10-K

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 February 2, 2003

OR

o 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 001-16485

KRISPY KREME DOUGHNUTS, INC.

(Exact name of registrant as specified in its charter)

North Carolina	56-2169715
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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:

Common Stock, No Par Value
(Title of class)
Preferred Share Purchase Rights
(Title of class)

Warrants to Purchase Common Stock
(Title of class)

Securities registered pursuant to Section 12(g) of the Act:
None

     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 o

     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. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x   No o

     The aggregate market value of voting and non-voting common equity of the registrant held by nonaffiliates of the registrant, as of August 4, 2002 was $1,314,273,599.

     Number of shares of Common Stock, no par value, outstanding as of April 7, 2003: 56,819,026.

DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the registrant’s Annual Report to Shareholders for the fiscal year ended February 2, 2003 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 June 4, 2003 have been incorporated by reference into Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS

PART I
	ITEM 1. BUSINESS.
	ITEM 2. PROPERTIES.
	ITEM 3. LEGAL PROCEEDINGS.
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
	ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
	ITEM 6. SELECTED FINANCIAL DATA.
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
	ITEM 11. EXECUTIVE COMPENSATION.
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
	ITEM 14. CONTROLS AND PROCEDURES.
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
SIGNATURES
CERTIFICATIONS
EX-3.2 AMENDED AND RESTATED BYLAWS
EX-10.19 EMPLOYMENT AGREEMENT
EX-13 PORTIONS OF FISCAL 2003 ANNUAL REPORT
EX-21.1 LIST OF SUBSIDIARIES
EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP
EX-99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EX-99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER

TABLE OF CONTENTS

		Page
	PART I
ITEM 1	Business		2
ITEM 2	Properties		18
ITEM 3	Legal Proceedings		18
ITEM 4	Submission of Matters to a Vote of Security Holders		19
	PART II
ITEM 5	Market for Registrant’s Common Equity and Related Stockholder Matters		19
ITEM 6	Selected Financial Data		19
ITEM 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
ITEM 7A	Quantitative and Qualitative Disclosures About Market Risks		20
ITEM 8	Financial Statements and Supplementary Data		20
ITEM 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		20
	PART III
ITEM 10	Directors and Executive Officers of the Registrant		20
ITEM 11	Executive Compensation		20
ITEM 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		20
ITEM 13	Certain Relationships and Related Transactions		21
ITEM 14	Controls and Procedures		21
	PART IV
ITEM 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K		21
SIGNATURES
CERTIFICATIONS

PART I

     As used herein, unless the context otherwise requires, “Krispy Kreme,” the “Company,” “we” or “us” refers to Krispy Kreme Doughnuts, Inc. and its subsidiaries. References contained herein to fiscal 1999, fiscal 2000, fiscal 2001, fiscal 2002 and fiscal 2003 mean the fiscal years ended January 31, 1999, January 30, 2000, January 28, 2001, February 3, 2002 and February 2, 2003, respectively. Please note that our fiscal year ended February 3, 2002 contained 53 weeks. This Annual Report on Form 10-K (“Form 10-K”) contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“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 2003 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 and a two-for-one stock split paid on June 14, 2001 in the form of a dividend to shareholders of record as of May 29, 2001.

ITEM 1. BUSINESS.

Overview

     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 on April 4, 2000 and KKDC became a wholly-owned subsidiary of Krispy Kreme. On April 10, 2000, Krispy Kreme closed a public offering of its common stock.

     Krispy Kreme files annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Exchange Act. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549 or obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including the Company, that file electronically with the SEC at www.sec.gov.

     We make available through our website at www.krispykreme.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or provide it to, the SEC. The content on our website is available for information purposes only. It should not be relied upon for investment purposes.

     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, our doughnut-making theater, our vertical integration and our strong franchise system creates significant opportunities for continued growth.

     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.

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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 and off-premises sales as described further under “Business Model—Store Operations.”

     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 17.1% in fiscal 2001, 12.8 % in fiscal 2002 and 11.8% in fiscal 2003.

     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 doughnut-making 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. 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. We believe the following represent significant growth opportunities for our Company:

• Domestic store development. We believe our 276 factory stores (stores which contain a full doughnut-making production line) as of February 2, 2003 represent less than one-third of the total traditional factory stores we can ultimately build in North America. Our highest priority expansion plans in our recent store development efforts have focused on markets with over 100,000 households. We will continue to expand in these markets because of their dense population characteristics which enable us to achieve economies of scale in local operations infrastructure and brand-building efforts. In fiscal 2003, we announced an initiative to enhance our expansion through the opening of factory stores in small markets, those with less than 100,000 households. Through value engineering, we believe we have reduced the level of investment in property and equipment required to open a Krispy Kreme store, making the opportunity to enter small markets economically viable. We also expect that stores in these small markets will participate in fund-raising programs and develop off-premises business, further enhancing the opportunity in these markets, although we believe that their retail sales alone will generate attractive financial returns. We expect the stores opened in these markets will primarily be franchised stores and will be opened by our existing franchisees. We are currently in the process of awarding concurrent development agreements for certain small markets to many of our existing franchisees.

• International store development. In fiscal 2002, we began to expand our development efforts to include markets outside the continental United States. Through a joint venture, we began opening stores in Canada. In fiscal 2003, we entered into a joint venture to develop the Australian and New Zealand markets and a joint venture to develop stores in the United Kingdom and the Republic of Ireland. We opened our first store in Australia in fiscal 2003, a commissary to be used for training and sampling prior to the opening of the first retail store, which is expected in fiscal 2004. We expect to open our first retail store in the United Kingdom in fiscal 2004 as well. Based upon our initial research and experience with our first stores in Canada, we are focusing our current international development efforts primarily on opportunities in Australia and New Zealand, the United Kingdom, the Republic of Ireland, Japan, Mexico, South Korea and Spain. We anticipate that development efforts in all of these markets will be through joint

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	ventures. Our ability to expand in these or other international markets, however, will depend on a number of factors, including demand for our product, our ability to supply or obtain the ingredients and equipment necessary to produce our products and local laws or policies of the particular countries. Ultimately, we believe that the opportunity for growth through expansion internationally is at least as great as the domestic opportunity.
•	Expanded beverage offerings. One of our focus areas has been on creating a best-in-class beverage opportunity to complement our doughnut offering. With the acquisition of Digital Java, Inc., a small Chicago-based coffee company, in fiscal 2002, we acquired significant coffee roasting expertise. We relocated the acquired assets and operations to a newly constructed coffee roasting facility at our Ivy Avenue plant in Winston-Salem, NC. We have now formulated a complete beverage program, including four drip coffees, a complete line of espresso-based coffees including flavors, and both coffee-based and noncoffee-based frozen drinks. These drinks will complement our existing juices, sodas, milks and waters. We introduced the first component of this program, the drip coffee offering, to our stores in fiscal 2003, replacing the previous product which was purchased from an unrelated third party. As of February 2, 2003, approximately 70 Krispy Kreme locations offer the new, full beverage program, most of which are new stores that opened with the full program. We anticipate introducing the remaining components of the new beverage program, primarily espresso and frozen beverages, in all remaining stores over the next twelve to eighteen months. We believe this new beverage program represents an opportunity to increase beverage sales in a meaningful way, which in turn will enhance our profitability due to the attractive margins associated with beverage sales.
•	Hot doughnut machine technology. During fiscal 2002, we developed a new hot doughnut machine technology which can provide our customers with virtually the same hot doughnut experience as the equipment in our factory stores. This machine, however, has significant advantages over the factory store doughnut machine in that it is smaller in size, involves a less complicated production process and costs less. We began our initial tests of the concept with doughnut and coffee shops in three different markets and venues in North Carolina and continue to develop and enhance the technology. As of February 2, 2003, five doughnut and coffee shops were open, four of which are owned by the Company. We plan to continue our tests of this concept. We believe this technology will facilitate our expansion into smaller markets and into dense urban areas.
•	Satellite store concept. In addition to the doughnut and coffee shop concept, we plan to experiment with a new generation satellite concept, which will sell fresh doughnuts, beverages and Krispy Kreme collectibles. The doughnuts will be supplied by a nearby factory store, multiple times each day. We view the satellite concept, which we believe will have attractive financial returns, as an additional way to achieve market penetration in a variety of market sizes and settings. We expect to begin our tests of this concept in the second half of fiscal 2004.
•	Montana Mills Bread Co., Inc. In April 2003, we completed the acquisition, through an exchange of stock, of Montana Mills Bread Co., Inc. (“Montana Mills”), an owner and operator of upscale “village bread stores” in the Northeastern and Midwestern United States. Montana Mills’ stores produce and sell a variety of breads and baked goods prepared in an open-view format. We believe Krispy Kreme’s unique brand-building and operational capabilities represent a significant leverage opportunity. We will spend up to the next 24 months refining and expanding the Montana Mills concept, retaining its core best-in-class breads, but expanding the offering to include bread-based meals and appropriate accompaniments in an inviting, fast casual setting. Once developed, we plan to leverage our existing franchise network and the infrastructures our franchisees have created to roll out the concept. We believe this network will substantially expedite a national expansion. We also believe that this acquisition will provide an opportunity to leverage our existing capabilities, such as our distribution chain, off-premises sales and coffee-roasting expertise, to expand Montana Mills’ business.

     The ingredients for market leadership. The doughnut industry 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:

• A strong brand

• A highly differentiated product

• A high-volume production capacity

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• A market penetration strategy using multiple sales channels

     A proven franchise system. Krispy Kreme is committed to growth in part, 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 doughnut-making 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 and also intend to continue to periodically repurchase associate or area developer markets to take advantage of opportunities for synergies and market expansion. 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 many large DSD customers. We believe these strengths, 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 doughnut-making process starts well before the store-level operations with:

• Our owned and operated manufacturing plants, which produce our proprietary mixes

• Our state-of-the-art laboratories that test all key ingredients and each batch of mix produced

• Our self-manufactured, custom stainless steel doughnut-making equipment

     Additionally, at the store level, we provide a 14-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, as well as customer service.

     A balanced financial model. Krispy Kreme generates sales and income from three distinct sources: company stores, which we refer to as Company Store Operations, franchise fees and royalties from our franchise stores, which we refer to as Franchise Operations, and a vertically integrated supply chain, which we refer to as Krispy Kreme Manufacturing and Distribution, or KKM&D. In addition to lowering the cost of goods sold for our stores, KKM&D generates attractive margins on sales of our mixes, equipment and coffee. 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 - Business Segment Information in the notes to our consolidated financial statements for fiscal 2003.

Business Model

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     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: our company and franchised stores, which we refer to collectively as Store Operations, 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. The principal source of revenue for stores is the production and distribution of doughnuts. 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.

• 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 drip coffee, other beverages, other bakery items and collectible memorabilia such as tee shirts, sweatshirts and hats. Fundraising sales, described under “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.

• 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 utilization of our stores’ production capacity

– Improve our stores’ return on investment

     As of February 2, 2003, approximately 124 of our stores sold to major grocery store chains, including Kroger, Food Lion, Albertsons, Speedway, 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:

• Strong product knowledge and technical skills

• Control of all critical production and distribution processes

• 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:

• Mix manufacturing. We produce all of our proprietary doughnut mixes at our manufacturing facilities in Winston-Salem, NC and Effingham, IL. We control production of this critical input in order to ensure that our products meet quality expectations and to maximize our profit potential.

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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

• Equipment manufacturing. We manufacture proprietary doughnut-making 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.

– Efficiency. We continually refine our equipment design to ensure maximum automation in order to manage labor costs and/or improve consistency.

• Distribution centers. We operate three distribution centers (Winston-Salem, NC, Effingham, IL, and greater Los Angeles, CA) which are capable of supplying our stores with all of their key supplies, including all food ingredients, coffee, juices, signage, display cases, uniforms and various other items. Stores must use our doughnut mixes exclusively. In addition, most of our store operators have agreed contractually through our Supply Chain Alliance Program to purchase all of their requirements for the critical areas of their business from KKM&D through fiscal 2004. 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.

• Beverage program. We provide many of the beverages offered in our stores, most of which are purchased from third parties. However, one of our focus areas has been on creating a best-in-class beverage program. Through the acquisition in fiscal 2002 of Digital Java, Inc., a small Chicago-based coffee company, we acquired significant coffee roasting expertise. Subsequent to the acquisition, we relocated the operations to a newly constructed coffee roasting facility at our Ivy Avenue plant in Winston-Salem, NC, which became operational in fiscal 2003. We have now formulated a complete beverage program including four drip coffees, a complete line of espresso-based coffees including flavors and both coffee-based and noncoffee-based frozen drinks. We introduced the first component of this program, the drip coffee offering, to our stores in fiscal 2003, replacing the previous product which was purchased from an unrelated third party. As of February 2, 2003, the operation was supporting the new, full beverage program in approximately 70 Krispy Kreme locations, most of which are new stores that opened with the full program. We believe our new beverage program presents an opportunity to:

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– Ensure a high quality product offering;

– Increase beverage sales through an expanded product offering; and

– Enhance profitability as a result of the higher margins associated with beverage sales.

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:

• 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.

• Doughnut-making theaters. Each of our stores showcases our doughnut-making process. Our goal is to provide our customers with a unique entertainment experience and, in addition, visibly reinforce our commitment to quality and freshness.

• 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.

• Destination locations. Our full-service stores incorporate doughnut-making 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.

• Affordable indulgences. Our doughnuts are reasonably priced to ensure that they are affordable for the widest audience possible.

• 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 Kreme doughnuts to raise money for their schools, clubs and community organizations.

Industry Overview

     The doughnut industry is highly fragmented. We expect doughnut sales to continue to grow due to a variety of factors, including the growth in two-income households and corresponding shift towards foods consumed away from home, increased snack food consumption and further growth of doughnut purchases from in-store bakeries. 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, our relatively small store population, and our attractive unit economics position us very well for growth in our domestic markets. We plan to increase our revenues and profits by expanding our store base through small markets and satellite stores, improving on-premises sales at existing stores and increasing off-premises sales. We have additional growth opportunities through our expansion in international markets, the introduction of our new beverage program and the Hot Doughnut Machine. The acquisition of Montana Mills presents further opportunities for growth. We believe this acquisition gives us an opportunity to apply our experience and strength in creating a national franchise network toward building a franchise network for Montana Mills. Through these additional opportunities, our future growth prospects have expanded significantly.

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     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 2004, we anticipate opening approximately 77 new stores under existing agreements, the majority of which are expected to be franchised stores located in the United States. Our franchisees, including the area developers in which we had a majority ownership interest as of February 2, 2003, (Freedom Rings, LLC (“Freedom Rings”), the area developer with rights to develop stores in the Philadelphia market, Glazed Investments, LLC (“Glazed Investments”), the area developer with rights to develop markets in Colorado, Minnesota and Wisconsin, and Golden Gate Doughnuts, LLC (“Golden Gate”), the area developer with rights to develop stores in Northern California), are contractually obligated to open over 250 new stores in both the United States and internationally in the fiscal 2004 through fiscal 2009 period. The addition of new stores will be accomplished primarily through franchising with area developers following a prescribed development plan for their respective territories, although we also intend to open new company stores on a limited basis in existing or repurchased markets to take advantage of synergies and growth opportunities. The development plan for most franchisees was 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 announced in fiscal 2003 an initiative to enhance our expansion through the opening of factory stores in small markets, those with less than 100,000 households. We believe we have reduced the level of investment in property and equipment required to open a Krispy Kreme store, making the opportunity to enter small markets economically viable.

     We will also continue to consider opportunities to acquire or increase an equity interest in franchisees or repurchase market rights from franchisees to take advantage of opportunities for synergies and market expansion. During fiscal 2003, we repurchased market rights, as well as the related assets, from franchisees in Akron, Ohio, Destin, Florida, Pensacola, Florida and Toledo, Ohio. In March 2003, we purchased the market rights, as well as related assets, from our franchisee with rights to certain markets in Kansas and Missouri.

     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 a 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.

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     International expansion. As of February 2, 2003, we had entered into joint ventures to develop Krispy Kreme stores in Canada, Australia, New Zealand, the United Kingdom and the Republic of Ireland. Six stores were open in international markets as of February 2, 2003, five of which were located in Canada. The remaining store is in Australia and is a commissary which will be used for training and sampling prior to the opening of the first retail store in that market, expected in fiscal 2004. Under the terms of their development agreements, these joint ventures are committed to open an additional 83 stores in the period from fiscal 2004 through fiscal 2009. We anticipate entering into additional joint ventures to develop markets outside the United States as our initial research and experience indicates that other markets present viable opportunities for the Krispy Kreme concept. Other markets we are focusing on include Japan, Mexico, South Korea and Spain.

     Expanded beverage offerings. In addition to our juices, sodas, milk and waters, we have formulated a beverage program which includes four drip coffees, a complete line of espresso-based coffees including flavors and both coffee-based and noncoffee-based frozen drinks. We introduced the first component of this program, the drip coffee offering, to our stores in fiscal 2003. The drip coffee, roasted in our facility, replaced the existing product which was purchased from a third party. Approximately 70 Krispy Kreme locations currently offer the full, new beverage program. We plan to introduce the remaining components of the program, espresso-based coffees and frozen drinks, in our remaining stores over the next twelve to eighteen months. We believe that our expanded beverage offering will increase beverage sales as well as enhance our profitability, due to the higher margins generally associated with beverage sales.

     Doughnut and coffee shops. During fiscal 2002, we introduced a new concept store, the “doughnut and coffee shop.” This store uses the new Hot Doughnut Machine technology, which completes the final steps of the production process and requires less space than the full production equipment in our traditional factory store. This technology combines time, temperature and humidity elements to re-heat unglazed doughnuts, provided by a traditional factory store, and prepare them for the glazing process. Once glazed, customers can have virtually the same hot doughnut experience in a doughnut and coffee shop as in a factory store. Additionally, the doughnut and coffee shop offers our new full line of coffee and other beverages. As of February 2, 2003, five doughnut and coffee shops were open, four of which are owned by the Company. We plan to continue our tests of this concept.

     Satellite store concept. In addition to the doughnut and coffee shop concept, we plan to experiment with a new generation satellite concept. In this concept, we will sell fresh doughnuts, beverages and Krispy Kreme collectibles; however, the doughnuts will not be produced on site, but rather will be supplied by a nearby factory store, multiple times each day. We view the satellite concept, which we believe will have attractive financial returns, as an additional way to achieve market penetration in a variety of market sizes and settings. We expect to begin our tests of this concept in the second half of fiscal 2004.

     Montana Mills Bread Co., Inc. In April 2003, we completed the acquisition, through an exchange of stock, of Montana Mills Bread Co., Inc., an owner and operator of upscale “village bread stores” in the Northeastern and Midwestern United States. Montana Mills’ stores produce and sell a variety of breads and baked goods prepared in an open-view format. We believe Krispy Kreme’s unique brand-building and operational capabilities represent a significant leverage opportunity. We will spend up to the next 24 months refining and expanding the Montana Mills concept, retaining its core best-in-class breads, but expanding the offering to include bread-based meals and appropriate accompaniments in an inviting, fast casual setting. Once developed, we plan to leverage our existing franchise network and the infrastructures our franchisees have created to roll out the concept. We believe this network will substantially expedite a national expansion. We also believe that this acquisition will provide an opportunity to leverage our existing capabilities, such as our distribution chain, off-premises sales and coffee-roasting expertise, to expand Montana Mills’ business.

     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 typical new store, excluding land and pre-opening costs, is approximately $800,000 for a building of approximately 4,600 square feet and approximately $525,000 to $625,000 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

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each period. Company stores’ operating cash flow is store revenues less all direct store expenses other than depreciation expenses.

		Year Ended
		January 28,			February 3,			February 2,
		2001			2002			2003
		(Dollars in thousands)
Average weekly sales per store:
	Company	$	69		$	72		$	76
	Franchised		43			53			58
Company stores’ operating cash flow as a percentage of store revenues			25.6	%		27.7	%		28.0	%

     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, as well as the impact in company stores’ sales of the sales of our consolidated joint ventures’ stores, most of which are new stores opened in the last three fiscal years. Franchised stores’ average weekly sales have been increasing, however, 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 stores, excluding the consolidated joint ventures’ stores, 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:

• High volume traffic

• High household density

• Proximity to both daytime employment and residential centers

• 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 4,600 square feet. They are equipped with automated doughnut-making equipment capable of producing from 4,000 dozen to 10,000 dozen doughnuts daily. 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:

• Varieties of products

• Product specifications

• Sales channels

• Packaging

• Sanitation and cleaning

• Signage

• Furniture and fixtures

• Image and use of logos and trademarks

• Training

• Marketing and advertising

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     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:

• Operating procedures

• Advertising and marketing programs

• Administrative, bookkeeping and accounting procedures

• Public relations

• 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 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 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 Chief Operating Officer, along with other corporate officers responsible for store operations, are responsible for corporate interaction with our store operations division directors 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 staff using store audits, weekly communications by telephone or e-mail and both scheduled and surprise store visits.

     We offer a comprehensive 14-week training program, conducted both at our headquarters and at certified training 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. Store counts include retail stores and commissaries and exclude the doughnut and coffee shops and the current version of our satellite concept stores.

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     Company stores. As of February 2, 2003, Krispy Kreme owned 99 stores, including 29 which are operated by consolidated joint ventures. A majority of these stores were developed between 1937 and 1996 and:

• Were designed as wholesale bakeries

• Generate a majority of their sales volume through off-premises sales

• Are located in the Southeast

• Are larger than new Krispy Kreme stores

     Of the 29 company stores owned by area developers in which we have a controlling interest, four are owned by Freedom Rings, in which we own a 70% interest, twelve are owned by Glazed Investments, in which we have an approximate 75% interest and thirteen are owned by Golden Gate, in which we own a 67% interest. The terms of our arrangements with area developers as described below are applicable to our agreements with these joint ventures as well.

     Associates. We had 20 associates who operated 57 stores as of February 2, 2003. 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 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 they pay no royalties. Although they are not required to contribute to the public relations and advertising fund, in fiscal 2003 most of the associates voluntarily contributed 1% of all sales 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. Under our area developer franchise program, which we introduced in the mid-1990s to strategically expand nationally into new territories, 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 February 2, 2003, we had 30 area developers operating 149 stores. These area developers have contractual commitments to open over 250 stores in their territories during their initial development schedule. Of these 30 area developers, we had a controlling interest in three and a minority equity interest in twelve. Those in which we have a controlling interest operated 29 stores as of February 2, 2003 and those in which we have a minority interest operated 30 stores as of February 2, 2003. 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.

     Effective March 10, 2003, the Company acquired the rights to certain franchise markets in Kansas and Missouri, as well as the related assets, which included five stores, from an Area Developer franchisee, in exchange for cash of approximately $32,000,000. The operations and assets acquired, primarily inventory and equipment, will be included with those of the Company effective March 10, 2003.

     Our area developers are typically multi-unit food operators with a high level of knowledge about the local territory or territories they will develop and a proven financial capability to fully develop their territories. Our strategy, in part, is to grow 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.

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     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 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 do not provide financing to our franchisees other than in our capacity as an equity investor as described above. When we are an equity investor, we contribute equity or guarantee debt or lease commitments of the joint venture generally proportionate to our ownership interest. See Note 17 - Joint Ventures in the notes to our consolidated financial statements. In the past, however, we maintained a program permitting franchisees to lease proprietary Krispy Kreme equipment from our primary bank and we guaranteed the leases. One franchisee took advantage of this program, which we no longer offer.

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:

• We will not attempt to define the Krispy Kreme experience for our customer;

• We prefer to have our customers tell their Krispy Kreme stories and share their experiences with others;

• We will focus on enhancing customer experiences through product-focused, value-added activities; and

• 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:

• Product donations to local radio and television stations, schools, government agencies and other community organizations

• Good neighbor product deliveries to create trial uses

• Sponsorship of local events and nonprofit organizations

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• A “Good Grades Program,” which recognizes scholastic achievement with certificates and free doughnuts

• Our “Krispy Kreme Ambassador Program,” which enlists our fans as ambassadors in new markets to generate awareness and excitement around a new store opening

• Friends of Krispy Kreme eNewsletter sent to those customers that have registered to receive monthly updates about new products, promotions and store openings.

     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’s Today Show, Rosie O’Donnell, The Tonight Show with Jay Leno, Ally McBeal, NYPD Blue, The Practice and Primary Colors, among others. We have been mentioned in more than 65 movies and television shows during the year ended February 2, 2003 and more than 225 movies and television shows during the prior three years. We have also been featured or mentioned in over 10,500 print publications during fiscal 2003 and 9,000 print publications during fiscal 2002, including The Wall Street Journal, The New York Times, The Washington Post, the Los Angeles Times, Newsweek, Glamour, InStyle and People. 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 will occasionally utilize live radio and direct mail to generate awareness and trial usage of our products.

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 corporate portal, myKrispyKreme.com, 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 at multiple times weekly and aggregated into the corporate manufacturing data warehouse.

     The majority of our information technology hardware, including POS systems, is leased.

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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 also compete against other retailers who sell sweet treats such as cookie stores and ice cream stores. 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.

     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 and service marks, including “Krispy Kreme” and “Hot Doughnuts Now” and the logos associated with these marks. We have also registered some of our trademarks in approximately 22 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, both those in the United States and those in international markets, 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.

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     Food product regulation. Our doughnut mixes are produced at our manufacturing facilities in Winston-Salem, NC and Effingham, IL. The North Carolina Department of Agriculture has regulatory power over food products shipped from our Winston-Salem, facility. Additionally, shipments from our Effingham facility are subject to the applicable governmental rules and regulations. 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.

     As we expand internationally, we will be exporting our products, principally our doughnut mixes and coffee, to our franchisees in markets outside the United States. Numerous government regulations apply to both the export of food products from the United States as well as the import of food products into other countries. If one or more of the ingredients in our products are banned, alternative ingredients would need to be found. Although we intend to be proactive in addressing any product ingredient issues, such requirements may delay our ability to open stores in other countries in accordance with our desired schedule.

     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 (“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; interfere 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 are subject to periodic inspections by this agency.

     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 February 2, 2003 we employed 3,913 people. Of these, 240 were employed in our administrative offices and 254 were employed in our manufacturing and distribution centers. In our company stores and commissaries, we had 3,419 employees. Of these, 3,134 were full-time, including 353 managers and administrators. These numbers do not include persons employed by our Freedom Rings, Glazed Investments or Golden Gate joint ventures.

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     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.

ITEM 2. PROPERTIES.

Stores. As of February 2, 2003, there were 276 Krispy Kreme stores, of which 99 were company stores (including 29 which are operated by consolidated joint ventures), 120 were owned by area developers (including 30 in which we have a joint venture interest) and 57 were owned by associates. Of the 276 Krispy Kreme stores in operation at February 2, 2003, 270 are located in 37 states in the continental United States, five are located in eastern Canada and one is located in Australia.

• The majority of our stores have on-premises sales, and 124 stores also engage in off-premises sales.

• Of the 70 stores we operated ourselves as of February 2, 2003, we owned the land and building for 40 stores. We leased both the land and building for 24 stores, leased only the land for 5 stores and leased only the building for 1 store.

• Of the 29 stores we operated by consolidated joint ventures as of February 2, 2003, we owned the land and building for 6 stores. We leased both the land and building for 6 stores and leased only the land for 17 stores.

     Our store counts do not include the doughnut and coffee shops or the current version of our satellite concept stores.

     KKM&D facilities. We own a 137,000 square foot mix manufacturing plant and distribution center in Winston-Salem. Our coffee roasting operation is also located at this facility. We lease a 29,000 square foot facility near Los Angeles which is used as a distribution center. Additionally, we own a 100,000 square foot facility in Winston-Salem, which we use primarily as our equipment manufacturing facility and also as our training facility. In fiscal 2003, we opened a 187,000 square foot mix manufacturing and distribution facility in Effingham, IL.

     Other properties. Our corporate headquarters is located in Winston-Salem, North Carolina. We occupy approximately 35,000 square feet of this multi-tenant facility under a lease that expires on January 31, 2010, with one five-year renewal option. We have leased an additional 24,000 square feet in this facility under four leases which expire between May 31, 2003 and September 30, 2005.

ITEM 3. LEGAL PROCEEDINGS.

     On March 9, 2000, a lawsuit was filed against the Company, management, and Golden Gate, one of the Company’s consolidated joint ventures, in Superior Court in the State of California. The plaintiffs alleged, among other things, breach of contract, and sought compensation for damages and punitive damages. In September 2000, after the case was transferred to Sacramento Superior Court, that court granted the motion to compel arbitration of the action and stay the lawsuit pending the outcome of arbitration. After an appeal to the California appellate courts, on October 1, 2001, plaintiffs filed a demand for arbitration with the American Arbitration Association against KKDC, Golden Gate and others. After an extended series of arbitration hearings, the Arbitration Panel dismissed all claims against all parties, except the claim for breach of contract against KKDC and Golden Gate. The Panel entered a preliminary award of $7,925,000 against KKDC and Golden Gate, which was substantially less than the damages claimed. The Company recorded a provision of $9,075,000 in fiscal 2003, consisting of the $7,925,000 award plus an estimate of the plaintiff’s legal fees and other costs expected to be awarded of $1,150,000. Although further hearings have been scheduled to determine issues concerning litigation fees and costs, the Company anticipates that all claims will be concluded in early fiscal 2004 in a manner acceptable to the Company without further substantial adverse consequences.

     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.

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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 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Our common stock trades on The New York Stock Exchange under the symbol KKD. The following table sets forth for the periods indicated the high and low sales price of our common stock for the periods indicated.

	High		Low
Fiscal Year Ended February 2, 2003:
First Quarter	$	44.02	$	33.00
Second Quarter		41.70		29.32
Third Quarter		38.02		27.40
Fourth Quarter		40.00		29.45
Fiscal Year Ended February 3, 2002:
First Quarter	$	22.61	$	15.13
Second Quarter		43.50		20.13
Third Quarter		39.76		25.00
Fourth Quarter		46.90		33.35

     On November 4, 2002, the Company issued 95,436 shares of its common stock in connection with the purchase of certain assets of associate franchisees KKS of Pensacola, Inc. and Destin Doughnuts, Inc. and certain franchise rights of Charles C. Scruggs, III. This issuance was a private placement exempt from registration under Section 4(2) of the Securities Act.

Dividend Policy

     We did not pay any dividends in fiscal 2003 or 2002. 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:

•	Earnings		•	Capital requirements
•	Financial condition		•	Restrictions in financing agreements
	•	Other factors deemed relevant by the board of directors

     Dividend payments are restricted by our bank credit facilities to 50% of our net income for the immediately preceding fiscal year.

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 2003 Annual Report to Shareholders.

-19-

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     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 2003 Annual Report to Shareholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

     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 Disclosures about Market Risks” in the Company’s fiscal 2003 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 2003 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 May 1, 2003 for the Annual Meeting of Shareholders to be held on June 4, 2003 (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. See also the information under the caption “Report of the Compensation Committee on Executive Compensation” of the Proxy Statement, which information is not incorporated herein by reference.

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.

-20-

Equity Compensation Plan Information

The following table shows the number of outstanding options and shares available for future issuance of options under all of the Company’s equity compensation plans as of February 2, 2003. All of the Company’s equity compensation plans have been approved by the Company’s shareholders.

	Number of					Number of Securities
	Securities to be					Remaining Available for
	Issued Upon			Weighted-Average		Future Issuance Under
	Exercise of			Exercise Price of		Equity Compensation
	Outstanding			Outstanding		Plans (Excluding
	Options, Warrants			Options, Warrants		Securities Reflected in
	and Rights			and Rights		Column (a))
Plan Category	(a)			(b)		(c)
Equity compensation plans approved by shareholders		9,440,800	(1)	$	11.60		6,511,900	(2)
Equity compensation plans not approved by shareholders		—			—		—
Total		9,440,800		$	11.60		6,511,900

(1)  Represents shares of common stock issuable pursuant to outstanding options under the 1998 Stock Option Plan and the 2000 Stock Incentive Plan.

(2)  Represents shares of common stock which may be issued pursuant to awards under the 2000 Stock Incentive Plan.

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 by reference.

ITEM 14. CONTROLS AND PROCEDURES..

     Based on their evaluation of the Company’s disclosure controls and procedures as of a date within 90 days of the filing of this Annual Report on Form 10-K, the Chief Executive Officer and the Chief Financial Officer have concluded that such controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect such controls subsequent to the date of their evaluation.

PART IV

ITEM 15. 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 Company’s fiscal 2003 Annual Report to Shareholders filed as an exhibit to this Form 10-K.

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Description
Report of Independent Accountants
Consolidated Balance Sheets as of February 3, 2002 and February 2, 2003
Consolidated Statements of Operations for the Years Ended January 28, 2001,
	February 3, 2002 and February 2, 2003
Consolidated Statements of Shareholders’ Equity for the Years Ended January 28, 2001,
	February 3, 2002 and February 2, 2003
Consolidated Statements of Cash Flows for the Years Ended January 28, 2001,
	February 3, 2002 and February 2, 2003
Notes to Consolidated Financial Statements

     2.     Financial Statement Schedule. The following financial statement schedule is included in this Part IV of this Form 10-K.

Schedule	Page
Schedule II – Consolidated Valuation and Qualifying Accounts and Reserves		26
Report of Independent Accountants		27

     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

     We filed a Current Report on Form 8-K with the Commission on January 31, 2003 in which we reported the announcement of the merger agreement to acquire Montana Mills Bread Co., Inc., an owner and operator of upscale “village bread stores” in the Northeastern and Midwestern United States.

(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	—	Amended Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of Krispy Kreme’s Registration Statement on Form S-8 (Commission File No. 333-97787), filed with the Commission on August 7, 2002)
3.2*	—	Amended and Restated Bylaws of the Registrant
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)
4.3	—	Specimen Montana Mills Redeemable Common Stock Purchase Warrant Certificate (incorporated by reference to Exhibit 4.2 of Montana Mills’ Registration Statement on Form SB-2 (Commission File No. 333-86956) filed with the Commission on April 25, 2002).
4.4	—	Form of Montana Mills Redeemable Common Stock Purchase Warrant Agreement (incorporated by reference to Exhibit 4.4 of Montana Mills’ Registration Statement on Form SB-2 (Commission File No. 333-86956) filed with the Commission on April 25, 2002).

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Exhibit
Number		Description of Exhibits
10.1	—	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)
10.2	—	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)
10.3	—	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)
10.4	—	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)
10.5	—	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)
10.6	—	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)
10.7	—	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)
10.8	—	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)
10.9	—	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)

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Exhibit
Number		Description of Exhibits
10.10	—	1998 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)**
10.11	—	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)**
10.12	—	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)**
10.13	—	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)**
10.14	—	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)**
10.15	—	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)**
10.16	—	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)**
10.17	—	Employment Agreement dated February 1, 2001 between the Registrant and John W. Tate (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 28, 2001)**
10.18	—	Employment Agreement dated December 1, 2000 between the Registrant and Randy S. Casstevens (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended February 3, 2002)**
10.19*	—	Employment Agreement dated April 22, 2002 between the Registrant and R. Frank Murphy**
10.20	—	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)**
10.21	—	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)**

-24-

Exhibit
Number		Description of Exhibits
10.22	—	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)
10.23	—	Credit Agreement dated as of March 21, 2002 between Krispy Kreme Doughnut Corporation and Wachovia Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Commission on April 5, 2002)
13*	—	Portions of the Registrant’s Fiscal 2003 Annual Report to Shareholders
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)
99.1*	—	Certification of Chief Executive Officer
99.2*	—	Certification of Chief Financial Officer

*	Filed herewith.
**	Identifies management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 15(c) of Form 10-K.

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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 28, 2001	$	1,324,000	$	1,349,000	$	—	$	1,371,000	$	1,302,000
For the year ended February 3, 2002	$	1,302,000	$	502,000	$	—	$	622,000	$	1,182,000
For the year ended February 2, 2003	$	1,182,000	$	272,000	$	—	$	1,000	$	1,453,000

(1) Amounts represent net write-off of uncollectible receivable balances.

-26-

Report of Independent Accountants
on Financial Statement Schedule

To the Board of Directors and Shareholders of Krispy Kreme Doughnuts, Inc.:

     Our audits of the consolidated financial statements referred to in our report dated March 13, 2003 appearing in the 2003 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 15(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 13, 2003

27

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/ Randy S. Casstevens
		Name: Randy S. Casstevens Title: Chief Financial Officer
Date: May 2, 2003

POWER OF ATTORNEY

     Each person whose signature appears below hereby constitutes and appoints Scott A. Livengood, John W. Tate and Randy S. Casstevens, or any 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 May 2, 2003.

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 of Concept Development
John N. McAleer
/s/ Randy S. Casstevens	Chief Financial Officer (Principal Financial and
Randy S. Casstevens	Accounting Officer)
/s/ Erskine Bowles Erskine Bowles	Director
/s/ Mary Davis Holt Mary Davis Holt	Director
/s/ William T. Lynch William T. Lynch	Director
/s/ James H. Morgan James H. Morgan	Director
/s/ Dr. Su Hua Newton Dr. Su Hua Newton	Director
/s/ Robert L. Strickland Robert L. Strickland	Director
/s/ Togo D. West, Jr. Togo D. West, Jr.	Director

CERTIFICATIONS

     I, Scott A. Livengood, President and Chief Executive Officer of Krispy Kreme Doughnuts, Inc., certify that:

     1.     I have reviewed this annual report on Form 10-K of Krispy Kreme Doughnuts, Inc. for the fiscal year ended February 2, 2003;

     2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

     4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of the annual report (the “Evaluation Date”); and
c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.     The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 2, 2003

/s/ Scott A. Livengood

Scott A. Livengood

President and Chief Executive

Officer

     I, Randy S. Casstevens, Chief Financial Officer of Krispy Kreme Doughnuts, Inc., certify that:

     1.     I have reviewed this annual report on Form 10-K of Krispy Kreme Doughnuts, Inc. for the fiscal year ended February 2, 2003;

     2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

     4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of the annual report (the “Evaluation Date”); and
c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.     The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 2, 2003

