have initial lease periods of four to 18 years, and contain provisions for renewal options of five to 10 years. INFLATION We do not believe that inflation has had a material impact on our results of operations in recent years. However, we cannot predict what effect inflation may have on our results of operations in the future. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS We are exposed to market risk from changes in interest rates on our outstanding bank debt. Our revolving line of credit bears interest at either our lender's prime rate minus 110 basis points or a rate equal to LIBOR plus 100 basis points. We elect the rate on a monthly basis. Additionally, the Northern California revolving line of credit bears interest at one-month LIBOR plus 125 basis points. We have guaranteed 84% of that line of credit. The interest cost of our bank debt is affected by changes in either prime or LIBOR. Such changes could adversely impact our operating results. We have no derivative financial or derivative commodity instruments in our cash or cash equivalents. On any business day that we have excess cash available, we use it to pay down our revolving line of credit. We purchase certain commodities such as flour, sugar and soybean oil. These commodities are usually purchased under long-term purchase agreements, generally one to three years, at fixed prices. We are subject to market risk in that the current market price of any commodity item may be below our contractual price. We do not use financial instruments to hedge commodity prices. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities," effective for years beginning after June 15, 2000, Krispy Kreme's first quarter of fiscal year 2002. FAS 133, as amended by FAS 138, requires that all derivatives be recorded on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Because we do not use derivatives, the adoption of FAS 133 will not have any impact on our financial statements. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which among other guidance, clarifies certain conditions to be met in order to recognize revenue. SAB 101 is required to be adopted no later than the fourth quarter of fiscal years beginning after December 15, 1999. We have adopted SAB 101 in fiscal 2001, which has resulted in no material effect on our revenue recognition policy or revenues recorded. 27 12 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS - ----------------------------------------------------------------------------------------------- YEAR ENDED JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,183 $ 7,026 Short-term investments -- 18,103 Accounts receivable, less allowance for doubtful accounts of $1,324 (2000) and $1,302 (2001) 17,965 19,855 Accounts receivable, affiliates 1,608 2,599 Other receivables 794 2,279 Inventories 9,979 12,031 Prepaid expenses 3,148 1,909 Income taxes refundable 861 -- Deferred income taxes 3,500 3,809 --------- --------- Total current assets 41,038 67,611 Property and equipment, net 60,584 78,340 Deferred income taxes 1,398 -- Long-term investments -- 17,877 Investment in unconsolidated joint ventures -- 4,695 Other assets 1,938 2,970 --------- --------- Total assets $ 104,958 $ 171,493 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 13,106 $ 14,697 Accrued expenses 14,080 19,904 Revolving line of credit -- 3,526 Current maturities of long-term debt 2,400 -- Income taxes payable -- 41 --------- --------- Total current liabilities 29,586 38,168 ========= ========= Deferred income taxes -- 579 Compensation deferred (unpaid) 990 1,106 Long-term debt, net of current portion 20,502 -- Accrued restructuring expenses 4,259 3,109 Other long-term obligations 1,866 1,735 --------- --------- Total long-term liabilities 27,617 6,529 Minority interest -- 1,117 SHAREHOLDERS' EQUITY: Preferred stock, no par value, 10 million shares authorized; none issued and outstanding -- -- Common stock, no par value, 100,000 shares authorized; issued and outstanding -- 0 (2000) and 25,916 (2001) -- 85,060 Common stock, $10 par value, 1,000 shares authorized; issued and outstanding -- 467 (2000) and 0 (2001) 4,670 -- Paid-in capital 10,805 -- Unearned compensation -- (188) Notes receivable, employees (2,547) (2,349) Nonqualified employee benefit plan asset -- (126) Nonqualified employee benefit plan liability -- 126 Accumulated other comprehensive income -- 609 Retained earnings 34,827 42,547 --------- --------- Total shareholders' equity 47,755 125,679 --------- --------- Total liabilities and shareholders' equity $ 104,958 $ 171,493 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 28 13 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - ------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 ------------- ------------- ------------- Total revenues $ 180,880 $ 220,243 $ 300,715 Operating expenses 159,941 190,003 250,690 General and administrative expenses 10,897 14,856 20,061 Depreciation and amortization expenses 4,278 4,546 6,457 Provision for restructuring 9,466 -- -- --------- --------- --------- Income (loss) from operations (3,702) 10,838 23,507 Interest income 181 293 2,325 Interest expense (1,507) (1,525) (607) Equity loss in joint ventures -- -- (706) Minority interest -- -- (716) Loss on sale of property and equipment (251) -- (20) --------- --------- --------- Income (loss) before income taxes (5,279) 9,606 23,783 Provision (benefit) for income taxes (2,112) 3,650 9,058 --------- --------- --------- Net income (loss) $ (3,167) $ 5,956 $ 14,725 ========= ========= ========= Basic earnings (loss) per share $ (.19) $ 0.32 $ 0.60 ========= ========= ========= Diluted earnings (loss) per share $ (.19) $ 0.30 $ 0.55 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 29 14 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------------- ---------------------------------------- KRISPY KREME DOUGHNUT CORPORATION KRISPY KREME DOUGHNUTS, INC. ------------------------------------------------------------------------------------- COMMON COMMON ADDITIONAL PREFERRED PREFERRED COMMON COMMON SHARES STOCK PAID-IN CAPITAL SHARES STOCK SHARES STOCK ------ ------ --------------- --------- ---------- ------ ------ BALANCE AS OF FEBRUARY 1, 1998 364 $ 3,642 $ 1,102 -- $ -- -- $ -- Net loss for the year ended January 31, 1999 Cash dividends on common stock ($3.25 per share) Sale of common stock 44 438 4,181 Conversion of Long-Term Incentive Plan shares to common stock 59 590 5,522 Collections on notes receivable Issuance of notes receivable ---- -------- -------- ----- -------- ----- -------- BALANCE AT JANUARY 31, 1999 467 $ 4,670 $ 10,805 -- $ -- -- $ -- Net income for the year ended January 30, 2000 Collections of Long-Term Incentive Plan shares receivable Issuance of notes receivable ---- -------- -------- ----- -------- ----- -------- BALANCE AT JANUARY 30, 2000 467 $ 4,670 $ 10,805 -- $ -- -- $ -- Comprehensive income: Net income for the year ended January 28, 2001 Unrealized holding gain Total comprehensive income Proceeds from public offering 6,900 65,637 Conversion of Krispy Kreme Doughnut Corporation shares to Krispy Kreme Doughnuts, Inc. shares (467) (4,670) (10,805) 18,680 15,475 Cash dividend to shareholders Issuance of shares to employee stock ownership plan 290 3,039 Contribution to the nonqualified employee benefit plan Liability under the nonqualified employee benefit plan Issuance of restricted common shares 6 210 Exercise of stock options 40 699 Amortization of restricted common shares Collections on notes receivable ---- --------- -------- ----- -------- ------- -------- BALANCE AT JANUARY 28, 2001 -- $ -- $ -- -- $ -- 25,916 $ 85,060 ==== ========= ======== ===== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 30 15
IN THOUSANDS - ------------------------------------------------------------------------------------------------------------------------------- NOTES NONQUALIFIED NONQUALIFIED ACCUMULATED OTHER UNEARNED RECEIVABLE EMPLOYEE BENEFIT EMPLOYEE BENEFIT COMPREHENSIVE RETAINED COMPENSATION EMPLOYEES PLAN ASSET PLAN LIABILITY INCOME EARNINGS TOTAL ------------ ---------- ---------------- ---------------- ----------------- -------- ------ $ -- $ (34) $ -- $ -- $ -- $33,556 $ 38,266 (3,167) (3,167) (1,518) (1,518) 4,619 6,112 34 34 (2,099) (2,099) - -------- -------- ----- ---- ---- ------- -------- $ -- $ (2,099) $ -- $ -- $ -- $28,871 $ 42,247 5,956 5,956 226 226 (674) (674) - -------- -------- ----- ---- ---- ------- -------- $ -- $ (2,547) $ -- $ -- $ -- $34,827 $ 47,755 14,725 14,725 609 609 -------- 15,334 65,637 -- (7,005) (7,005) 3,039 (126) (126) 126 126 (210) -- 699 22 22 198 198 - -------- -------- ----- ---- ---- ------- --------- $ (188) $ (2,349) $(126) $126 $609 $42,547 $ 125,679 ======== ======== ===== ==== ==== ======= =========