/s/ Randy S. Casstevens

Randy S. Casstevens

Chief Financial Officer

EX-3.2 3 g82317exv3w2.txt EX-3.2 AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF KRISPY KREME DOUGHNUTS, INC. Effective March 21, 2003 * * * * * * * * * * * * * * * * * * * * * * * ARTICLE I. - OFFICES Section 1. Registered Office: The registered office of the corporation shall be at 370 Knollwood Street, Winston-Salem, North Carolina 27103. Section 2. Principal Office: The principal office of the corporation shall be located at the same address as the registered office or such other place as may be designated by the Board of Directors. Section 3. Other Offices: The corporation may have offices at such other places, either within or without the State of North Carolina, as the Board of Directors may from time to time determine, or as the affairs of the corporation may require. ARTICLE II. - MEETINGS OF SHAREHOLDERS Section 1. Place of Meetings: All meetings of shareholders shall be held at the registered office of the corporation, or at such other place, either within or without the State of North Carolina, as shall be designated in the notice of the meeting or agreed on by a majority of the shareholders entitled to vote thereat. Section 2. Annual Meetings: (a) The annual meeting of shareholders shall be held on a date and at a place at an hour to be fixed by the Chief Executive Officer and affirmed by the Board of Directors from time to time, for the purpose of electing directors of the corporation and for the transaction of such other business as may be properly brought before the meeting. (b) No business shall be transacted at an annual meeting of shareholders, except such business as shall be (i) specified in the notice of meeting given as provided in Article II, Section 5, (ii) otherwise brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise brought before the meeting by a shareholder of record entitled to vote at the meeting, in compliance with the procedures set forth in this Article II, Section 2(b). For business to be brought before an annual meeting by a shareholder pursuant to (iii) above, the shareholder must have given timely notice in writing to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to, or mailed to and received at, the principal office of the corporation not less than forty days nor more than ninety days prior to the meeting. If less than fifty days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder will be timely if received by the Secretary of the Company not later than the close of business on the tenth day following the day on which such notice of the date of the meeting or such public disclosure was given or made. Notice of the date of the meeting shall be deemed to have been given by the corporation more than fifty days in advance of the annual meeting if the annual meeting is called on the date prescribed by Article II, Section 1, without regard to whether notice or public disclosure thereof is made. Notice of action to be brought before the annual meeting pursuant to (iii) above shall set forth as to each such matter the shareholder proposes to bring before the annual meeting (A) a brief description of the business desired to be brought before the annual meeting and the reasons for bringing such business before the annual meeting, (B) the name and address, as they appear on the corporation's books, of each shareholder proposing such business, (C) the classes and number of shares of the corporation that are owned of record and beneficially by each such shareholder, and (D) any material interest of such shareholders in such business other than any interest as a shareholder of the corporation. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the provisions set forth in this Article II, Section 2(b). If the chairman of the annual meeting determines that any business was not properly brought before the meeting in accordance with the provisions of these Bylaws, he shall so declare to the meeting and, to the extent permitted by law, any such business not properly brought before the meeting shall not be transacted. Section 3. Substitute Annual Meeting: If the annual meeting shall not be held on the day designated by these bylaws, a substitute meeting may be called in accordance with the provisions of Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting. Section 4. Special Meetings: Special meetings of the shareholders may be called at any time by the President, Secretary or Board of Directors of the corporation. Section 5. Notice of Meetings: Written or printed notice stating the time and place of the meeting shall be delivered not less than ten nor more than fifty days before the date thereof, either personally or by mail, by or at the direction of the Chairman, the President, the Secretary, or other person calling the meeting, to each shareholder of record entitled to vote at such meeting. In the case of an annual or substitute annual meeting, the notice of meeting need not specifically state the business to be transacted thereat unless it is a matter, other than election of Directors, on which the vote of shareholders is expressly required by the provisions of the North Carolina Business Corporation Act. In the 2 case of a special meeting, the notice of meeting shall specifically state the purpose or purposes for which the meeting is called. When a meeting is adjourned for one hundred twenty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. When a meeting is adjourned for less than one hundred twenty days in any one adjournment, it is not necessary to give any notice of the adjourned meeting other than by announcement at the meeting at which the adjournment is taken. Section 6. Voting Lists: After fixing the record date for a meeting, the Secretary of the corporation shall prepare an alphabetical list of the shareholders entitled to notice of such meeting or any adjournment thereof, arranged by voting group, class and series, with the address of and number of shares held by each. Such list shall be kept on file at the principal office of the corporation, or at a place identified in the meeting notice in the city where the meeting will be held, beginning two business days after notice of such meeting is given and continuing through the meeting, and on written demand shall be subject to inspection or copying by any shareholder, his agent or attorney at any time during regular business hours. This list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the whole time of the meeting. Section 7. Quorum: The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of shareholders. If there is no quorum at the opening of a meeting of shareholders, such meeting may be adjourned from time to time by the vote of a majority of the shares voting on the motion to adjourn; and, at any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting. The shareholders at a meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 8. Voting of Shares: Each outstanding share having voting rights shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Except in the election of Directors the vote of a majority of the shares voted on any matter at a meeting of shareholders at which a quorum is present shall be the act of the shareholders on that matter, unless the vote of a greater number is required by law. In the election of Directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Voting on all matters shall be by voice vote or by a show of hands unless the holders of one tenth of the shares represented at the meeting shall, prior to the voting on any matter, demand a ballot vote on that particular matter. The election of directors is governed by Article III, Section 3. 3 Section 9. Informal Action by Shareholders: Any action which may be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the persons who would be entitled to vote upon such action at a meeting, and filed with the Secretary of the corporation to be kept in the Corporate Minute Book. Section 10. Proxies: At all meetings of shareholders, shares may be voted either in person or by one or more agents authorized by a written proxy executed by the shareholder or his duly authorized attorney-in-fact. A telegram, cablegram, wireless message or photogram appearing to have been transmitted by a shareholder, or a photographic, photostatic or equivalent reproduction of a writing appointing one or more agents shall be deemed a written proxy within the meaning of this section. ARTICLE III. - DIRECTORS Section 1. General Powers: The business and affairs of the corporation shall be managed by the Board of Directors. Section 2. Number, Term and Qualifications: (a) The number of Directors constituting the whole Board shall be not more than fifteen nor less than nine. The authorized number of Directors, within the limits above specified, shall be determined by the affirmative vote of a majority of the whole Board given at a regular or special meeting of the Board of Directors; provided that, if the number so determined is to be increased, or decreased, notice of the proposed increase or decrease shall be included in the notice of such meeting, or all of the Directors at the time in office be present at such meeting, or those not present at any time waive or have waived notice thereof in writing; and provided, further, that the number of Directors which shall constitute the whole Board shall not be less than nine nor shall it be reduced to a number less than the number of Directors then in office unless such reduction shall become effective only at and after the next ensuing meeting of shareholders for the election of Directors. (b) The directors of the corporation shall be divided into the following three classes: Class I, Class II and Class III. The number of directors in each class shall be as nearly equal in number as possible. Each initial director in Class I shall be elected to an initial term of one (1) year, each initial director in Class II shall be elected to an initial term of two (2) years and each initial director in Class III shall be elected to an initial term of three (3) years. Each director shall hold office until the election and qualification of his successor or his earlier death, resignation, retirement or removal from office. Upon the expiration of the initial term for each class of directors, the directors of each class shall be elected for a term of three (3) years. Directors need not be residents of the State of North Carolina or shareholders of the corporation. 4 Section 3. Nomination and Election of Directors: Except as provided in Section 5 and Section 2 of this Article, the Directors shall be elected at the annual meeting of shareholders. If any shareholder so demands, election of Directors shall be by ballot. Only persons who are nominated in accordance with the provisions set forth in these bylaws shall be eligible to be elected as directors at an annual or special meeting of shareholders. Nomination of election to the Board of Directors shall be made by or at the direction of the Board of Directors or a committee appointed thereby. Nomination for election of any person to the Board of Directors may also be made by a shareholder entitled to vote on such election if written notice of the nomination of such person shall have been delivered to the Secretary of the corporation at the principal office of the corporation not less than forty days nor more than ninety days prior to the meeting. If less than fifty days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder will be timely if received by the Secretary of the Company not later than the close of business on the tenth day following the day on which such notice of the date of the meeting or such public disclosure was given or made. Notice of the date of the meeting shall be deemed to have been given by the corporation more than fifty days in advance of the annual meeting if the annual meeting is called on the date prescribed by Article II, Section 1, without regard to whether notice or public disclosure thereof is made. Each such notice shall set forth: (i) the name and address of the shareholder who intends to make the nomination; (ii) a representation that such shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) as to each person to be nominated (A) such person's name and address, employment history for the past five years, affiliations, if any, with the corporation and other corporations, the class and number of shares of the corporation that are owned of record or beneficially by such person and information concerning any transaction in such shares within the prior sixty days, whether such person has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) within the past five years and the details thereof, whether such person has been a party to any proceeding or subject to any judgment, decree or final order with respect to violations of federal or state securities laws within the past five years and the details thereof, and the details of any contract, arrangement, understanding or relationships with any person with respect to any securities of the corporation; (B) such person's written consent to being named as a nominee and to serving as director if elected and (C) a description of all arrangements or understandings between the shareholder and each such nominee and any other person or persons (naming such person or 5 persons) pursuant to which the nomination or nominations are to be made by the shareholder. The chairman of the meeting shall refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Section 4. Removal: Directors may be removed from office only with cause by a vote of shareholders holding 66 2/3% of the outstanding shares entitled to vote at an election of Directors. If any Directors are so removed, new Directors may be elected at the same meeting. Section 5. Vacancies: A vacancy occurring in the Board of Directors may be filled by a majority of the remaining Directors though less than a quorum, or by the sole remaining Director; but a vacancy created by an increase in the authorized number of Directors outside of the range specified in Section 2 of this Article shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose. The shareholders may elect a Director at any time to fill any vacancy not filled by the Directors. Section 6. Compensation: The Board of Directors may compensate Directors for their services as such and may provide for the payment of all expenses incurred by the Directors in attending regular and special meetings of the Board. Section 7. Emeritus Directors: The Board of Directors may, from time to time, by majority vote, elect one or more of its former Directors to serve as Emeritus Directors for one or more consecutive one-year terms or until earlier resignation or removal by a majority of the Board of Directors. Emeritus Directors may be asked to serve as consultants to the Board of Directors and may be appointed by the Board of Directors to serve as consultants to committees of the Board of Directors. Emeritus Directors may be invited to attend meetings of the Board of Directors or any committee of the Board of Directors for which they have been appointed to serve as consultants. Emeritus Directors shall not be permitted to vote on matters brought before the Board of Directors or any committee thereof and shall not be counted for the purpose of determining whether a quorum of the Board or Directors or the committee is present. Emeritus Directors will be entitled to receive fees and reimbursement for expenses of meeting attendance, as recommended by the Chairman of the Board of Directors and approved by the Board of Directors. Emeritus Directors may be removed at any time by the Board of Directors. An Emeritus Director shall not have any of the responsibilities or liabilities of a director, nor any of a director's rights, powers or privileges. Reference in these Bylaws to "Directors" shall not mean or include Emeritus Directors. Section 8. Director Retirement: A Director shall retire as of the annual meeting coincident with the end of term in which such Director attains age 70, except that any Director having attained the age of 70 as of the annual meeting of the shareholders held in 2003 shall be permitted to complete such Director's present term and stand for reelection for one additional term. 6 ARTICLE IV. - MEETINGS OF DIRECTORS Section 1. Regular Meetings: A regular meeting of the Board of Directors shall be held immediately after, and at the same place as, the annual meeting of the shareholders. In addition, to the annual meeting of the Board of Directors, there shall be three regular meetings of the Board of Directors to be held at the offices of the corporation or at such other place as may be designated by the Chairman of the Board or the President in August and November (on the third Tuesday thereof after the closing of the corporation's previous fiscal month) and on the last Tuesday in January prior to close of each fiscal year. The Chairman of the Board may designate the time of the meetings. Section 2. Special Meetings: Special meetings of the Board of Directors may be called by or at the request of the Chairman, President or any two Directors. Such meetings may be held within or without the State of North Carolina. Section 3. Notice of Meetings: Regular meetings of the Board of Directors may be held without notice. The person or persons calling a special meeting of the Board of Directors shall, at least two days before the meeting, give notice thereof by any usual means of communication. Such notice need not specify the purpose for which the meeting is called. Attendance by a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called. Section 4. Quorum: A majority of the Directors fixed by these bylaws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. Section 5. Manner of Acting: Except as otherwise provided in this section, the act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 6. Informal Action by Directors: Action taken by a majority of the Directors without a meeting is nevertheless Board action if written consent to the action in question is signed by all the Directors and filed with the minutes of the proceedings of the Board, whether done before or after the action so taken. Section 7. Meeting by Telephone: Any one or more members of any such committee may participate in a meeting of the committee by means of a conference telephone or similar communications device which allows all persons participating in the meeting to hear each other and such participation in a meeting shall be deemed presence in person at such meeting. 7 ARTICLE V. - EXECUTIVE AND OTHER COMMITTEES Section 1. Appointment: The Board of Directors, by resolution adopted by a majority of the number of Directors then in office, may designate from among its members an Executive Committee or one or more other committees, each consisting of two or more Directors. The designation of any such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility or liability imposed upon it or him by law. Section 2. Authority: Any such committee shall have and exercise all authority of the Board of Directors in the management of the corporation except to the extent, if any, that such authority shall be limited by the resolution appointing such committee and except also to the extent limited by law. Section 3. Tenure and Qualifications: Each member of any such committee shall hold office until the next regular annual meeting of the Board of Directors following his designation and until his successor is designated as a member of any such committee and is elected and qualified. Section 4. Meetings: Regular meetings of any such committee may be held without notice at such time and place as such committee may fix from time to time by resolution. Special meetings of any such committee may be called by any member thereof upon not less than one day's notice stating the place, date and hour of such meeting, which notice may be written or oral, and if mailed, shall be deemed to be delivered when deposited in the United States mail addressed to any member of the Executive Committee at his business address. Any member of the Executive Committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof to attend in person. The notice of a meeting of the Executive Committee need not state the business proposed to be transacted at the meeting. Section 5. Quorum: A majority of the members of any such committee shall constitute a quorum for the transaction of business at any meeting thereof, and actions of such committee must be authorized by the affirmative vote of a majority of the members present at the meeting at which a quorum is present. Section 6. Informal Action: Action taken by a majority of the members of any such committee without meeting is nevertheless action of such committee if written consent to the action in question is signed by all of the members of such committee and filed with the minutes of the proceedings of the committee, whether done before or after the actions so taken. Section 7. Removal: Any member of any such committee may be removed at any time with or without cause by resolution adopted by a majority of the Board of Directors. 8 Section 8. Vacancies: Any vacancy in any such committee may be filled by resolution adopted by a majority of the Board of Directors. Section 9. Procedure: Any such committee shall elect a presiding officer from among its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the Board of Directors for its information at the meeting thereof held next after the proceedings shall have been taken. Section 10. Meeting by Telephone: Any one or more members of any such committee may participate in a meeting of the committee by means of a conference telephone or similar communications device which allows all persons participating in the meeting to hear each other and such participation in a meeting shall be deemed presence in person at such meeting. ARTICLE VI. - OFFICERS Section 1. Number: The officers of the corporation shall consist of a President, a Secretary, a Treasurer, and such Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers as the Board of Directors may from time to time elect. Any two or more offices may be held by the same person, except the offices of President and Secretary may not be held by the same person. Section 2. Election and Term: The officers of the corporation shall be selected by the Board of Directors. Such elections may be held at any regular or special meeting of the Board. Each officer shall hold office for a period of one year or until his death, resignation, retirement, removal, disqualification or his successor is elected and qualifies. Section 3. Removal: Any officer or agent elected or appointed by the Board of Directors may be removed by the Board with or without cause; but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4. President: The President, subject to the control of the Board of Directors, shall supervise and control the management of the corporation in accordance with these bylaws. He shall preside at all meetings of shareholders and directors. He shall sign, with any other proper officer, certificates for shares of the corporation and any deeds, mortgages, bonds, contracts, or other instruments which may be lawfully executed on behalf of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be delegated by the Board of Directors to some other officer or agent; and, in general, he shall perform such other duties as may be prescribed by the Board of Directors from time to time. 9 Section 5. Vice Presidents: The Executive Vice Presidents, Senior Vice Presidents, and Vice Presidents in the order of their election, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of that office. In addition, they shall perform such other duties and have such other powers as the Board of Directors shall prescribe. Section 6. Secretary: The Secretary shall keep a correct record of all the proceedings of the meetings of the shareholders and Directors. He shall attend to the giving of notices, have custody of the corporate seal, and affix it to all instruments required to be executed under seal as authorized by the Board of Directors. He shall perform such other duties as are incident to the office of Secretary, and shall have such other powers and duties as may be conferred upon him by the Board of Directors. Section 7. Treasurer: The Treasurer shall have charge of all the moneys and securities belonging to the corporation. He shall deposit said property with such banks as the Board of Directors shall designate and in the name of the corporation. He shall keep a record of all receipts and disbursements, and shall have charge of all records of the corporation relating to its finances. He shall perform such other duties as are incident to the office of Treasurer, and shall have such other powers and duties as may be conferred upon him by the Board of Directors. Section 8. Assistant Secretaries and Treasurers: The Assistant Secretaries and Assistant Treasurers shall, in the absence or disability of the Secretary or the Treasurer, respectively, perform the duties and exercise the powers of those offices, and they shall, in general, perform such other duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the President or the Board of Directors. Section 9. Bonds: The Board of Directors may by resolution require any or all officers, agents and employees of the corporation to give bond to the corporation, with sufficient sureties, conditioned on the faithful performance of the duties of their respective offices or positions, and to comply with such other conditions as may from time to time be required by the Board of Directors. Section 10. Vacancies: A vacancy in any office because of death, resignation, removal, disqualification, or other reason, may be filled by the Board of Directors for the unexpired portion of the term. ARTICLE VII. - INDEMNIFICATION Section 1. Expenses and Liabilities: (a) Any person who at any time serves or has served (1) as a Director, Emeritus Director, officer, employee or agent of the corporation, (2) at the request of the corporation as a Director, Emeritus Director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, 10 joint venture, trust, or other enterprise, or (3) at the request of the corporation as a trustee or administrator under an employee benefit plan, shall have a right to be indemnified by the corporation to the fullest extent from time to time permitted by law against Liability and Expenses in any Proceeding (including without limitation a Proceeding brought by or on behalf of the corporation itself) arising out of his or her status as such or activities in any of the foregoing capacities or results from him being called as a witness at a time when he has not been made a named defendant or respondent to any Proceeding. (b) The Board of Directors of the corporation shall take all such action as may be necessary and appropriate to authorize the corporation to pay the indemnification required by this provision, including without limitation, to the extent needed, making a good faith evaluation of the manner in which the claimant for indemnity acted and of the reasonable amount of indemnity due him. (c) Any person who at any time serves or has served in any of the aforesaid capacities for or on behalf of the corporation shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the rights provided for herein. Any repeal or modification of these indemnification provisions shall not affect any rights or obligations existing at the time of such repeal or modification. The rights provided for herein shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from this provision. (d) The rights granted herein shall not be limited by the provisions contained in Sections 55-8-51 through 55-8-56 of the North Carolina General Statutes or any successor to such statute. Section 2. Advance Payment of Expenses: The Corporation shall (upon receipt of an undertaking by or on behalf of the Director, Emeritus Director, officer, employee or agent involved to repay the Expenses described herein unless it shall ultimately be determined that he or she is entitled to be indemnified by the corporation against such Expenses) pay Expenses incurred by such Director, Emeritus Director, officer, employee or agent in defending a Proceeding or appearing as a witness at a time when he or she has not been named as a defendant or a respondent with respect thereto in advance of the final disposition of such Proceeding. Section 3. Insurance: The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a Director, Emeritus Director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a Director, Emeritus Director, officer, employee or agent of another domestic or foreign corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan against any liability asserted against him or her and incurred by him or her in any such 11 capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability. Section 4. Definitions: The following terms as used in this Article shall have the following meanings. "Proceeding" means any threatened, pending or completed action, suit, or proceeding and any appeal therein (and any inquiry or investigation that could lead to such action, suit, or proceeding), whether civil, criminal, administrative, investigative or arbitrative and whether formal or informal. "Expenses" means expenses of every kind, including counsel fees. "Liability" means the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), reasonable expenses incurred with respect to a Proceeding, and all reasonable expenses incurred in enforcing the indemnification rights provided herein. "Director" and "Emeritus Director" include the estate or personal representative of such Director or Emeritus Director. "Corporation" shall include any domestic or foreign predecessor of this corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. ARTICLE VIII. - CONTRACTS, CHECKS AND DEPOSITS Section 1. Contracts: The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument on behalf of the corporation and such authority may be general or confined to specific instances. Section 2. Checks and Drafts: All checks, drafts or other orders for the payment of money issued in the name of the corporation shall be signed by such officer or officers, agent or agents, of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. Section 3. Deposits: All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such depositories as the Board of Directors shall direct. ARTICLE IX. - CERTIFICATES FOR SHARES AND TRANSFER THEREOF Section 1. Certificates for Shares: Certificates representing shares of the corporation shall be issued, in such form as the Board of Directors shall determine, to every shareholder for the fully paid shares owned by him. These certificates shall be signed by the President or any Vice President, and the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer. They shall be consecutively numbered or otherwise identified; and the name and address of the persons to whom they are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. 12 Section 2. Transfer of Shares: Transfer of shares shall be made on the stock transfer books of the corporation only upon surrender of the certificates for the shares sought to be transferred by the record holder thereof or by his duly authorized agent, transferee or legal representative. All certificates surrendered for transfer shall be canceled before new certificates for the transferred shares shall be issued. Section 3. Closing Transfer Books and Fixing Record Date: For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, fifty days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice or to vote at a meeting of shareholders, such books shall be closed for at least ten days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such record date in any case to be not more than fifty days and, in case of a meeting of shareholders, not less than ten days immediately preceding the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. Section 4. Lost Certificates: The Board of Directors may authorize the issuance of a new certificate in place of a certificate claimed to have been lost or destroyed, upon receipt of an affidavit of such fact from the person claiming the loss or destruction. When authorizing such issuance of a new certificate, the Board may require the claimant to give the corporation a bond in said sum as it may direct to indemnify the corporation against loss from any claim with respect to the certificate claimed to have been lost or destroyed; or the Board may, by resolution reciting that the circumstances justify such action, authorize the issuance of a new certificate without requiring such a bond. ARTICLE X. - GENERAL PROVISIONS Section 1. Dividends: The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and by its charter. 13 Section 2. Seal: The seal shall be in the form of a circle with the name of the corporation and N.C. on the circumference and the word "SEAL" in the center as shown by the impress of the corporate seal on the margin of this section of the bylaws. Section 3. Waiver of Notice: Whenever any notice is required to be given to any shareholder or Director under the provisions of the North Carolina Business Corporation Act or under the provisions of the charter or bylaws of this corporation a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Section 4. Fiscal Year: Unless otherwise ordered by the Board of Directors by action recorded in the minutes, the fiscal year of the corporation shall end on the Sunday in either January or February closest to January 31. Section 5. Amendments: Except as otherwise provided herein, these bylaws may be amended or repealed and new bylaws may be adopted by the affirmative vote of a majority of the Directors then holding office at any regular or special meeting of the Board of Directors. The Board of Directors shall have no power to adopt a bylaw: (1) requiring more than a majority of the voting shares for a quorum at a meeting of shareholders or more than a majority of the votes cast to constitute action of the shareholders, except where higher percentages are required by law; or (2) providing for the management of the corporation other than by the Board of Directors or a committee thereof. No bylaw adopted or amended by the shareholders shall be altered or repealed by the Board of Directors. Notwithstanding any provision contained in these Bylaws to the contrary, the affirmative vote of at least 66 2/3% of the outstanding shares of Common Stock of the corporation shall be required to amend or repeal the following provisions of these Bylaws: Article II, Section 2(b) (Annual Meetings); Article II, Section 4 (Special Meetings); Article II, Section 5 (Notice of Meetings); Article III, Section 2 (Directors - Number, Term and Qualifications); or Article III, Section 4 (Directors - Removal). No alteration, amendment or rescission of a bylaw shall be voted upon unless notice thereof has been given in the notice of the meeting or unless all of the Directors of the corporation execute a written waiver of notice stating that action upon the bylaws is to be taken at the meeting, and the original of such waiver shall be recorded in the Minute Book. 14 EX-10.19 4 g82317exv10w19.txt EX-10.19 EMPLOYMENT AGREEMENT EXHIBIT 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (THE "AGREEMENT") is made effective the 22nd day of April, 2002, by and between KRISPY KREME DOUGHNUTS, INC. a North Carolina corporation (the "Company"), and R. FRANK MURPHY (the "Executive"). RECITAL The Executive is being hired as Executive Vice President and General Counsel, reporting to the CEO, 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 April 22, 2002 and ending April 21, 2005; provided, however, that commencing April 22, 2003, the Executive's Period of Employment shall automatically be extended for successive one-year periods each year as of April 22 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. (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. 2 4. POSITION, DUTIES AND RESPONSIBILITIES. During the Period of Employment, the executive shall (a) serve as Executive Vice President and General Counsel of the Company, reporting to the CEO, and its subsidiaries or in such other Senior Management position as may be assigned to him by mutual agreement with the Board of Directors. The Executive shall be employed hereunder in Forsyth County, North Carolina 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 $300,000, with annual increases in accordance with the Company's regular practices for members of Senior Management. In addition, he shall receive 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, and all expenses necessary to maintain law license and professional memberships, 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. 3 (e) The Company agrees to pay the Executive's dues and assessments for membership in Forsyth Country Club and in the Piedmont Club. 6. TERMINATION OF EMPLOYMENT. During the Period of Employment: (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 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. 4 (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, (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 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 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: 5 (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 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 6 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: (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 Section 8 and any amounts earned by the Executive subsequent to his 7 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 he Voting Stock; or (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 medial, 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. 8 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 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 10(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. 9 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 8 and 9 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: R. Frank Murphy 445 North Westview Drive Winston-Salem, NC 27104 IF TO THE COMPANY: Krispy Kreme Doughnut Corporation P.O. Box 83 Winston-Salem, NC 27102-0083 (for mail) 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. 10 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 8 and 9 of the Agreement shall survive the termination of this Agreement and shall continue for the terms set forth in Sections 8 and 9. 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. KRISPY KREME DOUGHNUT CORPORATION By: /s/ Scott A. Livengood -------------------------------------- Scott A. Livengood, CEO and President [CORPORATE SEAL] EXECUTIVE /s/ R. Frank Murphy (Seal) ----------------------------------- R. Frank Murphy 11 EX-13 5 g82317exv13.txt EX-13 PORTIONS OF FISCAL 2003 ANNUAL REPORT 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 January 31, 1999, January 30, 2000, January 28, 2001, February 3, 2002 and February 2, 2003 have been derived from our audited consolidated financial statements. Please note that our fiscal year ended February 3, 2002 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 and the royalties and fees received from our franchised stores. Our consolidated financial statements appearing elsewhere in this annual report exclude franchised store sales and include royalties and fees received from our franchisees. The consolidated financial statements also include the results of Freedom Rings, LLC, the area developer in Philadelphia, and Golden Gate Doughnuts, LLC, the area developer in Northern California, in which Krispy Kreme has a majority ownership interest, as well as the results of Glazed Investments, LLC, the area developer in Colorado, Minnesota and Wisconsin, for periods subsequent to August 22, 2002, the date the Company acquired a controlling interest in this area developer. 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 on March 19, 2001 to shareholders of record as of March 5, 2001 and a two-for-one stock split paid on June 14, 2001 to shareholders of record as of May 29, 2001. Unless otherwise specified, references in this annual report to "Krispy Kreme," the "Company," "we," "us" or "our" refer to Krispy Kreme Doughnuts, Inc. and its subsidiaries.

IN THOUSANDS, EXCEPT PER SHARE DATA AND STORE NUMBERS - ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - ---------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Total revenues $ 180,880 $ 220,243 $ 300,715 $ 394,354 $ 491,549 Operating expenses 159,941 190,003 250,690 316,946 381,489 General and administrative expenses 10,897 14,856 20,061 27,562 28,897 Depreciation and amortization expenses 4,278 4,546 6,457 7,959 12,271 Arbitration award -- -- -- -- 9,075 Provision for restructuring 9,466 -- -- -- -- ------------------------------------------------------------------------- Income (loss) from operations (3,702) 10,838 23,507 41,887 59,817 Interest expense (income), net, and other 1,577 1,232 (1,698) (2,408) 749 Equity loss in joint ventures -- -- 706 602 2,008 Minority interest -- -- 716 1,147 2,287 ------------------------------------------------------------------------- Income (loss) before income taxes (5,279) 9,606 23,783 42,546 54,773 Provision (benefit) for income taxes (2,112) 3,650 9,058 16,168 21,295 ------------------------------------------------------------------------- Net income (loss) $ (3,167) $ 5,956 $ 14,725 $ 26,378 $ 33,478 ========================================================================= Net income (loss) per share: Basic $ (.09) $ .16 $ .30 $ .49 $ .61 Diluted (.09) .15 .27 .45 .56 Shares used in calculation of net income (loss) per share: Basic 32,996 37,360 49,184 53,703 55,093 Diluted 32,996 39,280 53,656 58,443 59,492 Cash dividends declared per common share $ .04 $ -- $ -- $ -- $ -- OPERATING DATA (UNAUDITED): Systemwide sales $ 240,316 $ 318,854 $ 448,129 $ 621,665 $ 778,573 Number of stores at end of period: Company 61 58 63 75 99 Franchised 70 86 111 143 177 ------------------------------------------------------------------------- Systemwide 131 144 174 218 276 ========================================================================= Average weekly sales per store: Company $ 47 $ 54 $ 69 $ 72 $ 76 Franchised 28 38 43 53 58 BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 8,387 $ 11,452 $ 29,443 $ 49,236 $ 81,441 Total assets 93,312 104,958 171,493 255,376 410,487 Long-term debt, including current maturities 21,020 22,902 -- 4,643 60,489 Total shareholders' equity 42,247 47,755 125,679 187,667 273,352

21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with the financial statements and the accompanying notes. This annual report contains statements about future events and expectations, including anticipated store and market openings, planned capital expenditures and trends in or expectations regarding the Company's operations and financing abilities, that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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 statements. 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; the quality of franchise store operations; the 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 Krispy Kreme's periodic reports, proxy statement and other information statements 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 negative 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 and a two-for-one stock split paid on June 14, 2001 to shareholders of record as of May 29, 2001. CRITICAL ACCOUNTING POLICIES The Company's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. The Company chooses accounting policies within US GAAP that management believes are appropriate to accurately and fairly report the Company's operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions and has discussed the development and selection of critical accounting policies with its audit committee of the board of directors. The Company believes the following accounting policies are critical to understanding the results of operations and affect the more significant judgments and estimates used in the preparation of the consolidated financial statements: BASIS OF CONSOLIDATION. Our consolidated financial statements include the accounts of Krispy Kreme Doughnuts, Inc. and all subsidiaries where control rests with the Company. Investments in affiliates in which the Company has the ability to exercise significant influence over operating and financial policies (generally 20- to 50-percent ownership), all of which are investments in joint ventures with certain of our franchisees, are accounted for by the equity method of accounting. Our judgments regarding the level of influence or control in each equity method investment include considering key factors such as our ownership interest, representation on the management committee, participation in policy making decisions and material intercompany transactions. Investments in other joint ventures that we do not control and for which we do not have the ability to exercise significant influence are carried at cost. All significant intercompany accounts and transactions, including transactions with equity method investees, are eliminated in consolidation. ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts receivable arise primarily from royalties earned on sales of our franchisees, sales by KKM&D of equipment, mix and other supplies necessary to operate a Krispy Kreme store to our franchisees, as well as from off-premises sales by Company-owned stores to convenience and grocery stores and other customers. Payment terms generally range from 30 to 54 days. The Company has experienced minimal uncollectible accounts receivable from franchisees. The majority of the allowance for doubtful accounts relates to receivables from convenience and grocery stores and other customers for off-premises sales in our Company stores. Although collection efforts continue, the Company establishes an allowance for these accounts generally when they become past due and are deemed uncollectible. INTANGIBLE ASSETS. Effective fiscal 2003, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." The Statement addresses the accounting and reporting of goodwill and other intangible assets subsequent to their acquisition. The Statement requires intangible assets with definite lives to be amortized over their estimated useful lives, while those with indefinite lives and goodwill are no longer subject to amortization, but must be tested annually for impairment, or more frequently if events and circumstances indicate potential impairment. The Company evaluated its intangible assets and determined that all such assets have indefinite lives and, therefore, are not subject to amortization. The Statement required an initial impairment assessment be performed upon adoption, involving comparing the fair value of goodwill and other intangible assets to related carrying values for the reporting unit. The Company performed this test upon adoption of SFAS 22 No. 142 and found no instances of impairment. During the fourth quarter of fiscal 2003, the Company performed the annual impairment test and determined that its intangible assets and goodwill were not impaired. The annual test for impairment involves determining the fair value of the reporting unit to which the intangible asset or goodwill is assigned and comparing that fair value to the reporting unit's carrying value, including the intangible asset or goodwill. To determine fair value, the Company uses a combination of the fair value of the cash flows that the reporting unit can be expected to generate in the future (the Income Approach), the fair value of the business in comparison to similar publicly traded businesses (the Market Comparable Method) and the fair value of the net assets of the business based on exchange prices in actual transactions (the Market Transaction Method). These valuation methods require management to make projections of revenues, operating expenses, working capital investment, capital spending and cash flows for the respective reporting unit over a multi-year period, as well as the weighted average cost of capital to be used as a discount rate. The Company must also identify publicly traded companies in similar lines of business. Significant management judgment is involved in preparing these estimates. Changes in projections or estimates could significantly change the estimated fair value of reporting units and impact the recorded balances for intangible assets and goodwill. In addition, if management uses different assumptions or estimates in the future or if different conditions occur in future periods, future operating results and the balances of intangible assets and goodwill in the future could be materially impacted. ASSET IMPAIRMENT. When a store is identified as underperforming or when a decision is made to close a store, the Company makes an assessment of the potential impairment of the related assets. The assessment is based upon a comparison of the carrying amount of the assets, primarily property and equipment, to the estimated undiscounted cash flows expected to be generated from those assets. To estimate cash flows, management projects the net cash flows anticipated from continuing operation of the store until its closing as well as cash flows anticipated from disposal of the related assets, if any. If the carrying amount of the assets exceeds the sum of the undiscounted cash flows, the Company records an impairment charge measured as the excess of the carrying value over the fair value of the assets. The resulting net book value of the assets, less estimated net realizable value at disposition, is depreciated over the remaining term that the store will continue in operation. Disposition efforts on assets held for sale begin immediately following the store closing. Determining undiscounted cash flows and fair value of store assets involves estimating future cash flows, revenues, operating expenses and sales values. The projections of these amounts represent management's best estimates as of the time of the review. If different cash flows had been estimated, property and equipment balances could be impacted. Further, if management uses different assumptions or estimates in the future or if different conditions occur in future periods, future operating results could be impacted. INSURANCE. The Company is generally self-insured for most employee health care claims, workers' compensation, automobile liability and product and general liability losses. Insurance liabilities are accrued based upon historical and industry trends and are adjusted when necessary due to changing circumstances. Outside actuaries are used to assist in estimating insurance obligations. Because there are many estimates and assumptions involved in recording these liabilities, differences between actual future events and prior estimates and assumptions could impact future operating results and result in adjustments to these liabilities. For further information concerning accounting policies, refer to Note 2 -- Nature of Business and Significant Accounting Policies in the notes to our consolidated financial statements. COMPANY OVERVIEW AND INDUSTRY OUTLOOK We expect doughnut sales to grow due to a variety of factors, including the growth in two-income households and corresponding shift to foods consumed away from home, increased snack food consumption and further growth of doughnut purchases from in-store bakeries. 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 has enhanced, and will continue to help enhance the growth and expansion of the overall doughnut market. 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. 23 "Private label" products carry the retailer's brand name or some other non-Krispy Kreme brand. Unbranded and private label products are a declining portion of our business. In addition to our retail stores, we are vertically integrated. Our Krispy Kreme Manufacturing and Distribution business unit, KKM&D, produces doughnut mixes and manufactures our doughnut-making equipment, which all of our stores are required to purchase. Additionally, this business unit currently operates distribution centers that provide Krispy Kreme stores with essentially all supplies for the critical areas of their business. In fiscal 2003, we opened our second mix manufacturing and distribution facility in Effingham, Illinois. The new mix facility triples our mix manufacturing capacity and also adds our third distribution facility. This business unit is volume-driven, and its economics are enhanced by the opening of new stores and the penetration of on-premises and off-premises sales channels by existing stores. In fiscal 2002, through the acquisition of the assets of Digital Java, Inc., we began to expand our vertical integration to sourcing and roasting our own coffee beans. Digital Java, Inc., a Chicago-based coffee company, was a sourcer and micro-roaster of premium quality coffee and offered a broad line of coffee-based and non-coffee based beverages. Subsequent to the acquisition, we relocated the acquired assets and operations to a newly constructed coffee roasting facility at our Ivy Avenue plant in Winston-Salem. This operation is supporting the rollout of our new beverage program which includes drip coffee, espresso and frozen beverages. During fiscal 2003, we completed the rollout of the first component of this program, converting our stores to the new drip coffee offering, replacing the previous product sold which was purchased from an unrelated third party. As of February 2, 2003, the operation was supporting the new, full beverage program in approximately 70 Krispy Kreme locations, most of which are new stores that opened with the full program. We anticipate introducing the remaining components of the new beverage program, primarily espresso and frozen beverages, in all remaining stores over the next twelve to eighteen months. We believe our vertical integration allows us to maintain the consistency and quality of our products throughout our system. In addition, through vertical integration, we believe we can utilize volume buying power, which helps lower the cost of supplies to each of our stores, and enhance our profitability. In our recent store development efforts, we have focused on opening both Company and franchised stores in major metropolitan markets, generally markets with greater than 100,000 households. In fiscal 2003, we announced an initiative to enhance our expansion through the opening of factory stores in small markets, with small markets being defined as those markets having less than 100,000 households. Through value engineering, we believe we have reduced the level of investment in property and equipment required to open a Krispy Kreme store, making the opportunity to enter small markets economically viable. We also expect that stores in these small markets will participate in fund-raising programs and develop off-premises business, further enhancing the opportunity in these markets, although we believe that their retail sales alone will generate attractive financial returns. We expect the stores opened in these markets will primarily be franchised stores and will be opened by our existing franchisees. During fiscal 2002, we introduced a new concept store, the "doughnut and coffee shop." This store uses the new Hot Doughnut Machine technology, which completes the final steps of the production process and requires less space than the full production equipment in our traditional factory store. This technology combines time, temperature and humidity elements to re-heat unglazed doughnuts, provided by a traditional factory store, and prepare them for the glazing process. Once glazed, customers can have the same hot doughnut experience in a doughnut and coffee shop as in a factory store. Additionally, the doughnut and coffee shop offers our new full line of coffee and other beverages. During fiscal 2002, we began our initial tests of the concept in three different markets and venues in North Carolina and continue to develop and enhance the technology. As of February 2, 2003, five doughnut and coffee shops were open, four of which are owned by the Company. We plan to continue our tests of this concept. In addition to the doughnut and coffee shop concept, we plan to experiment with a new generation satellite concept. In this concept, we will sell fresh doughnuts, beverages and Krispy Kreme collectibles, however the doughnuts will not be produced on site but rather will be supplied by a nearby factory store, multiple times each day. As stated above, we intend to expand our concept primarily through opening new franchise stores in territories across the continental United States and Canada, as well as select other international markets as discussed below. We also have entered and intend to enter into joint ventures with some of our franchisees. As of February 2, 2003, there were 276 Krispy Kreme stores nationwide consisting of 99 Company-owned stores (including 29 which are consolidated joint venture stores), 120 Area Developer franchise stores (including 30 in which we have a joint venture interest) and 57 Associate franchise stores. For fiscal 2004, we anticipate opening approximately 77 new stores under existing agreements, most of which are expected to be franchise stores. We also anticipate opening a combination of at least ten doughnut and coffee shops and/or satellite stores. The store format will be determined by the site opportunities, primarily the space available. In contemplation of our future international expansion, we are beginning to develop our global strategy as well as the capabilities and infrastructure necessary to support our expansion outside the United States. We currently have five stores in Canada, one of which is a commissary, and will open additional stores in the Canadian market in the coming years. These stores are owned and operated by a joint venture. During fiscal 2003, we entered into a joint venture to franchise the Australian and New Zealand markets. The joint venture opened its first store, a commissary to be used for training and sampling prior to 24 opening the first retail store, in Australia in fiscal 2003. We expect the joint venture to open its first retail store in the second quarter of fiscal 2004. During fiscal 2003, we also entered into a joint venture to develop Krispy Kreme stores in the United Kingdom and Republic of Ireland. We expect the joint venture to open its first store in the United Kingdom in late fiscal 2004. We are also focusing on additional markets outside the United States, including Japan, Mexico, South Korea and Spain. Our initial research indicates that these will be viable markets for the Krispy Kreme concept. In January 2003, we announced plans to acquire, through an exchange of stock, Montana Mills Bread Co., Inc. ("Montana Mills"), an owner and operator of upscale "village bread stores" in the Northeastern and Midwestern United States. Montana Mills' stores produce and sell a variety of breads and baked goods prepared in an open-view format. We believe that the acquisition of Montana Mills will provide operational synergies as well as an opportunity to leverage our existing capabilities, such as our distribution chain, off-premises sales and coffee-roasting expertise, to expand Montana Mills' business. We also believe that the acquisition of Montana Mills provides an opportunity to apply our experience and strength in creating a national franchise network towards building a franchise network for Montana Mills. The acquisition is expected to be completed in the first quarter of fiscal 2004. Subsequently, we expect to spend approximately two years fully developing and refining the Montana Mills concept. The revenues of Montana Mills in fiscal 2004 subsequent to completion of the acquisition are not expected to be material to the consolidated revenues of the Company. As we expand our business, 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. RESULTS OF OPERATIONS 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 and discussion of critical accounting policies above, refer to Note 2 -- Nature of Business and Significant Accounting Policies in the notes to our consolidated financial statements. A guide to the discussion for each period is presented below. OVERVIEW. 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 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 segment include store level expenses along with direct general and administrative expenses. - FRANCHISE OPERATIONS. Represents the results of our franchise programs. 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 and development and franchise fees ranging from $20,000 to $40,000 per store. Most associates and area developers also contribute 1.0% of all sales to our national advertising and brand development fund. Expenses for this business segment include costs incurred to recruit new franchisees, costs 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. This business unit buys and processes ingredients used to produce doughnut mixes and manufactures doughnut-making equipment that all of our stores are required to purchase. This business unit also includes our coffee roasting operations, which became operational in fiscal 2003. The operations currently support our drip coffee beverage program, which was rolled out to our stores in the third quarter of fiscal 2003, replacing the existing drip coffee offering that was purchased from an unrelated third party. Production in this facility will be increased in fiscal 2004 with the growth in stores and as the other components of our expanded beverage program, primarily espresso and frozen beverages, are introduced in our existing and new stores. Currently, the operations support the expanded beverage program in approximately 70 stores, most of which are new stores that opened with the full program. The KKM&D business unit also purchases and sells essentially all supplies necessary to operate a Krispy Kreme store, including all food ingredients, juices, 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. 25 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, interest income, interest expense, equity loss in joint ventures, minority interest in consolidated joint ventures and the provision for income taxes. 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 2001 (52 WEEKS ENDED JANUARY 28, 2001), FISCAL 2002 (53 WEEKS ENDED FEBRUARY 3, 2002) AND FISCAL 2003 (52 WEEKS ENDED FEBRUARY 2, 2003) EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES. CERTAIN OPERATING DATA ARE ALSO SHOWN FOR THE SAME PERIODS.

DOLLARS IN THOUSANDS - --------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - --------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Total revenues 100.0% 100.0% 100.0% Operating expenses 83.4 80.4 77.6 General and administrative expenses 6.7 7.0 5.9 Depreciation and amortization expenses 2.1 2.0 2.5 Arbitration award -- -- 1.8 ----------------------------------------------------- Income from operations 7.8 10.6 12.2 Interest expense (income), net, and other (0.1) (0.2) 1.1 ----------------------------------------------------- Income before income taxes 7.9 10.8 11.1 Provision for income taxes 3.0 4.1 4.3 ----------------------------------------------------- Net income 4.9% 6.7% 6.8% ----------------------------------------------------- OPERATING DATA: Systemwide sales $ 448,129 $ 621,665 $ 778,573 Increase in comparable store sales: Company 22.9% 11.7% 12.8% Systemwide 17.1% 12.8% 11.8%

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 THE NOTES TO OUR CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL DISCUSSION OF OUR REPORTABLE SEGMENTS. OPERATING EXPENSES EXCLUDE DEPRECIATION AND AMORTIZATION EXPENSES, INDIRECT (UNALLOCATED) GENERAL AND ADMINISTRATIVE EXPENSES AND THE ARBITRATION AWARD. DIRECT GENERAL AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN OPERATING EXPENSES.

IN THOUSANDS - --------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - --------------------------------------------------------------------------------------------------------------- REVENUES BY BUSINESS SEGMENT: Company Store Operations $ 213,677 $ 266,209 $ 319,592 Franchise Operations 9,445 14,008 19,304 KKM&D 77,593 114,137 152,653 ----------------------------------------------------- Total revenues $ 300,715 $ 394,354 $ 491,549 ----------------------------------------------------- OPERATING EXPENSES BY BUSINESS SEGMENT: Company Store Operations $ 181,470 $ 217,419 $ 252,524 Franchise Operations 3,642 4,896 4,877 KKM&D 65,578 94,631 124,088 ----------------------------------------------------- Total operating expenses $ 250,690 $ 316,946 $ 381,489 -----------------------------------------------------

26 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, INDIRECT (UNALLOCATED) GENERAL AND ADMINISTRATIVE EXPENSES AND THE ARBITRATION AWARD. DIRECT GENERAL AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN OPERATING EXPENSES.

- --------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - --------------------------------------------------------------------------------------------------------------- REVENUES BY BUSINESS SEGMENT: Company Store Operations 71.1% 67.5% 65.0% Franchise Operations 3.1 3.6 3.9 KKM&D 25.8 28.9 31.1 ----------------------------------------------------- Total revenues 100.0% 100.0% 100.0% ===================================================== OPERATING EXPENSES BY BUSINESS SEGMENT: Company Store Operations 84.9% 81.7% 79.0% Franchise Operations 38.6% 35.0% 25.3% KKM&D 84.5% 82.9% 81.3% ----------------------------------------------------- Total operating expenses 83.4% 80.4% 77.6% =====================================================

ADDITIONALLY, DATA ON STORE OPENING ACTIVITY ARE SHOWN BELOW. TRANSFERRED STORES REPRESENT STORES SOLD BETWEEN THE COMPANY AND FRANCHISEES.

- ---------------------------------------------------------------------------------------------------------------- COMPANY FRANCHISED TOTAL - ---------------------------------------------------------------------------------------------------------------- YEAR ENDED JANUARY 28, 2001 Beginning count 58 86 144 Opened 8 28 36 Closed (3) (3) (6) ----------------------------------------------- Ending count 63 111 174 =============================================== YEAR ENDED FEBRUARY 3, 2002 Beginning count 63 111 174 Opened 7 41 48 Closed (2) (2) (4) Transferred 7 (7) -- ----------------------------------------------- Ending count 75 143 218 =============================================== YEAR ENDED FEBRUARY 2, 2003 Beginning count 75 143 218 Opened 14 49 63 Closed (3) (2) (5) Transferred 13 (13) -- ----------------------------------------------- Ending count 99 177 276 ===============================================

Company stores as of February 2, 2003 included 29 stores operated by area developer joint ventures 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, and exclude the doughnut and coffee shops and the current version of our satellite concept stores. YEAR ENDED FEBRUARY 2, 2003 COMPARED WITH YEAR ENDED FEBRUARY 3, 2002 OVERVIEW As noted above, we operate on a 52- or 53-week fiscal year. Our operations for fiscal 2003 contained 52 weeks while fiscal 2002 contained 53 weeks. This event occurs every fifth year. When we make reference to fiscal 2002 adjusted for the number of weeks, we have adjusted fiscal 2002 results to approximate a 52-week year. All references to comparable store sales are on the basis of comparing the 52 weeks in fiscal 2003 with the comparable 52 weeks in fiscal 2002. 27 THE FOLLOWING TABLE PRESENTS A RECONCILIATION OF SYSTEMWIDE SALES, REVENUES AND NET INCOME FOR FISCAL 2002 TO MANAGEMENT'S ESTIMATE OF THE AMOUNTS THAT WOULD HAVE BEEN REPORTED HAD FISCAL 2002 BEEN A 52-WEEK YEAR:

IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - --------------------------------------------------------------------------------------------------------------- ADJUSTMENT FISCAL FISCAL 2002, FOR EXTRA 2002, AS REPORTED WEEK PRO FORMA - --------------------------------------------------------------------------------------------------------------- SYSTEMWIDE SALES: Company $ 266,209 $ (5,315) $ 260,894 Franchised 355,456 (7,865) 347,591 ---------------------------------------------------- Total systemwide sales $ 621,665 $ (13,180) $ 608,485 ==================================================== REVENUES: Company Store Operations $ 266,209 $ (5,315) $ 260,894 Franchise Operations 14,008 (288) 13,720 KKM&D 114,137 (2,291) 111,846 ---------------------------------------------------- Total revenues $ 394,354 $ (7,894) $ 386,460 ==================================================== NET INCOME $ 26,378 $ (558) $ 25,820 ====================================================

The Company estimates that the 53rd week impacted diluted earnings per share by approximately $0.01. Systemwide sales for fiscal 2003 increased 25.2% to $778.6 million compared to $621.7 million in the prior year. The increase was comprised of an increase of 20.1% in Company store sales, to $319.6 million, and an increase of 29.1% in Franchise store sales, to $459.0 million. The increase was the result of sales from new stores opened during the fiscal year and an increase in systemwide comparable sales. During fiscal 2003, 49 new franchise stores and 14 new Company stores were opened and two franchise stores and three Company stores were closed for a net increase of 58 stores. Additionally, during fiscal 2003, four Associate franchise stores and one Area Developer franchise store became Company stores via the acquisition of franchise markets in Akron, OH, Destin, FL, Pensacola, FL and Toledo, OH, and nine Area Developer franchise stores became Company stores via the acquisition of a controlling interest in Glazed Investments, LLC ("Glazed Investments"), the franchisee with rights to develop markets in Colorado, Minnesota and Wisconsin. We also sold one Company store to an Associate franchisee in fiscal 2003. As a result, the total number of stores at the end of fiscal 2003 was 276, consisting of 99 Company stores (including 29 which are consolidated joint venture stores), 120 Area Developer franchise stores (including 30 in which we have a joint venture interest) and 57 Associate franchise stores. Systemwide comparable store sales increased 11.8% in the fiscal year. We believe continued increased brand awareness and growth in off-premises sales contributed significantly to this increase in our systemwide comparable store sales. Adjusting for the number of weeks in fiscal 2002, the increase in systemwide sales was 28.0%. Total Company revenues increased 24.6% to $491.5 million in fiscal 2003 compared with $394.4 million in the prior fiscal year. This increase was comprised of increases in Company Store Operations revenues of 20.1% to $319.6 million, Franchise Operations revenues of 37.8%, to $19.3 million, and KKM&D revenues, excluding intercompany sales, of 33.7%, to $152.7 million. Adjusting for the number of weeks in fiscal 2002, the increase in Company revenues was 27.2%. Net income for fiscal 2003 was $33.5 million compared to $26.4 million in the prior year, an increase of 26.9%. Diluted earnings per share was $0.56, an increase of 24.8% over the prior year. Fiscal 2003 results include a pre-tax charge of $9.1 million related to an arbitration award against the Company, more fully discussed in Note 18 -- Legal Contingencies in the notes to our consolidated financial statements. Excluding the effect of the arbitration award, net income for fiscal 2003 would have been $39.1 million, an increase of 51.6% over fiscal 2002, as adjusted to approximate a 52-week year. The arbitration award reduced diluted earnings per share by approximately $0.10. COMPANY STORE OPERATIONS COMPANY STORE OPERATIONS REVENUES. Company Store Operations revenues increased to $319.6 million in fiscal 2003 from $266.2 million in fiscal 2002, an increase of 20.1%. Comparable store sales increased by 12.8%. 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 $21.4 million and total off-premises sales increased approximately $32.0 million. On-premises sales grew principally as a result of more customer visits, the introduction of new products, including featured doughnut varieties, and our continued increase in brand awareness due in part to the expansion of our off-premises sales programs. Additionally, a retail price increase was implemented in the fall of fiscal 2003. Company store on-premises sales were also positively impacted by the sales of the twelve stores operated by Glazed Investments. In August 2002, the Company acquired a controlling interest in this franchisee and, as a result, the revenues of this franchisee are consolidated with the Company Store Operations revenues for periods subsequent to the acquisition. Company Store Operations revenues also include the revenues of Freedom Rings, LLC ("Freedom Rings"), the area developer with rights to develop stores in the Philadelphia market in which the Company has a 70% interest, and the revenues of Golden Gate Doughnuts, LLC ("Golden Gate"), the area developer with rights to develop stores in the Northern California market in which the Company has a 67% interest. Off-premises sales grew primarily as a 28 result of the addition of several new convenience and grocery store customers as well as the expansion of the number of locations served in our existing customer base. We believe excessive summer heat as well as extreme weather patterns in the winter months, including record levels of rain, ice and snow in many parts of the United States, put pressure on both on- and off-premises sales. In particular, weather conditions impacted construction of several stores in the fourth quarter and delayed their openings. This resulted in fewer operating weeks from these stores and therefore lower than expected sales. Adjusting for the number of weeks in fiscal 2002, the increase in Company Store Operations revenues was 22.5%. COMPANY STORE OPERATIONS OPERATING EXPENSES. Company Store Operations operating expenses increased 16.1% to $252.5 million in fiscal 2003 from $217.4 million in fiscal 2002. Company Store Operations operating expenses as a percentage of Company Store Operations revenues were 79.0% in fiscal 2003 compared with 81.7% in the prior year. The decrease in Company Store Operations operating expenses as a percentage of revenues was primarily due to increased operating efficiencies generated by growth in store sales volumes as demonstrated by the 12.8% increase in comparable store sales discussed above, selected price increases, improved profitability of our off-premises sales and a focus on gross margin improvement. 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. No such provisions were made during fiscal 2003. FRANCHISE OPERATIONS FRANCHISE OPERATIONS REVENUES. Franchise Operations revenues, consisting of franchise fees and royalties, increased 37.8%, to $19.3 million, in fiscal 2003 from $14.0 million in the prior year. The growth in revenue was primarily due to the franchise fees and additional royalties associated with 49 new franchise stores opened in fiscal 2003, net of the impact of two store closings and the net transfer of 13 stores from Franchise to Company as a result of acquisitions, as well as the impact of opening 41 new franchise stores, net of the impact of two store closings and the transfers from Franchise to Company of seven stores as a result of acquisitions, during fiscal 2002. Also contributing to the growth in revenue was comparable store sales increases. Adjusting for the number of weeks in fiscal 2002, the increase in Franchise Operations revenues was 40.7%. FRANCHISE OPERATIONS OPERATING EXPENSES. Franchise Operations operating expenses were $4.9 million in fiscal 2003 and fiscal 2002. As a percentage of Franchise Operations revenues, Franchise Operations operating expenses were 25.3% in the current year compared with 35.0% in the prior year. Franchise Operations operating expenses, as a percentage of Franchise Operations revenues, have decreased during fiscal 2003 as compared to the prior year primarily as a result of the Company leveraging the infrastructure it has put in place to oversee the expansion of our franchise concept. KKM&D KKM&D REVENUES. KKM&D sales to franchise stores increased 33.7%, to $152.7 million, in fiscal 2003 from $114.1 million in fiscal 2002. Consistent with the prior year, the primary reason for the increase in revenues was the opening of 49 new franchise stores, net of the impact of two store closings and the net transfer of 13 stores from Franchise to Company, in fiscal 2003; the opening of 41 new franchise stores, net of the impact of two store closings and the transfer of seven franchise stores to Company, in fiscal 2002; 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 new store is required to purchase doughnut-making equipment and other peripheral equipment from KKM&D, thereby enhancing KKM&D sales. Adjusting for the number of weeks in fiscal 2002, the increase in KKM&D revenues was 36.5%. KKM&D OPERATING EXPENSES. KKM&D operating expenses increased 31.1%, to $124.1 million, in fiscal 2003 from $94.6 million in fiscal 2002. KKM&D operating expenses as a percentage of KKM&D revenues were 81.3% in the current year compared with 82.9% in the prior year. The decrease in KKM&D operating expenses as a percentage of revenues was due to improved efficiencies in our Winston-Salem mix and equipment manufacturing facilities. With the opening of the new mix manufacturing facility in Effingham, Illinois in the second quarter of fiscal 2003, our Winston-Salem mix manufacturing facility was able to scale back its mix production levels, improving its efficiency as it had been running at excessive levels in fiscal 2002 and early fiscal 2003. Additionally, the relocation of our equipment manufacturing facility during the third quarter of fiscal 2002 to a facility better designed to facilitate our manufacturing process has resulted in improved manufacturing efficiencies as compared to the prior year. Start-up costs associated with the new mix and distribution facility in Effingham, as well as those associated with our coffee roasting operation in Winston-Salem, which continues to expand operations as it supports the rollout of our new beverage program, had a negative impact on KKM&D operating expenses as a percentage of KKM&D revenues. OTHER GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 4.8%, to $28.9 million, in fiscal 2003 from $27.6 million in fiscal 2002. General and administrative expenses as a percentage of total revenues were 5.9% in fiscal 2003 compared with 7.0% in fiscal 2002. The dollar growth in general and administrative expenses is primarily due to increased personnel and salary and related benefit costs to support our expansion and other cost increases necessitated by the 29 growth of the Company, partially offset by lower provisions for employee benefit costs, primarily incentive provisions determined under the terms of the plans. The dollar growth in general and administrative expenses would have been higher; however, during the second and part of the third quarter, we implemented strict controls on various general and administrative expenses as we were concerned about a slow-down in the momentum of the business which we believe was caused primarily by the excessive summer heat and drought in many of our market areas. We imposed controls on salary expenses, travel expenses and professional fees, among others. General and administrative expenses as a percentage of total revenues declined during fiscal 2003 primarily as a result of our 24.6% growth in revenues during the period. In particular, acquisitions of Associate and Area Developer franchise markets in fiscal 2003, including the acquisition of a controlling interest in Glazed Investments, a joint venture, resulted in revenue gains with minimal incremental general and administrative expenses as we were able to leverage our existing infrastructure in many functional areas to support these acquired operations. In addition, as a percentage of total revenues, general and administrative expenses will vary in part depending upon the number of new store openings in a period. During fiscal 2003, 49 new franchise stores were opened, as compared to 41 new franchise stores opened in the comparable period of the prior year. As each new store is required to purchase doughnut-making equipment and other peripheral equipment from KKM&D, the increased number of store openings generally results in increased revenues. These increased revenues further leverages the existing general and administrative expense structure as there is minimal incremental general and administrative expenses associated with a store opening. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased 54.2%, to $12.3 million, in fiscal 2003 from $8.0 million in the prior year. Depreciation and amortization expenses as a percentage of total revenues were 2.5% in fiscal 2003 compared with 2.0% in fiscal 2002. The dollar growth in depreciation and amortization expenses is due to increased capital asset additions, including additions related to our new mix and distribution facility, which became operational in fiscal 2003, and additions related to new stores, including new stores opened by our consolidated joint ventures. See Liquidity and Capital Resources section for additional discussion. ARBITRATION AWARD. As discussed further in Note 18 -- Legal Contingencies in the notes to our consolidated financial statements, in fiscal 2003 we recorded a charge of $9.1 million as a result of an arbitration panel's ruling against the Company in a lawsuit. The charge represents the arbitration panel's award of approximately $7.9 million and management's estimate of additional costs to be awarded in connection with the action, including plaintiff's legal fees, of approximately $1.2 million. INTEREST INCOME. Interest income in fiscal 2003 decreased 34.0% over fiscal 2002 primarily as a result of lower rates of interest earned in fiscal 2003 on excess cash invested. INTEREST EXPENSE. Interest expense was $1.8 million in fiscal 2003 compared with $337,000 in fiscal 2002. This increase is primarily the result of interest on the Term Loan used to finance our new mix manufacturing and distribution facility in Effingham, Illinois. Prior to completion of the facility during the second quarter of fiscal 2003, interest on borrowings used to finance the facility was capitalized. Additionally, interest expense in fiscal 2003 includes interest on borrowings by Glazed Investments for periods subsequent to our acquisition of a controlling interest in this joint venture, and interest on increased borrowings of Golden Gate, as both consolidated joint ventures continue to finance their expansion through bank or other third party debt. EQUITY LOSS IN JOINT VENTURES. This item represents the Company's share of operating results associated with our investments in unconsolidated joint ventures to develop and operate Krispy Kreme stores. These joint ventures are in various stages of their development of Krispy Kreme stores. For example, some ventures have multiple stores in operation while others have none. Each joint venture has varying levels of infrastructure, primarily human resources, in place to open stores. As a result, the joint ventures are leveraging their infrastructure to varying degrees, which greatly impacts the profitability of a joint venture. In particular, the increase in the loss in fiscal 2003 was impacted by the Company's share of the initial start-up expenses of the Company's first joint ventures in markets outside North America, the joint venture with rights to develop stores in Australia and New Zealand and the joint venture with rights to develop stores in the United Kingdom and Ireland. Note 17 -- Joint Ventures in the notes to our consolidated financial statements contains further information about each of our joint ventures. At February 2, 2003, there were 30 stores open by unconsolidated joint ventures compared to 18 stores at February 3, 2002. MINORITY INTEREST. This expense represents the net elimination of the minority partners' share of income or losses from consolidated joint ventures to develop and operate Krispy Kreme stores. The increase in this expense is primarily a result of increased profitability of Golden Gate, which opened four additional stores in fiscal 2003, and the inclusion of the minority partners' share of the results of operations of Glazed Investments, subsequent to our acquisition of a controlling interest in this franchisee in fiscal 2003. 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 was $21.3 million in fiscal 2003, representing a 38.9% effective rate, compared to $16.2 million, or a 38.0% effective rate, in the prior year. Excluding the effect of the arbitration award, which reduced the provision for income taxes as a result of the tax benefits anticipated from the award, the provision for income taxes would have been $24.7 million, or a 38.7% effective rate. The increase in the effective rate is primarily the result of increased state income taxes, due to expansion into higher taxing states, as well as increases in statutory rates in several jurisdictions. The rate was also impacted by the Company's share of losses associated with our investments in international joint ventures which are not currently deductible. The Company expects the effective tax rate for fiscal 2004 to increase to approximately 39.5%, 30 primarily due to anticipated increases in state income taxes and expected continued losses from international joint ventures in the early stages of operations. NET INCOME AND DILUTED EARNINGS PER SHARE. Net income for fiscal 2003 was $33.5 million compared to $26.4 million in the prior year, an increase of 26.9%. Diluted earnings per share was $0.56, an increase of 24.8% over the prior year. Fiscal 2003 results include a pre-tax charge of $9.1 million related to an arbitration award against the Company, more fully discussed in Note 18 - Legal Contingencies in the notes to our consolidated financial statements. Excluding the effect of the arbitration award, net income for fiscal 2003 would have been $39.1 million, an increase of 51.6% over fiscal 2002, as adjusted to approximate a 52-week year. The arbitration award reduced diluted earnings per share by approximately $0.10. YEAR ENDED FEBRUARY 3, 2002 COMPARED WITH YEAR ENDED JANUARY 28, 2001 OVERVIEW As previously stated, we operate on a 52- or 53-week fiscal year. Our operations for fiscal 2002 contained 53 weeks while fiscal 2001 contained 52 weeks. This event occurs every fifth year. When we make reference to fiscal 2002 adjusted for the number of weeks, we have adjusted fiscal 2002 results to approximate a 52-week year. All references to comparable store sales are on the basis of comparing the comparable 52 weeks in fiscal 2002 with the comparable 52 weeks in fiscal 2001. Systemwide sales for fiscal 2002 increased 38.7% to $621.7 million compared to $448.1 million in fiscal 2001. The increase was comprised of an increase of 24.6% in Company Store sales, to $266.2 million, and an increase of 51.6% in Franchise Store sales, to $355.5 million. The increase was the result of sales from new stores opened during the fiscal year and an increase in systemwide comparable sales. During fiscal 2002, 41 new franchise stores and seven new Company stores were opened and two franchise stores and two Company stores were closed for a net increase of 44 stores. Additionally, as a result of the acquisition of an Area Developer market and two Associate markets, four Area Developer franchise stores and three Associate franchise stores became Company stores. The total number of stores at the end of fiscal 2002 was 218. Of those, 75 were Company stores (including 11 consolidated joint venture stores), 91 were Area Developer franchise stores (including 18 in which we have a joint venture interest) and 52 were Associate franchise stores. Systemwide comparable store sales increased 12.8% in fiscal 2002. We believe continued increased brand awareness and growth in off-premises sales contributed significantly to this increase in our systemwide comparable store sales. Adjusting for the number of weeks in fiscal 2002, the increase in systemwide sales was 35.8%. Total Company revenues increased 31.1% to $394.4 million in fiscal 2002 compared with $300.7 million in fiscal 2001. This increase was comprised of increases in Company Store Operations revenues of 24.6%, to $266.2 million, Franchise Operations revenues of 48.3%, to $14.0 million, and KKM&D revenues, excluding intercompany sales, of 47.1%, to $114.1 million. Adjusting for the number of weeks in fiscal 2002, the increase in Company revenues was 28.5%. Net income for fiscal 2002 was $26.4 million versus $14.7 million for fiscal 2001, an increase of 79.1%. Diluted earnings per share was $0.45, an increase of 64.6% over fiscal 2001. COMPANY STORE OPERATIONS COMPANY STORE OPERATIONS REVENUES. Company Store Operations revenues increased to $266.2 million in fiscal 2002 from $213.7 million in fiscal 2001, an increase of 24.6%. Comparable store sales increased by 11.7%. 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 $25.4 million and total off-premises sales increased approximately $27.1 million. On-premises sales grew principally as a result of more customer visits, the introduction of new products and our continued increase in brand awareness due in part to the expansion of our off-premises sales programs. Additionally, a retail price increase was implemented during the first quarter of fiscal 2002. Company store on-premises sales were also positively impacted by the sales of stores operated by consolidated joint ventures, particularly the nine stores in the Northern California market. During fiscal 2002, the Company had a 59% interest in Golden Gate and a 70% interest in Freedom Rings, the joint venture developing the Philadelphia market, and as a result, they are consolidated with the Company Store Operations revenues and results. Adjusting for the number of weeks in fiscal 2002, the increase in Company Store Operations revenues was 22.1%. COMPANY STORE OPERATIONS OPERATING EXPENSES. Company Store Operations operating expenses increased 19.8% to $217.4 million in fiscal 2002 from $181.5 million in fiscal 2001. Company Store Operations operating expenses as a percentage of Company Store Operations revenues were 81.7% in fiscal 2002 compared with 84.9% in fiscal 2001. The decrease in Company Store Operations operating expenses as a percentage of revenues was primarily due to increased operating efficiencies generated by growth in store sales volumes, as demonstrated by the 11.7% increase in comparable store sales discussed above, selected price increases, improved profitability of our off-premises sales and a focus on gross margin improvement, particularly labor utilization and a reduction in shrink. Slightly offsetting the improved operating efficiencies was an increase in labor rate costs implemented in order to improve employee retention. 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 31 make provisions to cover closing or impairment costs for underperforming stores, and for older stores that need to be closed and relocated. No such provisions were made during fiscal 2002. FRANCHISE OPERATIONS FRANCHISE OPERATIONS REVENUES. Franchise Operations revenues increased 48.3%, to $14.0 million, in fiscal 2002 from $9.4 million in fiscal 2001. The growth in revenue was primarily due to the opening of 41 new franchise stores, net of the impact of two store closings and the net transfer of seven stores from Franchise to Company, as well as the impact of opening 28 new franchise stores, net of the impact of three store closings, during fiscal 2001. Adjusting for the number of weeks in fiscal 2002, the increase in Franchise Operations revenues was 45.3%. FRANCHISE OPERATIONS OPERATING EXPENSES. Franchise Operations operating expenses increased to $4.9 million in fiscal 2002 from $3.6 million in fiscal 2001. As a percentage of Franchise Operations revenues, Franchise Operations operating expenses were 35.0% in fiscal 2002 compared with 38.6% in fiscal 2001. Operating expenses, as a percentage of revenue, decreased during fiscal 2002 as compared to fiscal 2001 as a result of the Company leveraging the infrastructure it has put in place to oversee the expansion of our franchise concept. KKM&D KKM&D REVENUES. KKM&D sales to franchise stores increased 47.1%, to $114.1 million, in fiscal 2002 from $77.6 million in fiscal 2001. The primary reason for the increase in revenues was the opening of 41 new franchise stores, net of the impact of two store closings and the net transfer of seven stores from Franchise to Company, in fiscal 2002; the opening of 28 new franchise stores, net of the impact of three store closings, in fiscal 2001; and comparable store sales increases. Increased doughnut sales through both the on-premises and off-premises sales channels by franchise stores translated into additional revenues for KKM&D from sales of mixes, sugar, shortening and other supplies. Also, each of these new stores is required to purchase doughnut-making equipment and other peripheral equipment from KKM&D, thereby enhancing KKM&D sales. Adjusting for the number of weeks in fiscal 2002, the increase in KKM&D revenues was 44.1%. KKM&D OPERATING EXPENSES. KKM&D operating expenses increased 44.3%, to $94.6 million, in fiscal 2002 from $65.6 million in fiscal 2001. KKM&D operating expenses as a percentage of KKM&D revenues were 82.9% in fiscal 2002 compared with 84.5% in fiscal 2001. 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 produced in the facilities. Continued stability in our key ingredient costs also contributed. Additionally, the relocation of our equipment manufacturing facility during the third quarter of fiscal 2002 to a facility better designed to facilitate our manufacturing process resulted in improved manufacturing efficiencies as compared to fiscal 2001. OTHER GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 37.4%, to $27.6 million, in fiscal 2002 from $20.1 million in fiscal 2001. General and administrative expenses as a percentage of total revenues were 7.0% in fiscal 2002 compared with 6.7% in fiscal 2001. The growth in general and administrative expenses is due to increased prototype expenses, increased personnel and related salary and benefit costs to support our expansion, and other cost increases necessitated by the growth of the Company. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased 23.3%, to $8.0 million, in fiscal 2002 from $6.5 million in fiscal 2001. Depreciation and amortization expenses as a percentage of total revenues were 2.0% in fiscal 2002 compared with 2.1% in fiscal 2001. The dollar growth in depreciation and amortization expenses is due to increased capital asset additions. See Liquidity and Capital Resources section for additional discussion. INTEREST INCOME. Interest income in fiscal 2002 increased 28.2% over fiscal 2001 as a result of the investment of excess proceeds from both our initial public offering completed in April 2000 and our follow on public offering completed in February 2001. Approximately $36.0 million was invested in various government securities, short-term commercial paper instruments, and corporate bonds at the end of fiscal 2002 resulting in interest income of $3.0 million for fiscal 2002 compared to $2.3 million for fiscal 2001. INTEREST EXPENSE. Interest expense of $337,000 in fiscal 2002 decreased 44.5% from $607,000 in the prior year. This decrease is a result of paying off substantially all of our debt in mid-April 2000 after the completion of our initial public offering. The decrease is offset by interest expense on borrowings of Golden Gate. EQUITY LOSS IN JOINT VENTURES. These expenses consist of the Company's share of operating results associated with the Company's investments in unconsolidated joint ventures, accounted for under the equity method, to develop and operate Krispy Kreme stores. At February 3, 2002, the Company was invested in seven unconsolidated joint ventures. The decrease in this expense was the result of additional joint venture store openings. As stores open and infrastructure of the joint ventures is leveraged, operating results of an individual joint venture generally improve. At February 3, 2002, there were 18 stores open by unconsolidated joint ventures compared to five at January 28, 2001. 32 MINORITY INTEREST. This expense represents the net elimination of the minority partners' share of income or losses from consolidated joint ventures to develop and operate Krispy Kreme stores. The increase in this expense was primarily a result of increased profitability of Golden Gate, which opened four additional stores in fiscal 2002. 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 was $16.2 million in fiscal 2002 representing a 38.0% effective rate compared to $9.1 million, or an effective rate of 38.1%, in the prior year. 33 QUARTERLY RESULTS The following tables set forth unaudited quarterly information for each of the eight fiscal quarters in the two year period ended February 2, 2003. 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. In particular, the operating results for the quarter ended February 2, 2003, the fourth quarter of fiscal 2003, includes a pre-tax charge of $9.1 million as a result of an arbitration panel's ruling against the Company in a lawsuit. See Note 18 -- Legal Contingencies in the notes to the consolidated financial statements for further discussion. In addition, we have historically 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. The 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 and a two-for-one stock split paid in the form of a stock dividend on June 14, 2001.

IN THOUSANDS, EXCEPT PER SHARE DATA - ------------------------------------------------------------------------------------------------------------------ APR. 29, JULY 29, OCT. 28, FEB. 3, MAY 5, AUG. 4, NOV. 3, FEB. 2, THREE MONTHS ENDED 2001 2001 2001 2002 2002 2002 2002 2003 - ------------------------------------------------------------------------------------------------------------------ Total revenues $87,921 $89,545 $99,804 $117,084 $111,059 $114,626 $129,130 $136,734 Operating expenses 71,195 72,683 80,177 92,891 86,362 90,487 100,295 104,345 General and administrative expenses 6,222 5,966 7,023 8,351 7,623 6,589 7,429 7,256 Depreciation and amortization expenses 1,872 1,952 2,131 2,004 2,546 2,612 3,403 3,710 Arbitration award -- -- -- -- -- -- -- 9,075 ------------------------------------------------------------------------------------- Income from operations 8,632 8,944 10,473 13,838 14,528 14,938 18,003 12,348 Interest (income) expense, net, and other expenses (591) (598) 22 508 236 535 1,531 2,742 ------------------------------------------------------------------------------------- Income before income taxes 9,223 9,542 10,451 13,330 14,292 14,403 16,472 9,606 Provision for income taxes 3,504 3,627 3,971 5,066 5,431 5,545 6,347 3,972 ------------------------------------------------------------------------------------- Net income $ 5,719 $ 5,915 $ 6,480 $ 8,264 $ 8,861 $ 8,858 $ 10,125 $ 5,634 ===================================================================================== Net income per share: Basic $ .11 $ .11 $ .12 $ .15 $ .16 $ .16 $ .18 $ .10 Diluted .10 .10 .11 .14 .15 .15 .17 .09

OUR OPERATING RESULTS FOR THESE EIGHT QUARTERS EXPRESSED AS PERCENTAGES OF APPLICABLE REVENUES WERE AS FOLLOWS:

- -------------------------------------------------------------------------------------------------------------------- APR. 29, JULY 29, OCT. 28, FEB. 3, MAY 5, AUG. 4, NOV. 3, FEB. 2, THREE MONTHS ENDED 2001 2001 2001 2002 2002 2002 2002 2003 - -------------------------------------------------------------------------------------------------------------------- Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses 81.0 81.2 80.3 79.3 77.7 79.0 77.7 76.3 General and administrative expenses 7.1 6.7 7.0 7.1 6.9 5.7 5.8 5.3 Depreciation and amortization expenses 2.1 2.2 2.1 1.8 2.3 2.3 2.6 2.7 Arbitration award -- -- -- -- -- -- -- 6.7 ------------------------------------------------------------------------------------ Income from operations 9.8 9.9 10.6 11.8 13.1 13.0 13.9 9.0 Interest (income) expense, net, and other expenses (0.7) (0.7) 0.1 0.4 0.2 0.5 1.2 2.0 ------------------------------------------------------------------------------------ Income before income taxes 10.5 10.6 10.5 11.4 12.9 12.5 12.7 7.0 Provision for income taxes 4.0 4.1 4.0 4.3 4.9 4.8 4.9 2.9 ------------------------------------------------------------------------------------ Net income 6.5% 6.5% 6.5% 7.1% 8.0% 7.7% 7.8% 4.1% ====================================================================================

34 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 2001 and fiscal 2002 primarily through cash flow generated from operations, as well as proceeds from the initial public offering completed in April 2000 and follow on public offering completed in early February 2001. Capital requirements for fiscal 2003 were funded primarily through cash flow generated from operations, with the exception of the purchase of our new mix and distribution facility in Effingham, Illinois. As discussed below, purchase of the facility was funded from borrowings under a credit agreement with a bank. We believe our cash flow generation ability is becoming a financial strength and will aid in the expansion of our business. Our consolidated joint ventures funded their capital requirements through cash flows from operations and borrowings under various financing arrangements, including revolving lines of credit, term loans and short-term debt. CASH FLOW FROM OPERATIONS OVERVIEW. Net cash flow from operations was $32.1 million in fiscal 2001, $36.2 million in fiscal 2002 and $51.0 million in fiscal 2003. Operating cash flow in each year has benefited from increased net income, offset by additional investments in working capital, primarily receivables and inventories, and, in fiscal 2003, a reduction in accrued expenses, offset by the accrual for the arbitration award. In fiscal 2001, and fiscal 2002, additional investments in working capital were offset somewhat by decreases in accrued expenses. In fiscal 2003, net income increased $18.8 million, or 127.4%, compared with fiscal 2001, and it increased $7.1 million, or 26.9%, compared with fiscal 2002. Net working capital was $29.4 million at January 28, 2001, $49.2 million at February 3, 2002 and $81.4 million at February 2, 2003. Additional investments in receivables and inventory have been necessary due to the expansion of our off-premises sales programs and the opening of new franchise stores. Accrued expenses in fiscal 2003 decreased primarily as a result of net lower accruals for employee benefit plans, primarily incentive plans, as determined under the terms of the plans, at February 2, 2003 as compared to February 3, 2002. The accrual of $9.1 million for the arbitration award (see Note 18 -- Legal Contingencies in the notes to our consolidated financial statements) reduced working capital in fiscal 2003. Additionally, operating cash flows were favorably impacted by the tax benefit from the exercise of nonqualified stock options of $13.8 million in fiscal 2003. The Company's operating cash flows may continue to be favorably impacted by similar tax benefits in the future; however, the exercise of stock options is outside of the Company's control. DETAILED ANALYSIS ACCOUNTS RECEIVABLE. Our investment in receivables increased $3.4 million in fiscal 2001, $13.3 million in fiscal 2002 and $7.4 million in fiscal 2003. Accounts receivable have been increasing for the following reasons: 1) The expansion of our off-premises sales programs and the corresponding receivables from grocery and convenience stores and other off-premises customers. Payment terms for off-premises customers vary depending on their credit worthiness and the type of off-premises program we offer them. Sometimes customers do not pay within their credit terms or there are disputes over amounts owed to us. We use our judgment in deciding whether to grant additional payment days, intensify collection efforts, suspend service, write the account off as uncollectible or a combination of the above. Write-offs of accounts receivable due to uncollectibility have not had a significant negative impact on operating cash flow. As we expect our off-premises business to continue to grow, accounts receivable balances from off-premises customers are also expected to grow. 2) An increase in the number of franchise stores that are operating: 111 at January 28, 2001, 143 at February 3, 2002, and 177 at February 2, 2003. We generate accounts receivable from franchisees as a result of royalties earned on their sales as well as our weekly shipments of mix, other ingredients and supplies to each store. Therefore, as the number of franchise stores have grown, so have the corresponding accounts receivable balances. Accounts receivable balances from franchisees are shown under the captions accounts receivable and accounts receivable, affiliates on the consolidated balance sheets. Receivables from franchisees in which we own no interest are included in the accounts receivable caption, while receivables from franchisees in which we own a minority interest or receivables from stores owned by members of our Board of Directors, or other related parties to the Company, are shown under the caption accounts receivable, affiliates. Payment terms on these receivables are 30 or 35 days from the date of invoice, depending on the franchisee's payment method (traditional check versus electronic payment arrangements). We also generate accounts receivable from franchise stores whenever they build a new store, as we supply the doughnut-making equipment and other capital expenditure items necessary to operate a store. Payment terms on these items are 54 days from the date of installation of the doughnut-making equipment. Accounts receivable generated from a new store opening are typically in excess of $550,000 per store. If franchise store openings are heavily concentrated in a particular quarter, and depending on when they opened in the quarter, the sales of the doughnut-making equipment and other capital expenditure items we sell to franchisees can cause an increase in our accounts receivable balances. In the fourth quarter of both fiscal 2002 and fiscal 2003, we opened 20 franchise stores, concentrated in the mid to late weeks of the quarter, which also contributed to the increase in accounts receivable. We have had minimal experience with uncollectible 35 accounts receivable from our franchisees. We expect accounts receivable from franchisees will continue to grow over time as we open new stores and sell mix, supplies and other ingredients to an increasing base of franchise stores. INVENTORIES. Our investment in inventories increased $4.0 million in fiscal 2002 and $7.9 million in fiscal 2003. Inventories have increased primarily as a result of: 1) An increase in the number of Company-owned stores: 63 at January 28, 2001, 75 at February 3, 2002 and 99 at February 2, 2003. Each store carries an inventory consisting of mix, other ingredients and supplies necessary to operate the store. As we add more Company stores in the future, we anticipate that inventory levels will grow accordingly. 2) A planned increase in inventory levels at KKM&D -- raw materials, work-in-progress, finished goods and service parts -- to support the increased number of stores in the system, as well as anticipated new store openings. The total number of stores in operation at January 28, 2001, February 3, 2002 and February 2, 2003 was 174, 218 and 276, respectively. Additionally, the Company anticipates opening 77 stores, most of which will be Franchise stores, in fiscal 2004. Also, during the year our new mix and distribution facility in Effingham, IL became operational and inventory levels increased as a result of stocking this facility. INCOME TAXES. During fiscal 2003, we made estimated income tax payments in the first half of the fiscal year. Stock option exercises during the latter half of the fiscal year resulted in tax deductions for the Company which significantly lowered our income tax liability for fiscal 2003, resulting in an income tax refundable amount of $2.0 million at February 2, 2003. The timing of these payments versus the timing of stock option exercises negatively impacted operating cash flow for fiscal 2003. While we try to anticipate events which will impact the amount and timing of income tax payments, it is difficult to anticipate the impact stock option exercises will have on our overall tax position as stock option exercise decisions are at the discretion of the option holder. CASH FLOW FROM INVESTING ACTIVITIES Net cash used for investing activities was $67.3 million in fiscal 2001, $52.3 million in fiscal 2002 and $94.6 million in fiscal 2003. Investing activities in fiscal 2003 primarily consisted of capital expenditures for property and equipment, additional investments in joint ventures and the acquisition of franchise markets, net of cash acquired. Investing activities in fiscal 2002 primarily consisted of capital expenditures and the acquisition of franchise markets, net of cash acquired. In addition to capital expenditures, investing activities in fiscal 2001 consisted of the purchase of approximately $41.4 million of marketable securities with a portion of the proceeds from the initial public offering and cash flow generated from operations. In fiscal 2003, our capital expenditures were $83.2 million, an increase of $45.9 million, or 123.0%, compared with fiscal 2002 and an increase of $57.5 million, or 224.3%, compared with fiscal 2001. Capital expenditures in fiscal 2003 included expenditures for the new mix manufacturing and distribution facility in Effingham, Illinois, for the construction of new Company stores, including new stores opened by our consolidated joint ventures, capital expenditures for existing Company stores and remodels of Company stores, expenditures to support our off-premises sales programs and expenditures for the installation of a coffee roasting operation at our Ivy Avenue facility in Winston-Salem. These expenditures were necessary to support our efforts of increasing sales of our products throughout North America and for expansion internationally. Capital expenditures for property and equipment in fiscal 2004 are expected to be in excess of $55.0 million, consisting principally of expenditures for new stores, including stores to be opened by our consolidated joint ventures, store remodels, technology and infrastructure in our KKM&D operations. This amount, however, could be higher or lower depending on needs and situations that arise during the year. In fiscal 2003, we also spent $5.0 million in cash, net of cash acquired, and issued approximately 837,000 shares of common stock for the acquisition of associate and area developer markets and to acquire a controlling interest in a joint venture. The associate and area developer franchisee markets we acquired were in Akron, OH, Destin, FL, Pensacola, FL and Toledo, OH. Primarily through the issuance of common stock, we acquired a controlling interest in Glazed Investments, our area developer joint venture with rights to develop stores in the Colorado, Minnesota and Wisconsin markets. In fiscal 2002, we spent $20.6 million, net of cash acquired, and issued approximately 115,000 shares of common stock to acquire the Baltimore, MD, Charleston, SC and Savannah, GA markets from franchisees. We will acquire markets, in whole or in part under joint venture agreements, from franchisees if they are willing to sell to us and if there are sound business reasons for us to make the acquisition. These reasons may include a franchise market being contiguous to a Company store market where an acquisition would provide operational synergies; upside opportunity in the market because the franchisee has not fully developed on-premises or off-premises sales; or if we believe our acquiring the market would improve the brand image in the market. In March 2003, we spent approximately $32.0 million in cash to acquire the Kansas and Missouri markets from an area developer franchisee. We will be opportunistic about the acquisition of additional franchise markets and may acquire, in whole or in part under joint venture agreements, other markets in fiscal 2004. We have also announced plans to acquire, through an exchange of stock, Montana Mills Bread Co., Inc., an owner and operator of upscale "village bread stores" in the Northeastern and Midwestern United States. This acquisition is expected to be completed in the first half of fiscal 2004. See Note 21 -- Subsequent Events in the notes to our consolidated financial statements for more information on these transactions. Investing activities in fiscal 2003 also included additional investments in area developer joint ventures totaling $7.9 million, including initial investments in joint ventures with area developers in markets outside North America. These investments also included $1.6 million spent to acquire ownership interests from the Krispy Kreme Equity Group and from two executive officers of the Company in certain franchise markets where we already had an interest ranging from approximately 3% to 59%, 36 as described further in Note 15 -- Related Party Transactions and Note 17 -- Joint Ventures in the notes to our consolidated financial statements. We believe acquiring an ownership interest in franchise markets helps align interests between the Company and the franchisee and should provide returns for shareholders as the operators of these franchise markets achieve scale in their operations and become profitable. Investment activity in area developer joint ventures was minimal in fiscal 2002. In fiscal 2001, investing activities primarily consisted of capital expenditures for property and equipment, including expenditures to support our off-premises sales programs, capital expenditures for existing stores and equipment, development of new stores and the acquisition of stores from existing franchisees. Investing activities also include purchases of marketable securities with a portion of the proceeds from the initial public offering and cash flow generated from operations, as well as investments in area developer joint ventures. CASH FLOW FROM FINANCING ACTIVITIES Net cash provided by financing activities was $39.0 million in fiscal 2001, $30.9 million in fiscal 2002 and $53.8 million in fiscal 2003. Financing activities in fiscal 2003 consisted primarily of the borrowing of $33.0 million to finance the Effingham, Illinois mix and distribution facility, borrowings of long-term debt by consolidated joint ventures to finance store development of $11.2 million and proceeds from the exercise of stock options of $7.1 million. In addition, cash flows benefited from the repayment by members of the Company's management and Board of Directors of loans extended to them in 1998 in connection with the change in terms of an employee benefit plan. These loans were repaid in full, including accrued interest, in the third quarter of fiscal 2003. Financing activities in fiscal 2002 consisted primarily of the completion of our follow-on public offering which raised $17.2 million of capital, the exercise of stock options which provided cash of $3.9 million and cash of $4.0 million provided by outstanding checks which had not yet cleared the bank (book overdraft). The follow-on public offering was for 10,400,000 shares of common stock, of which 9,313,300 were sold by selling shareholders and 1,086,700 were sold by the Company with net proceeds to the Company of $17.2 million. Our financing activities in fiscal 2001 primarily consisted of the proceeds from our initial public offering of $65.6 million, the net repayment of debt of $19.4 million and the payment of cash dividends of $7.0 million. The repayment of debt was one of our stated uses of proceeds in our initial public offering filings with the Securities and Exchange Commission while the cash dividends paid were to pre initial public offering shareholders as part of our corporate reorganization. CAPITAL RESOURCES, CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS In addition to cash flow generated from operations, the Company utilizes other capital resources and financing arrangements to fund the expansion of the Krispy Kreme concept. A discussion of these capital resources and financing techniques is included below. DEBT. The Company maintains a revolving line of credit to provide borrowing availability for general working capital purposes and other financing and investing activities. The Company also entered into a term loan to finance a significant capital expenditure, the acquisition and construction of a new mix manufacturing and distribution facility, in fiscal 2003. In addition, our consolidated joint ventures maintain revolving lines of credit and/or various term borrowings to provide funding for general working capital purposes and the construction of new stores. The following is a discussion of our outstanding debt as of February 2, 2003. See also Note 7 -- Debt in the notes to our consolidated financial statements for additional information. On December 29, 1999, the Company entered into an unsecured Loan Agreement ("Agreement") with a bank to increase borrowing availability and extend the maturity of its revolving credit facility. The Agreement provides a $40 million revolving line of credit and expires on June 30, 2004. 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 was no interest, fee or other charge for the unadvanced portion of the line of credit until July 1, 2002 at which time the Company began paying a fee of 0.10% on the unadvanced portion. No amounts were outstanding on the revolving line of credit at February 3, 2002 or February 2, 2003. The amount available under the revolving line of credit is reduced by letters of credit, amounts outstanding under certain loans to franchisees which are guaranteed by the Company and certain amounts available or outstanding in connection with credit cards issued by the lender on behalf of the Company and was $31.7 million at February 2, 2003. Outstanding letters of credit, primarily for insurance purposes, totaled $6.6 million, amounts outstanding under the loans guaranteed by the Company totaled $152,000 and amounts available in connection with credit cards issued by the lender totaled $1.5 million at February 2, 2003. The Agreement contains provisions that, among other requirements, restrict capital expenditures, require the maintenance of certain financial ratios, place various restrictions on the sale of properties, restrict the Company's ability to enter into collateral repurchase agreements and guarantees, restrict the payment of dividends and require compliance with other customary financial and nonfinancial covenants. At February 2, 2003, the Company was in compliance with each of these covenants. 37 On March 21, 2002, the Company entered into a credit agreement with a bank ("Credit Agreement") to provide funding of up to $35.0 million for the initial purchase and completion of the Company's new mix and distribution facility in Effingham, Illinois. Construction of the Facility began in May 2001 and was originally funded through a synthetic lease agreement with a bank (see "Synthetic Lease" below). In May 2002, the outstanding borrowings under the Credit Agreement, totaling $33.0 million, were converted to a term loan ("Term Loan"). The Term Loan requires monthly payments of principal of $137,500 and interest through September 21, 2007, at which time a final payment of all outstanding principal and accrued interest will be due. The Credit Agreement also permits the Company to prepay the loan in whole at any time, or from time to time in part in amounts aggregating at least $500,000 or any larger multiple of $100,000 without penalty. The Term Loan bears interest at Adjusted LIBOR, as defined within the Credit Agreement, plus an Applicable Margin, as defined within the Credit Agreement. The Applicable Margin ranges from .75% to 1.75% and is determined based upon the Company's performance under certain financial covenants contained in the Credit Agreement. The interest rate applicable on February 2, 2003 was 2.13%. The Credit Agreement contains provisions that, among other requirements, restrict the payment of dividends and require the Company to maintain compliance with certain covenants, including the maintenance of certain financial ratios. At February 2, 2003, the Company was in compliance with each of these covenants. On March 27, 2002, the Company entered into an interest rate swap agreement to convert the variable payments due under the Credit Agreement to fixed amounts, thereby hedging against the impact of interest rate changes on future interest expense (forecasted cash flow). The Company formally documents all hedging instruments and assesses, both at inception of the contract and on an ongoing basis, whether the hedging instruments are effective in offsetting changes in cash flows of the hedged transaction. The swap was effective May 1, 2002 and had an initial notional amount of $33.0 million. The notional amount declines by $137,500 each month, to correspond with the reduction in principal of the Term Loan. The notional amount of the swap at February 2, 2003 was $31.8 million. Under the terms of the swap, the Company will make fixed rate payments to the counterparty, a bank, of 5.09% and in return receive payments at LIBOR. Monthly payments began June 1, 2002 and continue until the swap terminates May 1, 2007. At February 2, 2003, the fair value carrying amount of the swap was a liability of $2.6 million. Accumulated other comprehensive loss for the fiscal year ended February 2, 2003 includes a loss, net of related tax benefits, of $1.6 million, respectively, related to the swap. On October 12, 2001, Golden Gate, our Northern California joint venture, entered into a $6.8 million revolving line of credit agreement with a bank to provide funding to support construction of new stores, the growth of off-premises sales and general working capital needs. The Company has guaranteed 67% of amounts outstanding under the line of credit and the amount not guaranteed by the Company is collateralized by buildings and equipment owned by Golden Gate. The line of credit bears interest at one-month LIBOR plus 1.25% (2.59% at February 2, 2003) and matures on October 12, 2004. There is no interest, fee or other charge for the unadvanced portion of the line of credit. The line of credit replaced a previous $1.5 million line of credit, established January 25, 2001, with similar terms. At February 2, 2003, the amount outstanding under the $6.8 million revolving line of credit was $4.8 million On November 8, 2002, Golden Gate entered into a loan agreement with the bank to convert $3.0 million of the amount outstanding under the revolving line of credit to a term loan. The loan bears interest at one-month LIBOR plus 1.25% (2.59% at February 2, 2003). Repayment of the loan began in December 2002 with 59 monthly installments of $29,807 of principal and interest and one final payment of all remaining principal and interest due on November 8, 2007. The Company has guaranteed 67% of the outstanding balance of the term loan and the amount not guaranteed by the Company is collateralized by certain buildings and equipment owned by Golden Gate. On October 12, 2001, Golden Gate converted its previous revolving line of credit agreement, in the amount of $4.5 million, to a term loan. The Company has guaranteed 67% of the outstanding balance of this term loan. The amount not guaranteed by the Company is collateralized by buildings and equipment owned by Golden Gate. Repayment of the loan began in November 2001 with 59 equal monthly payments of $53,415 of principal and interest and one final payment of all remaining principal and interest due on October 12, 2006. Interest on the term loan is charged at the lender's one-month LIBOR plus 1.25% (2.59% at February 2, 2003). The line of credit and the term loans contain provisions requiring Golden Gate to maintain compliance with certain financial covenants, including maintenance of certain financial ratios. Golden Gate was in compliance with the applicable covenants at February 2, 2003. Based on our current expansion plans in Northern California, we will most likely seek additional borrowing capacity to support planned store openings and sales growth. The Company will most likely be required to guarantee a portion of this additional credit equal to its ownership percentage of the joint venture. On June 13, 2002, Freedom Rings, the Philadelphia joint venture, entered into an unsecured loan agreement with a bank to provide initial funding of $1.5 million for construction of a retail store. Interest on the loan was payable at the lender's one-month LIBOR plus 1.25%. On November 6, 2002, Freedom Rings entered into a $5.0 million revolving line of credit with the bank to provide funding for the construction of additional retail stores and general working capital purposes. The line of credit replaced the $1.5 million loan, which was repaid in full with borrowings under the line of credit and cancelled. The revolving line of credit bears interest at the bank's one-month LIBOR plus 1.25% (2.59% at February 2, 2003), is secured by certain 38 property and equipment owned by Freedom Rings and matures August 15, 2004. The Company has guaranteed 70% of the amounts available under the revolving line of credit. The revolving line of credit contains provisions requiring Freedom Rings to maintain compliance with certain financial covenants, including the maintenance of certain financial ratios. The joint venture was in compliance with the applicable covenants at February 2, 2003. Based on our current expansion plans in the Philadelphia area, we will most likely seek additional borrowing capacity to support planned store openings and sales growth. The Company will most likely be required to guarantee a portion of this additional credit equal to its ownership percentage of the joint venture. Glazed Investments, the joint venture franchisee with rights to Colorado, Minnesota and Wisconsin, typically enters into arrangements with a non-bank financing institution to provide funding for the construction of stores and the purchase of the related equipment. While individual promissory notes exist for the financing of each store and equipment purchase for which funding was provided through the issuance of debt, the terms of each are substantially the same. During the construction period, interest on amounts outstanding is payable monthly, generally at one-month LIBOR plus 4.25%. Upon completion of the store, the amount advanced for construction funding is converted to a real estate term loan ("Real Estate Loans") and amounts advanced for equipment purchases are converted to equipment term loans ("Equipment Loans"). Generally, Real Estate Loans require monthly payments of principal and interest for a fixed term of fifteen years and Equipment Loans require monthly payments of principal and interest for a fixed term of seven years. Interest is payable at rates based on either a fixed rate, which ranges from 7% to 8.65%, or a variable rate based on the one-month LIBOR rate or a commercial paper rate, plus a premium. The premium charged on variable rate loans ranges from 3.05% to 3.6%. At February 2, 2003, interest rates applicable to the debt range from 4.3% to 8.65%. The loans are secured by the related property and equipment. The Company has also guaranteed approximately 75% of the amounts outstanding under the loans. Glazed Investments has entered into promissory notes with Lawrence E. Jaro, chief executive officer of Glazed Investments, who holds an approximate 18% interest in the joint venture, whereby Mr. Jaro will provide funding to the joint venture for general working capital purposes. Borrowings under the promissory notes are also used to fund store development costs prior to establishment of permanent financing. Amounts outstanding are unsecured and bear interest at 10% which is payable at maturity. The notes generally have terms of less than six months and are repaid from operating cash flows of the joint venture or proceeds from permanent financing. Amounts outstanding at February 2, 2003 totaled $900,000 and are reported as short-term debt - related party in our consolidated financial statements. In July 2000, Glazed Investments issued $4.5 million in senior subordinated notes ("Notes") to fund, in part, expenses associated with the start-up of its operations. The Company purchased $1.0 million of the Notes at the time of the initial offering. In connection with the Company's acquisition of additional interests in Glazed Investments in fiscal 2003 (see Note 15 -- Related Party Transactions, Note 17 -- Joint Ventures and Note 20 -- Acquisitions), the Company acquired an additional $3.4 million in Notes. As a result, approximately $4.4 million of the Notes issued by Glazed Investments are payable to the Company. Prior to the acquisition by the Company of a controlling interest in Glazed Investments in August 2002, the Notes held by the Company were included in investments in unconsolidated joint ventures in the accompanying consolidated balance sheet. Effective with the consolidation of Glazed Investments with the accounts of the Company in August 2002, the Notes held by the Company were eliminated against the amount reflected in Glazed Investments balance sheet as payable to the Company. Accordingly, the Notes outstanding at February 2, 2003 as reflected in the accompanying consolidated balance sheet totaling $136,000 represent the total amount of the original $4.5 million issued that remains payable to a third party. The Notes bear interest at 12.0% payable semi-annually each April 30 and October 31 through April 30, 2010, at which time a final payment of outstanding principal and accrued interest is due. Based on our current expansion plans in the Colorado, Minnesota and Wisconsin markets, we will most likely seek additional borrowing capacity to support planned store openings and sales growth. The Company will most likely be required to guarantee a portion of this additional credit equal to its ownership percentage of the joint venture. The Company will continue to consider opportunities to acquire partial or entire interests in some of our franchise markets as the opportunity arises and there are sound business reasons to make the acquisition. Depending on the size and number of these acquisitions, it is likely that we will use, in addition to excess cash, additional debt to accomplish these acquisitions. See Capital Requirements below for further discussion. SYNTHETIC LEASE. On April 26, 2001, the Company entered into a synthetic lease agreement in which the lessor, a bank, had agreed to fund up to $35.0 million for construction of the Company's new mix and distribution facility in Effingham, Illinois (the "Facility"). Under the terms of the synthetic lease, the bank was to pay all costs associated with the construction of the building and the equipment to be used in the manufacturing and distribution processes. No "special purpose entity" was a party to this transaction. Lease payments were to begin upon completion of the Facility (the "Completion Date"). Construction of the Facility began in May 2001. The initial term of the lease was five years following the Completion Date. Under a synthetic lease, neither the cost of the Facility, nor the payment obligations are shown as an asset or as debt, respectively, on the Company's consolidated balance sheet. Therefore, the synthetic lease is often referred to as "off-balance sheet financing." We entered into the synthetic lease: 1) due to the attractiveness of the interest rate associated with the lease which, because of competition among the financial institutions proposing on the synthetic lease transaction, was lower than longer-term financing at the time we began construction of the Facility; 2) due to the flexibility the synthetic lease afforded us 39 at the end of its term as we could purchase the facility with cash, enter into another synthetic lease or enter into traditional financing; and 3) because it allowed us to preserve cash as our monthly lease payments were only covering interest costs on the Facility, as opposed to principal and interest, resulting in a lower monthly payment. As discussed above, on March 21, 2002, the Company terminated the synthetic lease and purchased the Facility from the bank. To finance the purchase, the Company entered into a Credit Agreement with the bank. See above and Note 7 -- Debt in the notes to our consolidated financial statements for further information on the terms of the Credit Agreement. OPERATING LEASES. The Company conducts some of its operations from leased facilities and, additionally, leases certain equipment under operating leases. Generally, these leases have initial terms of 5 to 18 years and contain provisions for renewal options of 5 to 10 years. In determining whether to enter into an operating lease for an asset, we evaluate the nature of the asset and the associated operating lease terms to determine if operating leases are an effective financing tool. We anticipate that we will continue to use operating leases as a financing tool as appropriate. DEBT AND LEASE GUARANTEES AND COLLATERAL REPURCHASE AGREEMENTS. In order to open stores and expand off-premises sales programs, our franchisees incur debt and enter into operating lease agreements. For those franchisees in which we have an ownership interest, we will guarantee an amount of the debt or leases generally equal to our ownership percentage. Because these are relatively new entities without a long track record of operations, these guarantees are necessary for our joint venture partners to get financing for the growth of their businesses. In the past, we have also guaranteed debt amounts or entered into collateral repurchase agreements for Company stock or doughnut-making equipment for certain franchisees when we did not have an ownership interest in them, though we have suspended this practice unless there are some unusual circumstances which require our financial guarantees. In accordance with generally accepted accounting principles existing at the time we made these commitments, these guarantees are not recorded as liabilities on our consolidated balance sheet. As of February 2, 2003, we had lease guarantee commitments totaling $357,000 and loan guarantees totaling $7.3 million. These amounts do not include guarantees of debt of our consolidated joint ventures, as the entire amount of the bank debt of these joint ventures is shown as a liability on our consolidated balance sheet, nor does it include lease guarantees as the gross amount of lease commitments for these joint ventures is shown in Note 8 -- Lease Commitments to our consolidated financial statements. Of the total guaranteed amount of $7.7 million, $6.5 million are for franchisees in which we have an ownership interest and $1.2 million are for franchisees in which we have no ownership interest. The amount of debt and lease guarantees related to franchisees in which we have an ownership interest will continue to grow as these joint ventures open more stores while the amount of debt and lease guarantees related to franchisees in which we do not have an interest is expected to decrease. To date the Company has not experienced any losses in connection with these guarantees, and we consider it unlikely that we will have to satisfy any of these guarantees. OFF BALANCE SHEET ARRANGEMENTS. Upon termination of the synthetic lease transaction on March 21, 2002 as discussed above, the Company does not have any off balance sheet debt nor does it have any transactions, arrangements or relationships with any "special purpose" entities. SUMMARIES OF OUR CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS AS OF FEBRUARY 2, 2003 ARE AS FOLLOWS: CONTRACTUAL CASH OBLIGATIONS AT FEBRUARY 2, 2003

IN THOUSANDS - ------------------------------------------------------------------------------------------------------------------ PAYMENTS DUE IN PAYMENTS TOTAL ----------------------------------------------- DUE AFTER AMOUNT FISCAL 2004 FISCAL 2005 FISCAL 2006 FISCAL 2007 - ------------------------------------------------------------------------------------------------------------------ Long-term debt $ 60,489 $ 3,301 $10,985 $ 3,727 $42,476 Operating leases 69,711 10,969 9,187 6,707 42,848 ------------------------------------------------------------------------------ Total Contractual Cash Obligations $130,200 $14,270 $20,172 $10,434 $85,324 ==============================================================================

OTHER COMMERCIAL COMMITMENTS AT FEBRUARY 2, 2003

IN THOUSANDS - -------------------------------------------------------------------------------------------------------------------- AMOUNTS EXPIRING IN AMOUNTS TOTAL ----------------------------------------------- EXPIRING AFTER AMOUNT FISCAL 2004 FISCAL 2005 FISCAL 2006 FISCAL 2007 - -------------------------------------------------------------------------------------------------------------------- Letters of credit(1) $ 6,626 $ 6,626 $ -- $ -- $ -- Guarantees 7,652 2,903 498 517 3,734 ------------------------------------------------------------------------------- Total Other Commercial Commitments $ 14,278 $ 9,529 $ 498 $ 517 $ 3,734 ===============================================================================

(1) The letters of credit are automatically renewed on an annual basis. CAPITAL REQUIREMENTS. In the next five years, we plan to use cash primarily for the following activities: - Adding mix production and distribution capacity to support expansion - Remodeling and relocation of selected older Company stores - Expanding our equipment manufacturing and operations training facilities 40 - Investing in all or part of franchisees' operations, both domestically and internationally - 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. In fiscal 2001, fiscal 2002 and fiscal 2003 we primarily relied on cash flow generated from the initial public offering completed in April 2000 and our follow-on public offering completed in early February 2001, cash flow generated from operations and our borrowing capacity under our lines of credit. In addition, in fiscal 2003 we used term debt to finance our new mix manufacturing and distribution facility in Effingham, Illinois and our consolidated joint ventures use a combination of revolving credit facilities and term debt to finance their operations and store development. Given our continued interest in pursuing acquisitions of partial or entire interests in franchisees or other entities, we are evaluating the need for additional capital, after considering cash flow from operations, to fund these activities. If additional capital is needed, we may raise such capital through public or private equity or debt financing or other financing arrangements. We are currently exploring a new credit facility arrangement, most likely with a bank syndication group that would give us increased borrowing capacity to use for new store construction, acquisitions, or other capital needs. We have not determined, however, the size and structure of any new syndicated credit facility. We believe, however, that given our outlook for the next 24 months we will have sufficient capital to execute our business plan. 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-owned stores - Reducing the number and amount of joint venture investments in area developers or acquisitions of franchise markets - Slowing the building of our infrastructure in both personnel and facilities. 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 DISCLOSURES ABOUT MARKET RISKS We are exposed to market risk from changes in interest rates on our outstanding debt. Our $40 million 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 points. We elect the rate on a monthly basis. Our consolidated joint ventures are also parties to various debt agreements with variable interest rates. During fiscal 2002, Golden Gate entered into a credit facility with a bank, a $6.75 million revolving line of credit and a term loan. In fiscal 2003, Golden Gate converted a portion of the amount outstanding under its revolving line of credit to a term loan. These credit facilities, the revolving line of credit and term loans, bear interest at LIBOR plus 1.25%. We guarantee 67% of the amounts outstanding under these facilities. In fiscal 2003, Freedom Rings entered into a $5 million revolving line of credit to provide additional funding for store construction and general working capital purposes. Amounts outstanding under the revolving line of credit bear interest at LIBOR plus 1.25%. We guarantee 70% of the amounts outstanding under this facility. Glazed Investments has outstanding several promissory notes issued to finance store development. These notes bear interest at varying rates, based upon LIBOR or commercial paper rates plus a premium. We guarantee approximately 75% of amounts outstanding under these agreements. Amounts outstanding under our Credit Agreement bear interest at adjusted LIBOR plus an applicable margin, which ranges from .75% to 1.75%. We entered into an interest rate swap to convert the variable rate payments due under the Credit Agreement on a notional amount of $33 million to a fixed rate of 5.09% through May 1, 2007. The notional amount declines by $137,500 per month, to correspond with the reduction in principal of the Term Loan. The interest cost of our debt is affected by changes in either prime or LIBOR. Such changes could adversely impact our operating results. We have no derivative financial interests or derivative commodity instruments in our cash or cash equivalents. Because the majority of the Company's revenue, expense and capital purchasing activities are currently transacted in United States dollars, the exposure to foreign currency exchange risk is minimal. However, as our international operations grow, our foreign currency exchange risks will increase. 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 a fixed price. 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 August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," effective for years beginning after June 15, 2002, or the Company's fiscal year 2004. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with 41 the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The adoption of this Statement will not have a significant impact on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for years beginning after December 15, 2001, or the Company's fiscal year 2003. SFAS No. 144 superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the requirements of SFAS No. 121 to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and to measure an impairment loss as the difference between the carrying amount and the fair value of the asset. The adoption of SFAS No. 144 in fiscal 2003 did not have a significant impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections." Among other provisions, SFAS No. 145 rescinds both SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and the amendment of SFAS No. 4, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the accounting for sale-leaseback transactions and the accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 are applicable for fiscal years beginning after, transactions entered into after and financial statements issued on or subsequent to May 15, 2002. The Company does not believe that SFAS No. 145 will have a significant impact on its consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost, as defined in EITF 94-3, was recognized at the date of commitment to an exit or disposal plan. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Although the Company does not have any exit or disposal activities planned currently, SFAS No. 146 will impact the timing of recognition of liabilities for costs associated with any such activities. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements for a guarantor's accounting for and disclosures of certain guarantees issued and outstanding. It also specifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, although it does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the guarantee. FIN 45 also specifies certain disclosures required to be made in interim and annual financial statements related to guarantees. The recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The accounting for guarantees issued prior to this date is not affected. Disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the disclosure requirements of FIN 45 (see Note 16 -- Commitments and Contingencies and Note 17 -- Joint Ventures in the notes to our consolidated financial statements) and began applying the recognition and measurement provisions for all material guarantees entered into or modified after December 31, 2002. The impact of FIN 45 on future consolidated financial statements will depend upon whether the Company enters into or modifies any material guarantees. Currently, the majority of our guarantees are for debt or leases of our joint ventures. Typically, guarantees are provided based on our ownership in the joint ventures. For such guarantees we enter into, we expect to record the fair value as an increase in our investment in the joint ventures. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The Statement also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure in both annual and interim statements of the effects on reported results of an entity's accounting policy decisions with respect to stock-based employee compensation. The disclosure provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has included the required disclosures in Note 2 -- Nature of Business and Significant Accounting Policies in the accompanying consolidated financial statements and will include the disclosures required in interim statements in its financial statements for the first quarter of fiscal 2004. Currently, the Company does not intend to change its accounting for stock-based compensation. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which addresses the consolidation of business enterprises (variable interest entities), to which the usual condition of consolidation, a controlling financial interest, does not apply. FIN 46 requires an entity to assess its equity investments to determine if they are variable interest entities. As defined in FIN 46, variable interests are contractual, ownership or other interests in an entity that 42 change with changes in the entity's net asset value. Variable interests in an entity may arise from financial instruments, service contracts, guarantees, leases or other arrangements with the variable interest entity. An entity that will absorb a majority of the variable interest entity's expected losses or expected residual returns, as defined in FIN 46, is considered the primary beneficiary of the variable interest entity. The primary beneficiary must include the variable interest entity's assets, liabilities and results of operations in its consolidated financial statements. FIN 46 is immediately effective for all variable interest entities created after January 31, 2003. For variable interest entities created prior to this date, the provisions of FIN 46 must be applied no later than the beginning of the Company's third quarter of fiscal 2004. The Company currently has equity interests in joint ventures with other entities to develop and operate Krispy Kreme stores. For those joint ventures where the Company does not have the ability to control the joint venture's management committee, the Company accounts for its investment under the equity method of accounting. For certain of these joint ventures, the Company holds variable interests, such as providing guarantees of the joint venture's debt or leases. As a result, these joint ventures may be considered variable interest entities and it is possible that the Company may be required to consolidate them when FIN 46 becomes effective at the beginning of the third quarter of the Company's fiscal 2004. While the Company's net operating results will be the same regardless of whether these joint ventures are consolidated or accounted for under the equity method, individual line items in the consolidated financial statements will be impacted if any of the joint ventures must be consolidated as a result of inclusion of the assets, liabilities and operating results of the variable interest entities in the individual line items in the consolidated financial statements. The Company is currently evaluating the classification of its unconsolidated joint ventures and, as a result, has not completed its assessment of whether or not the adoption of FIN 46 will have a material impact on its consolidated financial statements. 43 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED BALANCE SHEETS

IN THOUSANDS - ---------------------------------------------------------------------------------------------- FEB. 3, 2002 FEB. 2, 2003 - ---------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 21,904 $ 32,203 Short-term investments 15,292 22,976 Accounts receivable, less allowance for doubtful accounts of $1,182 (2002) and $1,453 (2003) 26,894 34,373 Accounts receivable, affiliates 9,017 11,062 Other receivables 2,771 884 Inventories 16,159 24,365 Prepaid expenses 2,591 3,478 Income taxes refundable 2,534 1,963 Deferred income taxes 4,607 9,824 -------------------------------- Total current assets 101,769 141,128 Property and equipment, net 112,577 202,558 Long-term investments 12,700 4,344 Investments in unconsolidated joint ventures 3,400 6,871 Intangible assets 16,621 48,703 Other assets 8,309 6,883 -------------------------------- Total assets $ 255,376 $ 410,487 -------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 12,095 $ 14,055 Book overdraft 9,107 11,375 Accrued expenses 26,729 20,981 Arbitration award -- 9,075 Revolving line of credit 3,871 -- Current maturities of long-term debt 731 3,301 Short-term debt -- related party -- 900 -------------------------------- Total current liabilities 52,533 59,687 -------------------------------- Deferred income taxes 3,930 9,849 Long-term debt, net of current portion 3,912 49,900 Revolving lines of credit -- 7,288 Other long-term obligations 4,843 5,218 -------------------------------- Total long-term liabilities 12,685 72,255 Commitments and contingencies Minority interest 2,491 5,193 SHAREHOLDERS' EQUITY: Preferred stock, no par value, 10,000 shares authorized; none issued and outstanding -- -- Common stock, no par value, shares authorized -- 100,000 (2002) and 300,000 (2003); issued and outstanding -- 54,271 (2002) and 56,295 (2003) 121,052 173,112 Unearned compensation (186) (119) Notes receivable, employees (2,580) (558) Nonqualified employee benefit plan assets (138) (339) Nonqualified employee benefit plan liability 138 339 Accumulated other comprehensive income (loss) 456 (1,486) Retained earnings 68,925 102,403 -------------------------------- Total shareholders' equity 187,667 273,352 -------------------------------- Total liabilities and shareholders' equity $ 255,376 $ 410,487 ================================

The accompanying notes are an integral part of these consolidated financial statements. 44 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - ---------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - ---------------------------------------------------------------------------------------------------- Total revenues $300,715 $394,354 $491,549 Operating expenses 250,690 316,946 381,489 General and administrative expenses 20,061 27,562 28,897 Depreciation and amortization expenses 6,457 7,959 12,271 Arbitration award (Note 18) -- -- 9,075 -------- -------- -------- Income from operations 23,507 41,887 59,817 Interest income 2,325 2,980 1,966 Interest expense (607) (337) (1,781) Equity loss in joint ventures (706) (602) (2,008) Minority interest (716) (1,147) (2,287) Loss on sale of property and equipment (20) (235) (934) -------- -------- -------- Income before income taxes 23,783 42,546 54,773 Provision for income taxes 9,058 16,168 21,295 -------- -------- -------- Net income $ 14,725 $ 26,378 $ 33,478 ======== ======== ======== Basic earnings per share $ 0.30 $ 0.49 $ 0.61 ======== ======== ======== Diluted earnings per share $ 0.27 $ 0.45 $ 0.56 ======== ======== ========