31 16 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS -------------------------------------------------- YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 ------------- ------------- ------------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ (3,167) $ 5,956 $ 14,725 Items not requiring (providing) cash: Depreciation and amortization 4,278 4,546 6,457 Deferred income taxes (3,658) 258 1,668 Loss on disposal of property and equipment, net 251 -- 20 Compensation expense related to restricted stock awards -- -- 22 Provision for restructuring 9,466 (127) -- Provision for store closings and impairment 2,336 1,139 318 Minority interest -- -- 716 Equity loss in joint ventures -- -- 706 Change in assets and liabilities: Receivables (3,422) (4,760) (3,434) Inventories (1,881) (93) (2,052) Prepaid expenses (252) (1,619) 1,239 Income taxes, net 1,397 (2,016) 902 Accounts payable 4,584 1,570 1,591 Accrued restructuring expenses -- (1,185) (1,243) Accrued expenses 1,008 4,966 8,956 Deferred compensation and other long-term obligations 742 345 (15) -------- -------- -------- Net cash provided by operating activities 11,682 8,980 30,576 -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment (12,374) (11,335) (25,655) Proceeds from disposal of property and equipment -- -- 1,419 Proceeds from disposal of assets held for sale -- 830 -- Investments in unconsolidated joint ventures -- -- (6,333) (Increase) decrease in other assets 548 479 (1,348) Purchase of investments net -- -- (35,371) -------- -------- -------- Net cash used for investing activities: (11,826) (10,026) (67,288) -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Repayment of long-term debt (2,400) (2,400) (22,901) Net borrowings from revolving line of credit -- -- 3,526 Borrowings of long-term debt 2,550 4,282 -- Proceeds from stock offering 4,619 -- 65,637 Proceeds from exercise of stock options -- -- 699 Minority interest -- -- 401 Cash dividends paid (1,180) (1,518) (7,005) Issuance of notes receivable (2,099) (674) -- Collection of notes receivable 34 226 198 -------- -------- -------- Net cash provided by (used for) financing activities: 1,524 (84) 40,555 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 1,380 (1,130) 3,843 Cash and cash equivalents at beginning of year 2,933 4,313 3,183 -------- -------- -------- Cash and cash equivalents at end of year $ 4,313 $ 3,183 $ 7,026 -------- -------- -------- Supplemental schedule of non-cash investing and financing activities Issuance of stock to Krispy Kreme Profit-Sharing Stock Ownership Plan -- -- $ 3,039 Issuance of stock to restricted stock plan -- -- $ 210
The accompanying notes are an integral part of these consolidated financial statements. 32 17 KRISPY KREME DOUGHNUTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PURPOSE Krispy Kreme Doughnuts, Inc. was incorporated in North Carolina on December 2, 1999 as a wholly-owned subsidiary of Krispy Kreme Doughnut Corporation ("KKDC"). Pursuant to a plan of merger approved by shareholders on November 10, 1999, the shareholders of KKDC became shareholders of Krispy Kreme Doughnuts, Inc. on April 4, 2000. Each shareholder received 20 shares of Krispy Kreme Doughnuts, Inc. common stock and $15 in cash for each share of KKDC common stock they held. As a result of the merger, KKDC became a wholly-owned subsidiary of Krispy Kreme Doughnuts, Inc. Krispy Kreme Doughnuts, Inc. closed a public offering of its common stock on April 10, 2000 by selling 3,450,000 common shares at a price of $21 per share. All consolidated financial statements prior to the merger are those of KKDC and all consolidated financial statements after the merger are those of Krispy Kreme Doughnuts, Inc. For purposes of computing earnings per share, the number of common shares prior to the merger have been restated to reflect the 20 shares of Krispy Kreme Doughnuts, Inc. common stock issued for each share of KKDC's common stock and to reflect a two-for-one stock split effective March 19, 2001 to shareholders of record as of March 5, 2001. All references to the number of shares (other than common stock issued or outstanding on the 2000 Consolidated Balance Sheet and 1999 and 2000 Consolidated Statements of Shareholders' Equity), per share amounts, cash dividends and any other reference to shares in the Consolidated Financial Statements and all subsequent references in the accompanying Notes to Consolidated Financial Statements ("Notes"), unless otherwise noted, have been adjusted to reflect the split on a retroactive basis. Previously awarded stock options, restricted stock awards, and all other agreements payable in Krispy Kreme Doughnuts, Inc. common stock have been adjusted or amended to reflect the split. 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS. Krispy Kreme Doughnuts, Inc. and its subsidiaries (the "Company") are engaged principally in the sale of doughnuts and related items through Company-owned stores. The Company also derives revenue from franchise and development fees and the collection of royalties from franchisees. Additionally, the Company sells doughnutmaking equipment and mix to Company-owned and franchised stores. The significant accounting policies followed by the Company in preparing the accompanying financial statements are as follows: BASIS OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Investments of 50% or greater in affiliates are also consolidated and the portion not owned by the company is shown as a minority interest in consolidated subsidiary companies. EQUITY METHOD OF ACCOUNTING. Investments in 20% to 49.9% owned affiliates are accounted for by the equity method of accounting, whereby the investment is carried at cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition. FISCAL YEAR. The Company's fiscal year is based on a 52/53 week year. The fiscal year ends on the Sunday closest to the last day in January. The years ended January 31, 1999, January 30, 2000 and January 28, 2001 contained 52 weeks. CASH AND CASH EQUIVALENTS. The Company considers cash on hand, deposits in banks, and all highly liquid debt instruments with a maturity of three months or less at date of acquisition to be cash and cash equivalents. Cash overdrafts are reclassified to accounts payable. The amounts reclassified are $7,175,000 and $6,487,000 at January 30, 2000 and January 28, 2001, respectively. INVENTORIES. Inventories are recorded at the lower of average cost or market. INVESTMENTS. Investments consist of United States Treasury notes, mortgage-backed government securities, corporate debt securities and certificates of deposit and are included in short term and long term investments in the accompanying balance sheet. Certificates of deposit are carried at cost which approximates fair value. All other marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Management determines the appropriate classification of its investments in marketable securities at the time of the purchase and reevaluates such determination at each balance sheet date. As of January 28, 2001, all marketable securities are classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains and losses reported as a separate component of shareholders' equity in accumulated other comprehensive income. The cost of investments sold is determined on the specific identification or the first-in, first-out method. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost less accumulated depreciation. Major renewals and betterments are charged to the property accounts while replacements, maintenance, and repairs which do not improve or extend the lives of the respective assets are expensed currently. Interest is capitalized on major capital expenditures during the period of construction. 33 18 Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives: Buildings -- 15 to 35 years; Equipment -- 3 to 15 years; Leasehold improvements -- lesser of useful lives of assets or lease term. Assets acquired in the first half of the fiscal year are depreciated for a half year in the year of acquisition. Assets acquired in the second half of the fiscal year are not depreciated in the year of acquisition but are depreciated for a full year in the next fiscal year. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES. The Company uses the asset and liability method to account for income taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases for assets and liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS. Cash, accounts receivable, accounts payable, accrued liabilities and variable rate debt are reflected in the financial statements at cost which approximates fair value because of the short-term maturity of these instruments. ADVERTISING COSTS. All costs associated with advertising and promoting products are expensed in the period incurred. STORE OPENING COSTS. Costs incurred to open either Company or franchise stores are expensed in the period incurred. STORE CLOSING COSTS. When a decision is made to close a store, the Company records a charge to cover the estimated costs of the planned store closing including (1) the unrecoverable portion of the remaining lease payments on leased stores, (2) the write-down of store assets to reflect estimated realizable values (recorded as a reduction of the recorded asset on the Company's consolidated balance sheet), and (3) other costs associated with the store closing. Other closing costs and the current portion of lease liabilities are recorded in Accrued Expenses on the Company's consolidated balance sheet. The long-term portion of lease liabilities is recorded in Other Long-Term Obligations. At the store closing date, the Company discontinues depreciation on all assets related to closed store properties. Disposition efforts on assets held for sale begin immediately following the store closing. Reductions in the amount accrued for store closings represent ongoing lease payments on remaining lease obligations. REVENUE RECOGNITION. A summary of the revenue recognition policies for each segment of the Company (see Note 14) is as follows: - Company Store Operations revenue is derived from the sale of doughnuts and related items to on-premises and off-premises customers. Revenue is recognized at the time of sale for on-premises sales and at the time of delivery for off-premises sales. - Franchise Operations revenue is derived from: (1) development and franchise fees from the opening of new stores; and (2) royalties charged to franchisees based on sales. Development and franchise fees are charged for certain new stores and are deferred until the store is opened. The royalties recognized in each period are based on the sales in that period. - KKM&D revenue is derived from the sale of doughnutmaking equipment, mix and other supplies needed to operate a doughnut store to Company-owned and franchised stores. Revenue is recognized at the time the title and the risk of loss pass to the customer. Revenue from Company-owned stores and consolidated joint venture stores is eliminated in consolidation. STOCK-BASED COMPENSATION. The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Under APB 25, the Company recognizes no compensation expense related to employee stock options, as no options are granted below the market price at the grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the recognition of compensation expense based on the fair value of options on the grant date but allows companies to continue applying APB 25 if certain pro forma disclosures are made assuming hypothetical fair value method application. For additional information on the Company's stock options, including pro forma disclosures required by SFAS 123, refer to Note 13. SHAREHOLDER RIGHTS PLAN. Each share of the Company's common stock has one preferred share purchase right. Each share purchase right entitles the registered shareholder to purchase one one-hundredth (1/100) of a share of Krispy Kreme Series A Participating Cumulative Preferred Stock, $1.00 par value per share, at a price of $96.00 per one one-hundredth of a Series A preferred share. The share purchase rights are not exercisable until the earlier to occur of (1) 10 days following a public announcement that a person or group of affiliated or associated persons -- referred to as an acquiring person -- have acquired beneficial ownership of 15% or more of the Company's outstanding common stock or (2) 10 business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer which would result in an acquiring person beneficially owning 15% or more of the outstanding shares of common stock. The share purchase rights will expire on January 18, 2010, unless that expiration date is extended or unless the share purchase rights are redeemed or exchanged by the Company. 34 19 If the Company is acquired in a merger or other business combination, or if 50% or more of the Company's consolidated assets or earning power is sold after a person or group has become an acquiring person, proper provision will be made so that each holder of a share purchase right -- other than share purchase rights beneficially owned by the acquiring person, which will thereafter be void -- will have the right to receive, upon exercise of the share purchase right at the then current exercise price, the number of shares of common stock of the acquiring company which at the time of the transaction have a market value of two times the share purchase right exercise price. If any person or group becomes an acquiring person, proper provision shall be made so that each holder of a share purchase right -- other than share purchase rights beneficially owned by the acquiring person, which will thereafter be void -- will have the right to receive upon exercise, and without paying the exercise price, the number of shares of Krispy Kreme common stock with a market value equal to the share purchase right exercise price. Series A preferred shares purchasable upon exercise of the share purchase rights will not be redeemable. Each Series A preferred share will be entitled to a minimum preferential dividend payment of $1 per share and will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock. In the event the Company liquidates, the holders of the Series A preferred shares will be entitled to a minimum preferential liquidation payment of $1 per share but will be entitled to an aggregate payment of 100 times the payment made per share of common stock. Each Series A preferred share will have 100 votes, voting together with the shares of common stock. Finally, in the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each Series A preferred share will be entitled to receive 100 times the amount received per share of common stock. These rights are protected by customary antidilution provision. Before the date the share purchase rights are exercisable, the share purchase rights may not be detached or transferred separately from the common stock. The share purchase rights will expire on January 18, 2010, unless that expiration date is extended or unless the share purchase rights are redeemed or exchanged by the Company. At any time an acquiring person acquires beneficial ownership of 15% or more of the Company's outstanding common stock, the board of directors may redeem the share purchase rights in whole, but not in part, at a price of $0.001 per share purchase right. Immediately upon any share purchase rights redemption, the exercise rights terminate, and the holders will only be entitled to receive the redemption price. CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the Company to credit risk consist principally of accounts receivable. Accounts receivable are primarily from grocery and convenience stores. The Company performs ongoing credit evaluations of its customers' financial condition. The Company had no single customer that accounted for more than 10% of total revenues in fiscal 2001. In fiscal 2000, there was one customer that accounted for 10.2% of total revenues. The Company's two largest customers accounted for 17.9% and 15.6% of total revenues for fiscal 2000 and fiscal 2001, respectively. Accounts receivable for these two customers accounted for approximately 42.5% of net accounts receivable at January 30, 2000 and 16.9% of net accounts receivable at January 28, 2001. COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income," requires that certain items such as foreign currency translation adjustments, unrealized gains and losses on certain investments in debt and equity securities and minimum pension liability adjustments be presented as separate components of shareholders' equity. SFAS 130 defines these as items of other comprehensive income and as such must be reported in a financial statement that is displayed with the same prominence as other financial statements. At January 28, 2001, accumulated other comprehensive income, as reflected in the consolidated statements of shareholders' equity, was comprised of net unrealized holding gains on marketable securities of $609,000. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," effective for years beginning after June 15, 2000, the Company's first quarter of fiscal year 2002. SFAS 133, as amended by SFAS 138, requires that all derivatives be recorded on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in the fair value of hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Since derivatives are not used, the adoption of SFAS 133 will not have any impact on the financial statements of the Company. In December 1999, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which, among other guidance, clarifies certain conditions to be met in order to recognize revenue. SAB 101 is required to be adopted no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company has adopted SAB 101 in fiscal 2001. Its adoption has resulted in no material effect on the Company's revenue recognition policy or revenues recorded. RECLASSIFICATIONS. Certain reclassifications of the 1999 and 2000 Consolidated Financial Statements and related footnotes have been made to conform with the 2001 presentation. 35 20 3. INVESTMENTS The following table provides certain information about investments at January 28, 2001. The Company did not hold any investments at January 30, 2000.