The accompanying notes are an integral part of these consolidated financial statements. 45 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 AT JANUARY 30, 2000 467 $4,670 $ 10,805 -- $ -- -- $ -- Comprehensive income: Net income for the year ended January 28, 2001 Unrealized holding gain, net Total comprehensive income Proceeds from public offering 13,800 65,637 Conversion of Krispy Kreme Doughnut Corporation shares to Krispy Kreme Doughnuts, Inc. shares (467) (4,670) (10,805) 37,360 15,475 Cash dividend to shareholders Issuance of shares to employee stock ownership plan 580 3,039 Contribution to the nonqualified employee benefit plan Liability under the nonqualified employee benefit plan Issuance of restricted common shares 12 210 Exercise of stock options, including tax benefit of $595 80 699 Amortization of restricted common shares Collection of notes receivable --------------------------------------------------------------------------------- BALANCE AT JANUARY 28, 2001 -- $ -- $ -- -- $ -- 51,832 $ 85,060 Comprehensive income: Net income for the year ended February 3, 2002 Unrealized holding loss, net Foreign currency translation adjustment, net Total comprehensive income Proceeds from public offering 1,086 17,202 Exercise of stock options, including tax benefit of $9,772 1,183 13,678 Issuance of shares in conjunction with acquisition of franchise market 115 4,183 Adjustment of nonqualified employee benefit plan investments Issuance of restricted common shares 1 50 Amortization of restricted common shares Issuance of stock for notes receivable 54 879 Collection of notes receivable --------------------------------------------------------------------------------- BALANCE AT FEBRUARY 3, 2002 -- $ -- $ -- -- $ -- 54,271 $121,052 Comprehensive income: Net income for the year ended February 2, 2003 Unrealized holding loss, net of tax benefit of $241 Foreign currency translation adjustment, net of tax expense of $7 Unrealized loss from cash flow hedge, net of tax benefit of $982 Total comprehensive income Exercise of stock options, including tax benefit of $13,795 1,187 20,935 Issuance of shares in conjunction with acquisition of franchise markets 837 30,975 Adjustment of nonqualified employee benefit plan investments Amortization of restricted common shares Issuance of stock options in exchange for services 150 Collection of notes receivable --------------------------------------------------------------------------------- BALANCE AT FEBRUARY 2, 2003 -- $ -- $ -- -- $ -- 56,295 $173,112 =================================================================================

The accompanying notes are an integral part of these consolidated financial statements. 46 IN THOUSANDS

- ---------------------------------------------------------------------------------------------------------- NOTES NONQUALIFIED NONQUALIFIED ACCUMULATED OTHER UNEARNED RECEIVABLE, EMPLOYEE BENEFIT EMPLOYEE BENEFIT COMPREHENSIVE RETAINED COMPENSATION EMPLOYEES PLAN ASSETS PLAN LIABILITY INCOME (LOSS) EARNINGS TOTAL - ---------------------------------------------------------------------------------------------------------- $ -- $(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 26,378 26,378 (111) (111) (42) (42) ------- 26,225 17,202 13,678 4,183 (12) 12 -- (50) -- 52 52 (879) -- 648 648 - ---------------------------------------------------------------------------------------------------------- $(186) $(2,580) $(138) $138 $ 456 $ 68,925 $187,667 33,478 33,478 (385) (385) 11 11 (1,568) (1,568) ------- 31,536 20,935 30,975 (201) 201 -- 67 67 150 2,022 2,022 - ---------------------------------------------------------------------------------------------------------- $(119) $ (558) $(339) $339 $(1,486) $102,403 $273,352 ==========================================================================================================

47 KRISPY KREME DOUGHNUTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

IN THOUSANDS - --------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - --------------------------------------------------------------------------------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 14,725 $ 26,378 $ 33,478 Items not requiring cash: Depreciation and amortization 6,457 7,959 12,271 Deferred income taxes 1,668 2,553 1,632 Loss on disposal of property and equipment, net 20 235 934 Compensation expense related to restricted stock awards 22 52 67 Tax benefit from exercise of nonqualified stock options 595 9,772 13,795 Provision for store closings and impairment 318 -- -- Minority interest 716 1,147 2,287 Equity loss in joint ventures 706 602 2,008 Change in assets and liabilities: Receivables (3,434) (13,317) (7,390) Inventories (2,052) (3,977) (7,866) Prepaid expenses 1,239 (682) (331) Income taxes, net 902 (2,575) 571 Accounts payable 2,279 3,884 (33) Accrued expenses 7,966 4,096 (9,296) Arbitration award -- -- 9,075 Other long-term obligations (15) 83 (166) ---------------------------------------------------- Net cash provided by operating activities 32,112 36,210 51,036 ---------------------------------------------------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment (25,655) (37,310) (83,196) Proceeds from disposal of property and equipment 1,419 3,196 701 Proceeds from disposal of assets held for sale -- -- 1,435 Acquisition of franchise markets, net of cash acquired -- (20,571) (4,965) Investments in unconsolidated joint ventures (4,465) (1,218) (7,869) Purchases of investments (41,375) (10,128) (32,739) Proceeds from investments 6,004 18,005 33,097 Increase in other assets (3,216) (4,237) (1,038) ---------------------------------------------------- Net cash used for investing activities (67,288) (52,263) (94,574) ---------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Borrowings of long-term debt -- 4,643 44,234 Repayment of long-term debt (3,600) -- (2,170) Net (repayments) borrowings from revolving line of credit (15,775) 345 (121) Repayment of short-term debt -- related party -- -- (500) Debt issue costs -- -- (194) Proceeds from exercise of stock options 104 3,906 7,140 Proceeds from stock offering 65,637 17,202 -- Book overdraft (941) 3,960 2,268 Collection of notes receivable 198 648 3,612 Minority interest 401 227 (432) Cash dividends paid (7,005) -- -- ---------------------------------------------------- Net cash provided by financing activities 39,019 30,931 53,837 ---------------------------------------------------- Net increase in cash and cash equivalents 3,843 14,878 10,299 Cash and cash equivalents at beginning of year 3,183 7,026 21,904 ---------------------------------------------------- Cash and cash equivalents at end of year $ 7,026 $ 21,904 $ 32,203 ---------------------------------------------------- Supplemental schedule of non-cash investing and financing activities: Issuance of stock in conjunction with acquisition of franchise markets $ -- $ 4,183 $ 8,727 Issuance of stock in conjunction with acquisition of additional interest in area developer franchisee -- -- 22,248 Unrealized gain (loss) on investments 609 (111) (385) Issuance of stock options in exchange for services -- -- 150 Issuance of stock to Krispy Kreme Profit-Sharing Stock Ownership Plan 3,039 -- -- Issuance of restricted common shares 210 50 -- Issuance of stock in exchange for employee notes receivable -- 879 --

The accompanying notes are an integral part of these consolidated financial statements. 48 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 80 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. 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. 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 doughnut-making equipment, mix, coffee and other ingredients and supplies used in operating a doughnut store to Company-owned and franchised stores. The significant accounting policies followed by the Company in preparing the accompanying consolidated 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. Generally, investments greater than 50 percent in affiliates for which the Company maintains control are also consolidated and the portion not owned by the Company is shown as a minority interest. As of February 2, 2003, the Company consolidated the accounts of three joint ventures which the Company controlled: Freedom Rings, LLC ("Freedom Rings"), the joint venture with the rights to develop stores in the Philadelphia market; Glazed Investments, LLC ("Glazed Investments"), the joint venture with the rights to develop stores in Colorado, Minnesota and Wisconsin; and Golden Gate Doughnuts, LLC ("Golden Gate"), the joint venture with the rights to develop stores in Northern California. Generally, investments in 20- to 50-percent owned affiliates for which the Company has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method of accounting, whereby the investment is carried at the cost of acquisition, plus the Company's equity in undistributed earnings or losses since acquisition, less any distributions received by the Company. Accordingly, the Company's share of the net earnings of these companies is included in consolidated net income. Investments in less than 20-percent owned affiliates are accounted for by the cost method of accounting. FISCAL YEAR. The Company's fiscal year is based on a fifty-two/fifty-three week year. The fiscal year ends on the Sunday closest to the last day in January. The years ended January 28, 2001, February 3, 2002 and February 2, 2003 contained 52, 53 and 52 weeks, respectively. 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. INVENTORIES. Inventories are recorded at the lower of average cost (first-in, first-out) or market. INVESTMENTS. Investments consist of United States Treasury notes, mortgage-backed government securities, corporate debt securities, municipal securities and certificates of deposit and are included in short-term and long-term investments in the accompanying consolidated balance sheets. 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. At February 2, 2003, 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 (loss). 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. 49 Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives: Buildings -- 15 to 35 years; Machinery and equipment -- 3 to 15 years; Leasehold improvements -- lesser of useful lives of assets or lease term. INTANGIBLE ASSETS. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These pronouncements provide guidance on accounting for the acquisition of businesses and other intangible assets, including goodwill, which arise from such activities. SFAS No. 141 affirms that only the purchase method of accounting may be applied to a business combination and provides guidance on the allocation of purchase price to the assets acquired. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives are no longer amortized but are reviewed at least annually for impairment. SFAS No. 142 is effective for the Company's fiscal 2003, although goodwill and intangible assets acquired after June 30, 2001 were subject immediately to the non-amortization provisions of SFAS No. 142. The Company has evaluated its intangible assets, which at February 2, 2003 consist of goodwill recorded in connection with a business acquisition ($201,000) and the value assigned to reacquired franchise rights in connection with the acquisition of rights to certain markets from franchisees ($48,502,000), and determined that all such assets have indefinite lives and, as a result, are not subject to amortization provisions. For the fiscal year ended February 3, 2002, the Company recorded an expense of $100,000 to amortize intangible assets related to an acquisition completed prior to June 30, 2001. The Company completed impairment analyses of its intangible assets in fiscal 2003 and found no instances of impairment. 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. 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. For off-premises sales, revenue is recognized at the time of delivery. - 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 and the Company has performed substantially all of the initial services it is required to provide. The royalties recognized in each period are based on the sales in that period. - KKM&D revenue is derived from the sale of doughnut-making equipment, mix, coffee 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, generally upon delivery of the goods. Revenue from Company-owned stores and consolidated joint venture stores is eliminated in consolidation. INCOME TAXES. The Company uses the asset and liability method to account for income taxes, which requires the recognition of deferred tax assets and liabilities 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 debt are reflected in the financial statements at carrying amounts which approximate fair value. ADVERTISING COSTS. All costs associated with advertising and promoting products are expensed in the period incurred. STORE OPENING COSTS. All costs, both direct and indirect, incurred to open either Company or franchise stores are expensed in the period incurred. Direct costs to open stores amounted to $464,000, $551,000 and $845,000 in fiscal 2001, 2002 and 2003, respectively. ASSET IMPAIRMENT. When a store is identified as underperforming or when a decision is made to close a store, the Company makes an assessment of the potential impairment of the related assets. The assessment is based upon a comparison of the carrying amount of the assets, primarily property and equipment, to the estimated undiscounted cash flows expected to be generated from those assets. To estimate cash flows, management projects the net cash flows anticipated from continuing operation of the store until its closing as well as cash flows anticipated from disposal of the related assets, if any. If the carrying amount of the assets exceeds the sum of the undiscounted cash flows, the Company records an impairment charge measured as the excess of the carrying value over the fair value of the assets. The resulting net book value of the assets less estimated net realizable value at disposition, is depreciated over the remaining term that the store will continue in operation. STOCK-BASED COMPENSATION. The Company accounts for employee stock options in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB Opinion No. 25, the Company recognizes no compensation expense related to employee stock options, as no options are granted below the market price on the grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the recognition of compensation 50 expense based on the fair value of options on the grant date, but allows companies to continue applying APB Opinion No. 25 if certain pro forma disclosures are made assuming hypothetical fair value method application. HAD COMPENSATION EXPENSE FOR THE COMPANY'S STOCK OPTIONS BEEN BASED ON THE FAIR VALUE AT THE GRANT DATE UNDER THE METHODOLOGY PRESCRIBED BY SFAS NO. 123, THE COMPANY'S INCOME FROM CONTINUING OPERATIONS AND EARNINGS PER SHARE FOR THE THREE YEARS ENDED FEBRUARY 2, 2003 WOULD HAVE BEEN IMPACTED AS FOLLOWS:

IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - ----------------------------------------------------------------------------------------------------------- JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - ----------------------------------------------------------------------------------------------------------- Net income, as reported $ 14,725 $ 26,378 $ 33,478 Add: Stock-based expense reported in net income, net of related tax effects -- -- 31 Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects (1,032) (4,751) (8,653) ------------------------------------------------------ Pro forma net income $ 13,693 $ 21,627 $ 24,856 ------------------------------------------------------ Earnings per share: Reported earnings per share -- Basic $ 0.30 $ 0.49 $ 0.61 Pro forma earnings per share -- Basic 0.28 0.40 0.45 Reported earnings per share -- Diluted 0.27 0.45 0.56 Pro forma earnings per share -- Diluted 0.26 0.37 0.42

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. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - ----------------------------------------------------------------------------------------------------------- Expected life of option 7 years 7 years 7 years Risk-free interest rate 6.1% 5.0% 4.4% Expected volatility of stock 49.7% 52.6% 45.9% Expected dividend yield -- -- --

THE WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING FISCAL 2001, 2002 AND 2003 IS AS FOLLOWS:

- ----------------------------------------------------------------------------------------------------------- JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - ----------------------------------------------------------------------------------------------------------- Fair value of each option granted $ 11.54 $ 14.92 $ 18.91 Total number of options granted 1,863,600 2,169,600 1,186,200 Total fair value of all options granted $21,505,900 $32,370,400 $22,431,000

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, fiscal 2002 or fiscal 2003. The Company's two largest customers accounted for 15.6%, 12.5% and 11.4% of total revenues for fiscal 2001, fiscal 2002 and fiscal 2003, respectively. Accounts receivable for these two customers accounted for approximately 14.5% and 13.4% of net accounts receivable at February 3, 2002 and February 2, 2003, respectively. 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 No. 130 defines these as items of other comprehensive income which must be reported in a financial statement displayed with the same prominence as other financial statements. Accumulated other comprehensive income (loss), as reflected in the consolidated statements of shareholders' equity, was comprised of net unrealized holding gains on marketable securities of $498,000 at February 3, 2002 and $113,000 at February 2, 2003 and foreign currency translation adjustment, net, of $42,000 at February 3, 2002 and $31,000 at February 2, 2003. At February 2, 2003, accumulated other comprehensive income (loss) also included the unrealized loss from a cash flow hedge, net of related tax benefits, of $1,568,000. Total comprehensive income for fiscal 2001, 2002 and 2003 was $15,334,000, $26,225,000 and $31,536,000, respectively. FOREIGN CURRENCY TRANSLATION. For all non-U.S. joint ventures, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using exchange rates at the balance sheet date. Revenue and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are deferred in accumulated other comprehensive income (loss), a separate component of shareholders' equity. 51 RECENT ACCOUNTING PRONOUNCEMENTS. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for years beginning after June 15, 2002, or the Company's fiscal year 2004. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The adoption of this Statement will not have a significant impact on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective for years beginning after December 15, 2001, or the Company's fiscal year 2003. SFAS No. 144 superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the requirements of SFAS No. 121 to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and to measure an impairment loss as the difference between the carrying amount and the fair value of the asset. The adoption of SFAS No. 144 in fiscal 2003 did not have a significant impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections." Among other provisions, SFAS No. 145 rescinds both SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and the amendment of SFAS No. 4, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the accounting for sale-leaseback transactions and the accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 are applicable for fiscal years beginning after, transactions entered into after and financial statements issued on or subsequent to May 15, 2002. The Company does not believe that SFAS No. 145 will have a significant impact on its consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost, as defined in EITF 94-3, was recognized at the date of commitment to an exit or disposal plan. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Although the Company does not have any exit or disposal activities planned currently, SFAS No. 146 will impact the timing of recognition of liabilities for costs associated with any such activities. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements for a guarantor's accounting for and disclosures of certain guarantees issued and outstanding. It also specifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, although it does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the guarantee. FIN 45 also specifies certain disclosures required to be made in interim and annual financial statements related to guarantees. The recognition and measurement provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002. The accounting for guarantees issued prior to this date is not affected. Disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the disclosure requirements of FIN 45 (see Note 16 -- Commitments and Contingencies and Note 17 -- Joint Ventures) and began applying the recognition and measurement provisions for all material guarantees entered into or modified after December 31, 2002. The impact of FIN 45 on future consolidated financial statements will depend upon whether the Company enters into or modifies any material guarantees. Currently, the majority of the Company's guarantees are for debt or leases of joint ventures. Typically, guarantees are provided based on the Company's ownership in the joint ventures. For such guarantees entered into, the Company expects to record the fair value as an increase in investments in unconsolidated joint ventures. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. The Statement also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure in both annual and interim statements of the effects on reported results of an entity's accounting policy decisions with respect to stock-based employee compensation. The disclosure provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company has included the required disclosures elsewhere in this note and will include the disclosures required in interim statements in its financial statements for the first quarter of fiscal 2004. Currently, the Company does not intend to change its accounting for stock-based compensation. 52 In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which addresses the consolidation of business enterprises (variable interest entities), to which the usual condition of consolidation, a controlling financial interest, does not apply. FIN 46 requires an entity to assess its equity investments to determine if they are variable interest entities. As defined in FIN 46, variable interests are contractual, ownership or other interests in an entity that change with changes in the entity's net asset value. Variable interests in an entity may arise from financial instruments, service contracts, guarantees, leases or other arrangements with the variable interest entity. An entity that will absorb a majority of the variable interest entity's expected losses or expected residual returns, as defined in FIN 46, is considered the primary beneficiary of the variable interest entity. The primary beneficiary must include the variable interest entity's assets, liabilities and results of operations in its consolidated financial statements. FIN 46 is immediately effective for all variable interest entities created after January 31, 2003. For variable interest entities created prior to this date, the provisions of FIN 46 must be applied no later than the beginning of the Company's third quarter of fiscal 2004. The Company currently has equity interests in joint ventures with other entities to develop and operate Krispy Kreme stores. For those joint ventures where the Company does not have the ability to control the joint venture's management committee, the Company accounts for its investment under the equity method of accounting. For certain of these joint ventures, the Company holds variable interests, such as providing guarantees of the joint venture's debt or leases. As a result, these joint ventures may be considered variable interest entities and it is possible that the Company may be required to consolidate them when FIN 46 becomes effective at the beginning of the third quarter of the Company's fiscal 2004. While the Company's net operating results will be the same regardless of whether these joint ventures are consolidated or accounted for under the equity method, individual line items in the consolidated financial statements will be impacted if any of the joint ventures must be consolidated as a result of inclusion of the assets, liabilities and operating results of the variable interest entities in the individual line items in the consolidated financial statements. The Company is currently evaluating the classification of its unconsolidated joint ventures and, as a result, has not completed its assessment of whether or not the adoption of FIN 46 will have a material impact on its consolidated financial statements. RECLASSIFICATIONS. Certain reclassifications of amounts in the 2001 and 2002 consolidated financial statements and related notes have been made to conform with the 2003 presentation. 3. INVESTMENTS THE FOLLOWING TABLE PROVIDES CERTAIN INFORMATION ABOUT INVESTMENTS AT FEBRUARY 3, 2002 AND FEBRUARY 2, 2003.

IN THOUSANDS - ------------------------------------------------------------------------------------------------------------------ AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR COST HOLDING GAINS HOLDING LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------ FEBRUARY 3, 2002 U.S. government notes $ 9,049 $ -- $ (17) $ 9,032 Federal government agencies 10,959 442 (166) 11,235 Corporate debt securities 6,475 317 (88) 6,704 Other bonds 1,043 -- (22) 1,021 ------------------------------------------------------------------------- Total $27,526 $759 $(293) $27,992 ========================================================================= FEBRUARY 2, 2003 U.S. government notes $16,657 $152 $ (97) $16,712 Federal government agencies 7,485 289 (197) 7,577 Corporate debt securities 1,000 76 (45) 1,031 Certificate of deposit 2,000 -- -- 2,000 ------------------------------------------------------------------------- Total $27,142 $517 $(339) $27,320 =========================================================================

MATURITIES OF INVESTMENTS WERE AS FOLLOWS AT FEBRUARY 2, 2003:

IN THOUSANDS - --------------------------------------------------------------------------------------- AMORTIZED FAIR COST VALUE - --------------------------------------------------------------------------------------- Due within one year $22,844 $22,976 Due after one year through five years 4,298 4,344 ------------------------- Total $27,142 $27,320 =========================

53 4. INVENTORIES THE COMPONENTS OF INVENTORIES ARE AS FOLLOWS:

IN THOUSANDS - -------------------------------------------------------------------------------------------------------------- DISTRIBUTION EQUIPMENT MIX COMPANY CENTER DEPARTMENT DEPARTMENT STORES TOTAL - -------------------------------------------------------------------------------------------------------------- FEBRUARY 3, 2002 Raw materials $ -- $3,060 $ 788 $1,826 $ 5,674 Work in progress -- 28 -- -- 28 Finished goods 1,318 2,867 95 -- 4,280 Purchased merchandise 5,503 -- -- 613 6,116 Manufacturing supplies -- -- 61 -- 61 ------------------------------------------------------------------------- Totals $ 6,821 $5,955 $ 944 $2,439 $16,159 ========================================================================= FEBRUARY 2, 2003 Raw materials $ -- $3,828 $1,069 $1,922 $ 6,819 Work in progress -- 234 -- -- 234 Finished goods 2,222 3,616 172 -- 6,010 Purchased merchandise 10,191 -- -- 966 11,157 Manufacturing supplies -- -- 145 -- 145 ------------------------------------------------------------------------- Totals $12,413 $7,678 $1,386 $2,888 $24,365 =========================================================================

5. PROPERTY AND EQUIPMENT PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING:

IN THOUSANDS - -------------------------------------------------------------------------------------------- FEB. 3, 2002 FEB. 2, 2003 - -------------------------------------------------------------------------------------------- Land $ 14,823 $ 24,741 Buildings 39,566 88,641 Machinery and equipment 86,683 118,332 Leasehold improvements 13,463 19,522 Construction in progress 1,949 1,534 ------------------------------ 156,484 252,770 Less: accumulated depreciation 43,907 50,212 ------------------------------ Property and equipment, net $ 112,577 $ 202,558 ==============================

Depreciation expense was $6,141,000, $7,398,000 and $11,570,000 for fiscal 2001, fiscal 2002 and fiscal 2003, respectively. 6. ACCRUED EXPENSES ACCRUED EXPENSES CONSIST OF THE FOLLOWING:

IN THOUSANDS - -------------------------------------------------------------------------------------------- FEB. 3, 2002 FEB. 2, 2003 - -------------------------------------------------------------------------------------------- Insurance $ 4,891 $ 6,150 Salaries, wages and incentive compensation 11,686 6,034 Deferred revenue 2,082 1,485 Taxes, other than income 1,632 1,865 Other 6,438 5,447 ------------------------------ Total $ 26,729 $ 20,981 ==============================

54 7. DEBT THE COMPANY'S DEBT, INCLUDING DEBT OF CONSOLIDATED JOINT VENTURES, CONSISTS OF THE FOLLOWING:

IN THOUSANDS - -------------------------------------------------------------------------------------------- FEB. 3, 2002 FEB. 2, 2003 - -------------------------------------------------------------------------------------------- Krispy Kreme Doughnut Corporation: $40 million revolving line of credit $ -- $ -- Golden Gate: $6.75 million revolving line of credit 3,871 4,750 Freedom Rings: $5 million revolving line of credit -- 2,538 ------------------------------ Revolving lines of credit $ 3,871 $ 7,288 ============================== Glazed Investments: Short-term debt -- related party $ -- $ 900 ============================== Krispy Kreme Doughnut Corporation: $33 million term loan $ -- $ 31,763 Golden Gate: $4.5 million term loan 4,418 3,926 $3 million term loan -- 2,976 Glazed Investments: Real Estate and Equipment loans -- 14,400 Subordinated notes -- 136 Freedom Rings: Other debt 225 -- ------------------------------ 4,643 53,201 Current maturities of long-term debt (731) (3,301) ------------------------------ Long-term debt, net of current portion $ 3,912 $ 49,900 ==============================

$40 MILLION REVOLVING LINE OF CREDIT On December 29, 1999, the Company entered into an unsecured loan agreement ("Agreement") with a bank to increase borrowing availability and extend the maturity of its revolving line of credit. The Agreement provides a $40 million revolving line of credit and expires on June 30, 2004. 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 was no interest, fee or other charge for the unadvanced portion of the line of credit until July 1, 2002 at which time the Company began paying a fee of 0.10% on the unadvanced portion. No amounts were outstanding on the revolving line of credit at February 3, 2002 or February 2, 2003. The amount available under the revolving line of credit is reduced by letters of credit, amounts outstanding under certain loans made by the bank to franchisees which are guaranteed by the Company and certain amounts available or outstanding in connection with credit cards issued by the lender on behalf of the Company and was $31,695,000 at February 2, 2003. Outstanding letters of credit, primarily for insurance purposes, totaled $6,626,000, amounts outstanding under the loans guaranteed by the Company totaled $152,000 and amounts available in connection with credit cards issued by the lender totaled $1,527,000 at February 2, 2003. The Agreement contains provisions that, among other requirements, restrict capital expenditures, require the maintenance of certain financial ratios, place various restrictions on the sale of properties, restrict the Company's ability to enter into collateral repurchase agreements and guarantees, restrict the payment of dividends and require compliance with other customary financial and nonfinancial covenants. At February 2, 2003, the Company was in compliance with each of these covenants. $33 MILLION TERM LOAN On March 21, 2002, the Company entered into a credit agreement with a bank ("Credit Agreement") to provide funding of up to $35,000,000 for the initial purchase and completion of the Company's new mix and distribution facility in Effingham, Illinois (the "Facility"). Construction of the Facility began in May 2001 and was originally funded through a synthetic lease agreement with a bank (see Note 19 -- Synthetic Lease). The Company terminated the synthetic lease and purchased the Facility from the bank with the proceeds from the initial borrowing under the Credit Agreement of $31,710,000. On May 1, 2002, the outstanding borrowings under the Credit Agreement, totaling $33,000,000, were converted to a term loan ("Term Loan"). The Term Loan requires monthly payments of principal of $137,500 and interest through September 21, 2007, at which time a final payment of all outstanding principal and accrued interest will be due. The Credit Agreement also permits the Company to prepay the loan in whole at any time, or from time to time in part in amounts aggregating at least 55 $500,000 or any larger multiple of $100,000 without penalty. The Term Loan bears interest at Adjusted LIBOR, as defined within the Credit Agreement, plus an Applicable Margin, as defined within the Credit Agreement. The Applicable Margin ranges from .75% to 1.75% and is determined based upon the Company's performance under certain financial covenants contained in the Credit Agreement. The interest rate applicable on February 2, 2003 was 2.13%. Prior to conversion to a Term Loan, interest on amounts outstanding under the Credit Agreement was payable monthly. On March 27, 2002, the Company entered into an interest rate swap agreement to convert the variable payments due under the Credit Agreement to fixed amounts, thereby hedging against the impact of interest rate changes on future interest expense (forecasted cash flow). The Company formally documents all hedging instruments and assesses, both at inception of the contract and on an ongoing basis, whether the hedging instruments are effective in offsetting changes in cash flows of the hedged transaction. The swap was effective May 1, 2002 and had an initial notional amount of $33,000,000. The notional amount declines by $137,500 each month, to correspond with the reduction in principal of the Term Loan. The notional amount of the swap at February 2, 2003 was $31,763,000. Under the terms of the swap, the Company will make fixed rate payments to the counterparty, a bank, of 5.09% and in return receive payments at LIBOR. Monthly payments began June 1, 2002 and continue until the swap terminates May 1, 2007. The Company is exposed to credit loss in the event of nonperformance by the counterparty to the swap agreement. However, the Company does not anticipate nonperformance. At February 2, 2003, the fair value carrying amount of the swap was a liability of $2,550,000. Accumulated other comprehensive loss for the fiscal year ended February 2, 2003 includes a loss, net of related tax benefits, of $1,568,000 related to the swap. The Credit Agreement contains provisions that, among other requirements, restrict the payment of dividends and require the Company to maintain compliance with certain covenants, including the maintenance of certain financial ratios. The Company was in compliance with each of these covenants at February 2, 2003. CONSOLIDATED JOINT VENTURES -- GOLDEN GATE On October 12, 2001, Golden Gate, the Northern California joint venture, entered into a $6,750,000 revolving line of credit agreement with a bank. The Company has guaranteed 67% of amounts outstanding under the line of credit and the amount not guaranteed by the Company is collateralized by buildings and equipment owned by Golden Gate. The line of credit bears interest at one-month LIBOR plus 1.25% (2.59% at February 2, 2003). The line of credit was originally scheduled to mature in October 2002. In fiscal 2003, prior to the scheduled maturity, the terms of the line of credit were amended to extend maturity to October 12, 2004. There is no interest, fee or other charge for the unadvanced portion of the line of credit. The line of credit replaced a previous $1,500,000 line of credit, established January 25, 2001, with similar terms. At February 2, 2003, the amount outstanding under the $6,750,000 revolving line of credit was $4,750,000. On November 8, 2002, Golden Gate entered into a loan agreement with the bank to convert $3,000,000 of the amount outstanding under the revolving line of credit to a term loan. The loan bears interest at one-month LIBOR plus 1.25% (2.59% at February 2, 2003). Repayment of the loan began in December 2002 with 59 monthly installments of $29,807 of principal and interest and one final payment of all remaining principal and interest due on November 8, 2007. The Company has guaranteed 67% of the outstanding balance of the term loan and the amount not guaranteed by the Company is collateralized by certain buildings and equipment owned by Golden Gate. On October 12, 2001, Golden Gate converted its previous revolving line of credit agreement, in the amount of $4,500,000, to a term loan. The Company has guaranteed 67% of the outstanding balance of this term loan. The amount not guaranteed by the Company is collateralized by buildings and equipment owned by Golden Gate. Repayment of the loan began in November 2001 with 59 equal monthly payments of $53,415 of principal and interest and one final payment of all remaining principal and interest due on October 12, 2006. Interest on the term loan is charged at the lender's one-month LIBOR plus 1.25% (2.59% at February 2, 2003). The revolving line of credit and the term loans provide funding to support store construction, the growth of off-premises sales and general working capital needs. These agreements contain provisions requiring Golden Gate to maintain compliance with certain financial covenants, including the maintenance of certain financial ratios. The joint venture was in compliance with the applicable covenants at February 2, 2003. CONSOLIDATED JOINT VENTURES -- FREEDOM RINGS On June 13, 2002, Freedom Rings, the Philadelphia joint venture, entered into an unsecured loan agreement with a bank to provide initial funding of $1,500,000 for construction of a retail store. Interest on the loan was payable at the lender's one-month LIBOR plus 1.25%. On November 6, 2002, Freedom Rings entered into a $5,000,000 revolving line of credit with the bank to provide funding for the construction of additional retail stores and general working capital purposes. The line of credit replaced the $1,500,000 loan, which was repaid in full with borrowings under the line of credit and cancelled. The revolving line of credit bears interest at the bank's one-month LIBOR plus 1.25% (2.59% at February 2, 2003), is secured by certain property and equipment owned by Freedom Rings and matures August 15, 2004. The Company has guaranteed 70% of the amounts available under the revolving line of credit. The revolving line of credit contains provisions requiring Freedom Rings to maintain compliance with certain financial covenants, including the maintenance of certain financial ratios. The joint venture was in compliance with the applicable covenants at February 2, 2003. 56 On October 29, 2001, Freedom Rings entered into a non-bank loan agreement in order to finance the purchase of a parcel of land. Under the terms of the loan agreement, interest on the loan was charged at 8% and repayment began in November 2001 with nine equal monthly payments of principal and interest of $1,930. A final payment of the remaining principal balance of $221,000 plus accrued interest was made in August 2002 and the loan was terminated. CONSOLIDATED JOINT VENTURES -- GLAZED INVESTMENTS Glazed Investments, the joint venture franchisee with rights to Colorado, Minnesota and Wisconsin, typically enters into arrangements with a non-bank financing institution to provide funding for the construction of stores and the purchase of the related equipment. While individual promissory notes exist for the financing of each store and equipment purchase for which funding was provided through the issuance of debt, the terms of each are substantially the same. During the construction period, interest on amounts outstanding is payable monthly, generally at one-month LIBOR plus 4.25%. Upon completion of the store, the amount advanced for construction funding is converted to a real estate term loan ("Real Estate Loans") and amounts advanced for equipment purchases are converted to equipment term loans ("Equipment Loans"). Generally, Real Estate Loans require monthly payments of principal and interest for a fixed term of fifteen years and Equipment Loans require monthly payments of principal and interest for a fixed term of seven years. Interest is payable at rates based on either a fixed rate, which ranges from 7% to 8.65%, or a variable rate based on the one-month LIBOR rate or a commercial paper rate, plus a premium. The premium charged on variable rate loans ranges from 3.05% to 3.6%. At February 2, 2003, interest rates applicable to the Real Estate Loans and Equipment Loans range from 4.3% to 8.65%. The loans are secured by the related property and equipment. The Company has also guaranteed approximately 75% of the amounts outstanding under the loans. Glazed Investments has entered into promissory notes with Lawrence E. Jaro, chief executive officer of Glazed Investments, who holds an approximate 18% interest in the joint venture, whereby Mr. Jaro will provide funding to the joint venture for general working capital purposes. Borrowings under the promissory notes are also used to fund store development costs prior to establishment of permanent financing. Amounts outstanding are unsecured and bear interest at 10% which is payable at maturity. The notes generally have terms of less than six months and are repaid from operating cash flows of the joint venture or proceeds from permanent financing. Amounts outstanding at February 2, 2003 totaled $900,000 and are reported as short-term debt -- related party in the accompanying consolidated financial statements. In July 2000, Glazed Investments issued $4,520,000 in senior subordinated notes ("Notes") to fund, in part, expenses associated with the start-up of its operations. The Company purchased $1,007,000 of the Notes at the time of the initial offering. In connection with the Company's acquisition of additional interests in Glazed Investments in fiscal 2003 (see Note 15 -- Related Party Transactions, Note 17 -- Joint Ventures and Note 20 -- Acquisitions), the Company acquired an additional $3,377,000 in Notes. As a result, approximately $4,384,000 of the Notes issued by Glazed Investments are payable to the Company. Prior to the acquisition by the Company of a controlling interest in Glazed Investments in August 2002, the Notes held by the Company were included in investments in unconsolidated joint ventures in the accompanying consolidated balance sheet. Effective with the consolidation of Glazed Investments with the accounts of the Company in August 2002, the Notes held by the Company were eliminated against the amount reflected in Glazed Investments balance sheet as payable to the Company. Accordingly, the Notes outstanding at February 2, 2003 as reflected in the accompanying consolidated balance sheet totaling $136,000 represent the total amount of the original $4,520,000 issued that remains payable to a third party. The Notes bear interest at 12.0% payable semi-annually each April 30 and October 31 through April 30, 2010, at which time a final payment of outstanding principal and accrued interest is due. For franchisees in which we have an ownership interest, the Company will sometimes guarantee an amount of the debt or leases, generally equal to the Company's ownership percentage. The amounts guaranteed by the Company are disclosed in Note 17 -- Joint Ventures. The aggregate maturities for long-term debt for the five fiscal years ending after February 2, 2003 are $3,301,000, $10,985,000, $3,727,000, $5,479,000 and $28,386,000, respectively. Interest paid was $607,000 in fiscal 2001, $337,000 in fiscal 2002 and $1,855,000 (including $74,000 that was capitalized) in fiscal 2003. 8. LEASE COMMITMENTS The Company conducts some of its operations from leased facilities and, additionally, leases certain equipment under operating leases. Generally, these leases have initial terms of 5 to 18 years and contain provisions for renewal options of 5 to 10 years. 57 AT FEBRUARY 2, 2003, FUTURE MINIMUM ANNUAL RENTAL COMMITMENTS, GROSS, UNDER NONCANCELABLE OPERATING LEASES, INCLUDING LEASE COMMITMENTS OF CONSOLIDATED JOINT VENTURES, ARE AS FOLLOWS:

IN THOUSANDS - ------------------------------------------------------------------------- FISCAL YEAR ENDING IN AMOUNT - ------------------------------------------------------------------------- 2004 $ 10,969 2005 9,187 2006 6,707 2007 5,018 2008 5,433 Thereafter 32,397 ------------ $ 69,711 ============

Rental expense, net of rental income, totaled $8,540,000 in fiscal 2001, $10,576,000 in fiscal 2002 and $13,169,000 in fiscal 2003. 9. INCOME TAXES THE COMPONENTS OF THE PROVISION FOR FEDERAL AND STATE INCOME TAXES ARE SUMMARIZED AS FOLLOWS:

IN THOUSANDS - --------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - --------------------------------------------------------------------------------------------------------------- Currently payable $ 7,390 $ 13,615 $ 19,663 Deferred 1,668 2,553 1,632 ------------------------------------------------------ $ 9,058 $ 16,168 $ 21,295 ======================================================

A RECONCILIATION OF THE STATUTORY FEDERAL INCOME TAX RATE WITH THE COMPANY'S EFFECTIVE RATE IS AS FOLLOWS:

IN THOUSANDS - --------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - --------------------------------------------------------------------------------------------------------------- Federal taxes at statutory rate $ 8,321 $ 14,891 $ 19,170 State taxes, net of federal benefit 673 1,158 1,405 Other 64 119 720 ------------------------------------------------------ $ 9,058 $ 16,168 $ 21,295 ======================================================

Income tax payments, net of refunds, were $5,894,000 in fiscal 2001, $6,616,000 in fiscal 2002 and $5,298,000 in fiscal 2003. The income tax payments in fiscal 2002 and fiscal 2003 were lower than the current provision due to the income tax benefit of stock option exercises of $9,772,000 and $13,795,000 during fiscal 2002 and fiscal 2003, respectively. THE NET CURRENT AND NON-CURRENT COMPONENTS OF DEFERRED INCOME TAXES RECOGNIZED IN THE BALANCE SHEET ARE AS FOLLOWS:

IN THOUSANDS - ---------------------------------------------------------------------------------------------- FEB. 3, 2002 FEB. 2, 2003 - ---------------------------------------------------------------------------------------------- Net current assets $ 4,607 $ 9,824 Net non-current liabilities (3,930) (9,849) --------------------------------- $ 677 $ (25) =================================

58 THE TAX EFFECTS OF THE SIGNIFICANT TEMPORARY DIFFERENCES WHICH COMPRISE THE DEFERRED TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:

IN THOUSANDS - ---------------------------------------------------------------------------------------------- FEB. 3, 2002 FEB. 2, 2003 - ---------------------------------------------------------------------------------------------- ASSETS Compensation deferred (unpaid) $ 676 $ 663 Insurance 1,859 2,368 Other long-term obligations 659 395 Accrued restructuring expenses 1,183 501 Deferred revenue 791 1,165 Accounts receivable 449 556 Inventory 436 278 Charitable contributions carryforward -- 714 Gain/loss on hedging transactions -- 982 Accrued litigation -- 3,494 Accrued payroll -- 1,018 State tax credit carryforwards -- 179 State NOL carryforwards 2,524 2,463 Other 676 687 --------------------------------- Gross deferred tax assets 9,253 15,463 --------------------------------- LIABILITIES Property and equipment 5,589 11,628 Goodwill 198 1,037 Prepaid expenses 265 360 --------------------------------- Gross deferred tax liabilities 6,052 13,025 --------------------------------- Valuation allowance -- State NOL carryforwards (2,524) (2,463) --------------------------------- Net asset/(liability) $ 677 $ (25) =================================

At February 2, 2003, the Company has recorded a valuation allowance against the state NOL carryforwards of $2,463,000. If these carryforwards are realized in the future, $2,232,000 of the tax benefit would be recorded as an addition to common stock as this portion of the carryforwards were a result of the tax benefits of stock option exercises in fiscal 2002 and 2003. The Company records deferred tax assets reflecting the benefit of future deductible amounts. Realization of these assets is dependent on generating sufficient future taxable income and the ability to carryback losses to previous years in which there was taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, for which a valuation allowance has not been established, will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. 10. EARNINGS PER SHARE The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share reflects the potential dilution that would occur if stock options were exercised and the dilution from the issuance of restricted shares. The treasury stock method is used to calculate dilutive shares. This 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. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - ---------------------------------------------------------------------------------------------------------- Numerator: Net income $ 14,725 $ 26,378 $ 33,478 ====================================================== Denominator: Basic earnings per share -- weighted average shares 49,183,916 53,702,916 55,092,542 Effect of dilutive securities: Stock options 4,471,576 4,734,371 4,395,864 Restricted stock -- 5,698 3,967 ------------------------------------------------------ Diluted earnings per share -- adjusted weighted average shares 53,655,492 58,442,985 59,492,373 ======================================================

59 Stock options in the amount of 215,000 and 350,000 shares have been excluded from the diluted shares calculation for fiscal 2002 and 2003, respectively, as the inclusion of these options would be antidilutive. There were no such antidilutive options in fiscal 2001. 11. EMPLOYEE BENEFITS PLANS The Company has a 401(k) savings plan, which provides that employees may contribute from 1% to 100% of their base salary to the plan on a tax deferred basis up to the Internal Revenue Service limitations. Until March 15, 2000, when it ceased matching contributions to the 401(k) savings plan, the Company matched 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 $64,000 in fiscal 2001. 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, on a tax deferred basis up to the Internal Revenue Service limitations, 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 included in other assets in the consolidated balance sheet. The corresponding liability to participants is included in other long-term obligations. The balance in the asset and corresponding liability account was $359,000 and $617,000 at February 3, 2002 and February 2, 2003, respectively. 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 $2,056,000, $3,255,000 and $400,000 in fiscal 2001, fiscal 2002 and fiscal 2003, respectively, based on a contribution of 7% of eligible compensation for fiscal 2001 and fiscal 2002 and 1% of eligible compensation for fiscal 2003. Under the terms of the plan, the contribution can be made in the form of cash or newly issued shares of common stock. Forfeitures of previously allocated shares may also be used to fund the contribution. If cash is contributed, the plan acquires Krispy Kreme stock on the open market. With the exception of the initial year of the plan, the contribution is made annually in April. For fiscal 2001 and fiscal 2002, contributions to the plan were made in cash. The contribution for fiscal 2003 will be made in cash as well. 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 $19,000 in fiscal 2001, $201,000 in fiscal 2002 and $30,000 in fiscal 2003 for amounts credited to certain employees under the nonqualified plan. Effective February 1, 2002, the Company established the Krispy Kreme Doughnuts, Inc. Employee Stock Purchase Plan ("ESPP") to provide eligible employees of the Company an opportunity to purchase Company common stock. Under the terms of the plan, participants may defer between 1% and 15% of their base compensation. Amounts withheld are accumulated and, at the end of each quarter, used to purchase shares of common stock of the Company. The purchase price will be the fair market value on either the first or last day of the quarter, whichever is lower. If the actual market price of the stock on the date purchased exceeds the price at which shares can be acquired under the terms of the ESPP, the Company will make a contribution to fund the shortfall, resulting in a charge to operations in the period paid. The Company recorded compensation expense of $2,000 in fiscal 2003 in connection with the ESPP. Shares may be purchased by the ESPP directly from the Company or in the open market. There were no shares issued under the ESPP in fiscal 2002 and all shares purchased by the ESPP in fiscal 2003 were acquired in the open market. As of February 2, 2003, there were 2,000,000 shares reserved for issuance under the ESPP. Effective May 1, 1994, the Company established the Retirement Income Plan for Key Employees of Krispy Kreme Doughnut Corporation (the "Plan"), an unfunded nonqualified noncontributory defined benefit pension plan. Benefits were based on years of service and average final compensation during the employees' career. The Plan at all times was 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. In fiscal 2001, the Plan was frozen and no additional employees were covered under the Plan. Effective February 2, 2003, the Company elected to terminate the Plan. As a result, vested accrued benefits will be paid to Plan participants in fiscal 2004. 60 THE FOLLOWING TABLES SUMMARIZE THE STATUS OF THE PLAN AND THE AMOUNTS RECOGNIZED IN THE BALANCE SHEET:

IN THOUSANDS, EXCEPT PERCENTAGES - ---------------------------------------------------------------------------------------------- YEAR ENDED FEB. 3, 2002 FEB. 2, 2003 - ---------------------------------------------------------------------------------------------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation at beginning of year $ 1,162 $ 1,641 Service cost 181 221 Interest cost 87 114 Actuarial loss 211 128 Benefits paid -- (18) Change in plan provisions -- (1,257) -------------------------------- Projected benefit obligation at end of year $ 1,641 $ 829 ================================ CHANGE IN PLAN ASSETS Employer contributions $ -- $ 18 Benefits paid -- (18) -------------------------------- Fair value of plan assets at end of year $ -- $ -- ================================ NET AMOUNT RECOGNIZED Funded status $ (1,641) $ (829) Unrecognized net gain 125 -- -------------------------------- Net amount recognized $ (1,516) $ (829) ================================ ASSUMPTIONS Weighted average assumed discount rate 7.00% 6.50% 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 $ 181 $ 221 Interest cost 87 114 One-time curtailment gain -- (1,004) -------------------------------- Total $ 268 $ (669) ================================ RECONCILIATION OF NET PERIODIC PENSION ASSET (LIABILITY) FOR FISCAL YEAR Accrued pension cost as of end of prior year $ (1,248) $ (1,516) Contributions during the fiscal year -- 18 Net periodic pension (cost) income for the fiscal year (268) 669 -------------------------------- Accrued pension cost as of fiscal year end $ (1,516) $ (829) ================================

12. INCENTIVE COMPENSATION The Company has an incentive compensation plan for certain management and non-management level employees. Incentive awards are paid based upon the attainment of certain criteria, financial and non-financial, as outlined in the plan. Incentive compensation amounted to $5,500,000 in fiscal 2001, $6,543,000 in fiscal 2002 and $2,472,000 in fiscal 2003. Prior to fiscal 1999, 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, up 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 were 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 4,717,800 at a conversion rate of $1.30 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 loaned to participants amounts equal to their tax liability. The loans were executed via a 10-year promissory note (collateralized by the shares of common stock issued) with a fixed interest rate of 6%. The amount of such loans outstanding at February 3, 2002 was $1,845,000 and was recorded as a reduction of shareholders' equity. In fiscal 2003, the 61 outstanding amounts due under the loans of $1,926,000, including accrued interest, was paid in full and the loans were cancelled. During fiscal 2002, as part of a compensation arrangement with a former employee of Digital Java, Inc., a Chicago-based coffee company which the Company acquired in fiscal 2002 (see Note 20 -- Acquisitions), the Company issued 54,000 shares of common stock in exchange for a note receivable in the amount of $879,000. The note receivable bears interest at 6%, requires annual payments of principal and interest for its five-year term and is collateralized by the shares of common stock. Under the terms of the note, as long as certain employment and performance criteria are met, the employee will receive a bonus in the amount of the annual payment due. At February 3, 2002 and February 2, 2003 the balance of this note was $735,000 and $558,000, respectively, and is recorded in the consolidated balance sheet as a reduction of shareholders' equity. 13. SHAREHOLDERS' EQUITY STOCK OPTION PLANS AND RESTRICTED STOCK AWARDS 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, 8,900,000 shares of common stock of the Company were reserved for issuance to employees and Directors of the Company. Grants under the 1998 Plan may be in the form of either incentive stock options or nonqualified stock options. During fiscal 1999, 7,324,000 nonqualified options with a 10-year life were issued to employees and Directors at an exercise price of $1.30 per share, the fair market value of the common stock at the grant date. In fiscal 2001, 1,130,800 stock options were issued under the 1998 Plan at exercise prices ranging from $5.25 to $13.69. Stock options were granted at prices equal to the fair market value on the date of grant. In July 2000, the Company's 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 9,996,000 shares, including 496,000 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 3,000,000 shares for incentive stock options and 1,200,000 shares, in the aggregate, for stock appreciation rights, performance units, restricted stock and stock awards. During fiscal 2001, 732,800 stock options were issued under the 2000 Plan at exercise prices ranging from $14.77 to $20.63. During fiscal 2002, 2,169,600 stock options were issued under the 2000 Plan at exercise prices ranging from $15.13 to $42.11. During fiscal 2003, 1,186,200 stock options were issued under the 2000 Plan at exercise prices ranging from $30.98 to $37.25. Stock options were granted at prices equal to the 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 30, 2000 TO FEBRUARY 2, 2003:

- --------------------------------------------------------------------------------------------------------------------------------- SHARES SUBJECT WEIGHTED AVERAGE SHARES SUBJECT TO WEIGHTED AVERAGE TO OPTIONS EXERCISE PRICE PER SHARE EXERCISABLE OPTIONS EXERCISE PRICE PER SHARE - --------------------------------------------------------------------------------------------------------------------------------- OUTSTANDING, JANUARY 30, 2000 7,276,000 $ 1.30 364,000 $1.30 Granted 1,863,600 9.77 Exercised 80,000 1.30 Canceled 42,800 2.58 ------------------------------------------------------------------------------------------ OUTSTANDING, JANUARY 28, 2001 9,016,800 $ 3.04 936,000 $2.57 Granted 2,169,600 25.06 Exercised 1,182,800 3.30 Canceled 375,300 4.97 ------------------------------------------------------------------------------------------ OUTSTANDING, FEBRUARY 3, 2002 9,628,300 $ 7.90 2,976,200 $4.06 Granted 1,186,200 35.11 Exercised 1,187,300 6.01 Canceled 186,400 4.84 ------------------------------------------------------------------------------------------ OUTSTANDING, FEBRUARY 2, 2003 9,440,800 $11.60 4,567,800 $5.68 ==========================================================================================

At February 2, 2003, there were approximately 6,511,900 shares of common stock available for issuance pursuant to future stock option grants. 62 ADDITIONAL INFORMATION REGARDING OPTIONS OUTSTANDING AS OF FEBRUARY 2, 2003 IS AS FOLLOWS:

----------------------------------------------------------- ----------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------------------------------------------------- RANGE OF WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICES SHARES CONTRACTUAL LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE - -------------------------------------------------------------------------------------------------------------------- $ 1.30 -- $ 4.21 5,454,900 5.5 $ 1.30 3,553,500 $ 1.30 $ 4.22 -- $ 8.42 208,000 7.2 $ 5.25 32,000 $ 5.25 $12.63 -- $16.84 899,800 7.1 $15.17 497,500 $15.05 $16.85 -- $21.06 369,500 7.7 $18.22 93,800 $19.03 $21.07 -- $25.26 50,000 8.2 $22.06 12,500 $22.06 $25.27 -- $29.48 876,500 8.5 $28.52 174,000 $28.55 $29.49 -- $33.69 311,400 6.3 $31.73 180,600 $31.81 $33.70 -- $37.90 1,217,200 9.4 $35.18 10,500 $36.24 $37.91 -- $42.11 53,500 8.8 $39.45 13,400 $39.45

RESTRICTED STOCK AWARDS. In fiscal 2001 and 2002, respectively, the Company granted 11,052 and 1,187 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 $21.25. These shares vest ratably over either a three- or four-year period from the date of grant. 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 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. 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 provisions. 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. 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. 63 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, coffee 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. INFORMATION ABOUT THE COMPANY'S OPERATIONS BY BUSINESS SEGMENT IS AS FOLLOWS:

IN THOUSANDS - --------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 28, 2001 FEB. 3, 2002 FEB. 2, 2003 - --------------------------------------------------------------------------------------------------------------- Revenues: Company Store Operations $ 213,677 $ 266,209 $ 319,592 Franchise Operations 9,445 14,008 19,304 KKM&D 201,406 269,396 347,642 Intercompany sales eliminations (123,813) (155,259) (194,989) ------------------------------------------------------ Total revenues $ 300,715 $ 394,354 $ 491,549 ====================================================== Operating income: Company Store Operations $ 27,370 $ 42,932 $ 58,214 Franchise Operations 5,730 9,040 14,319 KKM&D 11,712 18,999 26,843 Unallocated general and administrative expenses (21,305) (29,084) (30,484) Arbitration award -- -- (9,075) ----------------------------------------------------- Total operating income $ 23,507 $ 41,887 $ 59,817 ===================================================== Depreciation and Amortization Expenses: Company Store Operations $ 4,838 $ 5,859 $ 8,854 Franchise Operations 72 72 108 KKM&D 303 507 1,723 Corporate administration 1,244 1,521 1,586 ----------------------------------------------------- Total depreciation and amortization expenses $ 6,457 $ 7,959 $ 12,271 =====================================================

15. RELATED PARTY TRANSACTIONS As of February 2, 2003, certain members of the Company's board of directors own 31 stores and are committed, under their respective franchise agreements, to open an additional 7 stores. Prior to March 5, 2002 (see Note 17 -- Joint Ventures), several officers were investors in a pooled investment fund which held interests in six joint ventures developing Krispy Kreme stores in new markets and four officers of the Company were investors in groups that owned 36 stores. Certain of the investments held by these four officers were in the same entities as those invested in by the KKEG. As of February 2, 2003, one officer of the Company was an investor in a group that owned four stores and was committed to open five additional stores and another officer of the Company was an investor in a group that owned five stores and had the rights to develop certain markets in Kansas and Missouri. None of these investments were in the same entities as those invested in by the Company. As discussed in Note 21 -- Subsequent Events, on March 10, 2003, the Company acquired from the franchisee the rights to the markets in Kansas and Missouri, as well as the related assets, including the five stores, in exchange for cash of approximately $32,000,000. An officer of the Company was an investor in the groups that held the rights to these markets. As a result of this acquisition, the officer who was an investor in this franchise no longer has an interest in any franchisees. Scott Livengood, the Company's Chairman, President and CEO, currently has the right to develop the Alamance, Durham, and Orange County areas of North Carolina. All franchisees are required to purchase mix and equipment from the Company. Total revenues includes $22,515,000 in fiscal 2001, $44,870,000 in fiscal 2002 and $69,539,000 in fiscal 2003 of sales to franchise doughnut stores owned, in whole or in part, by directors, employees of the Company, and Company joint venture investments. Total revenues also includes royalties 64 from these stores of $1,689,000 in fiscal 2001, $3,646,000 in fiscal 2002 and $7,013,000 in 2003. Trade accounts receivable from these stores, shown as accounts receivable, affiliates on the consolidated balance sheet, totaled $9,017,000 and $11,062,000 at February 3, 2002 and February 2, 2003, respectively. 16. COMMITMENTS AND CONTINGENCIES In order to assist certain associate and franchise operators in obtaining third-party financing, the Company from time-to-time enters into collateral repurchase agreements involving both Company stock and doughnut-making equipment. The Company's contingent liability related to these agreements was approximately $70,000 at February 3, 2002. The Company was not contingently liable under any such agreements at February 2, 2003. Additionally, primarily for the purpose of providing financing guarantees in a percentage equivalent to the Company's ownership percentage in various joint venture investments, the Company has guaranteed certain leases and loans from third-party financial institutions on behalf of franchise operators. The Company's contingent liability related to these guarantees was approximately $3,805,000 at February 3, 2002 and $7,652,000 at February 2, 2003. Of the total guaranteed amount of $7,652,000 at February 2, 2003, $6,450,000 are for franchisees in which we have an ownership interest and $1,202,000 are for franchisees in which we have no ownership interest. The expirations of these guarantees for the five fiscal years ending after February 2, 2003 are $2,903,000, $498,000, $517,000, $357,000 and $355,000, respectively. 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. JOINT VENTURES From time to time, the Company enters into joint venture agreements with partners to develop and operate Krispy Kreme stores. Each party's investment is determined based on their proportionate share of equity obtained. The Company's ability to control the management committee of the joint venture is the primary determining factor as to whether or not the joint venture results are consolidated with the Company. See "Basis of Consolidation" under Note 2 -- Nature of Business and Significant Accounting Policies. At February 3, 2002, the Company had invested in nine area developer joint ventures. The Company's interest in these joint ventures ranged from 3.3% to 70.0%. As of February 2, 2003, the Company had invested in 15 area developer joint ventures and held interests ranging from 25.0% to 74.7%. The Company will continue to seek opportunities to develop markets through joint ventures or to increase its ownership in existing joint ventures when there are sound business reasons to do so. On March 5, 2002, the Company increased its ownership in six joint ventures by acquiring from members of the Krispy Kreme Equity Group, LLC ("KKEG") the members' respective interest in the KKEG. The KKEG, a pooled investment fund, was established in March 2000 upon approval by the Company's board of directors. The purpose of the KKEG was to invest in joint ventures with new area developers in certain markets. The Company's officers were eligible to invest in the fund. Members of the board of directors who were not officers of the Company were not eligible to invest in the fund. The Company did not provide any funds to its officers to invest in the fund nor did it provide guarantees for the investment. The fund invested exclusively in a fixed number of joint ventures with certain new area developers as approved by its manager, obtaining a 5% interest in them. If any member of the fund withdrew, the fund had a right of first refusal with respect to the withdrawing member's interest. The remaining members then had the right to purchase any interest the fund did not purchase. Finally, the Company was obligated to purchase any remaining interest. At February 3, 2002, the fund had investments in six joint ventures. On March 5, 2002, the members of the KKEG voted to dissolve the KKEG and agreed to sell their interests in the KKEG to the Company, upon approval of the Company's board of directors, in an amount equal to the member's original investment, totaling an aggregate of $940,100. On March 6, 2002, the KKEG was dissolved. Also on March 5, 2002, the Company increased its ownership interest in six joint ventures by acquiring from Scott Livengood, Chairman, President and CEO, his interests in these joint ventures. In February 2000, the compensation committee of the Company's board of directors approved investments by Mr. Livengood, in joint ventures with certain new area developers in exchange for his giving up his rights to develop the Northern California market. The Company did not provide any funds to Mr. Livengood to invest in the joint ventures nor did it provide guarantees for the investments. Mr. Livengood had 3% investments in six area developers as of February 3, 2002. On March 5, 2002, after approval of the Company's board of directors, Mr. Livengood sold his interests in the joint ventures to the Company at his original cost of $558,800. The Company increased its ownership interest in KremeWorks, LLC, the area developer with rights to develop markets in the northwestern portion of the United States and western Canada, effective March 5, 2002 by acquiring from John McAleer, the Company's Executive Vice President and Vice Chairman of the Board, his interest in this joint venture. In February 2000, the compensation committee of the Company's board of directors approved an investment by Mr. McAleer, in this joint venture. The Company did not provide any funds to Mr. McAleer to invest in the joint venture nor did it provide guarantees for the investment. Mr. McAleer had a 21.7% investment in this joint venture as of February 3, 2002. On March 5, 2002, Mr. McAleer, upon approval of the Company's board of directors, sold his ownership interest in KremeWorks, LLC to the Company at his original cost of $75,800. With this acquisition, the Company increased its interest in the joint venture to 65 25.0% and gained one of the four seats on the management committee. As a result, the Company began accounting for its investment in KremeWorks, LLC using the equity method effective March 5, 2002. AS A RESULT OF THE TRANSACTIONS ON MARCH 5, 2002 IN WHICH THE COMPANY ACQUIRED THE KKEG'S, MR. LIVENGOOD'S AND MR. MCALEER'S INVESTMENTS IN THE JOINT VENTURES AS DESCRIBED ABOVE, THE OWNERSHIP PERCENTAGES OF THE COMPANY AND OTHER INVESTORS (WHICH DO NOT INCLUDE THE KKEG, MR. LIVENGOOD OR MR. MCALEER) IN CERTAIN JOINT VENTURES INCREASED AS FOLLOWS:

- ------------------------------------------------------------------------------------------------------------ OWNERSHIP INTERESTS ---------------------------------------------------- PRIOR TO MARCH 5, 2002 AS OF MARCH 5, 2002 ------------------------ ------------------------ KKDC OTHER INVESTORS KKDC OTHER INVESTORS - ------------------------------------------------------------------------------------------------------------ A-OK, LLC 22.3% 77.7% 30.3% 69.7% Amazing Glazed, LLC 22.3% 77.7% 30.3% 69.7% Glazed Investments, LLC 22.3% 77.7% 30.3% 69.7% Golden Gate Doughnuts, LLC 59.0% 41.0% 67.0% 33.0% KKNY, LLC 22.3% 77.7% 30.3% 69.7% KremeWorks, LLC 3.3% 96.7% 25.0% 75.0% New England Dough, LLC 49.0% 51.0% 57.0% 43.0%

CONSOLIDATED JOINT VENTURES On March 22, 2000, the Company entered into a joint venture, Golden Gate, to develop the Northern California market. The Company invested $2,060,000 for a 59% interest and holds two of the joint venture's three management committee seats. As discussed above, at February 3, 2002, the KKEG and Scott Livengood held interests in Golden Gate of 5% and 3%, respectively, which the Company acquired effective March 5, 2002. As a result, the Company's ownership interest in Golden Gate increased to 67%. The interest in the joint venture not owned by the Company, included in minority interest in the consolidated balance sheet, was reduced to 33% from 41%. The financial statements of this joint venture are consolidated in the results of the Company. The Company has guaranteed the payments on several leases and 67% of Golden Gate's line of credit and term loans (see Note 7 -- Debt). The terms of the guarantees range from four to twenty years. On February 27, 2000, the Company entered into a joint venture, Glazed Investments, to develop the Colorado, Minnesota and Wisconsin markets. The Company invested $500,000 for a 22.3% interest and held two of the joint venture's six management committee seats. As noted above, at February 3, 2002, the KKEG and Mr. Livengood held interests in Glazed Investments of 5% and 3%, respectively, which the Company acquired effective March 5, 2002, increasing its ownership interest in the joint venture to 30.3%. Effective August 22, 2002, the Company acquired an additional 44.4% interest in Glazed Investments, increasing its total investment in this joint venture to 74.7% (see Note 20 -- Acquisitions). Effective with the acquisition in August, the Company gained the right to designate four of the six management committee seats. As a result, the Company gained the ability to control the operations of the joint venture and, therefore, began consolidating the financial statements of Glazed Investments with those of the Company effective August 22, 2002. As a result of the Company's acquisitions of additional interests in Glazed Investments in fiscal 2003, the interest in the joint venture not owned by the Company, included in minority interest in the consolidated balance sheet, was reduced to 25.3%. The Company has guaranteed 74.7% of the amounts outstanding on certain bank and non-bank debt of Glazed Investments (see Note 7 -- Debt). On March 6, 2001, the Company entered into a joint venture, Freedom Rings, to develop the Philadelphia market. The Company invested $1,167,000 for a 70% interest and holds three of four management committee seats. The Company has guaranteed payments on certain leases and 70% of the bank debt of Freedom Rings (see Note 7 -- Debt). The terms of the guarantees range from two to ten years. The financial statements of this joint venture are consolidated with those of the Company and the 30% not owned by Krispy Kreme is included in minority interest. SUMMARIZED INFORMATION FOR THE COMPANY'S INVESTMENTS IN CONSOLIDATED JOINT VENTURES AS OF FEBRUARY 2, 2003, INCLUDING OUTSTANDING LOAN AND LEASE GUARANTEES, IS AS FOLLOWS:

- ---------------------------------------------------------------------------------------------------------------------- NUMBER OF In Thousands STORES AS OF OWNERSHIP % ---------------------------- FEBRUARY 2, 2003/ --------------- LOAN/ GENERAL GEOGRAPHICAL TOTAL STORES TO BE THIRD LEASE FISCAL 2003 MARKET DEVELOPED (1) KKDC PARTIES GUARANTEES (2) REVENUES - ---------------------------------------------------------------------------------------------------------------------- Freedom Rings, LLC Philadelphia, PA 4/18 70.0% 30.0% $ 2,936 $11,391 Manager Allocation 3 1 Glazed Investments, LLC Colorado, Minnesota, 12/28 74.7% 25.3% $11,370 $10,892(3) Wisconsin Manager Allocation 4 2 Golden Gate Doughnuts, LLC Northern California 13/25 67.0% 33.0% $14,016 $36,218 Manager Allocation 2 1

(1) The amount shown as "Total Stores to be Developed" represents the number of stores in the initial development agreement with the joint venture as well as commissary locations which have been opened. The number of stores in the initial development agreement will be re-evaluated as the market is developed and the number of stores to be opened may change. (2) Outstanding debt amounts are reflected in Note 7 -- Debt. The gross amount of commitments under leases is included in the future minimum annual rental commitments disclosed in Note 8 -- Lease Commitments. 66 (3) Fiscal 2003 revenues for Glazed Investments represent the amounts reported for the period subsequent to the Company's acquisition of a controlling interest in the joint venture. Total revenues of Glazed Investments for fiscal 2003 were $28,290,000. EQUITY METHOD JOINT VENTURES As of February 2, 2003, the Company had entered into twelve joint ventures as a minority interest party. Investments in these joint ventures have been made in the form of capital contributions and/or notes receivable. Notes receivable bear interest, payable semi-annually, at rates ranging from 5.5% to 10.0% per annum, and have maturity dates ranging from October 2010 to the dissolution of the joint venture. These investments and notes receivable are recorded in investments in unconsolidated joint ventures in the consolidated balance sheets. INFORMATION RELATED TO THE MARKETS, OWNERSHIP INTERESTS AND MANAGER ALLOCATIONS FOR JOINT VENTURES, WHICH ARE ACCOUNTED FOR BY THE EQUITY METHOD, IS SUMMARIZED AS FOLLOWS:

- ------------------------------------------------------------------------------------------------------------- NUMBER OF STORES AS OF OWNERSHIP % FEBRUARY 2, 2003/ ------------------- GENERAL GEOGRAPHICAL TOTAL STORES TO BE THIRD MARKET DEVELOPED (1) KKDC PARTIES - ------------------------------------------------------------------------------------------------------------- A-OK, LLC Arkansas, Oklahoma 4/10 30.3% 69.7% Manager Allocation 2 4 Amazing Glazed, LLC Pennsylvania (Pittsburgh) 4/9 30.3% 69.7% Manager Allocation 2 4 Amazing Hot Glazers, LLC Pennsylvania (Erie) 0/5 33.3% 66.7% Manager Allocation 2 4 Entrepreneurship and Economic North Carolina (Greensboro) 1/1 49.0% 51.0% Development Investment, LLC Manager Allocation 1 1 KK-TX I, L.P. Texas (Amarillo, Lubbock) 1/2 33.3% 66.7% Manager Allocation --(2) --(2) KKNY, LLC New York City, 6/25 30.3% 69.7% Northern New Jersey Manager Allocation 2 4 KremeKo, Inc. Eastern Canada 5/33 39.4%(3) 60.6%(3) Manager Allocation 2(4) 9(4) KremeWorks, LLC (5) Alaska, Hawaii, Oregon, 4/31 25.0% 75.0% Washington, Western Canada Manager Allocation 1 3 Krispy Kreme Australia Pty Limited Australia/ 1/31 35.0% 65.0% New Zealand Manager Allocation 2 3 Krispy Kreme of South Florida, LLC Southern Florida 1/8 35.3% 64.7% Manager Allocation 2 3 Krispy Kreme U.K. Limited United Kingdom, 0/25 35.9% 64.1% Republic of Ireland Manager Allocation 3 3 New England Dough, LLC Connecticut, 3/17 57.0%(6) 43.0% Massachusetts, Manager Allocation 2 2 Rhode Island - --------------------------------------------------------------------------------------------------------------

(1) The amount shown as "Total Stores to be Developed" represents the number of stores in the initial development agreement with the joint venture as well as commissary locations which have been opened. This number of stores in the initial development agreement will be re-evaluated as the market is developed and the number of stores to be opened may change. (2) KK-TX I, L.P. is a limited partnership. The Company holds a 33.3% interest in the joint venture as a limited partner. Under the terms of the partnership agreement, the general partner has full responsibility for managing the business of the partnership. (3) On September 5, 2002, KremeKo, Inc. ("KremeKo") completed an equity offering to raise funds for store development and general working capital purposes. The Company subscribed for its proportionate share of the offering and further agreed to purchase any shares not subscribed for by other existing shareholders. The Company paid approximately $4,000,000 for its subscribed shares as well as the over-allotment it received and, as a result, the Company's ownership interest increased from 34% to 39.4%, effective September 5, 2002. (4) KremeKo's shareholders' agreement requires that its board consist of eleven directors. The Company has the right to designate two of the directors and three other shareholders each have the right to designate one director. The remaining six directors are nominated by the board and elected by the shareholders. (5) Prior to March 5, 2002, KremeWorks, LLC ("KremeWorks") was accounted for using the cost method; however, as explained above, on March 5, 2002, John McAleer sold his interest in KremeWorks to the Company. As a result, Krispy Kreme's investment in KremeWorks has increased to 25%. Krispy Kreme now has one of four seats on the management committee. Subsequent to March 5, 2002, the Company's investment in KremeWorks has been accounted for by the equity method. 67 (6) Although the Company's ownership interest in New England Dough, LLC exceeds 50%, the Company accounts for this interest under the equity method as the Company does not have the ability to designate a majority of the members of the joint venture's management committee. INFORMATION RELATED TO THE COMPANY'S INVESTMENT AS WELL AS SUMMARIZED FINANCIAL INFORMATION AS OF FEBRUARY 2, 2003, FOR EACH JOINT VENTURE ACCOUNTED FOR BY THE EQUITY METHOD IS AS FOLLOWS:

In Thousands - ------------------------------------------------------------------------------------------------------------------------- SUMMARY FINANCIAL INFORMATION (1) - ------------------------------------------------------------------------------------------------------------------------- NET NON- NON- INVESTMENT NET GROSS INCOME/ CURRENT CURRENT CURRENT CURRENT AND NOTES SALES PROFIT (LOSS) ASSETS ASSETS LIABILITIES LIABILITIES IN JV (2) - ------------------------------------------------------------------------------------------------------------------------- A-OK, LLC $12,523 $ 9,021 $ 912 $ 868 $ 6,573 $ 860 $ 6,121 $ 393 Amazing Glazed, LLC 7,567 3,171 (297) 856 6,509 3,453 3,763 124 Amazing Hot Glazers, LLC (3) -- -- -- -- -- -- -- -- Entrepreneurship and Economic Development Investment, LLC 290 92 (225) 149 1,246 98 -- 676 KK-TX I, L.P. 618 120 (401) 118 2,244 683 1,846 (134) KKNY, LLC 18,366 8,689 (2,332) 3,839 11,204 7,491 3,359 1,052 KremeKo, Inc. 10,184 3,257 (2,915) 7,670 8,454 3,924 2,332 3,393 KremeWorks, LLC 14,448 6,808 970 1,115 9,042 2,691 2,343 204 Krispy Kreme Australia Pty Limited -- -- (1,100) 1,645 2,865 1,155 530 989 Krispy Kreme of South Florida, LLC 1,478 545 98 56 4,605 337 4,707 -- Krispy Kreme U.K. Limited -- -- (93) 699 19 19 -- 227 New England Dough, LLC 3,616 1,024 (843) 2,907 4,849 7,882 -- (53) -------------------------------------------------------------------------------------- Total $69,090 $32,727 $(6,226) $19,922 $57,610 $28,593 $25,001 $6,871 ======================================================================================

(1) The net sales, gross profit and net income (loss) shown for each of these joint ventures represents the amounts reported by the joint ventures for the period corresponding with the Company's fiscal year end, February 2, 2003, and the amounts shown as current assets, non-current assets, current liabilities and non-current liabilities represent the corresponding amounts reported by each of the joint ventures at February 2, 2003. (2) This amount represents the Company's investment in the joint venture plus the Company's portion of the joint venture's income or loss to date, net of distributions received. KK-TX I, L.P. and New England Dough, LLC are in the initial stages of operations. The Company's share of the cumulative net loss of each of these joint ventures exceeds its capital contribution. The Company has recorded the full loss attributable to its interest in the joint ventures as it believes these operations will become profitable in the short-term and the investments will be recovered. (3) Operating activities for Amazing Hot Glazers, LLC have not yet commenced. The Company is a guarantor of debt and lease obligations for various joint ventures accounted for under the equity method. The debt is also collateralized by the assets acquired by the joint venture. In accordance with generally accepted accounting principles existing at the time we made these commitments, these guarantees are not recorded as liabilities on our consolidated balance sheet. To date the Company has not experienced any losses in connection with these guarantees. The terms of the guarantees range from 4 to 20 years. THE FOLLOWING TABLE SUMMARIZES THE COMPANY'S OBLIGATIONS UNDER THESE GUARANTEES AS OF FEBRUARY 2, 2003 AND THE AGGREGATE MATURITIES FOR THE FIVE FISCAL YEARS ENDING AFTER FEBRUARY 2, 2003:

In Thousands, Except Percentages - ---------------------------------------------------------------------------------------------- TOTAL LOAN/ AMOUNTS EXPIRING IN GUARANTEE LEASE --------------------------------------- PERCENTAGES GUARANTEES FISCAL 2004 FISCAL 2005 FISCAL 2006 - ---------------------------------------------------------------------------------------------- A-OK, LLC 22.3% $1,325 $ 79 $ 86 $ 94 KK-TX I, L.P. 33.3% 647 35 38 41 KremeKo, Inc. 34.0% - 36.2% 909 102 109 155 Krispy Kreme of South Florida, LLC 35.3% 1,266 298 39 39 New England Dough, LLC 54.0% - 60.0% 2,303 2,221 61 21 --------------------------------------------------------------------- Total $6,450 $2,735 $333 $350 =====================================================

In Thousands, Except Percentages - --------------------------------------------------------------- AMOUNTS EXPIRING IN -------------------------------------- FISCAL 2007 FISCAL 2008 THEREAFTER - --------------------------------------------------------------- A-OK, LLC $102 $112 $ 852 KK-TX I, L.P. 44 48 441 KremeKo, Inc. 79 86 378 Krispy Kreme of South Florida, LLC 39 39 812 New England Dough, LLC -- -- -- -------------------------------------- Total $264 $285 $2,483 ======================================

18. LEGAL CONTINGENCIES On March 9, 2000, a lawsuit was filed against the Company, management, and Golden Gate, one of the Company's consolidated joint ventures, in Superior Court in the State of California. The plaintiffs alleged, among other things, breach of contract, and sought compensation for damages and punitive damages. In September 2000, after the case was transferred to Sacramento Superior Court, that court granted the motion to compel arbitration of the action and stay the lawsuit pending the 68 outcome of arbitration. After an appeal to the California appellate courts, on October 1, 2001, plaintiffs filed a demand for arbitration with the American Arbitration Association against KKDC, Golden Gate, and others. After an extended series of arbitration hearings, the Arbitration Panel dismissed all claims against all parties, except the claim for breach of contract against KKDC and Golden Gate. The Panel entered a preliminary award of $7,925,000 against KKDC and Golden Gate, which was substantially less than the damages claimed. The Company recorded a provision of $9,075,000 in fiscal 2003, consisting of the $7,925,000 award plus an estimate of the plaintiff's legal fees and other costs expected to be awarded of $1,150,000. Although further hearings have been scheduled to determine issues concerning litigation fees and costs, the Company anticipates that all claims will be concluded in early fiscal 2004 in a manner acceptable to the Company without further substantial adverse consequences. 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. 19. SYNTHETIC LEASE On April 26, 2001, the Company entered into a synthetic lease agreement in which the lessor, a bank, had agreed to fund up to $35,000,000 for construction of the Company's new mix and distribution facility in Effingham, Illinois (the "Facility"). Under the terms of the synthetic lease, the bank was to pay all costs associated with the construction of the building and the equipment to be used in the manufacturing and distribution processes. Lease payments were to begin upon completion of the Facility (the "Completion Date"). Construction of the Facility began in May 2001. The initial term of the lease was five years following the Completion Date. On March 21, 2002, the Company terminated the synthetic lease and purchased the Facility from the bank. To finance the purchase, the Company entered into a credit agreement with the bank. See Note 7 -- Debt for further information on the terms of the Credit Agreement. 20. ACQUISITIONS The Company from time to time acquires market rights from either Associate or Area Developer franchisees if they are willing to sell to the Company and if there are sound business reasons for the Company to make the acquisition. These reasons may include a franchise market being contiguous to a Company store market where an acquisition would provide operational synergies; upside opportunity in the market because the franchisee has not fully developed on-premises or off-premises sales; or if the Company believes an acquisition of the market would improve the brand image in the market. The purchase price for each acquisition is based upon an analysis of historical performance as well as estimates of future revenues and earnings in the respective markets acquired. Effective June 16, 2002, the Company acquired the rights to the Akron, OH market, as well as the related assets, from an associate franchisee. Effective June 30, 2002, the Company acquired the rights to the Toledo, OH market, as well as the related assets, from an Area Developer franchisee. Effective November 4, 2002, the Company acquired the rights to the Destin, FL and Pensacola, FL markets, as well as the related assets, from an associate franchisee. The total purchase price for these acquisitions was $10,948,000, consisting of cash of $2,221,000 and approximately 241,000 shares of common stock, valued at $8,727,000. The purchase price was allocated to accounts receivable -- $368,000, inventory -- $74,000, property and equipment -- $835,000, accounts payable -- $93,000, accrued expenses -- $77,000, repayment of a note receivable - $249,000 and reacquired franchise rights, an intangible asset not subject to amortization -- $10,090,000. Effective August 22, 2002, the Company acquired an additional 44.4% interest in Glazed Investments, an Area Developer franchisee with the rights to develop Krispy Kreme stores in markets in Colorado, Minnesota and Wisconsin. The total consideration paid was $23,048,000, consisting of cash of $800,000 and approximately 596,000 shares of stock, valued at $22,248,000. In connection with the acquisition, the Company also acquired a note receivable, payable by Glazed Investments, with a principal amount of $3,015,000 plus accrued interest of $111,000. Prior to the acquisition of an additional interest, the Company owned a 30.3% interest in this joint venture and had the right to designate two of the joint venture's six management committee seats. As a result of the acquisition, the Company now owns a 74.7% interest in the joint venture and has the right to designate four of the six management committee seats. As such, the Company has the ability to control the operations of the joint venture and, therefore, began consolidating the financial statements of Glazed Investments with those of the Company effective August 22, 2002. 69 The following unaudited pro forma financial information presents the combined results of Krispy Kreme Doughnuts, Inc. and the acquired markets as if the acquisitions discussed above had occurred as of the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisitions been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations of the Company.

In Thousands, Except Per Share Amounts - ---------------------------------------------------------------------------------------------- FEB. 3, 2002 FEB. 2, 2003 - ---------------------------------------------------------------------------------------------- (Unaudited) Total revenues $406,988 $507,345 Net income $ 27,745 $ 34,516 Diluted earnings per share $ 0.47 $ 0.58

The unaudited pro forma financial information presented above includes the revenues and net income of the acquired markets. Adjustments to the combined amounts were made to eliminate franchise fees and royalties previously earned by the Company from these operations for the periods presented, as well as to eliminate KKM&D revenues and corresponding expenses resulting from sales to these operations. Of the remaining approximately 25% interest in Glazed Investments not owned by the Company, approximately 22% is owned by certain members of Glazed Investments' management. As a condition to the acquisition, the Company entered into a put option agreement which gives each of these members of management the option to sell to the Company ultimately up to 100% of their respective interest in Glazed Investments during certain defined exercise periods, subject to certain limitations. The purchase price for the individual's respective interest is determined based upon a formula defined in the agreement, which is generally based upon earnings growth and cash flows of Glazed Investments' operations. The options become exercisable, in part, beginning in April 2004. If exercised, the Company has the option to pay the purchase price in cash or shares of the Company's common stock. The Company cannot estimate the likelihood of any of the options being exercised or the maximum amount the Company would be required to pay upon exercise. 21. SUBSEQUENT EVENTS On January 23, 2003, the Company signed an agreement and plan of merger ("Merger Agreement") under which it will acquire Montana Mills Bread Co., Inc. ("Montana Mills"), an owner and operator of upscale "village bread stores" in the Northeastern and Midwestern United States. Montana Mills' stores produce and sell a variety of breads and baked goods prepared in an open-view format. In addition to providing operating synergies, the acquisition of Montana Mills is expected to provide the Company with the ability to leverage its existing capabilities, such as its distribution chain, its off-premises sales and its coffee-roasting expertise, in order to expand Montana Mills' business. The acquisition is also expected to provide an opportunity to apply the Company's experience and strength in creating a national franchise network towards building a franchise network for Montana Mills. Under the terms of the Merger Agreement, each outstanding share of Montana Mills' common stock will be converted into the right to receive 0.1501 shares (the "Exchange Ratio") of Company common stock and cash in lieu of fractional shares. The Company filed a registration statement on Form S-4 with the Securities and Exchange Commission to register the shares to be issued in connection with the merger. The acquisition will become effective 20 business days after the information statement related to the merger is mailed to Montana Mills' shareholders. The information statement was mailed March 7, 2003 and the acquisition is expected to become effective April 7, 2003. Upon consummation of the merger, the Company expects to issue approximately 1,224,500 shares of the Company's common stock in exchange for all outstanding shares of common stock of Montana Mills. The shares issued will be valued at approximately $39,000,000, based on the closing price of the Company's common stock for a range of trading days around the announcement date, January 24, 2003. The Company will also reserve approximately 460,500 shares of common stock for issuance upon the exercise of warrants and options for Montana Mills' common stock currently outstanding, all of which will become exercisable for shares of the Company's common stock based upon the Exchange Ratio. The results of operations of Montana Mills will be included in the Company's consolidated financial statements as of the effective time of the acquisition. The Company expects to report Montana Mills operating results as a separate segment of its business. Effective March 10, 2003, the Company acquired the rights to certain franchise markets in Kansas and Missouri, as well as the related assets, which included five stores, from an Area Developer franchisee, in exchange for cash of approximately $32,000,000. Of the total purchase price, $8,000,000 was placed in escrow and will be released in accordance with the terms of the purchase agreement upon conclusion of audits of the financial statements of the operations of the Area Developer. The operations and assets acquired, primarily inventory and equipment, will be included with those of the Company effective March 10, 2003. The Company has not completed the allocation of the purchase price related to these acquisitions as it is in the process of identifying and determining the fair value of all assets acquired and liabilities assumed. On February 12, 2003, the Company entered into a joint venture to develop Krispy Kreme stores in El Paso, Texas and Cuidad Juarez, Mexico with an existing franchisee. The Company will own approximately 33% of the joint venture, Priz Doughnuts, L.P., a limited partnership, which will develop three stores in these markets over the next three years. 70 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 February 3, 2002 and February 2, 2003, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2003, 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 the opinion expressed above. As discussed in Note 2 to the consolidated financial statements, effective February 4, 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Greensboro, North Carolina March 13, 2003 71 EX-21.1 6 g82317exv21w1.txt EX-21.1 LIST OF SUBSIDIARIES . . . EXHIBIT 21.1 LIST OF SUBSIDIARIES

STATE OF INCORPORATION SUBSIDIARY(1) OR ORGANIZATION Krispy Kreme Doughnut Corporation North Carolina Krispy Kreme Distributing Company, Inc. North Carolina Krispy Kreme Coffee Company, LLC North Carolina Krispy Kreme Mobile Store Company North Carolina HD Capital Corporation Delaware HDN Development Corporation Kentucky Panhandle Doughnuts, LLC North Carolina Oliver Acquisition Corp. Delaware Krispy Kreme International Ltd. Switzerland Hot Doughnuts Now International Ltd. Switzerland Krispy Kreme Europe Limited United Kingdom Freedom Rings, LLC(2) Delaware Glazed Investments, LLC(2) Delaware Golden Gate Doughnuts, LLC(2) North Carolina New England Dough, LLC(2) Rhode Island

- ----------------- (1) Montana Mills Bread Co., Inc. became our wholly-owned subsidiary effective April 7, 2003. (2) Franchisees in which the registrant held a majority equity interest as of February 2, 2003. EX-23.1 7 g82317exv23w1.txt EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP 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, 333-47326, 333-87092, 333-97787), S-4 (No. 333-103434) and S-3 (Nos. 333-70336, 333-101365, 333-99211, 333-88758) of Krispy Kreme Doughnuts, Inc. of our report dated March 13, 2003 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 13, 2003 relating to the financial statement schedule, which appears in this Form 10-K. Greensboro, North Carolina May 2, 2003 EX-99.1 8 g82317exv99w1.txt EX-99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO CHAPTER 63, TITLE 18 UNITED STATES CODE SS.1350 AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 ACCOMPANYING ANNUAL REPORT ON FORM 10-K OF KRISPY KREME DOUGHNUTS, INC. FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2003 I, Scott A. Livengood, President and Chief Executive Officer of Krispy Kreme Doughnuts, Inc. (the "Company"), certify that the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended February 2, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 2, 2003 /s/ Scott A. Livengood ------------------------------------- Scott A. Livengood President and Chief Executive Officer EX-99.2 9 g82317exv99w2.txt EX-99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO CHAPTER 63, TITLE 18 UNITED STATES CODE SS.1350 AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 ACCOMPANYING ANNUAL REPORT ON FORM 10-K OF KRISPY KREME DOUGHNUTS, INC. FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2003 I, Randy S. Casstevens, Chief Financial Officer of Krispy Kreme Doughnuts, Inc. (the "Company"), certify that the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended February 2, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 2, 2003 /s/ Randy S. Casstevens ------------------------- Randy S. Casstevens Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.2

                                                                     EXHIBIT 3.2

                           AMENDED AND RESTATED BYLAWS
                                       OF
                          KRISPY KREME DOUGHNUTS, INC.

                            Effective March 21, 2003

                  * * * * * * * * * * * * * * * * * * * * * * *

                              ARTICLE I. - OFFICES

Section 1.        Registered Office: The registered office of the corporation
                  shall be at 370 Knollwood Street, Winston-Salem, North
                  Carolina 27103.

Section 2.        Principal Office: The principal office of the corporation
                  shall be located at the same address as the registered office
                  or such other place as may be designated by the Board of
                  Directors.

Section 3.        Other Offices: The corporation may have offices at such other
                  places, either within or without the State of North Carolina,
                  as the Board of Directors may from time to time determine, or
                  as the affairs of the corporation may require.

                     ARTICLE II. - MEETINGS OF SHAREHOLDERS

Section 1.        Place of Meetings: All meetings of shareholders shall be held
                  at the registered office of the corporation, or at such other
                  place, either within or without the State of North Carolina,
                  as shall be designated in the notice of the meeting or agreed
                  on by a majority of the shareholders entitled to vote thereat.

Section 2.        Annual Meetings: (a) The annual meeting of shareholders shall
                  be held on a date and at a place at an hour to be fixed by the
                  Chief Executive Officer and affirmed by the Board of Directors
                  from time to time, for the purpose of electing directors of
                  the corporation and for the transaction of such other business
                  as may be properly brought before the meeting.

                  (b) No business shall be transacted at an annual meeting of
                  shareholders, except such business as shall be (i) specified
                  in the notice of meeting given as provided in Article II,
                  Section 5, (ii) otherwise brought before the meeting by or at
                  the direction of the Board of Directors or (iii) otherwise
                  brought before the meeting by a shareholder of record entitled
                  to vote at the meeting, in compliance with the procedures set
                  forth in this Article II, Section 2(b).

                  For business to be brought before an annual meeting by a
                  shareholder pursuant to (iii) above, the shareholder must have
                  given timely notice in writing to the Secretary of the
                  Company. To be timely, a shareholder's notice must be
                  delivered to, or mailed to and received at, the principal
                  office of the corporation not less




                  than forty days nor more than ninety days prior to the
                  meeting. If less than fifty days' notice or prior public
                  disclosure of the date of the meeting is given or made to
                  shareholders, notice by the shareholder will be timely if
                  received by the Secretary of the Company not later than the
                  close of business on the tenth day following the day on which
                  such notice of the date of the meeting or such public
                  disclosure was given or made. Notice of the date of the
                  meeting shall be deemed to have been given by the corporation
                  more than fifty days in advance of the annual meeting if the
                  annual meeting is called on the date prescribed by Article II,
                  Section 1, without regard to whether notice or public
                  disclosure thereof is made. Notice of action to be brought
                  before the annual meeting pursuant to (iii) above shall set
                  forth as to each such matter the shareholder proposes to bring
                  before the annual meeting (A) a brief description of the
                  business desired to be brought before the annual meeting and
                  the reasons for bringing such business before the annual
                  meeting, (B) the name and address, as they appear on the
                  corporation's books, of each shareholder proposing such
                  business, (C) the classes and number of shares of the
                  corporation that are owned of record and beneficially by each
                  such shareholder, and (D) any material interest of such
                  shareholders in such business other than any interest as a
                  shareholder of the corporation. Notwithstanding anything in
                  these Bylaws to the contrary, no business shall be conducted
                  at an annual meeting except in accordance with the provisions
                  set forth in this Article II, Section 2(b). If the chairman of
                  the annual meeting determines that any business was not
                  properly brought before the meeting in accordance with the
                  provisions of these Bylaws, he shall so declare to the meeting
                  and, to the extent permitted by law, any such business not
                  properly brought before the meeting shall not be transacted.

Section 3.        Substitute Annual Meeting: If the annual meeting shall not be
                  held on the day designated by these bylaws, a substitute
                  meeting may be called in accordance with the provisions of
                  Section 4 of this Article. A meeting so called shall be
                  designated and treated for all purposes as the annual meeting.

Section 4.        Special Meetings: Special meetings of the shareholders may be
                  called at any time by the President, Secretary or Board of
                  Directors of the corporation.

Section 5.        Notice of Meetings: Written or printed notice stating the time
                  and place of the meeting shall be delivered not less than ten
                  nor more than fifty days before the date thereof, either
                  personally or by mail, by or at the direction of the Chairman,
                  the President, the Secretary, or other person calling the
                  meeting, to each shareholder of record entitled to vote at
                  such meeting.

                  In the case of an annual or substitute annual meeting, the
                  notice of meeting need not specifically state the business to
                  be transacted thereat unless it is a matter, other than
                  election of Directors, on which the vote of shareholders is
                  expressly required by the provisions of the North Carolina
                  Business Corporation Act. In the


                                       2


                  case of a special meeting, the notice of meeting shall
                  specifically state the purpose or purposes for which the
                  meeting is called.

                  When a meeting is adjourned for one hundred twenty days or
                  more, notice of the adjourned meeting shall be given as in the
                  case of an original meeting. When a meeting is adjourned for
                  less than one hundred twenty days in any one adjournment, it
                  is not necessary to give any notice of the adjourned meeting
                  other than by announcement at the meeting at which the
                  adjournment is taken.

Section 6.        Voting Lists: After fixing the record date for a meeting, the
                  Secretary of the corporation shall prepare an alphabetical
                  list of the shareholders entitled to notice of such meeting or
                  any adjournment thereof, arranged by voting group, class and
                  series, with the address of and number of shares held by each.
                  Such list shall be kept on file at the principal office of the
                  corporation, or at a place identified in the meeting notice in
                  the city where the meeting will be held, beginning two
                  business days after notice of such meeting is given and
                  continuing through the meeting, and on written demand shall be
                  subject to inspection or copying by any shareholder, his agent
                  or attorney at any time during regular business hours. This
                  list shall also be produced and kept open at the time and
                  place of the meeting and shall be subject to inspection by any
                  shareholder during the whole time of the meeting.

Section 7.        Quorum: The holders of a majority of the shares entitled to
                  vote, represented in person or by proxy, shall constitute a
                  quorum at meetings of shareholders. If there is no quorum at
                  the opening of a meeting of shareholders, such meeting may be
                  adjourned from time to time by the vote of a majority of the
                  shares voting on the motion to adjourn; and, at any adjourned
                  meeting at which a quorum is present, any business may be
                  transacted which might have been transacted at the original
                  meeting.

                  The shareholders at a meeting at which a quorum is present may
                  continue to do business until adjournment, notwithstanding the
                  withdrawal of enough shareholders to leave less than a quorum.

Section 8.        Voting of Shares: Each outstanding share having voting rights
                  shall be entitled to one vote on each matter submitted to a
                  vote at a meeting of shareholders.

                  Except in the election of Directors the vote of a majority of
                  the shares voted on any matter at a meeting of shareholders at
                  which a quorum is present shall be the act of the shareholders
                  on that matter, unless the vote of a greater number is
                  required by law. In the election of Directors those receiving
                  the greatest number of votes shall be deemed elected even
                  though not receiving a majority.

                  Voting on all matters shall be by voice vote or by a show of
                  hands unless the holders of one tenth of the shares
                  represented at the meeting shall, prior to the voting on any
                  matter, demand a ballot vote on that particular matter. The
                  election of directors is governed by Article III, Section 3.


                                       3


Section 9.        Informal Action by Shareholders: Any action which may be taken
                  at a meeting of the shareholders may be taken without a
                  meeting if a consent in writing, setting forth the action so
                  taken, shall be signed by all of the persons who would be
                  entitled to vote upon such action at a meeting, and filed with
                  the Secretary of the corporation to be kept in the Corporate
                  Minute Book.

Section 10.       Proxies: At all meetings of shareholders, shares may be voted
                  either in person or by one or more agents authorized by a
                  written proxy executed by the shareholder or his duly
                  authorized attorney-in-fact. A telegram, cablegram, wireless
                  message or photogram appearing to have been transmitted by a
                  shareholder, or a photographic, photostatic or equivalent
                  reproduction of a writing appointing one or more agents shall
                  be deemed a written proxy within the meaning of this section.

                            ARTICLE III. - DIRECTORS

Section 1.        General Powers: The business and affairs of the corporation
                  shall be managed by the Board of Directors.

Section 2.        Number, Term and Qualifications: (a) The number of Directors
                  constituting the whole Board shall be not more than fifteen
                  nor less than nine. The authorized number of Directors, within
                  the limits above specified, shall be determined by the
                  affirmative vote of a majority of the whole Board given at a
                  regular or special meeting of the Board of Directors; provided
                  that, if the number so determined is to be increased, or
                  decreased, notice of the proposed increase or decrease shall
                  be included in the notice of such meeting, or all of the
                  Directors at the time in office be present at such meeting, or
                  those not present at any time waive or have waived notice
                  thereof in writing; and provided, further, that the number of
                  Directors which shall constitute the whole Board shall not be
                  less than nine nor shall it be reduced to a number less than
                  the number of Directors then in office unless such reduction
                  shall become effective only at and after the next ensuing
                  meeting of shareholders for the election of Directors.

                  (b) The directors of the corporation shall be divided into the
                  following three classes: Class I, Class II and Class III. The
                  number of directors in each class shall be as nearly equal in
                  number as possible. Each initial director in Class I shall be
                  elected to an initial term of one (1) year, each initial
                  director in Class II shall be elected to an initial term of
                  two (2) years and each initial director in Class III shall be
                  elected to an initial term of three (3) years. Each director
                  shall hold office until the election and qualification of his
                  successor or his earlier death, resignation, retirement or
                  removal from office. Upon the expiration of the initial term
                  for each class of directors, the directors of each class shall
                  be elected for a term of three (3) years. Directors need not
                  be residents of the State of North Carolina or shareholders of
                  the corporation.


                                       4


Section 3.        Nomination and Election of Directors: Except as provided in
                  Section 5 and Section 2 of this Article, the Directors shall
                  be elected at the annual meeting of shareholders. If any
                  shareholder so demands, election of Directors shall be by
                  ballot.

                  Only persons who are nominated in accordance with the
                  provisions set forth in these bylaws shall be eligible to be
                  elected as directors at an annual or special meeting of
                  shareholders. Nomination of election to the Board of Directors
                  shall be made by or at the direction of the Board of Directors
                  or a committee appointed thereby.

                  Nomination for election of any person to the Board of
                  Directors may also be made by a shareholder entitled to vote
                  on such election if written notice of the nomination of such
                  person shall have been delivered to the Secretary of the
                  corporation at the principal office of the corporation not
                  less than forty days nor more than ninety days prior to the
                  meeting. If less than fifty days' notice or prior public
                  disclosure of the date of the meeting is given or made to
                  shareholders, notice by the shareholder will be timely if
                  received by the Secretary of the Company not later than the
                  close of business on the tenth day following the day on which
                  such notice of the date of the meeting or such public
                  disclosure was given or made. Notice of the date of the
                  meeting shall be deemed to have been given by the corporation
                  more than fifty days in advance of the annual meeting if the
                  annual meeting is called on the date prescribed by Article II,
                  Section 1, without regard to whether notice or public
                  disclosure thereof is made. Each such notice shall set forth:
                  (i) the name and address of the shareholder who intends to
                  make the nomination; (ii) a representation that such
                  shareholder is a holder of record of shares of the corporation
                  entitled to vote at such meeting and intends to appear in
                  person or by proxy at the meeting to nominate the person or
                  persons specified in the notice; (iii) as to each person to be
                  nominated (A) such person's name and address, employment
                  history for the past five years, affiliations, if any, with
                  the corporation and other corporations, the class and number
                  of shares of the corporation that are owned of record or
                  beneficially by such person and information concerning any
                  transaction in such shares within the prior sixty days,
                  whether such person has been convicted in a criminal
                  proceeding (excluding traffic violations or similar
                  misdemeanors) within the past five years and the details
                  thereof, whether such person has been a party to any
                  proceeding or subject to any judgment, decree or final order
                  with respect to violations of federal or state securities laws
                  within the past five years and the details thereof, and the
                  details of any contract, arrangement, understanding or
                  relationships with any person with respect to any securities
                  of the corporation; (B) such person's written consent to being
                  named as a nominee and to serving as director if elected and
                  (C) a description of all arrangements or understandings
                  between the shareholder and each such nominee and any other
                  person or persons (naming such person or


                                       5


                  persons) pursuant to which the nomination or nominations are
                  to be made by the shareholder. The chairman of the meeting
                  shall refuse to acknowledge the nomination of any person not
                  made in compliance with the foregoing procedure.

Section 4.        Removal: Directors may be removed from office only with cause
                  by a vote of shareholders holding 66 2/3% of the outstanding
                  shares entitled to vote at an election of Directors. If any
                  Directors are so removed, new Directors may be elected at the
                  same meeting.

Section 5.        Vacancies: A vacancy occurring in the Board of Directors may
                  be filled by a majority of the remaining Directors though less
                  than a quorum, or by the sole remaining Director; but a
                  vacancy created by an increase in the authorized number of
                  Directors outside of the range specified in Section 2 of this
                  Article shall be filled by election at an annual meeting or at
                  a special meeting of shareholders called for that purpose. The
                  shareholders may elect a Director at any time to fill any
                  vacancy not filled by the Directors.

Section 6.        Compensation: The Board of Directors may compensate Directors
                  for their services as such and may provide for the payment of
                  all expenses incurred by the Directors in attending regular
                  and special meetings of the Board.

Section 7.        Emeritus Directors: The Board of Directors may, from time to
                  time, by majority vote, elect one or more of its former
                  Directors to serve as Emeritus Directors for one or more
                  consecutive one-year terms or until earlier resignation or
                  removal by a majority of the Board of Directors. Emeritus
                  Directors may be asked to serve as consultants to the Board of
                  Directors and may be appointed by the Board of Directors to
                  serve as consultants to committees of the Board of Directors.
                  Emeritus Directors may be invited to attend meetings of the
                  Board of Directors or any committee of the Board of Directors
                  for which they have been appointed to serve as consultants.
                  Emeritus Directors shall not be permitted to vote on matters
                  brought before the Board of Directors or any committee thereof
                  and shall not be counted for the purpose of determining
                  whether a quorum of the Board or Directors or the committee is
                  present. Emeritus Directors will be entitled to receive fees
                  and reimbursement for expenses of meeting attendance, as
                  recommended by the Chairman of the Board of Directors and
                  approved by the Board of Directors. Emeritus Directors may be
                  removed at any time by the Board of Directors. An Emeritus
                  Director shall not have any of the responsibilities or
                  liabilities of a director, nor any of a director's rights,
                  powers or privileges. Reference in these Bylaws to "Directors"
                  shall not mean or include Emeritus Directors.

Section 8.        Director Retirement: A Director shall retire as of the annual
                  meeting coincident with the end of term in which such Director
                  attains age 70, except that any Director having attained the
                  age of 70 as of the annual meeting of the shareholders held in
                  2003 shall be permitted to complete such Director's present
                  term and stand for reelection for one additional term.


                                       6


                       ARTICLE IV. - MEETINGS OF DIRECTORS

Section 1.        Regular Meetings: A regular meeting of the Board of Directors
                  shall be held immediately after, and at the same place as, the
                  annual meeting of the shareholders. In addition, to the annual
                  meeting of the Board of Directors, there shall be three
                  regular meetings of the Board of Directors to be held at the
                  offices of the corporation or at such other place as may be
                  designated by the Chairman of the Board or the President in
                  August and November (on the third Tuesday thereof after the
                  closing of the corporation's previous fiscal month) and on the
                  last Tuesday in January prior to close of each fiscal year.
                  The Chairman of the Board may designate the time of the
                  meetings.

Section 2.        Special Meetings: Special meetings of the Board of Directors
                  may be called by or at the request of the Chairman, President
                  or any two Directors. Such meetings may be held within or
                  without the State of North Carolina.

Section 3.        Notice of Meetings: Regular meetings of the Board of Directors
                  may be held without notice.

                  The person or persons calling a special meeting of the Board
                  of Directors shall, at least two days before the meeting, give
                  notice thereof by any usual means of communication. Such
                  notice need not specify the purpose for which the meeting is
                  called.

                  Attendance by a Director at a meeting shall constitute a
                  waiver of notice of such meeting, except where a Director
                  attends a meeting for the express purpose of objecting to the
                  transaction of any business because the meeting is not
                  lawfully called.

Section 4.        Quorum: A majority of the Directors fixed by these bylaws
                  shall constitute a quorum for the transaction of business at
                  any meeting of the Board of Directors.

Section 5.        Manner of Acting: Except as otherwise provided in this
                  section, the act of the majority of the Directors present at a
                  meeting at which a quorum is present shall be the act of the
                  Board of Directors.

Section 6.        Informal Action by Directors: Action taken by a majority of
                  the Directors without a meeting is nevertheless Board action
                  if written consent to the action in question is signed by all
                  the Directors and filed with the minutes of the proceedings of
                  the Board, whether done before or after the action so taken.

Section 7.        Meeting by Telephone: Any one or more members of any such
                  committee may participate in a meeting of the committee by
                  means of a conference telephone or similar communications
                  device which allows all persons participating in the meeting
                  to hear each other and such participation in a meeting shall
                  be deemed presence in person at such meeting.


                                       7


                   ARTICLE V. - EXECUTIVE AND OTHER COMMITTEES

Section 1.        Appointment: The Board of Directors, by resolution adopted by
                  a majority of the number of Directors then in office, may
                  designate from among its members an Executive Committee or one
                  or more other committees, each consisting of two or more
                  Directors. The designation of any such committee and the
                  delegation thereto of authority shall not operate to relieve
                  the Board of Directors, or any member thereof, of any
                  responsibility or liability imposed upon it or him by law.

Section 2.        Authority: Any such committee shall have and exercise all
                  authority of the Board of Directors in the management of the
                  corporation except to the extent, if any, that such authority
                  shall be limited by the resolution appointing such committee
                  and except also to the extent limited by law.

Section 3.        Tenure and Qualifications: Each member of any such committee
                  shall hold office until the next regular annual meeting of the
                  Board of Directors following his designation and until his
                  successor is designated as a member of any such committee and
                  is elected and qualified.