IN THOUSANDS ---------------------------------------------------------------- AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR COST HOLDING GAINS HOLDING LOSSES VALUE --------- ---------------- ---------------- ----- JANUARY 28, 2001 Certificates of deposit $ 5,000 $ -- $ -- $ 5,000 US government notes 4,996 73 (20) 5,049 Federal government agencies 18,900 458 (50) 19,308 Corporate debt securities 6,475 151 (3) 6,623 ------- ---- ---- ------- Total $35,371 $682 $(73) $35,980 ======= ==== ==== =======
MATURITIES OF INVESTMENTS WERE AS FOLLOWS AT JANUARY 28, 2001:
IN THOUSANDS ------------------------------ AMORTIZED FAIR COST VALUE --------- ----- Due within one year $17,937 $18,103 Due after one year through five years 17,434 17,877 ------- ------- Total $35,371 $35,980 ======= =======
4. INVENTORIES THE COMPONENTS OF INVENTORIES ARE AS FOLLOWS:
IN THOUSANDS ------------------------------------------------------------------------------- DISTRIBUTION EQUIPMENT MIX COMPANY CENTER DEPARTMENT DEPARTMENT STORES TOTAL ------------ ---------- ---------- ------- ----- JANUARY 30, 2000 Raw materials $ -- $2,821 $444 $1,335 $ 4,600 Work in progress -- 57 -- -- 57 Finished goods 321 1,298 39 -- 1,658 Purchased merchandise 3,129 -- -- 498 3,627 Manufacturing supplies -- -- 37 -- 37 ------ ------ ---- ------ ------- Totals $3,450 $4,176 $520 $1,833 $ 9,979 ====== ====== ==== ====== ======= JANUARY 28, 2001 Raw materials $ -- $1,756 $475 $1,578 $ 3,809 Work in progress -- 248 -- -- 248 Finished goods 880 1,435 13 -- 2,328 Purchased merchandise 4,981 -- -- 641 5,622 Manufacturing supplies -- -- 24 -- 24 ------ ------ ---- ------ ------- Totals $5,861 $3,439 $512 $2,219 $12,031 ====== ====== ==== ====== =======
5. PROPERTY AND EQUIPMENT PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
IN THOUSANDS --------------------------------------- JAN. 30, 2000 JAN. 28, 2001 ------------- ------------- Land $ 11,144 $ 11,144 Buildings 24,606 29,637 Machinery and equipment 47,701 65,119 Leasehold improvements 9,627 10,440 Construction in progress 165 556 -------- -------- 93,243 116,896 Less: accumulated depreciation 32,659 38,556 -------- -------- Property and equipment, net $ 60,584 $ 78,340 ======== ========
36 21 6. ACCRUED EXPENSES ACCRUED EXPENSES CONSIST OF THE FOLLOWING:
IN THOUSANDS --------------------------------- JAN. 30, 2000 JAN. 28, 2001 ------------- ------------- Salaries and wages $ 3,255 $ 5,728 Restructuring expenses 1,115 1,022 Deferred revenue 655 2,042 Profit-sharing stock ownership plan contribution 2,750 2,075 Advertising fund 422 1,353 Casualty insurance 908 1,925 Group insurance 925 762 Impairment 1,188 49 Other 2,862 4,948 ------- ------- $14,080 $19,904 ======= =======
7. REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT On December 29, 1999, the Company amended and restated its Loan Agreement (the "Agreement") with a bank. The new agreement provides a $40 million revolving line of credit and a $12 million term loan. The Agreement, which is unsecured, expires on July 10, 2002. REVOLVING LINE OF CREDIT. Under the terms of the Agreement, interest on the revolving line of credit is charged, at the Company's option, at either the lender's prime rate less 110 basis points or at the one-month LIBOR plus 100 basis points. There is no interest, fee or other charge for the unadvanced portion of the line of credit. As of January 30, 2000 and January 28, 2001, the amount outstanding under the revolving line of credit was $19,302,000 and $91,000, respectively, and the interest rate was 6.823% and 7.561%, respectively. The amount available under the line of credit was $37.2 million at January 28, 2001. A provision of the Agreement allows the Company to convert, prior to the expiration date of the Agreement, all or a portion of the outstanding principal balance of the revolving line of credit to a term loan for a period of 60, 84, or 120 months with interest at the Company's option of either a variable Prime Rate based method, a variable LIBOR based method, or a Swap Rate based method with a ceiling tied to the Prime Rate at the time of conversion. As of January 28, 2001, no amounts from the $40 million line of credit facility had been converted to a term loan. TERM LOAN. Interest on term loans is computed on the same basis as the revolving line of credit except that the floor and ceiling rates are 5.5% and 8.125%, respectively (6.823% at January 30, 2000). The Company entered into a $12,000,000 term loan in July 1996 and repayment of this loan began on August 20, 1996, with monthly principal payments of $200,000 plus interest. As of January 30, 2000, the outstanding principal balance of the term loan was $3,600,000 and the interest rate was 6.823%. The term loan was repaid in full on April 10, 2000 without any penalty or premium. The Agreement contains provisions that, among other requirements, restrict capital expenditures, require the maintenance of certain financial ratios and restrict the payment of dividends. At January 28, 2001, the Company was in compliance with each of these covenants. The amended and restated Agreement, which was entered into in December 1999, replaced a Loan Agreement with a bank which was scheduled to expire on July 10, 2002. The previous Loan Agreement was in the form of a $28 million line of credit facility and had term loan provisions similar to those described above for the amended and restated Agreement. The interest rate methods under the former Loan Agreement did not vary from those prescribed in the amended and restated Agreement. At January 28, 2001, the Company had an outstanding letter of credit in the amount of $2,676,000 for insurance liability purposes, which reduces the Company's available line of credit. CONSOLIDATED JOINT VENTURES. On January 25, 2001, the Northern California joint venture entered into a $4,500,000 revolving line of credit agreement in which the Company has guaranteed 84% of the line of credit. The line of credit bears interest at one-month LIBOR plus 125 basis points and matures on January 15, 2002. There is no interest, fee or other charge for the unadvanced portion of the line of credit. As of January 28, 2001, the amount outstanding under the revolving line of credit was $3,435,000. Prior to the January 25, 2001 agreement, the Northern California joint venture had a $5 million revolving line of credit in place. The Company guaranteed the amounts outstanding under that line of credit. Under the terms of that agreement, interest on the revolving line of credit was payable monthly and charged at the one-month LIBOR plus 100 basis points. That line of credit expired on October 31, 2000 with an outstanding balance of $1,575,000. 37 22 The aggregate maturities for the term loan and the revolvers for the five years after January 28, 2001 are $3,526,000, $0, $0, $0, and $0, respectively. Interest paid was $1,404,000 in fiscal 1999, $1,421,000 in fiscal 2000 and $458,000 in fiscal 2001. 8. LEASE COMMITMENTS The Company conducts some of its operations from leased facilities and, additionally, leases certain equipment under operating leases. Generally, these have initial lease periods of 5 to 18 years and contain provisions for renewal options of 5 to 10 years. AT JANUARY 28, 2001, FUTURE MINIMUM ANNUAL RENTAL COMMITMENTS UNDER NONCANCELABLE OPERATING LEASES ARE AS FOLLOWS:
IN THOUSANDS ------------ FISCAL YEAR ENDING IN AMOUNT - --------------------- ------------ 2002 $ 8,695 2003 7,527 2004 5,195 2005 3,699 2006 2,616 Thereafter 14,583 -------- $ 42,315 ========
Rental expense, net of rental income, totaled $5,565,000 in fiscal 1999, $6,220,000 in fiscal 2000 and $8,540,000 in fiscal 2001. 9. INCOME TAXES THE COMPONENTS OF THE PROVISION (BENEFIT) FOR FEDERAL AND STATE INCOME TAXES ARE SUMMARIZED AS FOLLOWS:
IN THOUSANDS ------------------------------------------------------- YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ------------- Currently payable $ 1,546 $ 3,392 $ 7,390 Deferred (3,658) 258 1,668 ------- ------- ------- $(2,112) $ 3,650 $ 9,058 ======= ======= =======
A RECONCILIATION OF THE STATUTORY FEDERAL INCOME TAX RATE WITH THE COMPANY'S EFFECTIVE RATE IS AS FOLLOWS:
IN THOUSANDS ------------------------------------------------------- YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ------------- Federal taxes at statutory rate $(1,795) $ 3,266 $ 8,321 State taxes, net of federal benefit ( 440) 264 673 Other 123 120 64 ------- ------- ------- $(2,112) $ 3,650 $ 9,058 ======= ======= =======
Income tax payments, net of refunds, were $239,000 in fiscal 1999, $5,407,000 in fiscal 2000 and $5,894,000 in fiscal 2001. THE NET CURRENT AND NON-CURRENT COMPONENTS OF DEFERRED INCOME TAXES RECOGNIZED IN THE BALANCE SHEET ARE AS FOLLOWS:
IN THOUSANDS ---------------------------------- YEAR ENDED JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- Net current assets $ 3,500 $ 3,809 Net non-current assets (liabilities) 1,398 (579) ------- ------- $ 4,898 $ 3,230 ======= =======
38 23 THE TAX EFFECTS OF THE SIGNIFICANT TEMPORARY DIFFERENCES WHICH COMPRISE THE DEFERRED TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:
IN THOUSANDS ---------------------------------- YEAR ENDED JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ASSETS Compensation deferred (unpaid) $ 738 $ 826 Accrued group insurance 352 290 Other long-term obligations 509 592 Accrued insurance 1,097 732 Accrued restructuring expenses 2,042 1,570 Accrued store closings and impairment expenses 528 76 Deferred revenue 249 776 Accounts receivable 503 456 Inventory 236 397 Charitable contributions carryforward 835 420 State NOL carryforwards 895 895 Other 597 928 ------- ------- Gross deferred tax assets 8,581 7,958 ------- ------- LIABILITIES Property and equipment 3,343 4,279 Prepaid VEBA contribution 232 266 Prepaid expenses 108 183 ------- ------- Gross deferred tax liabilities 3,683 4,728 ------- ------- Net asset $ 4,898 $ 3,230 ======= =======
The Company has recorded a deferred tax asset reflecting the benefit of future deductible amounts. Realization of this asset is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. 10. EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if stock options were exercised and the impact of outstanding shares under our restricted stock plan. The treasury stock method is used to calculate dilutive shares, which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised, the proceeds of the tax benefits recognized by the Company in conjunction with nonqualified stock plans and from the amounts of unearned compensation associated with the restricted shares. THE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE:
IN THOUSANDS, EXCEPT SHARE AMOUNTS ------------------------------------------------------- YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ------------- Numerator: Net income (loss) $ (3,167) $ 5,956 $ 14,725 ========== ========== ========== Denominator: Basic earnings per share -- weighted average shares 16,498,360 18,680,440 24,591,958 Effect of dilutive securities: Stock options -- 959,440 2,235,788 ---------- ---------- ---------- Diluted earnings per share -- adjusted weighted average shares 16,498,360 19,639,880 26,827,746 ========== ========== ==========
Due to the loss in fiscal 1999, the 3,662,000 stock options outstanding would have been antidilutive and were excluded from the calculation of diluted earnings per share. 39 24 11. EMPLOYEE BENEFITS PLANS The Company has a 401(k) savings plan, which provides that employees may contribute a portion of their salaries to the plan on a tax deferred basis. The Company matches one-half of the first 2% and one-fourth of the next 4% of salary contributed by each employee. The Company's matching contributions approximated $440,000 in fiscal 1999, $501,000 in fiscal 2000 and $64,000 in fiscal 2001. Effective March 15, 2000, the Company ceased matching contributions to the 401(k) savings plan. Effective October 1, 2000, the Company established an unfunded Nonqualified Deferred Compensation Plan (the "401(k) Mirror Plan"). The 401(k) Mirror Plan is designed to enable the Company's executives to have the same opportunity to defer compensation as is available to other employees of the Company under the qualified 401(k) savings plan. Participants may defer from 1% to 15% of their base salary into the 401(k) Mirror Plan, may direct the investment of the amounts they have deferred and are always 100% vested with respect to the amounts they have deferred. The investments, however, are not a separate fund of assets and are shown in other assets on the consolidated balance sheet. The corresponding liability to participants is included in other long-term obligations. As of January 28, 2001 the balance in the asset and corresponding liability account was approximately $24,000. Effective May 1, 1994, the Company established the Retirement Income Plan for Key Employees of Krispy Kreme Doughnut Corporation (the Plan), a nonqualified noncontributory defined benefit pension plan. The benefits are based on years of service and average final compensation during the employees' career. The Plan at all times shall be entirely unfunded as such term is defined for purposes of the Employee Retirement Income Security Act (ERISA). The actuarial cost method used in determining the net periodic pension cost is the projected unit credit method. 40 25 THE FOLLOWING TABLES SUMMARIZE THE STATUS OF THE PLAN AND THE AMOUNTS RECOGNIZED IN THE BALANCE SHEET:
IN THOUSANDS, EXCEPT PERCENTAGES - ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation at beginning of year $ 834 $ 1,162 Service cost 180 181 Interest cost 56 87 Actuarial (gain) loss (120) -- Benefits paid -- -- Change in plan provisions -- -- -------- -------- Projected benefit obligation at end of year $ 950 $ 1,430 ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contributions -- -- Benefits paid -- -- -------- -------- Fair value of plan assets at end of year $ -- $ -- ======== ======== NET AMOUNT RECOGNIZED Funded status $ (950) $ (1,430) Unrecognized transition obligation (asset) -- -- Unrecognized prior service cost -- -- Unrecognized net loss (88) (86) Contributions from measurement date to fiscal year end -- -- -------- -------- Net amount recognized $ (1,038) $ (1,516) ======== ======== ASSUMPTIONS Weighted average assumed discount rate 7.50% 7.50% Weighted average expected long-term rate of return on plan assets N/A N/A Assumed rate of annual compensation increases 5.00% 5.00% NET PERIODIC PENSION COST Service cost $ 180 $ 181 Interest cost 56 87 Estimated return on plan assets -- -- Amortization of unrecognized transitional liability (asset) -- -- Amortization of prior service cost -- -- Recognized net actuarial (gain) or loss -- -- -------- -------- Total $ 236 $ 268 ======== ======== RECONCILIATION OF NET PENSION ASSET (LIABILITY) FOR FISCAL YEAR Prepaid (accrued) pension cost as of end of prior year $ (802) $ (1,248) Contributions during the fiscal year -- -- Net periodic pension cost for the fiscal year 236 268 -------- -------- Accrued pension cost as of fiscal year end $ (1,038) $ (1,516) ======== ========
Effective February 1, 1999, the Company established the Krispy Kreme Profit-Sharing Stock Ownership Plan. Under the terms of this qualified plan, the Company contributes a percentage of each employee's compensation, subject to Internal Revenue Service limits, to each eligible employee's account under the plan. The expense associated with this plan was $2,647,000 and $2,056,000 in fiscal 2000 and fiscal 2001, respectively, based on a contribution of 7% of eligible compensation. Under the terms of the plan, the contribution can be made in the form of cash or newly issued shares of common stock. With the exception of the initial year of the plan, the contribution is made annually on April 15 or the closest business day to April 15. The contribution for fiscal 2000 was made in the form of newly issued shares based on the initial price of the Company's common stock in the IPO. Employees become eligible for participation in the plan upon the completion of one year of service and vest ratably over five years. Credit for past service was granted to employees at the inception of the plan. The Company established a nonqualified "mirror" plan, effective February 1, 1999. Contributions to this nonqualified plan will be made under the same terms and conditions as the qualified plan, with respect to compensation earned by participants in excess of the maximum amount of compensation that may be taken into account under the qualified plan. The Company recorded compensation expense of $103,000 in fiscal 2000 and $19,000 in fiscal 2001 for amounts credited to certain employees under the nonqualified plan. 41 26 12. INCENTIVE COMPENSATION The Company has an incentive compensation plan for certain management and non-management level employees. Incentive compensation amounted to $2,300,000 in fiscal 1999, $3,146,000 in fiscal 2000 and $5,500,000 in fiscal 2001. In addition, in fiscal 1998, the Company had a Long-Term Incentive Plan (the Plan). Under the provisions of the Plan, a participant could elect to defer, for a period of not less than five years, from 0% to 100% of the bonus earned under the provisions of the incentive compensation plan described above. The deferred amount was converted to performance units based on the appropriate value (book value) of the Company's common stock as defined in the Plan. Upon completion of the deferral period, each participant's account would be distributed in accordance with the participant's election. The performance units granted under the