Section 4.        Meetings: Regular meetings of any such committee may be held
                  without notice at such time and place as such committee may
                  fix from time to time by resolution. Special meetings of any
                  such committee may be called by any member thereof upon not
                  less than one day's notice stating the place, date and hour of
                  such meeting, which notice may be written or oral, and if
                  mailed, shall be deemed to be delivered when deposited in the
                  United States mail addressed to any member of the Executive
                  Committee at his business address. Any member of the Executive
                  Committee may waive notice of any meeting and no notice of any
                  meeting need be given to any member thereof to attend in
                  person. The notice of a meeting of the Executive Committee
                  need not state the business proposed to be transacted at the
                  meeting.

Section 5.        Quorum: A majority of the members of any such committee shall
                  constitute a quorum for the transaction of business at any
                  meeting thereof, and actions of such committee must be
                  authorized by the affirmative vote of a majority of the
                  members present at the meeting at which a quorum is present.

Section 6.        Informal Action: Action taken by a majority of the members of
                  any such committee without meeting is nevertheless action of
                  such committee if written consent to the action in question is
                  signed by all of the members of such committee and filed with
                  the minutes of the proceedings of the committee, whether done
                  before or after the actions so taken.

Section 7.        Removal: Any member of any such committee may be removed at
                  any time with or without cause by resolution adopted by a
                  majority of the Board of Directors.


                                       8


Section 8.        Vacancies: Any vacancy in any such committee may be filled by
                  resolution adopted by a majority of the Board of Directors.

Section 9.        Procedure: Any such committee shall elect a presiding officer
                  from among its members and may fix its own rules of procedure
                  which shall not be inconsistent with these bylaws. It shall
                  keep regular minutes of its proceedings and report the same to
                  the Board of Directors for its information at the meeting
                  thereof held next after the proceedings shall have been taken.

Section 10.       Meeting by Telephone: Any one or more members of any such
                  committee may participate in a meeting of the committee by
                  means of a conference telephone or similar communications
                  device which allows all persons participating in the meeting
                  to hear each other and such participation in a meeting shall
                  be deemed presence in person at such meeting.

                             ARTICLE VI. - OFFICERS

Section 1.        Number: The officers of the corporation shall consist of a
                  President, a Secretary, a Treasurer, and such Executive Vice
                  Presidents, Senior Vice Presidents, Vice Presidents, Assistant
                  Secretaries, Assistant Treasurers and other officers as the
                  Board of Directors may from time to time elect. Any two or
                  more offices may be held by the same person, except the
                  offices of President and Secretary may not be held by the same
                  person.

Section 2.        Election and Term: The officers of the corporation shall be
                  selected by the Board of Directors. Such elections may be held
                  at any regular or special meeting of the Board. Each officer
                  shall hold office for a period of one year or until his death,
                  resignation, retirement, removal, disqualification or his
                  successor is elected and qualifies.

Section 3.        Removal: Any officer or agent elected or appointed by the
                  Board of Directors may be removed by the Board with or without
                  cause; but such removal shall be without prejudice to the
                  contract rights, if any, of the person so removed.

Section 4.        President: The President, subject to the control of the Board
                  of Directors, shall supervise and control the management of
                  the corporation in accordance with these bylaws. He shall
                  preside at all meetings of shareholders and directors. He
                  shall sign, with any other proper officer, certificates for
                  shares of the corporation and any deeds, mortgages, bonds,
                  contracts, or other instruments which may be lawfully executed
                  on behalf of the corporation, except where required or
                  permitted by law to be otherwise signed and executed and
                  except where the signing and execution thereof shall be
                  delegated by the Board of Directors to some other officer or
                  agent; and, in general, he shall perform such other duties as
                  may be prescribed by the Board of Directors from time to time.


                                       9


Section 5.        Vice Presidents: The Executive Vice Presidents, Senior Vice
                  Presidents, and Vice Presidents in the order of their
                  election, unless otherwise determined by the Board of
                  Directors, shall, in the absence or disability of the
                  President, perform the duties and exercise the powers of that
                  office. In addition, they shall perform such other duties and
                  have such other powers as the Board of Directors shall
                  prescribe.

Section 6.        Secretary: The Secretary shall keep a correct record of all
                  the proceedings of the meetings of the shareholders and
                  Directors. He shall attend to the giving of notices, have
                  custody of the corporate seal, and affix it to all instruments
                  required to be executed under seal as authorized by the Board
                  of Directors. He shall perform such other duties as are
                  incident to the office of Secretary, and shall have such other
                  powers and duties as may be conferred upon him by the Board of
                  Directors.

Section 7.        Treasurer: The Treasurer shall have charge of all the moneys
                  and securities belonging to the corporation. He shall deposit
                  said property with such banks as the Board of Directors shall
                  designate and in the name of the corporation. He shall keep a
                  record of all receipts and disbursements, and shall have
                  charge of all records of the corporation relating to its
                  finances. He shall perform such other duties as are incident
                  to the office of Treasurer, and shall have such other powers
                  and duties as may be conferred upon him by the Board of
                  Directors.

Section 8.        Assistant Secretaries and Treasurers: The Assistant
                  Secretaries and Assistant Treasurers shall, in the absence or
                  disability of the Secretary or the Treasurer, respectively,
                  perform the duties and exercise the powers of those offices,
                  and they shall, in general, perform such other duties as shall
                  be assigned to them by the Secretary or the Treasurer,
                  respectively, or by the President or the Board of Directors.

Section 9.        Bonds: The Board of Directors may by resolution require any or
                  all officers, agents and employees of the corporation to give
                  bond to the corporation, with sufficient sureties, conditioned
                  on the faithful performance of the duties of their respective
                  offices or positions, and to comply with such other conditions
                  as may from time to time be required by the Board of
                  Directors.

Section 10.       Vacancies: A vacancy in any office because of death,
                  resignation, removal, disqualification, or other reason, may
                  be filled by the Board of Directors for the unexpired portion
                  of the term.

                         ARTICLE VII. - INDEMNIFICATION

Section 1.        Expenses and Liabilities: (a) Any person who at any time
                  serves or has served (1) as a Director, Emeritus Director,
                  officer, employee or agent of the corporation, (2) at the
                  request of the corporation as a Director, Emeritus Director,
                  officer, partner, trustee, employee or agent of another
                  foreign or domestic corporation, partnership,


                                       10


                  joint venture, trust, or other enterprise, or (3) at the
                  request of the corporation as a trustee or administrator under
                  an employee benefit plan, shall have a right to be indemnified
                  by the corporation to the fullest extent from time to time
                  permitted by law against Liability and Expenses in any
                  Proceeding (including without limitation a Proceeding brought
                  by or on behalf of the corporation itself) arising out of his
                  or her status as such or activities in any of the foregoing
                  capacities or results from him being called as a witness at a
                  time when he has not been made a named defendant or respondent
                  to any Proceeding.

                  (b) The Board of Directors of the corporation shall take all
                  such action as may be necessary and appropriate to authorize
                  the corporation to pay the indemnification required by this
                  provision, including without limitation, to the extent needed,
                  making a good faith evaluation of the manner in which the
                  claimant for indemnity acted and of the reasonable amount of
                  indemnity due him.

                  (c) Any person who at any time serves or has served in any of
                  the aforesaid capacities for or on behalf of the corporation
                  shall be deemed to be doing or to have done so in reliance
                  upon, and as consideration for, the rights provided for
                  herein. Any repeal or modification of these indemnification
                  provisions shall not affect any rights or obligations existing
                  at the time of such repeal or modification. The rights
                  provided for herein shall inure to the benefit of the legal
                  representatives of any such person and shall not be exclusive
                  of any other rights to which such person may be entitled apart
                  from this provision.

                  (d) The rights granted herein shall not be limited by the
                  provisions contained in Sections 55-8-51 through 55-8-56 of
                  the North Carolina General Statutes or any successor to such
                  statute.

Section 2.        Advance Payment of Expenses: The Corporation shall (upon
                  receipt of an undertaking by or on behalf of the Director,
                  Emeritus Director, officer, employee or agent involved to
                  repay the Expenses described herein unless it shall ultimately
                  be determined that he or she is entitled to be indemnified by
                  the corporation against such Expenses) pay Expenses incurred
                  by such Director, Emeritus Director, officer, employee or
                  agent in defending a Proceeding or appearing as a witness at a
                  time when he or she has not been named as a defendant or a
                  respondent with respect thereto in advance of the final
                  disposition of such Proceeding.

Section 3.        Insurance: The corporation shall have the power to purchase
                  and maintain insurance on behalf of any person who is or was a
                  Director, Emeritus Director, officer, employee or agent of the
                  corporation, or is or was serving at the request of the
                  corporation as a Director, Emeritus Director, officer,
                  employee or agent of another domestic or foreign corporation,
                  partnership, joint venture, trust or other enterprise or as a
                  trustee or administrator under an employee benefit plan
                  against any liability asserted against him or her and incurred
                  by him or her in any such


                                       11


                  capacity, or arising out of his or her status as such, whether
                  or not the corporation would have the power to indemnify him
                  or her against such liability.

Section 4.        Definitions: The following terms as used in this Article shall
                  have the following meanings. "Proceeding" means any
                  threatened, pending or completed action, suit, or proceeding
                  and any appeal therein (and any inquiry or investigation that
                  could lead to such action, suit, or proceeding), whether
                  civil, criminal, administrative, investigative or arbitrative
                  and whether formal or informal. "Expenses" means expenses of
                  every kind, including counsel fees. "Liability" means the
                  obligation to pay a judgment, settlement, penalty, fine
                  (including an excise tax assessed with respect to an employee
                  benefit plan), reasonable expenses incurred with respect to a
                  Proceeding, and all reasonable expenses incurred in enforcing
                  the indemnification rights provided herein. "Director" and
                  "Emeritus Director" include the estate or personal
                  representative of such Director or Emeritus Director.
                  "Corporation" shall include any domestic or foreign
                  predecessor of this corporation in a merger or other
                  transaction in which the predecessor's existence ceased upon
                  consummation of the transaction.

                 ARTICLE VIII. - CONTRACTS, CHECKS AND DEPOSITS

Section 1.        Contracts: The Board of Directors may authorize any officer or
                  officers, agent or agents, to enter into any contract or
                  execute and deliver any instrument on behalf of the
                  corporation and such authority may be general or confined to
                  specific instances.

Section 2.        Checks and Drafts: All checks, drafts or other orders for the
                  payment of money issued in the name of the corporation shall
                  be signed by such officer or officers, agent or agents, of the
                  corporation and in such manner as shall from time to time be
                  determined by resolution of the Board of Directors.

Section 3.        Deposits: All funds of the corporation not otherwise employed
                  shall be deposited from time to time to the credit of the
                  corporation in such depositories as the Board of Directors
                  shall direct.

           ARTICLE IX. - CERTIFICATES FOR SHARES AND TRANSFER THEREOF

Section 1.        Certificates for Shares: Certificates representing shares of
                  the corporation shall be issued, in such form as the Board of
                  Directors shall determine, to every shareholder for the fully
                  paid shares owned by him. These certificates shall be signed
                  by the President or any Vice President, and the Secretary,
                  Assistant Secretary, Treasurer or Assistant Treasurer. They
                  shall be consecutively numbered or otherwise identified; and
                  the name and address of the persons to whom they are issued,
                  with the number of shares and date of issue, shall be entered
                  on the stock transfer books of the corporation.


                                       12


Section 2.        Transfer of Shares: Transfer of shares shall be made on the
                  stock transfer books of the corporation only upon surrender of
                  the certificates for the shares sought to be transferred by
                  the record holder thereof or by his duly authorized agent,
                  transferee or legal representative. All certificates
                  surrendered for transfer shall be canceled before new
                  certificates for the transferred shares shall be issued.

Section 3.        Closing Transfer Books and Fixing Record Date: For the purpose
                  of determining shareholders entitled to notice of or to vote
                  at any meeting of shareholders or any adjournment thereof, or
                  entitled to receive payment of any dividend, or in order to
                  make a determination of shareholders for any other proper
                  purpose, the Board of Directors may provide that the stock
                  transfer books shall be closed for a stated period but not to
                  exceed, in any case, fifty days. If the stock transfer books
                  shall be closed for the purpose of determining shareholders
                  entitled to notice or to vote at a meeting of shareholders,
                  such books shall be closed for at least ten days immediately
                  preceding such meeting.

                  In lieu of closing the stock transfer books, the Board of
                  Directors may fix in advance a date as the record date for any
                  such determination of shareholders, such record date in any
                  case to be not more than fifty days and, in case of a meeting
                  of shareholders, not less than ten days immediately preceding
                  the date on which the particular action, requiring such
                  determination of shareholders, is to be taken.

                  If the stock transfer books are not closed and no record date
                  is fixed for the determination of shareholders entitled to
                  notice of or to vote at a meeting of shareholders, or
                  shareholders entitled to receive payment of a dividend, the
                  date on which notice of the meeting is mailed or the date on
                  which the resolution of the Board of Directors declaring such
                  dividend is adopted, as the case may be, shall be the record
                  date for such determination of shareholders.

Section 4.        Lost Certificates: The Board of Directors may authorize the
                  issuance of a new certificate in place of a certificate
                  claimed to have been lost or destroyed, upon receipt of an
                  affidavit of such fact from the person claiming the loss or
                  destruction. When authorizing such issuance of a new
                  certificate, the Board may require the claimant to give the
                  corporation a bond in said sum as it may direct to indemnify
                  the corporation against loss from any claim with respect to
                  the certificate claimed to have been lost or destroyed; or the
                  Board may, by resolution reciting that the circumstances
                  justify such action, authorize the issuance of a new
                  certificate without requiring such a bond.

                         ARTICLE X. - GENERAL PROVISIONS

Section 1.        Dividends: The Board of Directors may from time to time
                  declare, and the corporation may pay, dividends on its
                  outstanding shares in the manner and upon the terms and
                  conditions provided by law and by its charter.


                                       13


Section 2.        Seal: The seal shall be in the form of a circle with the name
                  of the corporation and N.C. on the circumference and the word
                  "SEAL" in the center as shown by the impress of the corporate
                  seal on the margin of this section of the bylaws.

Section 3.        Waiver of Notice: Whenever any notice is required to be given
                  to any shareholder or Director under the provisions of the
                  North Carolina Business Corporation Act or under the
                  provisions of the charter or bylaws of this corporation a
                  waiver thereof in writing signed by the person or persons
                  entitled to such notice, whether before or after the time
                  stated therein, shall be equivalent to the giving of such
                  notice.

Section 4.        Fiscal Year: Unless otherwise ordered by the Board of
                  Directors by action recorded in the minutes, the fiscal year
                  of the corporation shall end on the Sunday in either January
                  or February closest to January 31.

Section 5.        Amendments: Except as otherwise provided herein, these bylaws
                  may be amended or repealed and new bylaws may be adopted by
                  the affirmative vote of a majority of the Directors then
                  holding office at any regular or special meeting of the Board
                  of Directors.

                  The Board of Directors shall have no power to adopt a bylaw:
                  (1) requiring more than a majority of the voting shares for a
                  quorum at a meeting of shareholders or more than a majority of
                  the votes cast to constitute action of the shareholders,
                  except where higher percentages are required by law; or (2)
                  providing for the management of the corporation other than by
                  the Board of Directors or a committee thereof.

                  No bylaw adopted or amended by the shareholders shall be
                  altered or repealed by the Board of Directors. Notwithstanding
                  any provision contained in these Bylaws to the contrary, the
                  affirmative vote of at least 66 2/3% of the outstanding shares
                  of Common Stock of the corporation shall be required to amend
                  or repeal the following provisions of these Bylaws: Article
                  II, Section 2(b) (Annual Meetings); Article II, Section 4
                  (Special Meetings); Article II, Section 5 (Notice of
                  Meetings); Article III, Section 2 (Directors - Number, Term
                  and Qualifications); or Article III, Section 4 (Directors -
                  Removal).

                  No alteration, amendment or rescission of a bylaw shall be
                  voted upon unless notice thereof has been given in the notice
                  of the meeting or unless all of the Directors of the
                  corporation execute a written waiver of notice stating that
                  action upon the bylaws is to be taken at the meeting, and the
                  original of such waiver shall be recorded in the Minute Book.


                                       14

EX-10.19

                                                                   EXHIBIT 10.19

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT (THE "AGREEMENT") is made effective the 22nd
day of April, 2002, by and between KRISPY KREME DOUGHNUTS, INC. a North Carolina
corporation (the "Company"), and R. FRANK MURPHY (the "Executive").

                                     RECITAL

         The Executive is being hired as Executive Vice President and General
Counsel, reporting to the CEO, 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 April 22, 2002 and ending April 21, 2005;
                  provided, however, that commencing April 22, 2003, the
                  Executive's Period of Employment shall automatically be
                  extended for successive one-year periods each year as of April
                  22 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.

                  (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.


                                       2



         4.       POSITION, DUTIES AND RESPONSIBILITIES. During the Period of
Employment, the executive shall

                  (a)      serve as Executive Vice President and General Counsel
                  of the Company, reporting to the CEO, and its subsidiaries or
                  in such other Senior Management position as may be assigned to
                  him by mutual agreement with the Board of Directors. The
                  Executive shall be employed hereunder in Forsyth County, North
                  Carolina 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
                  $300,000, with annual increases in accordance with the
                  Company's regular practices for members of Senior Management.
                  In addition, he shall receive 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, and all expenses
                  necessary to maintain law license and professional
                  memberships, 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.


                                       3



                  (e)      The Company agrees to pay the Executive's dues and
                  assessments for membership in Forsyth Country Club and in the
                  Piedmont Club.

         6.       TERMINATION OF EMPLOYMENT. During the Period of Employment:

                  (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
                  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.


                                       4



                  (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,

                           (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
                                    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 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:


                                       5



                           (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
                  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


                                       6



                  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:

                  (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 Section 8 and any amounts earned by the Executive
subsequent to his


                                       7



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 he
Voting Stock; or

                  (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 medial, 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.


                                       8



         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
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 10(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.


                                       9



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 8 and 9 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:               R. Frank Murphy
                                            445 North Westview Drive
                                            Winston-Salem, NC 27104

         IF TO THE COMPANY:                 Krispy Kreme Doughnut Corporation
                                            P.O. Box 83
                                            Winston-Salem, NC 27102-0083
                                            (for mail)

                                            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.


                                       10



         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 8 and 9 of the Agreement
shall survive the termination of this Agreement and shall continue for the terms
set forth in Sections 8 and 9.

         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.



                                       KRISPY KREME DOUGHNUT CORPORATION



                                       By: /s/ Scott A. Livengood
                                          --------------------------------------
                                          Scott A. Livengood, CEO and President



[CORPORATE SEAL]



                                       EXECUTIVE



                                       /s/ R. Frank Murphy                (Seal)
                                       -----------------------------------
                                       R. Frank Murphy


                                       11

EX-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 January 31, 1999, January 30, 2000,
January 28, 2001, February 3, 2002 and February 2, 2003 have been derived from
our audited consolidated financial statements. Please note that our fiscal year
ended February 3, 2002 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 and the royalties and fees
received from our franchised stores. Our consolidated financial statements
appearing elsewhere in this annual report exclude franchised store sales and
include royalties and fees received from our franchisees. The consolidated
financial statements also include the results of Freedom Rings, LLC, the area
developer in Philadelphia, and Golden Gate Doughnuts, LLC, the area developer in
Northern California, in which Krispy Kreme has a majority ownership interest, as
well as the results of Glazed Investments, LLC, the area developer in Colorado,
Minnesota and Wisconsin, for periods subsequent to August 22, 2002, the date the
Company acquired a controlling interest in this area developer.

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 on
March 19, 2001 to shareholders of record as of March 5, 2001 and a two-for-one
stock split paid on June 14, 2001 to shareholders of record as of May 29, 2001.
Unless otherwise specified, references in this annual report to "Krispy Kreme,"
the "Company," "we," "us" or "our" refer to Krispy Kreme Doughnuts, Inc. and its
subsidiaries.



                                                                 IN THOUSANDS, EXCEPT PER SHARE DATA AND STORE NUMBERS
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED                                 JAN. 31, 1999   JAN. 30, 2000   JAN. 28, 2001   FEB. 3, 2002   FEB. 2, 2003
- ----------------------------------------------------------------------------------------------------------------------
                                                                                           
STATEMENT OF OPERATIONS DATA:
Total revenues                              $   180,880     $   220,243     $   300,715    $   394,354    $   491,549
Operating expenses                              159,941         190,003         250,690        316,946        381,489
General and administrative expenses              10,897          14,856          20,061         27,562         28,897
Depreciation and amortization expenses            4,278           4,546           6,457          7,959         12,271
Arbitration award                                    --              --              --             --          9,075
Provision for restructuring                       9,466              --              --             --             --
                                            -------------------------------------------------------------------------
Income (loss) from operations                    (3,702)         10,838          23,507         41,887         59,817
Interest expense (income), net, and
  other                                           1,577           1,232          (1,698)        (2,408)           749
Equity loss in joint ventures                        --              --             706            602          2,008
Minority interest                                    --              --             716          1,147          2,287
                                            -------------------------------------------------------------------------
Income (loss) before income taxes                (5,279)          9,606          23,783         42,546         54,773
Provision (benefit) for income taxes             (2,112)          3,650           9,058         16,168         21,295
                                            -------------------------------------------------------------------------
Net income (loss)                           $    (3,167)    $     5,956     $    14,725    $    26,378    $    33,478
                                            =========================================================================
Net income (loss) per share:
 Basic                                      $      (.09)    $       .16     $       .30    $       .49    $       .61
 Diluted                                           (.09)            .15             .27            .45            .56
Shares used in calculation of net
  income (loss) per share:
 Basic                                           32,996          37,360          49,184         53,703         55,093
 Diluted                                         32,996          39,280          53,656         58,443         59,492
Cash dividends declared per common
  share                                     $       .04     $        --     $        --    $        --    $        --
OPERATING DATA (UNAUDITED):
Systemwide sales                            $   240,316     $   318,854     $   448,129    $   621,665    $   778,573
Number of stores at end of period:
 Company                                             61              58              63             75             99
 Franchised                                          70              86             111            143            177
                                            -------------------------------------------------------------------------
 Systemwide                                         131             144             174            218            276
                                            =========================================================================
Average weekly sales per store:
 Company                                    $        47     $        54     $        69    $        72    $        76
 Franchised                                          28              38              43             53             58
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital                             $     8,387     $    11,452     $    29,443    $    49,236    $    81,441
Total assets                                     93,312         104,958         171,493        255,376        410,487
Long-term debt, including current
  maturities                                     21,020          22,902              --          4,643         60,489
Total shareholders' equity                       42,247          47,755         125,679        187,667        273,352


                                        21


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion of our financial condition and results of operations
should be read together with the financial statements and the accompanying
notes. This annual report contains statements about future events and
expectations, including anticipated store and market openings, planned capital
expenditures and trends in or expectations regarding the Company's operations
and financing abilities, that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. 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 statements. 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; the quality of franchise store
operations; the 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 Krispy Kreme's periodic reports,
proxy statement and other information statements 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 negative 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
and a two-for-one stock split paid on June 14, 2001 to shareholders of record as
of May 29, 2001.

CRITICAL ACCOUNTING POLICIES

The Company's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The preparation of financial statements in
accordance with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of contingent assets and liabilities. US GAAP provides the
framework from which to make these estimates, assumptions and disclosures. The
Company chooses accounting policies within US GAAP that management believes are
appropriate to accurately and fairly report the Company's operating results and
financial position in a consistent manner. Management regularly assesses these
policies in light of current and forecasted economic conditions and has
discussed the development and selection of critical accounting policies with its
audit committee of the board of directors. The Company believes the following
accounting policies are critical to understanding the results of operations and
affect the more significant judgments and estimates used in the preparation of
the consolidated financial statements:

BASIS OF CONSOLIDATION.  Our consolidated financial statements include the
accounts of Krispy Kreme Doughnuts, Inc. and all subsidiaries where control
rests with the Company. Investments in affiliates in which the Company has the
ability to exercise significant influence over operating and financial policies
(generally 20- to 50-percent ownership), all of which are investments in joint
ventures with certain of our franchisees, are accounted for by the equity method
of accounting. Our judgments regarding the level of influence or control in each
equity method investment include considering key factors such as our ownership
interest, representation on the management committee, participation in policy
making decisions and material intercompany transactions. Investments in other
joint ventures that we do not control and for which we do not have the ability
to exercise significant influence are carried at cost. All significant
intercompany accounts and transactions, including transactions with equity
method investees, are eliminated in consolidation.

ALLOWANCE FOR DOUBTFUL ACCOUNTS.  Accounts receivable arise primarily from
royalties earned on sales of our franchisees, sales by KKM&D of equipment, mix
and other supplies necessary to operate a Krispy Kreme store to our franchisees,
as well as from off-premises sales by Company-owned stores to convenience and
grocery stores and other customers. Payment terms generally range from 30 to 54
days. The Company has experienced minimal uncollectible accounts receivable from
franchisees. The majority of the allowance for doubtful accounts relates to
receivables from convenience and grocery stores and other customers for
off-premises sales in our Company stores. Although collection efforts continue,
the Company establishes an allowance for these accounts generally when they
become past due and are deemed uncollectible.

INTANGIBLE ASSETS.  Effective fiscal 2003, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." The Statement addresses the accounting
and reporting of goodwill and other intangible assets subsequent to their
acquisition. The Statement requires intangible assets with definite lives to be
amortized over their estimated useful lives, while those with indefinite lives
and goodwill are no longer subject to amortization, but must be tested annually
for impairment, or more frequently if events and circumstances indicate
potential impairment. The Company evaluated its intangible assets and determined
that all such assets have indefinite lives and, therefore, are not subject to
amortization. The Statement required an initial impairment assessment be
performed upon adoption, involving comparing the fair value of goodwill and
other intangible assets to related carrying values for the reporting unit. The
Company performed this test upon adoption of SFAS

                                        22


No. 142 and found no instances of impairment. During the fourth quarter of
fiscal 2003, the Company performed the annual impairment test and determined
that its intangible assets and goodwill were not impaired.

The annual test for impairment involves determining the fair value of the
reporting unit to which the intangible asset or goodwill is assigned and
comparing that fair value to the reporting unit's carrying value, including the
intangible asset or goodwill. To determine fair value, the Company uses a
combination of the fair value of the cash flows that the reporting unit can be
expected to generate in the future (the Income Approach), the fair value of the
business in comparison to similar publicly traded businesses (the Market
Comparable Method) and the fair value of the net assets of the business based on
exchange prices in actual transactions (the Market Transaction Method). These
valuation methods require management to make projections of revenues, operating
expenses, working capital investment, capital spending and cash flows for the
respective reporting unit over a multi-year period, as well as the weighted
average cost of capital to be used as a discount rate. The Company must also
identify publicly traded companies in similar lines of business. Significant
management judgment is involved in preparing these estimates. Changes in
projections or estimates could significantly change the estimated fair value of
reporting units and impact the recorded balances for intangible assets and
goodwill. In addition, if management uses different assumptions or estimates in
the future or if different conditions occur in future periods, future operating
results and the balances of intangible assets and goodwill in the future could
be materially impacted.

ASSET IMPAIRMENT.  When a store is identified as underperforming or when a
decision is made to close a store, the Company makes an assessment of the
potential impairment of the related assets. The assessment is based upon a
comparison of the carrying amount of the assets, primarily property and
equipment, to the estimated undiscounted cash flows expected to be generated
from those assets. To estimate cash flows, management projects the net cash
flows anticipated from continuing operation of the store until its closing as
well as cash flows anticipated from disposal of the related assets, if any. If
the carrying amount of the assets exceeds the sum of the undiscounted cash
flows, the Company records an impairment charge measured as the excess of the
carrying value over the fair value of the assets. The resulting net book value
of the assets, less estimated net realizable value at disposition, is
depreciated over the remaining term that the store will continue in operation.
Disposition efforts on assets held for sale begin immediately following the
store closing.

Determining undiscounted cash flows and fair value of store assets involves
estimating future cash flows, revenues, operating expenses and sales values. The
projections of these amounts represent management's best estimates as of the
time of the review. If different cash flows had been estimated, property and
equipment balances could be impacted. Further, if management uses different
assumptions or estimates in the future or if different conditions occur in
future periods, future operating results could be impacted.

INSURANCE.  The Company is generally self-insured for most employee health care
claims, workers' compensation, automobile liability and product and general
liability losses. Insurance liabilities are accrued based upon historical and
industry trends and are adjusted when necessary due to changing circumstances.
Outside actuaries are used to assist in estimating insurance obligations.
Because there are many estimates and assumptions involved in recording these
liabilities, differences between actual future events and prior estimates and
assumptions could impact future operating results and result in adjustments to
these liabilities.

For further information concerning accounting policies, refer to Note
2 -- Nature of Business and Significant Accounting Policies in the notes to our
consolidated financial statements.

COMPANY OVERVIEW AND INDUSTRY OUTLOOK

We expect doughnut sales to grow due to a variety of factors, including the
growth in two-income households and corresponding shift to foods consumed away
from home, increased snack food consumption and further growth of doughnut
purchases from in-store bakeries. 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 has
enhanced, and will continue to help enhance the growth and expansion of the
overall doughnut market.

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.

                                        23


      "Private label" products carry the retailer's brand name or some other
      non-Krispy Kreme brand. Unbranded and private label products are a
      declining portion of our business.

In addition to our retail stores, we are vertically integrated. Our Krispy Kreme
Manufacturing and Distribution business unit, KKM&D, produces doughnut mixes and
manufactures our doughnut-making equipment, which all of our stores are required
to purchase. Additionally, this business unit currently operates distribution
centers that provide Krispy Kreme stores with essentially all supplies for the
critical areas of their business. In fiscal 2003, we opened our second mix
manufacturing and distribution facility in Effingham, Illinois. The new mix
facility triples our mix manufacturing capacity and also adds our third
distribution facility. This business unit is volume-driven, and its economics
are enhanced by the opening of new stores and the penetration of on-premises and
off-premises sales channels by existing stores.

In fiscal 2002, through the acquisition of the assets of Digital Java, Inc., we
began to expand our vertical integration to sourcing and roasting our own coffee
beans. Digital Java, Inc., a Chicago-based coffee company, was a sourcer and
micro-roaster of premium quality coffee and offered a broad line of coffee-based
and non-coffee based beverages. Subsequent to the acquisition, we relocated the
acquired assets and operations to a newly constructed coffee roasting facility
at our Ivy Avenue plant in Winston-Salem. This operation is supporting the
rollout of our new beverage program which includes drip coffee, espresso and
frozen beverages. During fiscal 2003, we completed the rollout of the first
component of this program, converting our stores to the new drip coffee
offering, replacing the previous product sold which was purchased from an
unrelated third party. As of February 2, 2003, the operation was supporting the
new, full beverage program in approximately 70 Krispy Kreme locations, most of
which are new stores that opened with the full program. We anticipate
introducing the remaining components of the new beverage program, primarily
espresso and frozen beverages, in all remaining stores over the next twelve to
eighteen months.

We believe our vertical integration allows us to maintain the consistency and
quality of our products throughout our system. In addition, through vertical
integration, we believe we can utilize volume buying power, which helps lower
the cost of supplies to each of our stores, and enhance our profitability.

In our recent store development efforts, we have focused on opening both Company
and franchised stores in major metropolitan markets, generally markets with
greater than 100,000 households. In fiscal 2003, we announced an initiative to
enhance our expansion through the opening of factory stores in small markets,
with small markets being defined as those markets having less than 100,000
households. Through value engineering, we believe we have reduced the level of
investment in property and equipment required to open a Krispy Kreme store,
making the opportunity to enter small markets economically viable. We also
expect that stores in these small markets will participate in fund-raising
programs and develop off-premises business, further enhancing the opportunity in
these markets, although we believe that their retail sales alone will generate
attractive financial returns. We expect the stores opened in these markets will
primarily be franchised stores and will be opened by our existing franchisees.

During fiscal 2002, we introduced a new concept store, the "doughnut and coffee
shop." This store uses the new Hot Doughnut Machine technology, which completes
the final steps of the production process and requires less space than the full
production equipment in our traditional factory store. This technology combines
time, temperature and humidity elements to re-heat unglazed doughnuts, provided
by a traditional factory store, and prepare them for the glazing process. Once
glazed, customers can have the same hot doughnut experience in a doughnut and
coffee shop as in a factory store. Additionally, the doughnut and coffee shop
offers our new full line of coffee and other beverages. During fiscal 2002, we
began our initial tests of the concept in three different markets and venues in
North Carolina and continue to develop and enhance the technology. As of
February 2, 2003, five doughnut and coffee shops were open, four of which are
owned by the Company. We plan to continue our tests of this concept.

In addition to the doughnut and coffee shop concept, we plan to experiment with
a new generation satellite concept. In this concept, we will sell fresh
doughnuts, beverages and Krispy Kreme collectibles, however the doughnuts will
not be produced on site but rather will be supplied by a nearby factory store,
multiple times each day.

As stated above, we intend to expand our concept primarily through opening new
franchise stores in territories across the continental United States and Canada,
as well as select other international markets as discussed below. We also have
entered and intend to enter into joint ventures with some of our franchisees. As
of February 2, 2003, there were 276 Krispy Kreme stores nationwide consisting of
99 Company-owned stores (including 29 which are consolidated joint venture
stores), 120 Area Developer franchise stores (including 30 in which we have a
joint venture interest) and 57 Associate franchise stores. For fiscal 2004, we
anticipate opening approximately 77 new stores under existing agreements, most
of which are expected to be franchise stores. We also anticipate opening a
combination of at least ten doughnut and coffee shops and/or satellite stores.
The store format will be determined by the site opportunities, primarily the
space available.

In contemplation of our future international expansion, we are beginning to
develop our global strategy as well as the capabilities and infrastructure
necessary to support our expansion outside the United States. We currently have
five stores in Canada, one of which is a commissary, and will open additional
stores in the Canadian market in the coming years. These stores are owned and
operated by a joint venture. During fiscal 2003, we entered into a joint venture
to franchise the Australian and New Zealand markets. The joint venture opened
its first store, a commissary to be used for training and sampling prior to

                                        24


opening the first retail store, in Australia in fiscal 2003. We expect the joint
venture to open its first retail store in the second quarter of fiscal 2004.
During fiscal 2003, we also entered into a joint venture to develop Krispy Kreme
stores in the United Kingdom and Republic of Ireland. We expect the joint
venture to open its first store in the United Kingdom in late fiscal 2004. We
are also focusing on additional markets outside the United States, including
Japan, Mexico, South Korea and Spain. Our initial research indicates that these
will be viable markets for the Krispy Kreme concept.

In January 2003, we announced plans to acquire, through an exchange of stock,
Montana Mills Bread Co., Inc. ("Montana Mills"), an owner and operator of
upscale "village bread stores" in the Northeastern and Midwestern United States.
Montana Mills' stores produce and sell a variety of breads and baked goods
prepared in an open-view format. We believe that the acquisition of Montana
Mills will provide operational synergies as well as an opportunity to leverage
our existing capabilities, such as our distribution chain, off-premises sales
and coffee-roasting expertise, to expand Montana Mills' business. We also
believe that the acquisition of Montana Mills provides an opportunity to apply
our experience and strength in creating a national franchise network towards
building a franchise network for Montana Mills. The acquisition is expected to
be completed in the first quarter of fiscal 2004. Subsequently, we expect to
spend approximately two years fully developing and refining the Montana Mills
concept. The revenues of Montana Mills in fiscal 2004 subsequent to completion
of the acquisition are not expected to be material to the consolidated revenues
of the Company.

As we expand our business, 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.

RESULTS OF OPERATIONS

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 and discussion of
critical accounting policies above, refer to Note 2 -- Nature of Business and
Significant Accounting Policies in the notes to our consolidated financial
statements. A guide to the discussion for each period is presented below.

OVERVIEW.  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 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 segment include store level expenses
      along with direct general and administrative expenses.

    - FRANCHISE OPERATIONS.  Represents the results of our franchise programs.
      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 and development and
      franchise fees ranging from $20,000 to $40,000 per store. Most associates
      and area developers also contribute 1.0% of all sales to our national
      advertising and brand development fund. Expenses for this business segment
      include costs incurred to recruit new franchisees, costs 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. This business
      unit buys and processes ingredients used to produce doughnut mixes and
      manufactures doughnut-making equipment that all of our stores are required
      to purchase. This business unit also includes our coffee roasting
      operations, which became operational in fiscal 2003. The operations
      currently support our drip coffee beverage program, which was rolled out
      to our stores in the third quarter of fiscal 2003, replacing the existing
      drip coffee offering that was purchased from an unrelated third party.
      Production in this facility will be increased in fiscal 2004 with the
      growth in stores and as the other components of our expanded beverage
      program, primarily espresso and frozen beverages, are introduced in our
      existing and new stores. Currently, the operations support the expanded
      beverage program in approximately 70 stores, most of which are new stores
      that opened with the full program. The KKM&D business unit also purchases
      and sells essentially all supplies necessary to operate a Krispy Kreme
      store, including all food ingredients, juices, 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.

                                        25


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, interest income, interest expense,
equity loss in joint ventures, minority interest in consolidated joint ventures
and the provision for income taxes.

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 2001 (52 WEEKS ENDED JANUARY 28, 2001), FISCAL 2002 (53 WEEKS
ENDED FEBRUARY 3, 2002) AND FISCAL 2003 (52 WEEKS ENDED FEBRUARY 2, 2003)
EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES. CERTAIN OPERATING DATA ARE ALSO
SHOWN FOR THE SAME PERIODS.



                                                                                           DOLLARS IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                              JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
STATEMENT OF OPERATIONS DATA:
Total revenues                                                 100.0%               100.0%               100.0%
Operating expenses                                              83.4                 80.4                 77.6
General and administrative expenses                              6.7                  7.0                  5.9
Depreciation and amortization expenses                           2.1                  2.0                  2.5
Arbitration award                                                 --                   --                  1.8
                                                         -----------------------------------------------------
Income from operations                                           7.8                 10.6                 12.2
Interest expense (income), net, and other                       (0.1)                (0.2)                 1.1
                                                         -----------------------------------------------------
Income before income taxes                                       7.9                 10.8                 11.1
Provision for income taxes                                       3.0                  4.1                  4.3
                                                         -----------------------------------------------------
 Net income                                                      4.9%                 6.7%                 6.8%
                                                         -----------------------------------------------------
OPERATING DATA:
Systemwide sales                                         $   448,129          $   621,665          $   778,573
Increase in comparable store sales:
 Company                                                        22.9%                11.7%                12.8%
 Systemwide                                                     17.1%                12.8%                11.8%


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 THE NOTES TO OUR CONSOLIDATED
FINANCIAL STATEMENTS FOR ADDITIONAL DISCUSSION OF OUR REPORTABLE SEGMENTS.
OPERATING EXPENSES EXCLUDE DEPRECIATION AND AMORTIZATION EXPENSES, INDIRECT
(UNALLOCATED) GENERAL AND ADMINISTRATIVE EXPENSES AND THE ARBITRATION AWARD.
DIRECT GENERAL AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN OPERATING EXPENSES.



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                              JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
REVENUES BY BUSINESS SEGMENT:
Company Store Operations                                 $   213,677          $   266,209          $   319,592
Franchise Operations                                           9,445               14,008               19,304
KKM&D                                                         77,593              114,137              152,653
                                                         -----------------------------------------------------
 Total revenues                                          $   300,715          $   394,354          $   491,549
                                                         -----------------------------------------------------
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations                                 $   181,470          $   217,419          $   252,524
Franchise Operations                                           3,642                4,896                4,877
KKM&D                                                         65,578               94,631              124,088
                                                         -----------------------------------------------------
 Total operating expenses                                $   250,690          $   316,946          $   381,489
                                                         -----------------------------------------------------


                                        26


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, INDIRECT (UNALLOCATED) GENERAL AND ADMINISTRATIVE
EXPENSES AND THE ARBITRATION AWARD. DIRECT GENERAL AND ADMINISTRATIVE EXPENSES
ARE INCLUDED IN OPERATING EXPENSES.




- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                              JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
REVENUES BY BUSINESS SEGMENT:
Company Store Operations                                        71.1%                67.5%                65.0%
Franchise Operations                                             3.1                  3.6                  3.9
KKM&D                                                           25.8                 28.9                 31.1
                                                         -----------------------------------------------------
 Total revenues                                                100.0%               100.0%               100.0%
                                                         =====================================================
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations                                        84.9%                81.7%                79.0%
Franchise Operations                                            38.6%                35.0%                25.3%
KKM&D                                                           84.5%                82.9%                81.3%
                                                         -----------------------------------------------------
 Total operating expenses                                       83.4%                80.4%                77.6%
                                                         =====================================================


ADDITIONALLY, DATA ON STORE OPENING ACTIVITY ARE SHOWN BELOW. TRANSFERRED STORES
REPRESENT STORES SOLD BETWEEN THE COMPANY AND FRANCHISEES.



- ----------------------------------------------------------------------------------------------------------------
                                                               COMPANY           FRANCHISED             TOTAL
- ----------------------------------------------------------------------------------------------------------------
                                                                                            
YEAR ENDED JANUARY 28, 2001
Beginning count                                                       58                  86                 144
Opened                                                                 8                  28                  36
Closed                                                                (3)                 (3)                 (6)
                                                                 -----------------------------------------------
 Ending count                                                         63                 111                 174
                                                                 ===============================================
YEAR ENDED FEBRUARY 3, 2002
Beginning count                                                       63                 111                 174
Opened                                                                 7                  41                  48
Closed                                                                (2)                 (2)                 (4)
Transferred                                                            7                  (7)                 --
                                                                 -----------------------------------------------
 Ending count                                                         75                 143                 218
                                                                 ===============================================
YEAR ENDED FEBRUARY 2, 2003
Beginning count                                                       75                 143                 218
Opened                                                                14                  49                  63
Closed                                                                (3)                 (2)                 (5)
Transferred                                                           13                 (13)                 --
                                                                 -----------------------------------------------
 Ending count                                                         99                 177                 276
                                                                 ===============================================


Company stores as of February 2, 2003 included 29 stores operated by area
developer joint ventures 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, and exclude the
doughnut and coffee shops and the current version of our satellite concept
stores.

YEAR ENDED FEBRUARY 2, 2003 COMPARED WITH YEAR ENDED FEBRUARY 3, 2002

OVERVIEW

As noted above, we operate on a 52- or 53-week fiscal year. Our operations for
fiscal 2003 contained 52 weeks while fiscal 2002 contained 53 weeks. This event
occurs every fifth year. When we make reference to fiscal 2002 adjusted for the
number of weeks, we have adjusted fiscal 2002 results to approximate a 52-week
year. All references to comparable store sales are on the basis of comparing the
52 weeks in fiscal 2003 with the comparable 52 weeks in fiscal 2002.

                                        27


THE FOLLOWING TABLE PRESENTS A RECONCILIATION OF SYSTEMWIDE SALES, REVENUES AND
NET INCOME FOR FISCAL 2002 TO MANAGEMENT'S ESTIMATE OF THE AMOUNTS THAT WOULD
HAVE BEEN REPORTED HAD FISCAL 2002 BEEN A 52-WEEK YEAR:



                                                                         IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
- ---------------------------------------------------------------------------------------------------------------
                                                                                ADJUSTMENT            FISCAL
                                                           FISCAL 2002,          FOR EXTRA             2002,
                                                            AS REPORTED            WEEK              PRO FORMA
- ---------------------------------------------------------------------------------------------------------------
                                                                                           
SYSTEMWIDE SALES:
Company                                                    $   266,209          $    (5,315)        $   260,894
Franchised                                                     355,456               (7,865)            347,591
                                                           ----------------------------------------------------
 Total systemwide sales                                    $   621,665          $   (13,180)        $   608,485
                                                           ====================================================
REVENUES:
Company Store Operations                                   $   266,209          $    (5,315)        $   260,894
Franchise Operations                                            14,008                 (288)             13,720
KKM&D                                                          114,137               (2,291)            111,846
                                                           ----------------------------------------------------
 Total revenues                                            $   394,354          $    (7,894)        $   386,460
                                                           ====================================================
NET INCOME                                                 $    26,378          $      (558)        $    25,820
                                                           ====================================================


The Company estimates that the 53rd week impacted diluted earnings per share by
approximately $0.01.

Systemwide sales for fiscal 2003 increased 25.2% to $778.6 million compared to
$621.7 million in the prior year. The increase was comprised of an increase of
20.1% in Company store sales, to $319.6 million, and an increase of 29.1% in
Franchise store sales, to $459.0 million. The increase was the result of sales
from new stores opened during the fiscal year and an increase in systemwide
comparable sales. During fiscal 2003, 49 new franchise stores and 14 new Company
stores were opened and two franchise stores and three Company stores were closed
for a net increase of 58 stores. Additionally, during fiscal 2003, four
Associate franchise stores and one Area Developer franchise store became Company
stores via the acquisition of franchise markets in Akron, OH, Destin, FL,
Pensacola, FL and Toledo, OH, and nine Area Developer franchise stores became
Company stores via the acquisition of a controlling interest in Glazed
Investments, LLC ("Glazed Investments"), the franchisee with rights to develop
markets in Colorado, Minnesota and Wisconsin. We also sold one Company store to
an Associate franchisee in fiscal 2003. As a result, the total number of stores
at the end of fiscal 2003 was 276, consisting of 99 Company stores (including 29
which are consolidated joint venture stores), 120 Area Developer franchise
stores (including 30 in which we have a joint venture interest) and 57 Associate
franchise stores. Systemwide comparable store sales increased 11.8% in the
fiscal year. We believe continued increased brand awareness and growth in
off-premises sales contributed significantly to this increase in our systemwide
comparable store sales. Adjusting for the number of weeks in fiscal 2002, the
increase in systemwide sales was 28.0%.

Total Company revenues increased 24.6% to $491.5 million in fiscal 2003 compared
with $394.4 million in the prior fiscal year. This increase was comprised of
increases in Company Store Operations revenues of 20.1% to $319.6 million,
Franchise Operations revenues of 37.8%, to $19.3 million, and KKM&D revenues,
excluding intercompany sales, of 33.7%, to $152.7 million. Adjusting for the
number of weeks in fiscal 2002, the increase in Company revenues was 27.2%.

Net income for fiscal 2003 was $33.5 million compared to $26.4 million in the
prior year, an increase of 26.9%. Diluted earnings per share was $0.56, an
increase of 24.8% over the prior year. Fiscal 2003 results include a pre-tax
charge of $9.1 million related to an arbitration award against the Company, more
fully discussed in Note 18 -- Legal Contingencies in the notes to our
consolidated financial statements. Excluding the effect of the arbitration
award, net income for fiscal 2003 would have been $39.1 million, an increase of
51.6% over fiscal 2002, as adjusted to approximate a 52-week year. The
arbitration award reduced diluted earnings per share by approximately $0.10.

COMPANY STORE OPERATIONS

COMPANY STORE OPERATIONS REVENUES.  Company Store Operations revenues increased
to $319.6 million in fiscal 2003 from $266.2 million in fiscal 2002, an increase
of 20.1%. Comparable store sales increased by 12.8%. 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
$21.4 million and total off-premises sales increased approximately $32.0
million. On-premises sales grew principally as a result of more customer visits,
the introduction of new products, including featured doughnut varieties, and our
continued increase in brand awareness due in part to the expansion of our
off-premises sales programs. Additionally, a retail price increase was
implemented in the fall of fiscal 2003. Company store on-premises sales were
also positively impacted by the sales of the twelve stores operated by Glazed
Investments. In August 2002, the Company acquired a controlling interest in this
franchisee and, as a result, the revenues of this franchisee are consolidated
with the Company Store Operations revenues for periods subsequent to the
acquisition. Company Store Operations revenues also include the revenues of
Freedom Rings, LLC ("Freedom Rings"), the area developer with rights to develop
stores in the Philadelphia market in which the Company has a 70% interest, and
the revenues of Golden Gate Doughnuts, LLC ("Golden Gate"), the area developer
with rights to develop stores in the Northern California market in which the
Company has a 67% interest. Off-premises sales grew primarily as a

                                        28


result of the addition of several new convenience and grocery store customers as
well as the expansion of the number of locations served in our existing customer
base. We believe excessive summer heat as well as extreme weather patterns in
the winter months, including record levels of rain, ice and snow in many parts
of the United States, put pressure on both on- and off-premises sales. In
particular, weather conditions impacted construction of several stores in the
fourth quarter and delayed their openings. This resulted in fewer operating
weeks from these stores and therefore lower than expected sales. Adjusting for
the number of weeks in fiscal 2002, the increase in Company Store Operations
revenues was 22.5%.

COMPANY STORE OPERATIONS OPERATING EXPENSES.  Company Store Operations operating
expenses increased 16.1% to $252.5 million in fiscal 2003 from $217.4 million in
fiscal 2002. Company Store Operations operating expenses as a percentage of
Company Store Operations revenues were 79.0% in fiscal 2003 compared with 81.7%
in the prior year. The decrease in Company Store Operations operating expenses
as a percentage of revenues was primarily due to increased operating
efficiencies generated by growth in store sales volumes as demonstrated by the
12.8% increase in comparable store sales discussed above, selected price
increases, improved profitability of our off-premises sales and a focus on gross
margin improvement.

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. No such provisions were made during fiscal 2003.

FRANCHISE OPERATIONS

FRANCHISE OPERATIONS REVENUES.  Franchise Operations revenues, consisting of
franchise fees and royalties, increased 37.8%, to $19.3 million, in fiscal 2003
from $14.0 million in the prior year. The growth in revenue was primarily due to
the franchise fees and additional royalties associated with 49 new franchise
stores opened in fiscal 2003, net of the impact of two store closings and the
net transfer of 13 stores from Franchise to Company as a result of acquisitions,
as well as the impact of opening 41 new franchise stores, net of the impact of
two store closings and the transfers from Franchise to Company of seven stores
as a result of acquisitions, during fiscal 2002. Also contributing to the growth
in revenue was comparable store sales increases. Adjusting for the number of
weeks in fiscal 2002, the increase in Franchise Operations revenues was 40.7%.

FRANCHISE OPERATIONS OPERATING EXPENSES.  Franchise Operations operating
expenses were $4.9 million in fiscal 2003 and fiscal 2002. As a percentage of
Franchise Operations revenues, Franchise Operations operating expenses were
25.3% in the current year compared with 35.0% in the prior year. Franchise
Operations operating expenses, as a percentage of Franchise Operations revenues,
have decreased during fiscal 2003 as compared to the prior year primarily as a
result of the Company leveraging the infrastructure it has put in place to
oversee the expansion of our franchise concept.

KKM&D

KKM&D REVENUES.  KKM&D sales to franchise stores increased 33.7%, to $152.7
million, in fiscal 2003 from $114.1 million in fiscal 2002. Consistent with the
prior year, the primary reason for the increase in revenues was the opening of
49 new franchise stores, net of the impact of two store closings and the net
transfer of 13 stores from Franchise to Company, in fiscal 2003; the opening of
41 new franchise stores, net of the impact of two store closings and the
transfer of seven franchise stores to Company, in fiscal 2002; 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 new store is required to purchase doughnut-making equipment and other
peripheral equipment from KKM&D, thereby enhancing KKM&D sales. Adjusting for
the number of weeks in fiscal 2002, the increase in KKM&D revenues was 36.5%.