Plan were credited with dividends in a manner identical to the common stock of the Company. The amount payable to a participant at the time benefit payments are due was equal in amount to the number of performance units credited to a participant's account multiplied by the current book value of the Company's common stock as defined in the Plan. Effective with fiscal year-end 1997, the right to defer additional incentive compensation under the provisions of the plan was suspended. In fiscal 1999, participants still employed by the Company were given the option to convert their performance units earned under the Plan to common shares of the Company's common stock, subject to certain restrictions. These shares had no voting rights prior to the initial public offering of the Company's common stock. The number of performance units converted was 2,358,900 at a conversion rate of $2.59 per performance unit for a total of approximately $6,112,000 in common stock issued in connection with the conversion. Due to the Federal and State income tax consequences of the conversion incurred by each participant, the Company made a loan to each participant equal to their tax liability. These loans were executed via a 10-year promissory note (collateralized by the common stock) with a fixed interest rate of 6%. The amount of such loans outstanding at January 30, 2000 and January 28, 2001 was $2,547,000 and $2,349,000, respectively and has been recorded as a deduction from shareholders' equity. 13. STOCK OPTION PLAN AND RESTRICTED STOCK AWARD STOCK OPTION PLANS. During fiscal 1999, the Company established the Krispy Kreme Doughnut Corporation 1998 Stock Option Plan (the "1998 Plan"). Under the terms of the 1998 Plan, 3,826,000 shares of common stock of the Company were reserved for issuance to employees and Directors of the Company. During fiscal 2000, an additional 480,000 shares of common stock of the Company were reserved for issuance under the 1998 Plan. Grants may be in the form of either incentive stock options or nonqualified stock options. During fiscal 1999, 3,662,000 nonqualified options with a 10-year life were issued to employees and Directors at an exercise price of $2.59 per share, the fair market value of the common stock at the grant date. During fiscal 2000, no additional stock options were issued under the 1998 Plan. In fiscal 2001, 564,000 stock options were issued under the 1998 Plan at an exercise price ranging from $10.50 per shares to $27.38. Stock options were granted at prices at fair market value on the date of grant. In July 2000, the shareholders approved the 2000 Stock Incentive Plan (the "2000 Plan"), which was adopted by the Board of Directors on June 6, 2000. Awards under the 2000 Plan may be incentive stock options, nonqualified stock options, stock appreciation rights, performance units, restricted stock (or units) and share awards. The maximum number of shares of common stock with respect to which awards may be granted under the 2000 Plan is 2,000,000 shares plus 280,000 shares that were available for grant, but not granted, under the 1998 Plan. The 2000 Plan provides aggregate limits on grants of the various types of awards in the amount of 1,500,000 shares for incentive stock options and 600,000 shares, in the aggregate for stock appreciation rights, performance units, restricted stock and stock awards. During fiscal 2001, 366,400 stock options were issued under the plan at an exercise price ranging from $29.53 to $41.25. Stock options were granted at prices at fair market value on the date of grant. OPTIONS UNDER BOTH PLANS VEST AND EXPIRE ACCORDING TO TERMS ESTABLISHED AT THE GRANT DATE. THE FOLLOWING TABLE SUMMARIZES ALL STOCK OPTION TRANSACTIONS FROM JANUARY 31, 1999 TO JANUARY 28, 2001:
SHARES SUBJECT WEIGHTED AVERAGE SHARES SUBJECT TO WEIGHTED AVERAGE TO OPTIONS EXERCISE PRICE PER SHARE EXERCISABLE OPTIONS EXERCISE PRICE PER SHARE ---------- ------------------------ ------------------- ------------------------ OUTSTANDING, FEBRUARY 1, 1998 -- -- -- -- Granted 3,662,000 $ 2.59 182,000 $ 2.59 Exercised -- -- -- -- Canceled -- -- -- -- ---------- ----------- -------- --------- OUTSTANDING, JANUARY 31, 1999 3,662,000 $ 2.59 182,000 $ 2.59 Granted -- -- -- -- Exercised -- -- -- -- Canceled 24,000 2.59 -- -- ---------- ----------- -------- --------- OUTSTANDING, JANUARY 30, 2000 3,638,000 $ 2.59 182,000 $ 2.59 Granted 931,800 19.54 -- -- Exercised 40,000 2.59 -- -- Canceled 21,400 5.15 -- -- ---------- ----------- -------- --------- OUTSTANDING, JANUARY 28, 2001 4,508,400 $ 6.08 468,000 $ 5.13 ========== =========== ======== =========
42 27 At January 28, 2001, there were approximately 1,896,000 shares of common stock available for issuance pursuant to future stock option grants. Additional information regarding options outstanding as of January 28, 2001 is as follows:
- ------------------------------------------------------------------------------------- -------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------------------------------------------------------ RANGE OF WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE SHARES CONTRACTUAL LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE - -------------- ------ ----------------------- -------------- ------ -------------- $2.59-$10.50 4,122,000 7.7 $ 3.63 468,000 $5.13 $27.38-41.25 386,400 9.6 $32.18 -- -- $2.59-$41.25 4,508,400 7.9 $ 6.08 468,000 $5.13
RESTRICTED STOCK AWARDS. In fiscal 2001, the Company granted 5,526 restricted stock awards in the form of the Company's common stock under the 2000 Plan to certain employees to provide incentive compensation. The weighted average grant-date fair value of the shares issued was $38.02. These shares vest ratably over either a three or four year period from the date of grant. PRO FORMA FAIR VALUE DISCLOSURES HAD COMPENSATION EXPENSE FOR THE COMPANY'S STOCK OPTIONS BEEN BASED ON THE FAIR VALUE OF THE GRANT DATE UNDER THE METHODOLOGY PRESCRIBED BY SFAS 123, THE COMPANY'S INCOME FROM CONTINUING OPERATIONS AND EARNINGS PER SHARE FOR THE THREE YEARS ENDED JANUARY 28, 2001 WOULD HAVE BEEN IMPACTED AS FOLLOWS:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -------------------------------------------------------------- JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 ------------- -------------- ------------- Reported net income (loss) $ (3,167) $ 5,956 $ 14,725 Pro forma net income (loss) (3,280) 5,843 13,693 Reported earnings per share-- Basic (.19) .32 .60 Pro forma earnings per share-- Basic (.20) .31 .56 Reported earnings per share-- Diluted (.19) .30 .55 Pro forma earnings per share-- Diluted (.20) .30 .51
THE FAIR VALUE OF OPTIONS GRANTED, WHICH IS AMORTIZED TO EXPENSE OVER THE OPTION VESTING PERIOD IN DETERMINING THE PRO FORMA IMPACT, IS ESTIMATED AT THE DATE OF GRANT USING THE BLACK-SCHOLES OPTION-PRICING MODEL WITH THE FOLLOWING WEIGHTED AVERAGE ASSUMPTIONS:
JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 ------------- -------------- ------------- Expected life of option 7 years 7 years 7 years Risk-free interest rate 4.8% 4.8% 6.1% Expected volatility of stock -- -- 49.7% Expected dividend yield 3.1% 3.1% --
THE WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING 1999, 2000 AND 2001 IS AS FOLLOWS:
JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 ------------- -------------- ------------- Fair value of each option granted $ .24 $ -- $ 23.08 Total number of options granted 3,662,000 -- 931,800 Total fair value of all options granted $ 864,232 $ -- $21,505,944
43 28 14. BUSINESS SEGMENT INFORMATION The Company has three reportable business segments. The Company Store Operations segment is comprised of the operating activities of the stores owned by the Company and those in consolidated joint ventures. These stores sell doughnuts and complementary products through both on-premises and off-premises sales. The majority of the ingredients and materials used by Company Store Operations is purchased from the KKM&D business segment. The Franchise Operations segment represents the results of the Company's franchise program. Under the terms of the franchise agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Krispy Kreme name. Expenses for this business segment include costs incurred to recruit new franchisees and to open, monitor and aid in the performance of these stores and direct general and administrative expenses. The KKM&D segment supplies mix, equipment and other items to both Company and franchisee owned stores. All intercompany transactions between the KKM&D business segment and Company stores and consolidated joint venture stores are eliminated in consolidation. Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources among segments. Segment operating income is income before general corporate expenses and income taxes.
IN THOUSANDS ------------------------------------------------------------ YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 - ---------- ------------- ------------- ------------- Revenues: Company Store Operations $ 145,251 $ 164,230 $ 213,677 Franchise Operations 3,236 5,529 9,445 KKM&D 107,431 142,215 201,406 Intercompany sales eliminations (75,038) (91,731) (123,813) --------- --------- --------- Total revenues $ 180,880 $ 220,243 $ 300,715 ========= ========= ========= Operating Income (loss): Company Store Operations $ 13,029 $ 18,246 $ 27,370 Franchise Operations 448 1,445 5,730 KKM&D 4,307 7,182 11,712 Unallocated general and administrative expenses (12,020) (16,035) (21,305) Provision for restructuring (9,466) -- -- --------- --------- --------- Total operating income $ (3,702) $ 10,838 $ 23,507 ========= ========= ========= Depreciation and Amortization Expenses: Company Store Operations $ 2,873 $ 3,059 $ 4,838 Franchise Operations 57 72 72 KKM&D 225 236 303 Corporate administration 1,123 1,179 1,244 --------- --------- --------- Total depreciation and amortization expenses $ 4,278 $ 4,546 $ 6,457 ========= ========= =========
44 29 15. RELATED PARTY TRANSACTIONS Total revenues includes $8,216,000 in fiscal 1999, $12,721,000 in fiscal 2000 and $22,515,000 in fiscal 2001 of sales to franchise doughnut stores owned by directors and an employee of the Company. Trade accounts receivable from these stores totaled $1,608,000 and $2,599,000 at January 30, 2000 and January 28, 2001, respectively. Total revenues also includes royalties from these stores of $569,000 in fiscal 1999, $904,000 in fiscal 2000 and $1,689,000 in fiscal 2001. Additionally, from time to time the Company extends credit to franchisees in the form of notes receivable. Interest is generally charged at the Prime Rate plus 1% and terms range from 6 months to 10 years. In March 2000, a pooled investment fund was established, the Krispy Kreme Equity Group, LLC, which invests in new area developers in certain markets. Krispy Kreme officers are eligible to invest in the fund. Members of the board of directors who are not Krispy Kreme officers are not eligible to invest in the fund. Krispy Kreme does not provide any funds to its officers to invest in the fund or provide guarantees for the investment. The fund invests exclusively in certain new area developers as approved by the Board of Directors, obtaining up to a 5% interest in them. As of January 28, 2001, the fund had invested in five area developers. If any member of the fund withdraws, the fund has a right of first refusal with respect to the withdrawing member's interest. The remaining members then have the right to purchase any interest the fund does not purchase. Finally, Krispy Kreme is obligated to purchase any remaining interest. Members are required to withdraw from the fund in the event of their death, retirement or termination of employment with Krispy Kreme. Certain members of the board of directors own 21 stores and are committed to open an additional 12 stores. In addition to officers' investments in the Krispy Kreme Equity Group, LLC, four officers of the Company are investors in groups that own 13 stores and are committed to open 171 additional stores. Certain of these investments are in the same entities as those invested in by the Krispy Kreme Equity Group, LLC. In December 1994, the Company implemented the Kingsmill Plan to provide franchise opportunities to corporate management and directors. Under the terms of the Kingsmill Plan, the Company makes franchise opportunities available to members of corporate management and provides financial assistance in the form of collateral repurchase agreements and guarantees of bank loans. The Kingsmill Plan was suspended in fiscal 1999. The Company has also entered into collateral repurchase agreements and loan guarantees with officers and directors outside the Kingsmill Plan. The Company's contingent liability related to collateral repurchase agreements for officers and directors is $2,456,000 at January 30, 2000 and $249,000 at January 28, 2001. The Company has guaranteed bank loans of $2,100,000 and $600,000 at January 30, 2000 and January 28, 2001, respectively. 16. COMMITMENTS AND CONTINGENCIES In order to assist certain associate and franchise operators in obtaining third-party financing, the Company has entered into collateral repurchase agreements involving both Company stock and doughnutmaking equipment. The Company's contingent liability related to these agreements is approximately $999,000 at January 30, 2000 and $1,266,000 at January 28, 2001. Additionally, the Company has guaranteed certain loans to third-party financial institutions on behalf of associate and franchise operators. The Company's contingent liability related to these guarantees was approximately $3,332,000 at January 30, 2000 and $2,593,000 at January 28, 2001. Because the Company enters into long-term contracts with its suppliers, in the event that any of these relationships terminate unexpectedly, even where it has multiple suppliers for the same ingredient, the Company's ability to obtain adequate quantities of the same high quality ingredient at the same competitive price could be negatively impacted. 17. RESTRUCTURING
IN THOUSANDS --------------------------------------------------------- LEASE LIABILITIES ACCRUED EXPENSES TOTAL ACCRUAL ----------------- ---------------- ------------- BALANCE AT JANUARY 31, 1999 $ 6,082 $ 350 $ 6,432 Additions 723 -- 723 Reductions (1,536) (70) (1,606) Transfers (487) 487 -- Adjustments -- (175) (175) ------- ----- ------- BALANCE AT JANUARY 30, 2000 4,782 592 5,374 Reductions (1,130) (113) (1,243) ------- ----- ------- BALANCE AT JANUARY 28, 2001 $ 3,652 $ 479 $ 4,131 ======= ===== =======
45 30 FISCAL 2000. During fiscal 2000, the Company reassessed certain provisions of its restructuring accrual. The Company determined that it was under-accrued for losses associated with operating lease commitments related to double drive-through buildings by $723,000 and over-accrued for certain other exit costs by $175,000. In addition, land included in Assets Held for Sale with a book value of $325,000 was sold for $830,000 resulting in a credit to restructuring expense. Together, these adjustments resulted in a net increase in restructuring expense of $43,000 for the year ended January 30, 2000. This amount has been included in Operating Expenses of the Company Store Operations segment. Reductions in Lease Liabilities represent ongoing lease payments on remaining lease obligations. Reductions in Accrued Expenses represent the cost of moving two double drive-through buildings. Accrued property taxes of $487,000, originally recorded as Lease Liabilities, have been transferred to Accrued Expenses. FISCAL 2001. Reductions in Lease Liabilities represent ongoing lease payments on remaining lease obligations. Reductions in Accrued Expenses represent the removal of one double drive-through building, as well as other miscellaneous expenses of three other double drive-though buildings. There was no additional restructuring expense for the year ended January 28, 2001. 18. STORE CLOSINGS AND IMPAIRMENT
IN THOUSANDS -------------------------------------- LEASE LIABILITIES AND ACCRUED EXPENSES BALANCE AT JANUARY 31, 1999 $ 283 Additions 1,139 Reductions (45) ------- BALANCE AT JANUARY 30, 2000 1,377 Additions 318 Reductions (1,494) ------- BALANCE AT JANUARY 28, 2001 $ 201 =======