KKM&D OPERATING EXPENSES.  KKM&D operating expenses increased 31.1%, to $124.1
million, in fiscal 2003 from $94.6 million in fiscal 2002. KKM&D operating
expenses as a percentage of KKM&D revenues were 81.3% in the current year
compared with 82.9% in the prior year. The decrease in KKM&D operating expenses
as a percentage of revenues was due to improved efficiencies in our
Winston-Salem mix and equipment manufacturing facilities. With the opening of
the new mix manufacturing facility in Effingham, Illinois in the second quarter
of fiscal 2003, our Winston-Salem mix manufacturing facility was able to scale
back its mix production levels, improving its efficiency as it had been running
at excessive levels in fiscal 2002 and early fiscal 2003. Additionally, the
relocation of our equipment manufacturing facility during the third quarter of
fiscal 2002 to a facility better designed to facilitate our manufacturing
process has resulted in improved manufacturing efficiencies as compared to the
prior year. Start-up costs associated with the new mix and distribution facility
in Effingham, as well as those associated with our coffee roasting operation in
Winston-Salem, which continues to expand operations as it supports the rollout
of our new beverage program, had a negative impact on KKM&D operating expenses
as a percentage of KKM&D revenues.

OTHER

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased 4.8%, to $28.9 million, in fiscal 2003 from $27.6 million in fiscal
2002. General and administrative expenses as a percentage of total revenues were
5.9% in fiscal 2003 compared with 7.0% in fiscal 2002. The dollar growth in
general and administrative expenses is primarily due to increased personnel and
salary and related benefit costs to support our expansion and other cost
increases necessitated by the

                                        29


growth of the Company, partially offset by lower provisions for employee benefit
costs, primarily incentive provisions determined under the terms of the plans.
The dollar growth in general and administrative expenses would have been higher;
however, during the second and part of the third quarter, we implemented strict
controls on various general and administrative expenses as we were concerned
about a slow-down in the momentum of the business which we believe was caused
primarily by the excessive summer heat and drought in many of our market areas.
We imposed controls on salary expenses, travel expenses and professional fees,
among others. General and administrative expenses as a percentage of total
revenues declined during fiscal 2003 primarily as a result of our 24.6% growth
in revenues during the period. In particular, acquisitions of Associate and Area
Developer franchise markets in fiscal 2003, including the acquisition of a
controlling interest in Glazed Investments, a joint venture, resulted in revenue
gains with minimal incremental general and administrative expenses as we were
able to leverage our existing infrastructure in many functional areas to support
these acquired operations. In addition, as a percentage of total revenues,
general and administrative expenses will vary in part depending upon the number
of new store openings in a period. During fiscal 2003, 49 new franchise stores
were opened, as compared to 41 new franchise stores opened in the comparable
period of the prior year. As each new store is required to purchase
doughnut-making equipment and other peripheral equipment from KKM&D, the
increased number of store openings generally results in increased revenues.
These increased revenues further leverages the existing general and
administrative expense structure as there is minimal incremental general and
administrative expenses associated with a store opening.

DEPRECIATION AND AMORTIZATION EXPENSES.  Depreciation and amortization expenses
increased 54.2%, to $12.3 million, in fiscal 2003 from $8.0 million in the prior
year. Depreciation and amortization expenses as a percentage of total revenues
were 2.5% in fiscal 2003 compared with 2.0% in fiscal 2002. The dollar growth in
depreciation and amortization expenses is due to increased capital asset
additions, including additions related to our new mix and distribution facility,
which became operational in fiscal 2003, and additions related to new stores,
including new stores opened by our consolidated joint ventures. See Liquidity
and Capital Resources section for additional discussion.

ARBITRATION AWARD.  As discussed further in Note 18 -- Legal Contingencies in
the notes to our consolidated financial statements, in fiscal 2003 we recorded a
charge of $9.1 million as a result of an arbitration panel's ruling against the
Company in a lawsuit. The charge represents the arbitration panel's award of
approximately $7.9 million and management's estimate of additional costs to be
awarded in connection with the action, including plaintiff's legal fees, of
approximately $1.2 million.

INTEREST INCOME.  Interest income in fiscal 2003 decreased 34.0% over fiscal
2002 primarily as a result of lower rates of interest earned in fiscal 2003 on
excess cash invested.

INTEREST EXPENSE.  Interest expense was $1.8 million in fiscal 2003 compared
with $337,000 in fiscal 2002. This increase is primarily the result of interest
on the Term Loan used to finance our new mix manufacturing and distribution
facility in Effingham, Illinois. Prior to completion of the facility during the
second quarter of fiscal 2003, interest on borrowings used to finance the
facility was capitalized. Additionally, interest expense in fiscal 2003 includes
interest on borrowings by Glazed Investments for periods subsequent to our
acquisition of a controlling interest in this joint venture, and interest on
increased borrowings of Golden Gate, as both consolidated joint ventures
continue to finance their expansion through bank or other third party debt.

EQUITY LOSS IN JOINT VENTURES.  This item represents the Company's share of
operating results associated with our investments in unconsolidated joint
ventures to develop and operate Krispy Kreme stores. These joint ventures are in
various stages of their development of Krispy Kreme stores. For example, some
ventures have multiple stores in operation while others have none. Each joint
venture has varying levels of infrastructure, primarily human resources, in
place to open stores. As a result, the joint ventures are leveraging their
infrastructure to varying degrees, which greatly impacts the profitability of a
joint venture. In particular, the increase in the loss in fiscal 2003 was
impacted by the Company's share of the initial start-up expenses of the
Company's first joint ventures in markets outside North America, the joint
venture with rights to develop stores in Australia and New Zealand and the joint
venture with rights to develop stores in the United Kingdom and Ireland. Note
17 -- Joint Ventures in the notes to our consolidated financial statements
contains further information about each of our joint ventures. At February 2,
2003, there were 30 stores open by unconsolidated joint ventures compared to 18
stores at February 3, 2002.

MINORITY INTEREST.  This expense represents the net elimination of the minority
partners' share of income or losses from consolidated joint ventures to develop
and operate Krispy Kreme stores. The increase in this expense is primarily a
result of increased profitability of Golden Gate, which opened four additional
stores in fiscal 2003, and the inclusion of the minority partners' share of the
results of operations of Glazed Investments, subsequent to our acquisition of a
controlling interest in this franchisee in fiscal 2003.

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 was $21.3 million in fiscal 2003, representing a
38.9% effective rate, compared to $16.2 million, or a 38.0% effective rate, in
the prior year. Excluding the effect of the arbitration award, which reduced the
provision for income taxes as a result of the tax benefits anticipated from the
award, the provision for income taxes would have been $24.7 million, or a 38.7%
effective rate. The increase in the effective rate is primarily the result of
increased state income taxes, due to expansion into higher taxing states, as
well as increases in statutory rates in several jurisdictions. The rate was also
impacted by the Company's share of losses associated with our investments in
international joint ventures which are not currently deductible. The Company
expects the effective tax rate for fiscal 2004 to increase to approximately
39.5%,

                                        30


primarily due to anticipated increases in state income taxes and expected
continued losses from international joint ventures in the early stages of
operations.

NET INCOME AND DILUTED EARNINGS PER SHARE.  Net income for fiscal 2003 was $33.5
million compared to $26.4 million in the prior year, an increase of 26.9%.
Diluted earnings per share was $0.56, an increase of 24.8% over the prior year.
Fiscal 2003 results include a pre-tax charge of $9.1 million related to an
arbitration award against the Company, more fully discussed in Note 18 - Legal
Contingencies in the notes to our consolidated financial statements. Excluding
the effect of the arbitration award, net income for fiscal 2003 would have been
$39.1 million, an increase of 51.6% over fiscal 2002, as adjusted to approximate
a 52-week year. The arbitration award reduced diluted earnings per share by
approximately $0.10.

YEAR ENDED FEBRUARY 3, 2002 COMPARED WITH YEAR ENDED JANUARY 28, 2001

OVERVIEW

As previously stated, we operate on a 52- or 53-week fiscal year. Our operations
for fiscal 2002 contained 53 weeks while fiscal 2001 contained 52 weeks. This
event occurs every fifth year. When we make reference to fiscal 2002 adjusted
for the number of weeks, we have adjusted fiscal 2002 results to approximate a
52-week year. All references to comparable store sales are on the basis of
comparing the comparable 52 weeks in fiscal 2002 with the comparable 52 weeks in
fiscal 2001.

Systemwide sales for fiscal 2002 increased 38.7% to $621.7 million compared to
$448.1 million in fiscal 2001. The increase was comprised of an increase of
24.6% in Company Store sales, to $266.2 million, and an increase of 51.6% in
Franchise Store sales, to $355.5 million. The increase was the result of sales
from new stores opened during the fiscal year and an increase in systemwide
comparable sales. During fiscal 2002, 41 new franchise stores and seven new
Company stores were opened and two franchise stores and two Company stores were
closed for a net increase of 44 stores. Additionally, as a result of the
acquisition of an Area Developer market and two Associate markets, four Area
Developer franchise stores and three Associate franchise stores became Company
stores. The total number of stores at the end of fiscal 2002 was 218. Of those,
75 were Company stores (including 11 consolidated joint venture stores), 91 were
Area Developer franchise stores (including 18 in which we have a joint venture
interest) and 52 were Associate franchise stores. Systemwide comparable store
sales increased 12.8% in fiscal 2002. We believe continued increased brand
awareness and growth in off-premises sales contributed significantly to this
increase in our systemwide comparable store sales. Adjusting for the number of
weeks in fiscal 2002, the increase in systemwide sales was 35.8%.

Total Company revenues increased 31.1% to $394.4 million in fiscal 2002 compared
with $300.7 million in fiscal 2001. This increase was comprised of increases in
Company Store Operations revenues of 24.6%, to $266.2 million, Franchise
Operations revenues of 48.3%, to $14.0 million, and KKM&D revenues, excluding
intercompany sales, of 47.1%, to $114.1 million. Adjusting for the number of
weeks in fiscal 2002, the increase in Company revenues was 28.5%.

Net income for fiscal 2002 was $26.4 million versus $14.7 million for fiscal
2001, an increase of 79.1%. Diluted earnings per share was $0.45, an increase of
64.6% over fiscal 2001.

COMPANY STORE OPERATIONS

COMPANY STORE OPERATIONS REVENUES.  Company Store Operations revenues increased
to $266.2 million in fiscal 2002 from $213.7 million in fiscal 2001, an increase
of 24.6%. Comparable store sales increased by 11.7%. 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
$25.4 million and total off-premises sales increased approximately $27.1
million. On-premises sales grew principally as a result of more customer visits,
the introduction of new products and our continued increase in brand awareness
due in part to the expansion of our off-premises sales programs. Additionally, a
retail price increase was implemented during the first quarter of fiscal 2002.
Company store on-premises sales were also positively impacted by the sales of
stores operated by consolidated joint ventures, particularly the nine stores in
the Northern California market. During fiscal 2002, the Company had a 59%
interest in Golden Gate and a 70% interest in Freedom Rings, the joint venture
developing the Philadelphia market, and as a result, they are consolidated with
the Company Store Operations revenues and results. Adjusting for the number of
weeks in fiscal 2002, the increase in Company Store Operations revenues was
22.1%.

COMPANY STORE OPERATIONS OPERATING EXPENSES.  Company Store Operations operating
expenses increased 19.8% to $217.4 million in fiscal 2002 from $181.5 million in
fiscal 2001. Company Store Operations operating expenses as a percentage of
Company Store Operations revenues were 81.7% in fiscal 2002 compared with 84.9%
in fiscal 2001. The decrease in Company Store Operations operating expenses as a
percentage of revenues was primarily due to increased operating efficiencies
generated by growth in store sales volumes, as demonstrated by the 11.7%
increase in comparable store sales discussed above, selected price increases,
improved profitability of our off-premises sales and a focus on gross margin
improvement, particularly labor utilization and a reduction in shrink. Slightly
offsetting the improved operating efficiencies was an increase in labor rate
costs implemented in order to improve employee retention.

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

                                        31


make provisions to cover closing or impairment costs for underperforming stores,
and for older stores that need to be closed and relocated. No such provisions
were made during fiscal 2002.

FRANCHISE OPERATIONS

FRANCHISE OPERATIONS REVENUES.  Franchise Operations revenues increased 48.3%,
to $14.0 million, in fiscal 2002 from $9.4 million in fiscal 2001. The growth in
revenue was primarily due to the opening of 41 new franchise stores, net of the
impact of two store closings and the net transfer of seven stores from Franchise
to Company, as well as the impact of opening 28 new franchise stores, net of the
impact of three store closings, during fiscal 2001. Adjusting for the number of
weeks in fiscal 2002, the increase in Franchise Operations revenues was 45.3%.

FRANCHISE OPERATIONS OPERATING EXPENSES.  Franchise Operations operating
expenses increased to $4.9 million in fiscal 2002 from $3.6 million in fiscal
2001. As a percentage of Franchise Operations revenues, Franchise Operations
operating expenses were 35.0% in fiscal 2002 compared with 38.6% in fiscal 2001.
Operating expenses, as a percentage of revenue, decreased during fiscal 2002 as
compared to fiscal 2001 as a result of the Company leveraging the infrastructure
it has put in place to oversee the expansion of our franchise concept.

KKM&D

KKM&D REVENUES.  KKM&D sales to franchise stores increased 47.1%, to $114.1
million, in fiscal 2002 from $77.6 million in fiscal 2001. The primary reason
for the increase in revenues was the opening of 41 new franchise stores, net of
the impact of two store closings and the net transfer of seven stores from
Franchise to Company, in fiscal 2002; the opening of 28 new franchise stores,
net of the impact of three store closings, in fiscal 2001; and comparable store
sales increases. Increased doughnut sales through both the on-premises and
off-premises sales channels by franchise stores translated into additional
revenues for KKM&D from sales of mixes, sugar, shortening and other supplies.
Also, each of these new stores is required to purchase doughnut-making equipment
and other peripheral equipment from KKM&D, thereby enhancing KKM&D sales.
Adjusting for the number of weeks in fiscal 2002, the increase in KKM&D revenues
was 44.1%.

KKM&D OPERATING EXPENSES.  KKM&D operating expenses increased 44.3%, to $94.6
million, in fiscal 2002 from $65.6 million in fiscal 2001. KKM&D operating
expenses as a percentage of KKM&D revenues were 82.9% in fiscal 2002 compared
with 84.5% in fiscal 2001. 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 produced in the facilities. Continued
stability in our key ingredient costs also contributed. Additionally, the
relocation of our equipment manufacturing facility during the third quarter of
fiscal 2002 to a facility better designed to facilitate our manufacturing
process resulted in improved manufacturing efficiencies as compared to fiscal
2001.

OTHER

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased 37.4%, to $27.6 million, in fiscal 2002 from $20.1 million in fiscal
2001. General and administrative expenses as a percentage of total revenues were
7.0% in fiscal 2002 compared with 6.7% in fiscal 2001. The growth in general and
administrative expenses is due to increased prototype expenses, increased
personnel and related salary and benefit costs to support our expansion, and
other cost increases necessitated by the growth of the Company.

DEPRECIATION AND AMORTIZATION EXPENSES.  Depreciation and amortization expenses
increased 23.3%, to $8.0 million, in fiscal 2002 from $6.5 million in fiscal
2001. Depreciation and amortization expenses as a percentage of total revenues
were 2.0% in fiscal 2002 compared with 2.1% in fiscal 2001. The dollar growth in
depreciation and amortization expenses is due to increased capital asset
additions. See Liquidity and Capital Resources section for additional
discussion.

INTEREST INCOME.  Interest income in fiscal 2002 increased 28.2% over fiscal
2001 as a result of the investment of excess proceeds from both our initial
public offering completed in April 2000 and our follow on public offering
completed in February 2001. Approximately $36.0 million was invested in various
government securities, short-term commercial paper instruments, and corporate
bonds at the end of fiscal 2002 resulting in interest income of $3.0 million for
fiscal 2002 compared to $2.3 million for fiscal 2001.

INTEREST EXPENSE.  Interest expense of $337,000 in fiscal 2002 decreased 44.5%
from $607,000 in the prior year. This decrease is a result of paying off
substantially all of our debt in mid-April 2000 after the completion of our
initial public offering. The decrease is offset by interest expense on
borrowings of Golden Gate.

EQUITY LOSS IN JOINT VENTURES.  These expenses consist of the Company's share of
operating results associated with the Company's investments in unconsolidated
joint ventures, accounted for under the equity method, to develop and operate
Krispy Kreme stores. At February 3, 2002, the Company was invested in seven
unconsolidated joint ventures. The decrease in this expense was the result of
additional joint venture store openings. As stores open and infrastructure of
the joint ventures is leveraged, operating results of an individual joint
venture generally improve. At February 3, 2002, there were 18 stores open by
unconsolidated joint ventures compared to five at January 28, 2001.

                                        32


MINORITY INTEREST.  This expense represents the net elimination of the minority
partners' share of income or losses from consolidated joint ventures to develop
and operate Krispy Kreme stores. The increase in this expense was primarily a
result of increased profitability of Golden Gate, which opened four additional
stores in fiscal 2002.

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 was $16.2 million in fiscal 2002 representing a 38.0%
effective rate compared to $9.1 million, or an effective rate of 38.1%, in the
prior year.

                                        33


QUARTERLY RESULTS

The following tables set forth unaudited quarterly information for each of the
eight fiscal quarters in the two year period ended February 2, 2003. 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. In particular, the operating results for the
quarter ended February 2, 2003, the fourth quarter of fiscal 2003, includes a
pre-tax charge of $9.1 million as a result of an arbitration panel's ruling
against the Company in a lawsuit. See Note 18 -- Legal Contingencies in the
notes to the consolidated financial statements for further discussion. In
addition, we have historically 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. The 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 and a two-for-one stock split paid in the form of a stock
dividend on June 14, 2001.



                                                                               IN THOUSANDS, EXCEPT PER SHARE DATA
- ------------------------------------------------------------------------------------------------------------------
                             APR. 29,   JULY 29,   OCT. 28,   FEB. 3,     MAY 5,    AUG. 4,    NOV. 3,    FEB. 2,
THREE MONTHS ENDED             2001       2001       2001       2002       2002       2002       2002       2003
- ------------------------------------------------------------------------------------------------------------------
                                                                                  
Total revenues               $87,921    $89,545    $99,804    $117,084   $111,059   $114,626   $129,130   $136,734
Operating expenses            71,195     72,683     80,177      92,891     86,362     90,487    100,295    104,345
General and administrative
  expenses                     6,222      5,966      7,023       8,351      7,623      6,589      7,429      7,256
Depreciation and
  amortization expenses        1,872      1,952      2,131       2,004      2,546      2,612      3,403      3,710
Arbitration award                 --         --         --          --         --         --         --      9,075
                             -------------------------------------------------------------------------------------
Income from operations         8,632      8,944     10,473      13,838     14,528     14,938     18,003     12,348
Interest (income) expense,
  net, and other expenses       (591)      (598)        22         508        236        535      1,531      2,742
                             -------------------------------------------------------------------------------------
Income before income taxes     9,223      9,542     10,451      13,330     14,292     14,403     16,472      9,606
Provision for income taxes     3,504      3,627      3,971       5,066      5,431      5,545      6,347      3,972
                             -------------------------------------------------------------------------------------
 Net income                  $ 5,719    $ 5,915    $ 6,480    $  8,264   $  8,861   $  8,858   $ 10,125   $  5,634
                             =====================================================================================
Net income per share:
 Basic                       $   .11    $   .11    $   .12    $    .15   $    .16   $    .16   $    .18   $    .10
 Diluted                         .10        .10        .11         .14        .15        .15        .17        .09


OUR OPERATING RESULTS FOR THESE EIGHT QUARTERS EXPRESSED AS PERCENTAGES OF
APPLICABLE REVENUES WERE AS FOLLOWS:



- --------------------------------------------------------------------------------------------------------------------
                              APR. 29,    JULY 29,    OCT. 28,    FEB. 3,    MAY 5,    AUG. 4,    NOV. 3,    FEB. 2,
THREE MONTHS ENDED              2001        2001        2001       2002       2002      2002       2002       2003
- --------------------------------------------------------------------------------------------------------------------
                                                                                     
Total revenues                 100.0%      100.0%      100.0%      100.0%    100.0%     100.0%     100.0%     100.0%
Operating expenses              81.0        81.2        80.3        79.3      77.7       79.0       77.7       76.3
General and administrative
  expenses                       7.1         6.7         7.0         7.1       6.9        5.7        5.8        5.3
Depreciation and
  amortization expenses          2.1         2.2         2.1         1.8       2.3        2.3        2.6        2.7
Arbitration award                 --          --          --          --        --         --         --        6.7
                               ------------------------------------------------------------------------------------
Income from operations           9.8         9.9        10.6        11.8      13.1       13.0       13.9        9.0
Interest (income) expense,
  net, and other expenses       (0.7)       (0.7)        0.1         0.4       0.2        0.5        1.2        2.0
                               ------------------------------------------------------------------------------------
Income before income taxes      10.5        10.6        10.5        11.4      12.9       12.5       12.7        7.0
Provision for income taxes       4.0         4.1         4.0         4.3       4.9        4.8        4.9        2.9
                               ------------------------------------------------------------------------------------
 Net income                      6.5%        6.5%        6.5%        7.1%      8.0%       7.7%       7.8%       4.1%
                               ====================================================================================


                                        34


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 2001 and fiscal 2002 primarily
through cash flow generated from operations, as well as proceeds from the
initial public offering completed in April 2000 and follow on public offering
completed in early February 2001. Capital requirements for fiscal 2003 were
funded primarily through cash flow generated from operations, with the exception
of the purchase of our new mix and distribution facility in Effingham, Illinois.
As discussed below, purchase of the facility was funded from borrowings under a
credit agreement with a bank. We believe our cash flow generation ability is
becoming a financial strength and will aid in the expansion of our business. Our
consolidated joint ventures funded their capital requirements through cash flows
from operations and borrowings under various financing arrangements, including
revolving lines of credit, term loans and short-term debt.

CASH FLOW FROM OPERATIONS

OVERVIEW.  Net cash flow from operations was $32.1 million in fiscal 2001, $36.2
million in fiscal 2002 and $51.0 million in fiscal 2003. Operating cash flow in
each year has benefited from increased net income, offset by additional
investments in working capital, primarily receivables and inventories, and, in
fiscal 2003, a reduction in accrued expenses, offset by the accrual for the
arbitration award. In fiscal 2001, and fiscal 2002, additional investments in
working capital were offset somewhat by decreases in accrued expenses. In fiscal
2003, net income increased $18.8 million, or 127.4%, compared with fiscal 2001,
and it increased $7.1 million, or 26.9%, compared with fiscal 2002. Net working
capital was $29.4 million at January 28, 2001, $49.2 million at February 3, 2002
and $81.4 million at February 2, 2003. Additional investments in receivables and
inventory have been necessary due to the expansion of our off-premises sales
programs and the opening of new franchise stores. Accrued expenses in fiscal
2003 decreased primarily as a result of net lower accruals for employee benefit
plans, primarily incentive plans, as determined under the terms of the plans, at
February 2, 2003 as compared to February 3, 2002. The accrual of $9.1 million
for the arbitration award (see Note 18 -- Legal Contingencies in the notes to
our consolidated financial statements) reduced working capital in fiscal 2003.
Additionally, operating cash flows were favorably impacted by the tax benefit
from the exercise of nonqualified stock options of $13.8 million in fiscal 2003.
The Company's operating cash flows may continue to be favorably impacted by
similar tax benefits in the future; however, the exercise of stock options is
outside of the Company's control.

DETAILED ANALYSIS

ACCOUNTS RECEIVABLE.  Our investment in receivables increased $3.4 million in
fiscal 2001, $13.3 million in fiscal 2002 and $7.4 million in fiscal 2003.
Accounts receivable have been increasing for the following reasons:

    1) The expansion of our off-premises sales programs and the corresponding
       receivables from grocery and convenience stores and other off-premises
       customers. Payment terms for off-premises customers vary depending on
       their credit worthiness and the type of off-premises program we offer
       them. Sometimes customers do not pay within their credit terms or there
       are disputes over amounts owed to us. We use our judgment in deciding
       whether to grant additional payment days, intensify collection efforts,
       suspend service, write the account off as uncollectible or a combination
       of the above. Write-offs of accounts receivable due to uncollectibility
       have not had a significant negative impact on operating cash flow. As we
       expect our off-premises business to continue to grow, accounts receivable
       balances from off-premises customers are also expected to grow.

    2) An increase in the number of franchise stores that are operating: 111 at
       January 28, 2001, 143 at February 3, 2002, and 177 at February 2, 2003.
       We generate accounts receivable from franchisees as a result of royalties
       earned on their sales as well as our weekly shipments of mix, other
       ingredients and supplies to each store. Therefore, as the number of
       franchise stores have grown, so have the corresponding accounts
       receivable balances. Accounts receivable balances from franchisees are
       shown under the captions accounts receivable and accounts receivable,
       affiliates on the consolidated balance sheets. Receivables from
       franchisees in which we own no interest are included in the accounts
       receivable caption, while receivables from franchisees in which we own a
       minority interest or receivables from stores owned by members of our
       Board of Directors, or other related parties to the Company, are shown
       under the caption accounts receivable, affiliates. Payment terms on these
       receivables are 30 or 35 days from the date of invoice, depending on the
       franchisee's payment method (traditional check versus electronic payment
       arrangements). We also generate accounts receivable from franchise stores
       whenever they build a new store, as we supply the doughnut-making
       equipment and other capital expenditure items necessary to operate a
       store. Payment terms on these items are 54 days from the date of
       installation of the doughnut-making equipment. Accounts receivable
       generated from a new store opening are typically in excess of $550,000
       per store. If franchise store openings are heavily concentrated in a
       particular quarter, and depending on when they opened in the quarter, the
       sales of the doughnut-making equipment and other capital expenditure
       items we sell to franchisees can cause an increase in our accounts
       receivable balances. In the fourth quarter of both fiscal 2002 and fiscal
       2003, we opened 20 franchise stores, concentrated in the mid to late
       weeks of the quarter, which also contributed to the increase in accounts
       receivable. We have had minimal experience with uncollectible

                                        35


       accounts receivable from our franchisees. We expect accounts receivable
       from franchisees will continue to grow over time as we open new stores
       and sell mix, supplies and other ingredients to an increasing base of
       franchise stores.

INVENTORIES.  Our investment in inventories increased $4.0 million in fiscal
2002 and $7.9 million in fiscal 2003. Inventories have increased primarily as a
result of:

    1) An increase in the number of Company-owned stores: 63 at January 28,
       2001, 75 at February 3, 2002 and 99 at February 2, 2003. Each store
       carries an inventory consisting of mix, other ingredients and supplies
       necessary to operate the store. As we add more Company stores in the
       future, we anticipate that inventory levels will grow accordingly.

    2) A planned increase in inventory levels at KKM&D -- raw materials,
       work-in-progress, finished goods and service parts -- to support the
       increased number of stores in the system, as well as anticipated new
       store openings. The total number of stores in operation at January 28,
       2001, February 3, 2002 and February 2, 2003 was 174, 218 and 276,
       respectively. Additionally, the Company anticipates opening 77 stores,
       most of which will be Franchise stores, in fiscal 2004. Also, during the
       year our new mix and distribution facility in Effingham, IL became
       operational and inventory levels increased as a result of stocking this
       facility.

INCOME TAXES.  During fiscal 2003, we made estimated income tax payments in the
first half of the fiscal year. Stock option exercises during the latter half of
the fiscal year resulted in tax deductions for the Company which significantly
lowered our income tax liability for fiscal 2003, resulting in an income tax
refundable amount of $2.0 million at February 2, 2003. The timing of these
payments versus the timing of stock option exercises negatively impacted
operating cash flow for fiscal 2003. While we try to anticipate events which
will impact the amount and timing of income tax payments, it is difficult to
anticipate the impact stock option exercises will have on our overall tax
position as stock option exercise decisions are at the discretion of the option
holder.

CASH FLOW FROM INVESTING ACTIVITIES

Net cash used for investing activities was $67.3 million in fiscal 2001, $52.3
million in fiscal 2002 and $94.6 million in fiscal 2003. Investing activities in
fiscal 2003 primarily consisted of capital expenditures for property and
equipment, additional investments in joint ventures and the acquisition of
franchise markets, net of cash acquired. Investing activities in fiscal 2002
primarily consisted of capital expenditures and the acquisition of franchise
markets, net of cash acquired. In addition to capital expenditures, investing
activities in fiscal 2001 consisted of the purchase of approximately $41.4
million of marketable securities with a portion of the proceeds from the initial
public offering and cash flow generated from operations.

In fiscal 2003, our capital expenditures were $83.2 million, an increase of
$45.9 million, or 123.0%, compared with fiscal 2002 and an increase of $57.5
million, or 224.3%, compared with fiscal 2001. Capital expenditures in fiscal
2003 included expenditures for the new mix manufacturing and distribution
facility in Effingham, Illinois, for the construction of new Company stores,
including new stores opened by our consolidated joint ventures, capital
expenditures for existing Company stores and remodels of Company stores,
expenditures to support our off-premises sales programs and expenditures for the
installation of a coffee roasting operation at our Ivy Avenue facility in
Winston-Salem. These expenditures were necessary to support our efforts of
increasing sales of our products throughout North America and for expansion
internationally. Capital expenditures for property and equipment in fiscal 2004
are expected to be in excess of $55.0 million, consisting principally of
expenditures for new stores, including stores to be opened by our consolidated
joint ventures, store remodels, technology and infrastructure in our KKM&D
operations. This amount, however, could be higher or lower depending on needs
and situations that arise during the year.

In fiscal 2003, we also spent $5.0 million in cash, net of cash acquired, and
issued approximately 837,000 shares of common stock for the acquisition of
associate and area developer markets and to acquire a controlling interest in a
joint venture. The associate and area developer franchisee markets we acquired
were in Akron, OH, Destin, FL, Pensacola, FL and Toledo, OH. Primarily through
the issuance of common stock, we acquired a controlling interest in Glazed
Investments, our area developer joint venture with rights to develop stores in
the Colorado, Minnesota and Wisconsin markets. In fiscal 2002, we spent $20.6
million, net of cash acquired, and issued approximately 115,000 shares of common
stock to acquire the Baltimore, MD, Charleston, SC and Savannah, GA markets from
franchisees. We will acquire markets, in whole or in part under joint venture
agreements, from franchisees if they are willing to sell to us and if there are
sound business reasons for us to make the acquisition. These reasons may include
a franchise market being contiguous to a Company store market where an
acquisition would provide operational synergies; upside opportunity in the
market because the franchisee has not fully developed on-premises or
off-premises sales; or if we believe our acquiring the market would improve the
brand image in the market. In March 2003, we spent approximately $32.0 million
in cash to acquire the Kansas and Missouri markets from an area developer
franchisee. We will be opportunistic about the acquisition of additional
franchise markets and may acquire, in whole or in part under joint venture
agreements, other markets in fiscal 2004. We have also announced plans to
acquire, through an exchange of stock, Montana Mills Bread Co., Inc., an owner
and operator of upscale "village bread stores" in the Northeastern and
Midwestern United States. This acquisition is expected to be completed in the
first half of fiscal 2004. See Note 21 -- Subsequent Events in the notes to our
consolidated financial statements for more information on these transactions.

Investing activities in fiscal 2003 also included additional investments in area
developer joint ventures totaling $7.9 million, including initial investments in
joint ventures with area developers in markets outside North America. These
investments also included $1.6 million spent to acquire ownership interests from
the Krispy Kreme Equity Group and from two executive officers of the Company in
certain franchise markets where we already had an interest ranging from
approximately 3% to 59%,

                                        36


as described further in Note 15 -- Related Party Transactions and Note
17 -- Joint Ventures in the notes to our consolidated financial statements. We
believe acquiring an ownership interest in franchise markets helps align
interests between the Company and the franchisee and should provide returns for
shareholders as the operators of these franchise markets achieve scale in their
operations and become profitable. Investment activity in area developer joint
ventures was minimal in fiscal 2002.

In fiscal 2001, investing activities primarily consisted of capital expenditures
for property and equipment, including expenditures to support our off-premises
sales programs, capital expenditures for existing stores and equipment,
development of new stores and the acquisition of stores from existing
franchisees. Investing activities also include purchases of marketable
securities with a portion of the proceeds from the initial public offering and
cash flow generated from operations, as well as investments in area developer
joint ventures.

CASH FLOW FROM FINANCING ACTIVITIES

Net cash provided by financing activities was $39.0 million in fiscal 2001,
$30.9 million in fiscal 2002 and $53.8 million in fiscal 2003.

Financing activities in fiscal 2003 consisted primarily of the borrowing of
$33.0 million to finance the Effingham, Illinois mix and distribution facility,
borrowings of long-term debt by consolidated joint ventures to finance store
development of $11.2 million and proceeds from the exercise of stock options of
$7.1 million. In addition, cash flows benefited from the repayment by members of
the Company's management and Board of Directors of loans extended to them in
1998 in connection with the change in terms of an employee benefit plan. These
loans were repaid in full, including accrued interest, in the third quarter of
fiscal 2003.

Financing activities in fiscal 2002 consisted primarily of the completion of our
follow-on public offering which raised $17.2 million of capital, the exercise of
stock options which provided cash of $3.9 million and cash of $4.0 million
provided by outstanding checks which had not yet cleared the bank (book
overdraft). The follow-on public offering was for 10,400,000 shares of common
stock, of which 9,313,300 were sold by selling shareholders and 1,086,700 were
sold by the Company with net proceeds to the Company of $17.2 million.

Our financing activities in fiscal 2001 primarily consisted of the proceeds from
our initial public offering of $65.6 million, the net repayment of debt of $19.4
million and the payment of cash dividends of $7.0 million. The repayment of debt
was one of our stated uses of proceeds in our initial public offering filings
with the Securities and Exchange Commission while the cash dividends paid were
to pre initial public offering shareholders as part of our corporate
reorganization.

CAPITAL RESOURCES, CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

In addition to cash flow generated from operations, the Company utilizes other
capital resources and financing arrangements to fund the expansion of the Krispy
Kreme concept. A discussion of these capital resources and financing techniques
is included below.

DEBT.  The Company maintains a revolving line of credit to provide borrowing
availability for general working capital purposes and other financing and
investing activities. The Company also entered into a term loan to finance a
significant capital expenditure, the acquisition and construction of a new mix
manufacturing and distribution facility, in fiscal 2003. In addition, our
consolidated joint ventures maintain revolving lines of credit and/or various
term borrowings to provide funding for general working capital purposes and the
construction of new stores. The following is a discussion of our outstanding
debt as of February 2, 2003. See also Note 7 -- Debt in the notes to our
consolidated financial statements for additional information.

On December 29, 1999, the Company entered into an unsecured Loan Agreement
("Agreement") with a bank to increase borrowing availability and extend the
maturity of its revolving credit facility. The Agreement provides a $40 million
revolving line of credit and expires on June 30, 2004. 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 was no interest, fee or other
charge for the unadvanced portion of the line of credit until July 1, 2002 at
which time the Company began paying a fee of 0.10% on the unadvanced portion. No
amounts were outstanding on the revolving line of credit at February 3, 2002 or
February 2, 2003. The amount available under the revolving line of credit is
reduced by letters of credit, amounts outstanding under certain loans to
franchisees which are guaranteed by the Company and certain amounts available or
outstanding in connection with credit cards issued by the lender on behalf of
the Company and was $31.7 million at February 2, 2003. Outstanding letters of
credit, primarily for insurance purposes, totaled $6.6 million, amounts
outstanding under the loans guaranteed by the Company totaled $152,000 and
amounts available in connection with credit cards issued by the lender totaled
$1.5 million at February 2, 2003.

The Agreement contains provisions that, among other requirements, restrict
capital expenditures, require the maintenance of certain financial ratios, place
various restrictions on the sale of properties, restrict the Company's ability
to enter into collateral repurchase agreements and guarantees, restrict the
payment of dividends and require compliance with other customary financial and
nonfinancial covenants. At February 2, 2003, the Company was in compliance with
each of these covenants.

                                        37


On March 21, 2002, the Company entered into a credit agreement with a bank
("Credit Agreement") to provide funding of up to $35.0 million for the initial
purchase and completion of the Company's new mix and distribution facility in
Effingham, Illinois. Construction of the Facility began in May 2001 and was
originally funded through a synthetic lease agreement with a bank (see
"Synthetic Lease" below). In May 2002, the outstanding borrowings under the
Credit Agreement, totaling $33.0 million, were converted to a term loan ("Term
Loan"). The Term Loan requires monthly payments of principal of $137,500 and
interest through September 21, 2007, at which time a final payment of all
outstanding principal and accrued interest will be due. The Credit Agreement
also permits the Company to prepay the loan in whole at any time, or from time
to time in part in amounts aggregating at least $500,000 or any larger multiple
of $100,000 without penalty. The Term Loan bears interest at Adjusted LIBOR, as
defined within the Credit Agreement, plus an Applicable Margin, as defined
within the Credit Agreement. The Applicable Margin ranges from .75% to 1.75% and
is determined based upon the Company's performance under certain financial
covenants contained in the Credit Agreement. The interest rate applicable on
February 2, 2003 was 2.13%.

The Credit Agreement contains provisions that, among other requirements,
restrict the payment of dividends and require the Company to maintain compliance
with certain covenants, including the maintenance of certain financial ratios.
At February 2, 2003, the Company was in compliance with each of these covenants.

On March 27, 2002, the Company entered into an interest rate swap agreement to
convert the variable payments due under the Credit Agreement to fixed amounts,
thereby hedging against the impact of interest rate changes on future interest
expense (forecasted cash flow). The Company formally documents all hedging
instruments and assesses, both at inception of the contract and on an ongoing
basis, whether the hedging instruments are effective in offsetting changes in
cash flows of the hedged transaction. The swap was effective May 1, 2002 and had
an initial notional amount of $33.0 million. The notional amount declines by
$137,500 each month, to correspond with the reduction in principal of the Term
Loan. The notional amount of the swap at February 2, 2003 was $31.8 million.
Under the terms of the swap, the Company will make fixed rate payments to the
counterparty, a bank, of 5.09% and in return receive payments at LIBOR. Monthly
payments began June 1, 2002 and continue until the swap terminates May 1, 2007.
At February 2, 2003, the fair value carrying amount of the swap was a liability
of $2.6 million. Accumulated other comprehensive loss for the fiscal year ended
February 2, 2003 includes a loss, net of related tax benefits, of $1.6 million,
respectively, related to the swap.

On October 12, 2001, Golden Gate, our Northern California joint venture, entered
into a $6.8 million revolving line of credit agreement with a bank to provide
funding to support construction of new stores, the growth of off-premises sales
and general working capital needs. The Company has guaranteed 67% of amounts
outstanding under the line of credit and the amount not guaranteed by the
Company is collateralized by buildings and equipment owned by Golden Gate. The
line of credit bears interest at one-month LIBOR plus 1.25% (2.59% at February
2, 2003) and matures on October 12, 2004. There is no interest, fee or other
charge for the unadvanced portion of the line of credit. The line of credit
replaced a previous $1.5 million line of credit, established January 25, 2001,
with similar terms. At February 2, 2003, the amount outstanding under the $6.8
million revolving line of credit was $4.8 million

On November 8, 2002, Golden Gate entered into a loan agreement with the bank to
convert $3.0 million of the amount outstanding under the revolving line of
credit to a term loan. The loan bears interest at one-month LIBOR plus 1.25%
(2.59% at February 2, 2003). Repayment of the loan began in December 2002 with
59 monthly installments of $29,807 of principal and interest and one final
payment of all remaining principal and interest due on November 8, 2007. The
Company has guaranteed 67% of the outstanding balance of the term loan and the
amount not guaranteed by the Company is collateralized by certain buildings and
equipment owned by Golden Gate.

On October 12, 2001, Golden Gate converted its previous revolving line of credit
agreement, in the amount of $4.5 million, to a term loan. The Company has
guaranteed 67% of the outstanding balance of this term loan. The amount not
guaranteed by the Company is collateralized by buildings and equipment owned by
Golden Gate. Repayment of the loan began in November 2001 with 59 equal monthly
payments of $53,415 of principal and interest and one final payment of all
remaining principal and interest due on October 12, 2006. Interest on the term
loan is charged at the lender's one-month LIBOR plus 1.25% (2.59% at February 2,
2003).

The line of credit and the term loans contain provisions requiring Golden Gate
to maintain compliance with certain financial covenants, including maintenance
of certain financial ratios. Golden Gate was in compliance with the applicable
covenants at February 2, 2003.

Based on our current expansion plans in Northern California, we will most likely
seek additional borrowing capacity to support planned store openings and sales
growth. The Company will most likely be required to guarantee a portion of this
additional credit equal to its ownership percentage of the joint venture.

On June 13, 2002, Freedom Rings, the Philadelphia joint venture, entered into an
unsecured loan agreement with a bank to provide initial funding of $1.5 million
for construction of a retail store. Interest on the loan was payable at the
lender's one-month LIBOR plus 1.25%. On November 6, 2002, Freedom Rings entered
into a $5.0 million revolving line of credit with the bank to provide funding
for the construction of additional retail stores and general working capital
purposes. The line of credit replaced the $1.5 million loan, which was repaid in
full with borrowings under the line of credit and cancelled. The revolving line
of credit bears interest at the bank's one-month LIBOR plus 1.25% (2.59% at
February 2, 2003), is secured by certain

                                        38


property and equipment owned by Freedom Rings and matures August 15, 2004. The
Company has guaranteed 70% of the amounts available under the revolving line of
credit. The revolving line of credit contains provisions requiring Freedom Rings
to maintain compliance with certain financial covenants, including the
maintenance of certain financial ratios. The joint venture was in compliance
with the applicable covenants at February 2, 2003.

Based on our current expansion plans in the Philadelphia area, we will most
likely seek additional borrowing capacity to support planned store openings and
sales growth. The Company will most likely be required to guarantee a portion of
this additional credit equal to its ownership percentage of the joint venture.

Glazed Investments, the joint venture franchisee with rights to Colorado,
Minnesota and Wisconsin, typically enters into arrangements with a non-bank
financing institution to provide funding for the construction of stores and the
purchase of the related equipment. While individual promissory notes exist for
the financing of each store and equipment purchase for which funding was
provided through the issuance of debt, the terms of each are substantially the
same. During the construction period, interest on amounts outstanding is payable
monthly, generally at one-month LIBOR plus 4.25%. Upon completion of the store,
the amount advanced for construction funding is converted to a real estate term
loan ("Real Estate Loans") and amounts advanced for equipment purchases are
converted to equipment term loans ("Equipment Loans"). Generally, Real Estate
Loans require monthly payments of principal and interest for a fixed term of
fifteen years and Equipment Loans require monthly payments of principal and
interest for a fixed term of seven years. Interest is payable at rates based on
either a fixed rate, which ranges from 7% to 8.65%, or a variable rate based on
the one-month LIBOR rate or a commercial paper rate, plus a premium. The premium
charged on variable rate loans ranges from 3.05% to 3.6%. At February 2, 2003,
interest rates applicable to the debt range from 4.3% to 8.65%. The loans are
secured by the related property and equipment. The Company has also guaranteed
approximately 75% of the amounts outstanding under the loans.

Glazed Investments has entered into promissory notes with Lawrence E. Jaro,
chief executive officer of Glazed Investments, who holds an approximate 18%
interest in the joint venture, whereby Mr. Jaro will provide funding to the
joint venture for general working capital purposes. Borrowings under the
promissory notes are also used to fund store development costs prior to
establishment of permanent financing. Amounts outstanding are unsecured and bear
interest at 10% which is payable at maturity. The notes generally have terms of
less than six months and are repaid from operating cash flows of the joint
venture or proceeds from permanent financing. Amounts outstanding at February 2,
2003 totaled $900,000 and are reported as short-term debt - related party in our
consolidated financial statements.

In July 2000, Glazed Investments issued $4.5 million in senior subordinated
notes ("Notes") to fund, in part, expenses associated with the start-up of its
operations. The Company purchased $1.0 million of the Notes at the time of the
initial offering. In connection with the Company's acquisition of additional
interests in Glazed Investments in fiscal 2003 (see Note 15 -- Related Party
Transactions, Note 17 -- Joint Ventures and Note 20 -- Acquisitions), the
Company acquired an additional $3.4 million in Notes. As a result, approximately
$4.4 million of the Notes issued by Glazed Investments are payable to the
Company. Prior to the acquisition by the Company of a controlling interest in
Glazed Investments in August 2002, the Notes held by the Company were included
in investments in unconsolidated joint ventures in the accompanying consolidated
balance sheet. Effective with the consolidation of Glazed Investments with the
accounts of the Company in August 2002, the Notes held by the Company were
eliminated against the amount reflected in Glazed Investments balance sheet as
payable to the Company. Accordingly, the Notes outstanding at February 2, 2003
as reflected in the accompanying consolidated balance sheet totaling $136,000
represent the total amount of the original $4.5 million issued that remains
payable to a third party. The Notes bear interest at 12.0% payable semi-annually
each April 30 and October 31 through April 30, 2010, at which time a final
payment of outstanding principal and accrued interest is due.

Based on our current expansion plans in the Colorado, Minnesota and Wisconsin
markets, we will most likely seek additional borrowing capacity to support
planned store openings and sales growth. The Company will most likely be
required to guarantee a portion of this additional credit equal to its ownership
percentage of the joint venture.

The Company will continue to consider opportunities to acquire partial or entire
interests in some of our franchise markets as the opportunity arises and there
are sound business reasons to make the acquisition. Depending on the size and
number of these acquisitions, it is likely that we will use, in addition to
excess cash, additional debt to accomplish these acquisitions. See Capital
Requirements below for further discussion.

SYNTHETIC LEASE.  On April 26, 2001, the Company entered into a synthetic lease
agreement in which the lessor, a bank, had agreed to fund up to $35.0 million
for construction of the Company's new mix and distribution facility in
Effingham, Illinois (the "Facility"). Under the terms of the synthetic lease,
the bank was to pay all costs associated with the construction of the building
and the equipment to be used in the manufacturing and distribution processes. No
"special purpose entity" was a party to this transaction. Lease payments were to
begin upon completion of the Facility (the "Completion Date"). Construction of
the Facility began in May 2001. The initial term of the lease was five years
following the Completion Date.

Under a synthetic lease, neither the cost of the Facility, nor the payment
obligations are shown as an asset or as debt, respectively, on the Company's
consolidated balance sheet. Therefore, the synthetic lease is often referred to
as "off-balance sheet financing." We entered into the synthetic lease: 1) due to
the attractiveness of the interest rate associated with the lease which, because
of competition among the financial institutions proposing on the synthetic lease
transaction, was lower than longer-term financing at the time we began
construction of the Facility; 2) due to the flexibility the synthetic lease
afforded us

                                        39


at the end of its term as we could purchase the facility with cash, enter into
another synthetic lease or enter into traditional financing; and 3) because it
allowed us to preserve cash as our monthly lease payments were only covering
interest costs on the Facility, as opposed to principal and interest, resulting
in a lower monthly payment. As discussed above, on March 21, 2002, the Company
terminated the synthetic lease and purchased the Facility from the bank. To
finance the purchase, the Company entered into a Credit Agreement with the bank.
See above and Note 7 -- Debt in the notes to our consolidated financial
statements for further information on the terms of the Credit Agreement.

OPERATING LEASES.  The Company conducts some of its operations from leased
facilities and, additionally, leases certain equipment under operating leases.
Generally, these leases have initial terms of 5 to 18 years and contain
provisions for renewal options of 5 to 10 years. In determining whether to enter
into an operating lease for an asset, we evaluate the nature of the asset and
the associated operating lease terms to determine if operating leases are an
effective financing tool. We anticipate that we will continue to use operating
leases as a financing tool as appropriate.

DEBT AND LEASE GUARANTEES AND COLLATERAL REPURCHASE AGREEMENTS.  In order to
open stores and expand off-premises sales programs, our franchisees incur debt
and enter into operating lease agreements. For those franchisees in which we
have an ownership interest, we will guarantee an amount of the debt or leases
generally equal to our ownership percentage. Because these are relatively new
entities without a long track record of operations, these guarantees are
necessary for our joint venture partners to get financing for the growth of
their businesses. In the past, we have also guaranteed debt amounts or entered
into collateral repurchase agreements for Company stock or doughnut-making
equipment for certain franchisees when we did not have an ownership interest in
them, though we have suspended this practice unless there are some unusual
circumstances which require our financial guarantees. In accordance with
generally accepted accounting principles existing at the time we made these
commitments, these guarantees are not recorded as liabilities on our
consolidated balance sheet. As of February 2, 2003, we had lease guarantee
commitments totaling $357,000 and loan guarantees totaling $7.3 million. These
amounts do not include guarantees of debt of our consolidated joint ventures, as
the entire amount of the bank debt of these joint ventures is shown as a
liability on our consolidated balance sheet, nor does it include lease
guarantees as the gross amount of lease commitments for these joint ventures is
shown in Note 8 -- Lease Commitments to our consolidated financial statements.
Of the total guaranteed amount of $7.7 million, $6.5 million are for franchisees
in which we have an ownership interest and $1.2 million are for franchisees in
which we have no ownership interest. The amount of debt and lease guarantees
related to franchisees in which we have an ownership interest will continue to
grow as these joint ventures open more stores while the amount of debt and lease
guarantees related to franchisees in which we do not have an interest is
expected to decrease. To date the Company has not experienced any losses in
connection with these guarantees, and we consider it unlikely that we will have
to satisfy any of these guarantees.

OFF BALANCE SHEET ARRANGEMENTS.  Upon termination of the synthetic lease
transaction on March 21, 2002 as discussed above, the Company does not have any
off balance sheet debt nor does it have any transactions, arrangements or
relationships with any "special purpose" entities.

SUMMARIES OF OUR CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS AS OF
FEBRUARY 2, 2003 ARE AS FOLLOWS:

                CONTRACTUAL CASH OBLIGATIONS AT FEBRUARY 2, 2003



                                                                                                      IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------
                                                                 PAYMENTS DUE IN                        PAYMENTS
                                   TOTAL         -----------------------------------------------        DUE AFTER
                                   AMOUNT        FISCAL 2004       FISCAL 2005       FISCAL 2006       FISCAL 2007
- ------------------------------------------------------------------------------------------------------------------
                                                                                        
Long-term debt                    $ 60,489         $ 3,301           $10,985           $ 3,727           $42,476
Operating leases                    69,711          10,969             9,187             6,707            42,848
                                  ------------------------------------------------------------------------------
Total Contractual Cash
  Obligations                     $130,200         $14,270           $20,172           $10,434           $85,324
                                  ==============================================================================


                OTHER COMMERCIAL COMMITMENTS AT FEBRUARY 2, 2003



                                                                                                        IN THOUSANDS
- --------------------------------------------------------------------------------------------------------------------
                                                              AMOUNTS EXPIRING IN                        AMOUNTS
                                  TOTAL         -----------------------------------------------       EXPIRING AFTER
                                  AMOUNT        FISCAL 2004       FISCAL 2005       FISCAL 2006        FISCAL 2007
- --------------------------------------------------------------------------------------------------------------------
                                                                                       
Letters of credit(1)             $  6,626         $ 6,626           $    --           $    --            $    --
Guarantees                          7,652           2,903               498               517              3,734
                                 -------------------------------------------------------------------------------
Total Other Commercial
  Commitments                    $ 14,278         $ 9,529           $   498           $   517            $ 3,734
                                 ===============================================================================


(1) The letters of credit are automatically renewed on an annual basis.