FISCAL 2000. In the fourth quarter of fiscal 2000, the Company recorded a $1.1 million charge for the closing of two stores. These stores were torn down in the second quarter of fiscal 2001 and new buildings constructed on the same sites. The accrual consists of the write-off of the net book value of buildings and leasehold improvements as well as equipment that will be abandoned. This charge has been recorded in Operating Expenses of the Company Store Operations segment. Reductions in the accrual consist of ongoing lease payments on remaining lease obligations. FISCAL 2001. In fiscal 2001, the Company recorded a $318,000 charge for the closing of a store damaged by fire. After a thorough evaluation of the property, the Company made the decision not to reopen the store. This charge has been recorded in Operating Expenses of the Company Store Operations segment. Reductions in the accrual represent the write-off of the net book value of leasehold improvements, the liabilities under rent termination agreements and other miscellaneous costs relating to the store damaged by fire. Additionally, reductions include ongoing lease payments on remaining lease obligations, as well as the write-off of the net book value of buildings, leasehold improvements, and equipment for two stores that were torn down in the second quarter of fiscal 2001. 19. JOINT VENTURES From time to time, the Company enters into joint ventures with partners to develop and operate Krispy Kreme stores. The Company's ownership percentage of the joint venture determines whether or not the joint venture results are consolidated with the Company. See "Basis of Consolidation" and "Equity Method of Accounting" under Note 2 -- Summary of Significant Accounting Policies. CONSOLIDATED JOINT VENTURES On March 22, 2000, the Company entered into a joint venture to develop the Northern California market. The Company invested $2,060,000 for a 59% interest. The financial statements of this joint venture are consolidated in the results of the Company. 46 31 EQUITY METHOD JOINT VENTURES On January 31, 2000, the Company repurchased the New York City market from an area developer for approximately $6.9 million. The Company invested an additional $300,000 in property and equipment. Subsequently, on April 17, 2000, the Company sold 77.67% of the New York City market for $5.6 million in exchange for cash and notes receivable. The Company's remaining investment of $1,608,000 in this joint venture is accounted for using the equity method. The Company has invested in four additional joint ventures as a minority interest party. Ownership percentages in these joint ventures range from 3.33% to 22.33%. Investments in these joint ventures have been made in the form of capital contributions, as well as notes receivable. Terms of the notes receivable include interest rates from 5.5% to 12.0% per annum, payable semiannually with due dates from April 17, 2001 to the dissolution of the joint venture. As of January 28, 2001, the Company had investments in equity method joint ventures of $1,674,000 and outstanding notes receivable of $3,021,000 in these joint ventures. These investments and notes receivable are recorded in investments in unconsolidated joint ventures and other receivables in the Consolidated Balance Sheet. SUMMARIZED FINANCIAL INFORMATION FOR THE COMPANY'S INVESTMENTS IN JOINT VENTURES, ACCOUNTED FOR BY THE EQUITY METHOD, FOLLOWS:
IN THOUSANDS -------------- JAN. 28, 2001 -------------- Current assets $ 3,809 Noncurrent assets 10,785 Current liabilities 729 Noncurrent liabilities 5,298 IN THOUSANDS -------------- JAN. 28, 2001 -------------- Net sales $ 7,029 Gross profit 1,057 Net loss (1,629)
20. LEGAL CONTINGENCIES The Company is engaged in various legal proceedings incidental to its normal business activities. In the opinion of management, the outcome of these matters is not expected to have a material effect on the Company's consolidated financial statements. On March 9, 2000, a lawsuit was filed against the Company, a member of management and Golden Gate Doughnuts, LLC, a franchisee of the Company, in Superior Court in the state of California. The plaintiffs allege, among other things, breach of contract and seek compensation for injury as well as punitive damages. On September 22, 2000, after the case was transferred to the Sacramento Superior Court, that court granted our motion to compel arbitration of the action and stayed the action pending the outcome of arbitration. On November 3, 2000, the plaintiffs petitioned for a writ of mandate overruling the Superior Court. On December 21, 2000, the Court of Appeals summarily denied the writ petition. Plaintiffs failed to petition the California Supreme Court for review of the lower court's decision within the time permitted by law. Plaintiffs may now initiate arbitration proceedings in North Carolina. The lawsuit against Mr. Livengood was dismissed by the California court for lack of personal jurisdiction. Plaintiffs have not appealed this judgment, and their time for doing so has expired. The Company believes that the allegations are without merit and that the outcome of the lawsuit will not have a material adverse effect on its consolidated financial statements. Accordingly, no accrual for loss (if any) has been provided in the accompanying consolidated financial statements. 21. SUBSEQUENT EVENTS In February 2001, the Company completed a follow-on public offering of 5,200,000 shares of common stock at a price of $33.50 per share with the net proceeds totaling $31.83 per share after underwriters' commissions. The 5,200,000 shares included a 600,000 share over-allotment option exercised by the underwriters. Of the 5,200,000 shares, 4,656,650 were sold by selling shareholders and 543,350 were sold by the Company. Net proceeds to the Company were $17,295,000. On February 2, 2001, the Company acquired the assets of Digital Java, Inc., a Chicago-based coffee company for a purchase price of $389,500 plus an earn-out not to exceed $775,000. Digital Java, Inc. is a sourcer and micro-roaster of premium quality coffees and offers a broad line of coffee-based and non-coffee beverages. On February 5, 2001, the Company purchased a 104,000 square foot manufacturing facility in Winston-Salem for approximately $3.3 million. The Company will relocate its equipment manufacturing and training facilities from its current location in Winston-Salem to this new facility. 47 32 KRISPY KREME DOUGHNUTS, INC. REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KRISPY KREME DOUGHNUTS, INC. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Krispy Kreme Doughnuts, Inc. and its subsidiaries (the Company) at January 30, 2000 and January 28, 2001, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /S/ PRICEWATERHOUSECOOPERS LLP Greensboro, North Carolina March 8, 2001, except as to the last paragraph of Note 1 for which the date is March 19, 2001 48 EX-21.1 4 g68654ex21-1.txt LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES STATE OF INCORPORATION SUBSIDIARY OR ORGANIZATION - ---------- ------------------------- Krispy Kreme Doughnut Corporation North Carolina Krispy Kreme Distributing Co., Inc. North Carolina Krispy Kreme Coffee Company, LLC North Carolina Thornton's Flav-O-Rich Bakery Incorporated North Carolina KKIM Corporation Delaware HD Capital Corporation Delaware HDN Development Corporation Kentucky Golden Gate Doughnuts, LLC(1) California - ---------- (1) Golden Gate Doughnuts, LLC is the registrant's Northern California franchisee in which the registrant holds a majority equity interest. EX-23.1 5 g68654ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 (PRICEWATERHOUSECOOPERS LETTERHEAD) EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-38236, 333-38250, 333-38258, 333-47326) of Krispy Kreme Doughnuts, Inc. of our report dated March 8, 2001 except as to the last paragraph of Note 1 for which the date is March 19, 2001 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 8, 2001 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Greensboro, North Carolina April 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----