CAPITAL REQUIREMENTS.  In the next five years, we plan to use cash primarily for
the following activities:

    - Adding mix production and distribution capacity to support expansion

    - Remodeling and relocation of selected older Company stores

    - Expanding our equipment manufacturing and operations training facilities

                                        40


    - Investing in all or part of franchisees' operations, both domestically and
      internationally

    - 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. In fiscal 2001, fiscal 2002 and fiscal 2003 we
primarily relied on cash flow generated from the initial public offering
completed in April 2000 and our follow-on public offering completed in early
February 2001, cash flow generated from operations and our borrowing capacity
under our lines of credit. In addition, in fiscal 2003 we used term debt to
finance our new mix manufacturing and distribution facility in Effingham,
Illinois and our consolidated joint ventures use a combination of revolving
credit facilities and term debt to finance their operations and store
development. Given our continued interest in pursuing acquisitions of partial or
entire interests in franchisees or other entities, we are evaluating the need
for additional capital, after considering cash flow from operations, to fund
these activities. If additional capital is needed, we may raise such capital
through public or private equity or debt financing or other financing
arrangements. We are currently exploring a new credit facility arrangement, most
likely with a bank syndication group that would give us increased borrowing
capacity to use for new store construction, acquisitions, or other capital
needs. We have not determined, however, the size and structure of any new
syndicated credit facility. We believe, however, that given our outlook for the
next 24 months we will have sufficient capital to execute our business plan.
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-owned stores

    - Reducing the number and amount of joint venture investments in area
      developers or acquisitions of franchise markets

    - Slowing the building of our infrastructure in both personnel and
      facilities.

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 DISCLOSURES ABOUT MARKET RISKS

We are exposed to market risk from changes in interest rates on our outstanding
debt. Our $40 million 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
points. We elect the rate on a monthly basis. Our consolidated joint ventures
are also parties to various debt agreements with variable interest rates. During
fiscal 2002, Golden Gate entered into a credit facility with a bank, a $6.75
million revolving line of credit and a term loan. In fiscal 2003, Golden Gate
converted a portion of the amount outstanding under its revolving line of credit
to a term loan. These credit facilities, the revolving line of credit and term
loans, bear interest at LIBOR plus 1.25%. We guarantee 67% of the amounts
outstanding under these facilities. In fiscal 2003, Freedom Rings entered into a
$5 million revolving line of credit to provide additional funding for store
construction and general working capital purposes. Amounts outstanding under the
revolving line of credit bear interest at LIBOR plus 1.25%. We guarantee 70% of
the amounts outstanding under this facility. Glazed Investments has outstanding
several promissory notes issued to finance store development. These notes bear
interest at varying rates, based upon LIBOR or commercial paper rates plus a
premium. We guarantee approximately 75% of amounts outstanding under these
agreements. Amounts outstanding under our Credit Agreement bear interest at
adjusted LIBOR plus an applicable margin, which ranges from .75% to 1.75%. We
entered into an interest rate swap to convert the variable rate payments due
under the Credit Agreement on a notional amount of $33 million to a fixed rate
of 5.09% through May 1, 2007. The notional amount declines by $137,500 per
month, to correspond with the reduction in principal of the Term Loan. The
interest cost of our debt is affected by changes in either prime or LIBOR. Such
changes could adversely impact our operating results.

We have no derivative financial interests or derivative commodity instruments in
our cash or cash equivalents.

Because the majority of the Company's revenue, expense and capital purchasing
activities are currently transacted in United States dollars, the exposure to
foreign currency exchange risk is minimal. However, as our international
operations grow, our foreign currency exchange risks will increase.

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 a fixed price. 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 August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," effective for years beginning after June 15,
2002, or the Company's fiscal year 2004. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It applies
to legal obligations associated with

                                        41


the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. The adoption of this Statement will
not have a significant impact on the Company's consolidated financial
statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for years beginning after December 15,
2001, or the Company's fiscal year 2003. SFAS No. 144 superseded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 retains the requirements of SFAS No. 121 to recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and to measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. The adoption of
SFAS No. 144 in fiscal 2003 did not have a significant impact on the Company's
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections." Among other
provisions, SFAS No. 145 rescinds both SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and the amendment of SFAS No. 4, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the accounting for sale-leaseback transactions and the
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of SFAS No. 145 are applicable for fiscal years beginning after,
transactions entered into after and financial statements issued on or subsequent
to May 15, 2002. The Company does not believe that SFAS No. 145 will have a
significant impact on its consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost, as defined in EITF 94-3, was recognized at the date
of commitment to an exit or disposal plan. SFAS No. 146 also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal activities
initiated after December 31, 2002. Although the Company does not have any exit
or disposal activities planned currently, SFAS No. 146 will impact the timing of
recognition of liabilities for costs associated with any such activities.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosures of certain guarantees issued and
outstanding. It also specifies that a guarantor is required to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee, although it does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the guarantee. FIN 45 also specifies certain disclosures required to
be made in interim and annual financial statements related to guarantees. The
recognition and measurement provisions of FIN 45 are effective for guarantees
issued or modified after December 31, 2002. The accounting for guarantees issued
prior to this date is not affected. Disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure requirements of FIN 45 (see Note
16 -- Commitments and Contingencies and Note 17 -- Joint Ventures in the notes
to our consolidated financial statements) and began applying the recognition and
measurement provisions for all material guarantees entered into or modified
after December 31, 2002. The impact of FIN 45 on future consolidated financial
statements will depend upon whether the Company enters into or modifies any
material guarantees. Currently, the majority of our guarantees are for debt or
leases of our joint ventures. Typically, guarantees are provided based on our
ownership in the joint ventures. For such guarantees we enter into, we expect to
record the fair value as an increase in our investment in the joint ventures.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. The Statement also amends
the disclosure provisions of SFAS No. 123 to require prominent disclosure in
both annual and interim statements of the effects on reported results of an
entity's accounting policy decisions with respect to stock-based employee
compensation. The disclosure provisions of SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company has included the required disclosures in Note 2 -- Nature of Business
and Significant Accounting Policies in the accompanying consolidated financial
statements and will include the disclosures required in interim statements in
its financial statements for the first quarter of fiscal 2004. Currently, the
Company does not intend to change its accounting for stock-based compensation.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of business enterprises (variable interest entities), to which the usual
condition of consolidation, a controlling financial interest, does not apply.
FIN 46 requires an entity to assess its equity investments to determine if they
are variable interest entities. As defined in FIN 46, variable interests are
contractual, ownership or other interests in an entity that

                                        42


change with changes in the entity's net asset value. Variable interests in an
entity may arise from financial instruments, service contracts, guarantees,
leases or other arrangements with the variable interest entity. An entity that
will absorb a majority of the variable interest entity's expected losses or
expected residual returns, as defined in FIN 46, is considered the primary
beneficiary of the variable interest entity. The primary beneficiary must
include the variable interest entity's assets, liabilities and results of
operations in its consolidated financial statements. FIN 46 is immediately
effective for all variable interest entities created after January 31, 2003. For
variable interest entities created prior to this date, the provisions of FIN 46
must be applied no later than the beginning of the Company's third quarter of
fiscal 2004.

The Company currently has equity interests in joint ventures with other entities
to develop and operate Krispy Kreme stores. For those joint ventures where the
Company does not have the ability to control the joint venture's management
committee, the Company accounts for its investment under the equity method of
accounting. For certain of these joint ventures, the Company holds variable
interests, such as providing guarantees of the joint venture's debt or leases.
As a result, these joint ventures may be considered variable interest entities
and it is possible that the Company may be required to consolidate them when FIN
46 becomes effective at the beginning of the third quarter of the Company's
fiscal 2004. While the Company's net operating results will be the same
regardless of whether these joint ventures are consolidated or accounted for
under the equity method, individual line items in the consolidated financial
statements will be impacted if any of the joint ventures must be consolidated as
a result of inclusion of the assets, liabilities and operating results of the
variable interest entities in the individual line items in the consolidated
financial statements. The Company is currently evaluating the classification of
its unconsolidated joint ventures and, as a result, has not completed its
assessment of whether or not the adoption of FIN 46 will have a material impact
on its consolidated financial statements.

                                        43


KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED BALANCE SHEETS



                                                                                  IN THOUSANDS
- ----------------------------------------------------------------------------------------------
                                                             FEB. 3, 2002         FEB. 2, 2003
- ----------------------------------------------------------------------------------------------
                                                                            
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                    $    21,904          $    32,203
Short-term investments                                            15,292               22,976
Accounts receivable, less allowance for doubtful accounts
  of $1,182 (2002) and $1,453 (2003)                              26,894               34,373
Accounts receivable, affiliates                                    9,017               11,062
Other receivables                                                  2,771                  884
Inventories                                                       16,159               24,365
Prepaid expenses                                                   2,591                3,478
Income taxes refundable                                            2,534                1,963
Deferred income taxes                                              4,607                9,824
                                                             --------------------------------
        Total current assets                                     101,769              141,128
Property and equipment, net                                      112,577              202,558
Long-term investments                                             12,700                4,344
Investments in unconsolidated joint ventures                       3,400                6,871
Intangible assets                                                 16,621               48,703
Other assets                                                       8,309                6,883
                                                             --------------------------------
        Total assets                                         $   255,376          $   410,487
                                                             --------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                             $    12,095          $    14,055
Book overdraft                                                     9,107               11,375
Accrued expenses                                                  26,729               20,981
Arbitration award                                                     --                9,075
Revolving line of credit                                           3,871                   --
Current maturities of long-term debt                                 731                3,301
Short-term debt -- related party                                      --                  900
                                                             --------------------------------
        Total current liabilities                                 52,533               59,687
                                                             --------------------------------
Deferred income taxes                                              3,930                9,849
Long-term debt, net of current portion                             3,912               49,900
Revolving lines of credit                                             --                7,288
Other long-term obligations                                        4,843                5,218
                                                             --------------------------------
        Total long-term liabilities                               12,685               72,255
Commitments and contingencies
Minority interest                                                  2,491                5,193
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 10,000 shares authorized;
  none issued and outstanding                                         --                   --
Common stock, no par value, shares authorized --
  100,000 (2002) and 300,000 (2003); issued and outstanding
  -- 54,271 (2002) and 56,295 (2003)                             121,052              173,112
Unearned compensation                                               (186)                (119)
Notes receivable, employees                                       (2,580)                (558)
Nonqualified employee benefit plan assets                           (138)                (339)
Nonqualified employee benefit plan liability                         138                  339
Accumulated other comprehensive income (loss)                        456               (1,486)
Retained earnings                                                 68,925              102,403
                                                             --------------------------------
        Total shareholders' equity                               187,667              273,352
                                                             --------------------------------
        Total liabilities and shareholders' equity           $   255,376          $   410,487
                                                             ================================


The accompanying notes are an integral part of these consolidated financial
statements.

                                        44


KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS


                                                              IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
- ----------------------------------------------------------------------------------------------------
YEAR ENDED                                           JAN. 28, 2001     FEB. 3, 2002     FEB. 2, 2003
- ----------------------------------------------------------------------------------------------------
                                                                                   
Total revenues                                            $300,715         $394,354         $491,549
Operating expenses                                         250,690          316,946          381,489
General and administrative expenses                         20,061           27,562           28,897
Depreciation and amortization expenses                       6,457            7,959           12,271
Arbitration award (Note 18)                                     --               --            9,075
                                                          --------         --------         --------
Income from operations                                      23,507           41,887           59,817
Interest income                                              2,325            2,980            1,966
Interest expense                                              (607)            (337)          (1,781)
Equity loss in joint ventures                                 (706)            (602)          (2,008)
Minority interest                                             (716)          (1,147)          (2,287)
Loss on sale of property and equipment                         (20)            (235)            (934)
                                                          --------         --------         --------
Income before income taxes                                  23,783           42,546           54,773
Provision for income taxes                                   9,058           16,168           21,295
                                                          --------         --------         --------
Net income                                                $ 14,725         $ 26,378         $ 33,478
                                                          ========         ========         ========
Basic earnings per share                                  $   0.30         $   0.49         $   0.61
                                                          ========         ========         ========
Diluted earnings per share                                $   0.27         $   0.45         $   0.56
                                                          ========         ========         ========




The accompanying notes are an integral part of these consolidated financial
statements.

                                        45


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 AT JANUARY 30, 2000                   467     $4,670        $ 10,805           --       $    --         --   $     --
Comprehensive income:
 Net income for the year ended January 28,
   2001
 Unrealized holding gain, net
 Total comprehensive income
Proceeds from public offering                                                                               13,800     65,637
Conversion of Krispy Kreme Doughnut
 Corporation shares to Krispy Kreme
 Doughnuts, Inc. shares                      (467)    (4,670)        (10,805)                               37,360     15,475
Cash dividend to shareholders
Issuance of shares to employee stock
 ownership plan                                                                                                580      3,039
Contribution to the nonqualified employee
 benefit plan
Liability under the nonqualified employee
 benefit plan
Issuance of restricted common shares                                                                            12        210
Exercise of stock options, including tax
 benefit of $595                                                                                                80        699
Amortization of restricted common shares
Collection of notes receivable
                                            ---------------------------------------------------------------------------------
BALANCE AT JANUARY 28, 2001                    --     $   --        $     --           --       $    --     51,832   $ 85,060
Comprehensive income:
 Net income for the year ended February 3,
   2002
 Unrealized holding loss, net
 Foreign currency translation adjustment,
   net
 Total comprehensive income
Proceeds from public offering                                                                                1,086     17,202
Exercise of stock options, including tax
 benefit of $9,772                                                                                           1,183     13,678
Issuance of shares in conjunction with
 acquisition of franchise market                                                                               115      4,183
Adjustment of nonqualified employee
 benefit plan investments
Issuance of restricted common shares                                                                             1         50
Amortization of restricted common shares
Issuance of stock for notes receivable                                                                          54        879
Collection of notes receivable
                                            ---------------------------------------------------------------------------------
BALANCE AT FEBRUARY 3, 2002                    --     $   --        $     --           --       $    --     54,271   $121,052
Comprehensive income:
 Net income for the year ended February 2,
   2003
 Unrealized holding loss, net of tax
   benefit of $241
 Foreign currency translation adjustment,
   net of tax expense of $7
 Unrealized loss from cash flow hedge, net
   of tax benefit of $982
 Total comprehensive income
Exercise of stock options, including tax
 benefit of $13,795                                                                                          1,187     20,935
Issuance of shares in conjunction with
 acquisition of franchise markets                                                                              837     30,975
Adjustment of nonqualified employee
 benefit plan investments
Amortization of restricted common shares
Issuance of stock options in exchange for
 services                                                                                                                 150
Collection of notes receivable
                                            ---------------------------------------------------------------------------------
BALANCE AT FEBRUARY 2, 2003                    --     $   --        $     --           --       $    --     56,295   $173,112
                                            =================================================================================


The accompanying notes are an integral part of these consolidated financial
statements.

                                        46


                                                                    IN THOUSANDS




- ----------------------------------------------------------------------------------------------------------
                  NOTES        NONQUALIFIED       NONQUALIFIED     ACCUMULATED OTHER
  UNEARNED     RECEIVABLE,   EMPLOYEE BENEFIT   EMPLOYEE BENEFIT     COMPREHENSIVE     RETAINED
COMPENSATION    EMPLOYEES      PLAN ASSETS       PLAN LIABILITY      INCOME (LOSS)     EARNINGS    TOTAL
- ----------------------------------------------------------------------------------------------------------
                                                                                
   $  --         $(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
                                                                                         26,378     26,378
                                                                           (111)                      (111)
                                                                            (42)                       (42)
                                                                                                   -------
                                                                                                    26,225
                                                                                                    17,202
                                                                                                    13,678
                                                                                                     4,183
                                    (12)                12                                              --
     (50)                                                                                               --
      52                                                                                                52
                    (879)                                                                               --
                     648                                                                               648
- ----------------------------------------------------------------------------------------------------------
   $(186)        $(2,580)         $(138)              $138              $   456        $ 68,925   $187,667
                                                                                         33,478     33,478
                                                                           (385)                      (385)
                                                                             11                         11
                                                                         (1,568)                    (1,568)
                                                                                                   -------
                                                                                                    31,536
                                                                                                    20,935
                                                                                                    30,975
                                   (201)               201                                              --
      67                                                                                                67
                                                                                                       150
                   2,022                                                                             2,022
- ----------------------------------------------------------------------------------------------------------
   $(119)        $  (558)         $(339)              $339              $(1,486)       $102,403   $273,352
==========================================================================================================



                                        47


KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                              JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
CASH FLOW FROM OPERATING ACTIVITIES:
Net income                                               $    14,725          $    26,378          $    33,478
Items not requiring cash:
  Depreciation and amortization                                6,457                7,959               12,271
  Deferred income taxes                                        1,668                2,553                1,632
  Loss on disposal of property and equipment, net                 20                  235                  934
  Compensation expense related to restricted stock
    awards                                                        22                   52                   67
  Tax benefit from exercise of nonqualified stock
    options                                                      595                9,772               13,795
  Provision for store closings and impairment                    318                   --                   --
  Minority interest                                              716                1,147                2,287
  Equity loss in joint ventures                                  706                  602                2,008
Change in assets and liabilities:
  Receivables                                                 (3,434)             (13,317)              (7,390)
  Inventories                                                 (2,052)              (3,977)              (7,866)
  Prepaid expenses                                             1,239                 (682)                (331)
  Income taxes, net                                              902               (2,575)                 571
  Accounts payable                                             2,279                3,884                  (33)
  Accrued expenses                                             7,966                4,096               (9,296)
  Arbitration award                                               --                   --                9,075
  Other long-term obligations                                    (15)                  83                 (166)
                                                          ----------------------------------------------------
        Net cash provided by operating activities             32,112               36,210               51,036
                                                          ----------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment                           (25,655)             (37,310)             (83,196)
Proceeds from disposal of property and equipment               1,419                3,196                  701
Proceeds from disposal of assets held for sale                    --                   --                1,435
Acquisition of franchise markets, net of cash acquired            --              (20,571)              (4,965)
Investments in unconsolidated joint ventures                  (4,465)              (1,218)              (7,869)
Purchases of investments                                     (41,375)             (10,128)             (32,739)
Proceeds from investments                                      6,004               18,005               33,097
Increase in other assets                                      (3,216)              (4,237)              (1,038)
                                                          ----------------------------------------------------
        Net cash used for investing activities               (67,288)             (52,263)             (94,574)
                                                          ----------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings of long-term debt                                      --                4,643               44,234
Repayment of long-term debt                                   (3,600)                  --               (2,170)
Net (repayments) borrowings from revolving line of
  credit                                                     (15,775)                 345                 (121)
Repayment of short-term debt -- related party                     --                   --                 (500)
Debt issue costs                                                  --                   --                 (194)
Proceeds from exercise of stock options                          104                3,906                7,140
Proceeds from stock offering                                  65,637               17,202                   --
Book overdraft                                                  (941)               3,960                2,268
Collection of notes receivable                                   198                  648                3,612
Minority interest                                                401                  227                 (432)
Cash dividends paid                                           (7,005)                  --                   --
                                                          ----------------------------------------------------
        Net cash provided by financing activities             39,019               30,931               53,837
                                                          ----------------------------------------------------
Net increase in cash and cash equivalents                      3,843               14,878               10,299
Cash and cash equivalents at beginning of year                 3,183                7,026               21,904
                                                          ----------------------------------------------------
Cash and cash equivalents at end of year                 $     7,026          $    21,904          $    32,203
                                                          ----------------------------------------------------
Supplemental schedule of non-cash investing and
  financing activities:
  Issuance of stock in conjunction with acquisition of
    franchise markets                                    $        --          $     4,183          $     8,727
  Issuance of stock in conjunction with acquisition of
    additional interest in area developer franchisee              --                   --               22,248
  Unrealized gain (loss) on investments                          609                 (111)                (385)
  Issuance of stock options in exchange for services              --                   --                  150
  Issuance of stock to Krispy Kreme Profit-Sharing
    Stock Ownership Plan                                       3,039                   --                   --
  Issuance of restricted common shares                           210                   50                   --
  Issuance of stock in exchange for employee notes
    receivable                                                    --                  879                   --


The accompanying notes are an integral part of these consolidated financial
statements.

                                        48


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 80 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.

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.

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 doughnut-making equipment, mix, coffee and other
ingredients and supplies used in operating a doughnut store to Company-owned and
franchised stores.

The significant accounting policies followed by the Company in preparing the
accompanying consolidated 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.
Generally, investments greater than 50 percent in affiliates for which the
Company maintains control are also consolidated and the portion not owned by the
Company is shown as a minority interest. As of February 2, 2003, the Company
consolidated the accounts of three joint ventures which the Company controlled:
Freedom Rings, LLC ("Freedom Rings"), the joint venture with the rights to
develop stores in the Philadelphia market; Glazed Investments, LLC ("Glazed
Investments"), the joint venture with the rights to develop stores in Colorado,
Minnesota and Wisconsin; and Golden Gate Doughnuts, LLC ("Golden Gate"), the
joint venture with the rights to develop stores in Northern California.
Generally, investments in 20- to 50-percent owned affiliates for which the
Company has the ability to exercise significant influence over operating and
financial policies are accounted for by the equity method of accounting, whereby
the investment is carried at the cost of acquisition, plus the Company's equity
in undistributed earnings or losses since acquisition, less any distributions
received by the Company. Accordingly, the Company's share of the net earnings of
these companies is included in consolidated net income. Investments in less than
20-percent owned affiliates are accounted for by the cost method of accounting.

FISCAL YEAR.  The Company's fiscal year is based on a fifty-two/fifty-three week
year. The fiscal year ends on the Sunday closest to the last day in January. The
years ended January 28, 2001, February 3, 2002 and February 2, 2003 contained
52, 53 and 52 weeks, respectively.

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.

INVENTORIES.  Inventories are recorded at the lower of average cost (first-in,
first-out) or market.

INVESTMENTS.  Investments consist of United States Treasury notes,
mortgage-backed government securities, corporate debt securities, municipal
securities and certificates of deposit and are included in short-term and
long-term investments in the accompanying consolidated balance sheets.
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. At February 2, 2003, 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 (loss). 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.

                                        49


Depreciation of property and equipment is provided on the straight-line method
over the estimated useful lives: Buildings -- 15 to 35 years; Machinery and
equipment -- 3 to 15 years; Leasehold improvements -- lesser of useful lives of
assets or lease term.

INTANGIBLE ASSETS.  In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." These pronouncements provide guidance on accounting for the acquisition
of businesses and other intangible assets, including goodwill, which arise from
such activities. SFAS No. 141 affirms that only the purchase method of
accounting may be applied to a business combination and provides guidance on the
allocation of purchase price to the assets acquired. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001. Under SFAS No. 142,
goodwill and intangible assets that have indefinite useful lives are no longer
amortized but are reviewed at least annually for impairment. SFAS No. 142 is
effective for the Company's fiscal 2003, although goodwill and intangible assets
acquired after June 30, 2001 were subject immediately to the non-amortization
provisions of SFAS No. 142. The Company has evaluated its intangible assets,
which at February 2, 2003 consist of goodwill recorded in connection with a
business acquisition ($201,000) and the value assigned to reacquired franchise
rights in connection with the acquisition of rights to certain markets from
franchisees ($48,502,000), and determined that all such assets have indefinite
lives and, as a result, are not subject to amortization provisions. For the
fiscal year ended February 3, 2002, the Company recorded an expense of $100,000
to amortize intangible assets related to an acquisition completed prior to June
30, 2001. The Company completed impairment analyses of its intangible assets in
fiscal 2003 and found no instances of impairment.

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.

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. For off-premises
      sales, revenue is recognized at the time of delivery.

    - 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 and the
      Company has performed substantially all of the initial services it is
      required to provide. The royalties recognized in each period are based on
      the sales in that period.

    - KKM&D revenue is derived from the sale of doughnut-making equipment, mix,
      coffee 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, generally upon delivery
      of the goods. Revenue from Company-owned stores and consolidated joint
      venture stores is eliminated in consolidation.

INCOME TAXES.  The Company uses the asset and liability method to account for
income taxes, which requires the recognition of deferred tax assets and
liabilities 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 debt are reflected in the financial statements
at carrying amounts which approximate fair value.

ADVERTISING COSTS.  All costs associated with advertising and promoting products
are expensed in the period incurred.

STORE OPENING COSTS.  All costs, both direct and indirect, incurred to open
either Company or franchise stores are expensed in the period incurred. Direct
costs to open stores amounted to $464,000, $551,000 and $845,000 in fiscal 2001,
2002 and 2003, respectively.

ASSET IMPAIRMENT.  When a store is identified as underperforming or when a
decision is made to close a store, the Company makes an assessment of the
potential impairment of the related assets. The assessment is based upon a
comparison of the carrying amount of the assets, primarily property and
equipment, to the estimated undiscounted cash flows expected to be generated
from those assets. To estimate cash flows, management projects the net cash
flows anticipated from continuing operation of the store until its closing as
well as cash flows anticipated from disposal of the related assets, if any. If
the carrying amount of the assets exceeds the sum of the undiscounted cash
flows, the Company records an impairment charge measured as the excess of the
carrying value over the fair value of the assets. The resulting net book value
of the assets less estimated net realizable value at disposition, is depreciated
over the remaining term that the store will continue in operation.

STOCK-BASED COMPENSATION.  The Company accounts for employee stock options in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Under APB Opinion No. 25, the Company recognizes
no compensation expense related to employee stock options, as no options are
granted below the market price on the grant date. SFAS No. 123, "Accounting for
Stock-Based Compensation," requires the recognition of compensation

                                        50


expense based on the fair value of options on the grant date, but allows
companies to continue applying APB Opinion No. 25 if certain pro forma
disclosures are made assuming hypothetical fair value method application.

HAD COMPENSATION EXPENSE FOR THE COMPANY'S STOCK OPTIONS BEEN BASED ON THE FAIR
VALUE AT THE GRANT DATE UNDER THE METHODOLOGY PRESCRIBED BY SFAS NO. 123, THE
COMPANY'S INCOME FROM CONTINUING OPERATIONS AND EARNINGS PER SHARE FOR THE THREE
YEARS ENDED FEBRUARY 2, 2003 WOULD HAVE BEEN IMPACTED AS FOLLOWS:



                                                                     IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
- -----------------------------------------------------------------------------------------------------------
                                                    JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- -----------------------------------------------------------------------------------------------------------
                                                                                      
Net income, as reported                              $    14,725          $    26,378          $    33,478
Add: Stock-based expense reported in net income,
     net of related tax effects                               --                   --                   31
Deduct: Total stock-based compensation expense
        determined under fair value method for all
        awards, net of related tax effects                (1,032)              (4,751)              (8,653)
                                                    ------------------------------------------------------
Pro forma net income                                 $    13,693          $    21,627          $    24,856
                                                    ------------------------------------------------------
Earnings per share:
Reported earnings per share -- Basic                 $      0.30          $      0.49          $      0.61
Pro forma earnings per share -- Basic                       0.28                 0.40                 0.45
Reported earnings per share -- Diluted                      0.27                 0.45                 0.56
Pro forma earnings per share -- Diluted                     0.26                 0.37                 0.42


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. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- -----------------------------------------------------------------------------------------------------------
                                                                                      
Expected life of option                                  7 years              7 years              7 years
Risk-free interest rate                                      6.1%                 5.0%                 4.4%
Expected volatility of stock                                49.7%                52.6%                45.9%
Expected dividend yield                                       --                   --                   --


THE WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING FISCAL 2001, 2002 AND
2003 IS AS FOLLOWS:



- -----------------------------------------------------------------------------------------------------------
                                                    JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- -----------------------------------------------------------------------------------------------------------
                                                                                      
Fair value of each option granted                    $     11.54          $     14.92          $     18.91
Total number of options granted                        1,863,600            2,169,600            1,186,200
Total fair value of all options granted              $21,505,900          $32,370,400          $22,431,000


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, fiscal 2002 or fiscal 2003. The Company's two largest
customers accounted for 15.6%, 12.5% and 11.4% of total revenues for fiscal
2001, fiscal 2002 and fiscal 2003, respectively. Accounts receivable for these
two customers accounted for approximately 14.5% and 13.4% of net accounts
receivable at February 3, 2002 and February 2, 2003, respectively.

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 No. 130 defines these as items of other comprehensive
income which must be reported in a financial statement displayed with the same
prominence as other financial statements. Accumulated other comprehensive income
(loss), as reflected in the consolidated statements of shareholders' equity, was
comprised of net unrealized holding gains on marketable securities of $498,000
at February 3, 2002 and $113,000 at February 2, 2003 and foreign currency
translation adjustment, net, of $42,000 at February 3, 2002 and $31,000 at
February 2, 2003. At February 2, 2003, accumulated other comprehensive income
(loss) also included the unrealized loss from a cash flow hedge, net of related
tax benefits, of $1,568,000. Total comprehensive income for fiscal 2001, 2002
and 2003 was $15,334,000, $26,225,000 and $31,536,000, respectively.

FOREIGN CURRENCY TRANSLATION.  For all non-U.S. joint ventures, the functional
currency is the local currency. Assets and liabilities of those operations are
translated into U.S. dollars using exchange rates at the balance sheet date.
Revenue and expenses are translated using the average exchange rates for the
reporting period. Translation adjustments are deferred in accumulated other
comprehensive income (loss), a separate component of shareholders' equity.

                                        51


RECENT ACCOUNTING PRONOUNCEMENTS.  In August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," effective for years beginning
after June 15, 2002, or the Company's fiscal year 2004. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. The adoption of this Statement will not have a
significant impact on the Company's consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for years beginning after December 15,
2001, or the Company's fiscal year 2003. SFAS No. 144 superseded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 retains the requirements of SFAS No. 121 to recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and to measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. The adoption of
SFAS No. 144 in fiscal 2003 did not have a significant impact on the Company's
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections." Among other
provisions, SFAS No. 145 rescinds both SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and the amendment of SFAS No. 4, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the accounting for sale-leaseback transactions and the
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of SFAS No. 145 are applicable for fiscal years beginning after,
transactions entered into after and financial statements issued on or subsequent
to May 15, 2002. The Company does not believe that SFAS No. 145 will have a
significant impact on its consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost, as defined in EITF 94-3, was recognized at the date
of commitment to an exit or disposal plan. SFAS No. 146 also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal activities
initiated after December 31, 2002. Although the Company does not have any exit
or disposal activities planned currently, SFAS No. 146 will impact the timing of
recognition of liabilities for costs associated with any such activities.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements for a
guarantor's accounting for and disclosures of certain guarantees issued and
outstanding. It also specifies that a guarantor is required to recognize, at the
inception of the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee, although it does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the guarantee. FIN 45 also specifies certain disclosures required to
be made in interim and annual financial statements related to guarantees. The
recognition and measurement provisions of FIN 45 are effective for guarantees
issued or modified after December 31, 2002. The accounting for guarantees issued
prior to this date is not affected. Disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure requirements of FIN 45 (see Note
16 -- Commitments and Contingencies and Note 17 -- Joint Ventures) and began
applying the recognition and measurement provisions for all material guarantees
entered into or modified after December 31, 2002. The impact of FIN 45 on future
consolidated financial statements will depend upon whether the Company enters
into or modifies any material guarantees. Currently, the majority of the
Company's guarantees are for debt or leases of joint ventures. Typically,
guarantees are provided based on the Company's ownership in the joint ventures.
For such guarantees entered into, the Company expects to record the fair value
as an increase in investments in unconsolidated joint ventures.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. The Statement also amends
the disclosure provisions of SFAS No. 123 to require prominent disclosure in
both annual and interim statements of the effects on reported results of an
entity's accounting policy decisions with respect to stock-based employee
compensation. The disclosure provisions of SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002. The
Company has included the required disclosures elsewhere in this note and will
include the disclosures required in interim statements in its financial
statements for the first quarter of fiscal 2004. Currently, the Company does not
intend to change its accounting for stock-based compensation.

                                        52


In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of business enterprises (variable interest entities), to which the usual
condition of consolidation, a controlling financial interest, does not apply.
FIN 46 requires an entity to assess its equity investments to determine if they
are variable interest entities. As defined in FIN 46, variable interests are
contractual, ownership or other interests in an entity that change with changes
in the entity's net asset value. Variable interests in an entity may arise from
financial instruments, service contracts, guarantees, leases or other
arrangements with the variable interest entity. An entity that will absorb a
majority of the variable interest entity's expected losses or expected residual
returns, as defined in FIN 46, is considered the primary beneficiary of the
variable interest entity. The primary beneficiary must include the variable
interest entity's assets, liabilities and results of operations in its
consolidated financial statements. FIN 46 is immediately effective for all
variable interest entities created after January 31, 2003. For variable interest
entities created prior to this date, the provisions of FIN 46 must be applied no
later than the beginning of the Company's third quarter of fiscal 2004.

The Company currently has equity interests in joint ventures with other entities
to develop and operate Krispy Kreme stores. For those joint ventures where the
Company does not have the ability to control the joint venture's management
committee, the Company accounts for its investment under the equity method of
accounting. For certain of these joint ventures, the Company holds variable
interests, such as providing guarantees of the joint venture's debt or leases.
As a result, these joint ventures may be considered variable interest entities
and it is possible that the Company may be required to consolidate them when FIN
46 becomes effective at the beginning of the third quarter of the Company's
fiscal 2004. While the Company's net operating results will be the same
regardless of whether these joint ventures are consolidated or accounted for
under the equity method, individual line items in the consolidated financial
statements will be impacted if any of the joint ventures must be consolidated as
a result of inclusion of the assets, liabilities and operating results of the
variable interest entities in the individual line items in the consolidated
financial statements. The Company is currently evaluating the classification of
its unconsolidated joint ventures and, as a result, has not completed its
assessment of whether or not the adoption of FIN 46 will have a material impact
on its consolidated financial statements.

RECLASSIFICATIONS.  Certain reclassifications of amounts in the 2001 and 2002
consolidated financial statements and related notes have been made to conform
with the 2003 presentation.

3. INVESTMENTS

THE FOLLOWING TABLE PROVIDES CERTAIN INFORMATION ABOUT INVESTMENTS AT FEBRUARY
3, 2002 AND FEBRUARY 2, 2003.



                                                                                                      IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------
                                          AMORTIZED          GROSS UNREALIZED       GROSS UNREALIZED        FAIR
                                             COST             HOLDING GAINS          HOLDING LOSSES         VALUE
- ------------------------------------------------------------------------------------------------------------------
                                                                                               
FEBRUARY 3, 2002
U.S. government notes                      $ 9,049                 $ --                  $ (17)            $ 9,032
Federal government agencies                 10,959                  442                   (166)             11,235
Corporate debt securities                    6,475                  317                    (88)              6,704
Other bonds                                  1,043                   --                    (22)              1,021
                                         -------------------------------------------------------------------------
        Total                              $27,526                 $759                  $(293)            $27,992
                                         =========================================================================
FEBRUARY 2, 2003
U.S. government notes                      $16,657                 $152                  $ (97)            $16,712
Federal government agencies                  7,485                  289                   (197)              7,577
Corporate debt securities                    1,000                   76                    (45)              1,031
Certificate of deposit                       2,000                   --                     --               2,000
                                         -------------------------------------------------------------------------
        Total                              $27,142                 $517                  $(339)            $27,320
                                         =========================================================================


MATURITIES OF INVESTMENTS WERE AS FOLLOWS AT FEBRUARY 2, 2003:



                                                                           IN THOUSANDS
- ---------------------------------------------------------------------------------------
                                                             AMORTIZED           FAIR
                                                               COST              VALUE
- ---------------------------------------------------------------------------------------
                                                                          
Due within one year                                           $22,844           $22,976
Due after one year through five years                           4,298             4,344
                                                              -------------------------
        Total                                                 $27,142           $27,320
                                                              =========================


                                        53


4. INVENTORIES

THE COMPONENTS OF INVENTORIES ARE AS FOLLOWS:




                                                                                                  IN THOUSANDS
- --------------------------------------------------------------------------------------------------------------
                                    DISTRIBUTION       EQUIPMENT           MIX           COMPANY
                                       CENTER          DEPARTMENT       DEPARTMENT       STORES         TOTAL
- --------------------------------------------------------------------------------------------------------------
                                                                                        
FEBRUARY 3, 2002
Raw materials                         $    --            $3,060           $  788         $1,826        $ 5,674
Work in progress                           --                28               --             --             28
Finished goods                          1,318             2,867               95             --          4,280
Purchased merchandise                   5,503                --               --            613          6,116
Manufacturing supplies                     --                --               61             --             61
                                     -------------------------------------------------------------------------
        Totals                        $ 6,821            $5,955           $  944         $2,439        $16,159
                                     =========================================================================
FEBRUARY 2, 2003
Raw materials                         $    --            $3,828           $1,069         $1,922        $ 6,819
Work in progress                           --               234               --             --            234
Finished goods                          2,222             3,616              172             --          6,010
Purchased merchandise                  10,191                --               --            966         11,157
Manufacturing supplies                     --                --              145             --            145
                                     -------------------------------------------------------------------------
        Totals                        $12,413            $7,678           $1,386         $2,888        $24,365
                                     =========================================================================



5. PROPERTY AND EQUIPMENT

PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING:



                                                                                IN THOUSANDS
- --------------------------------------------------------------------------------------------
                                                             FEB. 3, 2002       FEB. 2, 2003
- --------------------------------------------------------------------------------------------
                                                                          
Land                                                         $    14,823        $    24,741
Buildings                                                         39,566             88,641
Machinery and equipment                                           86,683            118,332
Leasehold improvements                                            13,463             19,522
Construction in progress                                           1,949              1,534
                                                             ------------------------------
                                                                 156,484            252,770
Less: accumulated depreciation                                    43,907             50,212
                                                             ------------------------------
        Property and equipment, net                          $   112,577        $   202,558
                                                             ==============================


Depreciation expense was $6,141,000, $7,398,000 and $11,570,000 for fiscal 2001,
fiscal 2002 and fiscal 2003, respectively.

6. ACCRUED EXPENSES

ACCRUED EXPENSES CONSIST OF THE FOLLOWING:



                                                                                IN THOUSANDS
- --------------------------------------------------------------------------------------------
                                                             FEB. 3, 2002       FEB. 2, 2003
- --------------------------------------------------------------------------------------------
                                                                          
Insurance                                                    $     4,891        $     6,150
Salaries, wages and incentive compensation                        11,686              6,034
Deferred revenue                                                   2,082              1,485
Taxes, other than income                                           1,632              1,865
Other                                                              6,438              5,447
                                                             ------------------------------
        Total                                                $    26,729        $    20,981
                                                             ==============================


                                        54


7. DEBT

THE COMPANY'S DEBT, INCLUDING DEBT OF CONSOLIDATED JOINT VENTURES, CONSISTS OF
THE FOLLOWING:



                                                                                IN THOUSANDS
- --------------------------------------------------------------------------------------------
                                                             FEB. 3, 2002       FEB. 2, 2003
- --------------------------------------------------------------------------------------------
                                                                          
Krispy Kreme Doughnut Corporation:
  $40 million revolving line of credit                       $        --        $        --
Golden Gate:
  $6.75 million revolving line of credit                           3,871              4,750
Freedom Rings:
  $5 million revolving line of credit                                 --              2,538
                                                             ------------------------------
Revolving lines of credit                                    $     3,871        $     7,288
                                                             ==============================
Glazed Investments:
  Short-term debt -- related party                           $        --        $       900
                                                             ==============================
Krispy Kreme Doughnut Corporation:
  $33 million term loan                                      $        --        $    31,763
Golden Gate:
  $4.5 million term loan                                           4,418              3,926
  $3 million term loan                                                --              2,976
Glazed Investments:
  Real Estate and Equipment loans                                     --             14,400
  Subordinated notes                                                  --                136
Freedom Rings:
  Other debt                                                         225                 --
                                                             ------------------------------
                                                                   4,643             53,201
Current maturities of long-term debt                                (731)            (3,301)
                                                             ------------------------------
Long-term debt, net of current portion                       $     3,912        $    49,900
                                                             ==============================



$40 MILLION REVOLVING LINE OF CREDIT
On December 29, 1999, the Company entered into an unsecured loan agreement
("Agreement") with a bank to increase borrowing availability and extend the
maturity of its revolving line of credit. The Agreement provides a $40 million
revolving line of credit and expires on June 30, 2004.

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 was no
interest, fee or other charge for the unadvanced portion of the line of credit
until July 1, 2002 at which time the Company began paying a fee of 0.10% on the
unadvanced portion. No amounts were outstanding on the revolving line of credit
at February 3, 2002 or February 2, 2003. The amount available under the
revolving line of credit is reduced by letters of credit, amounts outstanding
under certain loans made by the bank to franchisees which are guaranteed by the
Company and certain amounts available or outstanding in connection with credit
cards issued by the lender on behalf of the Company and was $31,695,000 at
February 2, 2003. Outstanding letters of credit, primarily for insurance
purposes, totaled $6,626,000, amounts outstanding under the loans guaranteed by
the Company totaled $152,000 and amounts available in connection with credit
cards issued by the lender totaled $1,527,000 at February 2, 2003.

The Agreement contains provisions that, among other requirements, restrict
capital expenditures, require the maintenance of certain financial ratios, place
various restrictions on the sale of properties, restrict the Company's ability
to enter into collateral repurchase agreements and guarantees, restrict the
payment of dividends and require compliance with other customary financial and
nonfinancial covenants. At February 2, 2003, the Company was in compliance with
each of these covenants.

$33 MILLION TERM LOAN
On March 21, 2002, the Company entered into a credit agreement with a bank
("Credit Agreement") to provide funding of up to $35,000,000 for the initial
purchase and completion of the Company's new mix and distribution facility in
Effingham, Illinois (the "Facility"). Construction of the Facility began in May
2001 and was originally funded through a synthetic lease agreement with a bank
(see Note 19 -- Synthetic Lease). The Company terminated the synthetic lease and
purchased the Facility from the bank with the proceeds from the initial
borrowing under the Credit Agreement of $31,710,000.

On May 1, 2002, the outstanding borrowings under the Credit Agreement, totaling
$33,000,000, were converted to a term loan ("Term Loan"). The Term Loan requires
monthly payments of principal of $137,500 and interest through September 21,
2007, at which time a final payment of all outstanding principal and accrued
interest will be due. The Credit Agreement also permits the Company to prepay
the loan in whole at any time, or from time to time in part in amounts
aggregating at least

                                        55


$500,000 or any larger multiple of $100,000 without penalty. The Term Loan bears
interest at Adjusted LIBOR, as defined within the Credit Agreement, plus an
Applicable Margin, as defined within the Credit Agreement. The Applicable Margin
ranges from .75% to 1.75% and is determined based upon the Company's performance
under certain financial covenants contained in the Credit Agreement. The
interest rate applicable on February 2, 2003 was 2.13%. Prior to conversion to a
Term Loan, interest on amounts outstanding under the Credit Agreement was
payable monthly.

On March 27, 2002, the Company entered into an interest rate swap agreement to
convert the variable payments due under the Credit Agreement to fixed amounts,
thereby hedging against the impact of interest rate changes on future interest
expense (forecasted cash flow). The Company formally documents all hedging
instruments and assesses, both at inception of the contract and on an ongoing
basis, whether the hedging instruments are effective in offsetting changes in
cash flows of the hedged transaction. The swap was effective May 1, 2002 and had
an initial notional amount of $33,000,000. The notional amount declines by
$137,500 each month, to correspond with the reduction in principal of the Term
Loan. The notional amount of the swap at February 2, 2003 was $31,763,000. Under
the terms of the swap, the Company will make fixed rate payments to the
counterparty, a bank, of 5.09% and in return receive payments at LIBOR. Monthly
payments began June 1, 2002 and continue until the swap terminates May 1, 2007.
The Company is exposed to credit loss in the event of nonperformance by the
counterparty to the swap agreement. However, the Company does not anticipate
nonperformance. At February 2, 2003, the fair value carrying amount of the swap
was a liability of $2,550,000. Accumulated other comprehensive loss for the
fiscal year ended February 2, 2003 includes a loss, net of related tax benefits,
of $1,568,000 related to the swap.

The Credit Agreement contains provisions that, among other requirements,
restrict the payment of dividends and require the Company to maintain compliance
with certain covenants, including the maintenance of certain financial ratios.
The Company was in compliance with each of these covenants at February 2, 2003.

CONSOLIDATED JOINT VENTURES -- GOLDEN GATE
On October 12, 2001, Golden Gate, the Northern California joint venture, entered
into a $6,750,000 revolving line of credit agreement with a bank. The Company
has guaranteed 67% of amounts outstanding under the line of credit and the
amount not guaranteed by the Company is collateralized by buildings and
equipment owned by Golden Gate. The line of credit bears interest at one-month
LIBOR plus 1.25% (2.59% at February 2, 2003). The line of credit was originally
scheduled to mature in October 2002. In fiscal 2003, prior to the scheduled
maturity, the terms of the line of credit were amended to extend maturity to
October 12, 2004. There is no interest, fee or other charge for the unadvanced
portion of the line of credit. The line of credit replaced a previous $1,500,000
line of credit, established January 25, 2001, with similar terms. At February 2,
2003, the amount outstanding under the $6,750,000 revolving line of credit was
$4,750,000.

On November 8, 2002, Golden Gate entered into a loan agreement with the bank to
convert $3,000,000 of the amount outstanding under the revolving line of credit
to a term loan. The loan bears interest at one-month LIBOR plus 1.25% (2.59% at
February 2, 2003). Repayment of the loan began in December 2002 with 59 monthly
installments of $29,807 of principal and interest and one final payment of all
remaining principal and interest due on November 8, 2007. The Company has
guaranteed 67% of the outstanding balance of the term loan and the amount not
guaranteed by the Company is collateralized by certain buildings and equipment
owned by Golden Gate.

On October 12, 2001, Golden Gate converted its previous revolving line of credit
agreement, in the amount of $4,500,000, to a term loan. The Company has
guaranteed 67% of the outstanding balance of this term loan. The amount not
guaranteed by the Company is collateralized by buildings and equipment owned by
Golden Gate. Repayment of the loan began in November 2001 with 59 equal monthly
payments of $53,415 of principal and interest and one final payment of all
remaining principal and interest due on October 12, 2006. Interest on the term
loan is charged at the lender's one-month LIBOR plus 1.25% (2.59% at February 2,
2003).

The revolving line of credit and the term loans provide funding to support store
construction, the growth of off-premises sales and general working capital
needs. These agreements contain provisions requiring Golden Gate to maintain
compliance with certain financial covenants, including the maintenance of
certain financial ratios. The joint venture was in compliance with the
applicable covenants at February 2, 2003.

CONSOLIDATED JOINT VENTURES -- FREEDOM RINGS
On June 13, 2002, Freedom Rings, the Philadelphia joint venture, entered into an
unsecured loan agreement with a bank to provide initial funding of $1,500,000
for construction of a retail store. Interest on the loan was payable at the
lender's one-month LIBOR plus 1.25%. On November 6, 2002, Freedom Rings entered
into a $5,000,000 revolving line of credit with the bank to provide funding for
the construction of additional retail stores and general working capital
purposes. The line of credit replaced the $1,500,000 loan, which was repaid in
full with borrowings under the line of credit and cancelled. The revolving line
of credit bears interest at the bank's one-month LIBOR plus 1.25% (2.59% at
February 2, 2003), is secured by certain property and equipment owned by Freedom
Rings and matures August 15, 2004. The Company has guaranteed 70% of the amounts
available under the revolving line of credit.

The revolving line of credit contains provisions requiring Freedom Rings to
maintain compliance with certain financial covenants, including the maintenance
of certain financial ratios. The joint venture was in compliance with the
applicable covenants at February 2, 2003.

                                        56


On October 29, 2001, Freedom Rings entered into a non-bank loan agreement in
order to finance the purchase of a parcel of land. Under the terms of the loan
agreement, interest on the loan was charged at 8% and repayment began in
November 2001 with nine equal monthly payments of principal and interest of
$1,930. A final payment of the remaining principal balance of $221,000 plus
accrued interest was made in August 2002 and the loan was terminated.

CONSOLIDATED JOINT VENTURES -- GLAZED INVESTMENTS
Glazed Investments, the joint venture franchisee with rights to Colorado,
Minnesota and Wisconsin, typically enters into arrangements with a non-bank
financing institution to provide funding for the construction of stores and the
purchase of the related equipment. While individual promissory notes exist for
the financing of each store and equipment purchase for which funding was
provided through the issuance of debt, the terms of each are substantially the
same. During the construction period, interest on amounts outstanding is payable
monthly, generally at one-month LIBOR plus 4.25%. Upon completion of the store,
the amount advanced for construction funding is converted to a real estate term
loan ("Real Estate Loans") and amounts advanced for equipment purchases are
converted to equipment term loans ("Equipment Loans"). Generally, Real Estate
Loans require monthly payments of principal and interest for a fixed term of
fifteen years and Equipment Loans require monthly payments of principal and
interest for a fixed term of seven years. Interest is payable at rates based on
either a fixed rate, which ranges from 7% to 8.65%, or a variable rate based on
the one-month LIBOR rate or a commercial paper rate, plus a premium. The premium
charged on variable rate loans ranges from 3.05% to 3.6%. At February 2, 2003,
interest rates applicable to the Real Estate Loans and Equipment Loans range
from 4.3% to 8.65%. The loans are secured by the related property and equipment.
The Company has also guaranteed approximately 75% of the amounts outstanding
under the loans.

Glazed Investments has entered into promissory notes with Lawrence E. Jaro,
chief executive officer of Glazed Investments, who holds an approximate 18%
interest in the joint venture, whereby Mr. Jaro will provide funding to the
joint venture for general working capital purposes. Borrowings under the
promissory notes are also used to fund store development costs prior to
establishment of permanent financing. Amounts outstanding are unsecured and bear
interest at 10% which is payable at maturity. The notes generally have terms of
less than six months and are repaid from operating cash flows of the joint
venture or proceeds from permanent financing. Amounts outstanding at February 2,
2003 totaled $900,000 and are reported as short-term debt -- related party in
the accompanying consolidated financial statements.

In July 2000, Glazed Investments issued $4,520,000 in senior subordinated notes
("Notes") to fund, in part, expenses associated with the start-up of its
operations. The Company purchased $1,007,000 of the Notes at the time of the
initial offering. In connection with the Company's acquisition of additional
interests in Glazed Investments in fiscal 2003 (see Note 15 -- Related Party
Transactions, Note 17 -- Joint Ventures and Note 20 -- Acquisitions), the
Company acquired an additional $3,377,000 in Notes. As a result, approximately
$4,384,000 of the Notes issued by Glazed Investments are payable to the Company.
Prior to the acquisition by the Company of a controlling interest in Glazed
Investments in August 2002, the Notes held by the Company were included in
investments in unconsolidated joint ventures in the accompanying consolidated
balance sheet. Effective with the consolidation of Glazed Investments with the
accounts of the Company in August 2002, the Notes held by the Company were
eliminated against the amount reflected in Glazed Investments balance sheet as
payable to the Company. Accordingly, the Notes outstanding at February 2, 2003
as reflected in the accompanying consolidated balance sheet totaling $136,000
represent the total amount of the original $4,520,000 issued that remains
payable to a third party. The Notes bear interest at 12.0% payable semi-annually
each April 30 and October 31 through April 30, 2010, at which time a final
payment of outstanding principal and accrued interest is due.

For franchisees in which we have an ownership interest, the Company will
sometimes guarantee an amount of the debt or leases, generally equal to the
Company's ownership percentage. The amounts guaranteed by the Company are
disclosed in Note 17 -- Joint Ventures.

The aggregate maturities for long-term debt for the five fiscal years ending
after February 2, 2003 are $3,301,000, $10,985,000, $3,727,000, $5,479,000 and
$28,386,000, respectively.

Interest paid was $607,000 in fiscal 2001, $337,000 in fiscal 2002 and
$1,855,000 (including $74,000 that was capitalized) in fiscal 2003.

8. LEASE COMMITMENTS

The Company conducts some of its operations from leased facilities and,
additionally, leases certain equipment under operating leases. Generally, these
leases have initial terms of 5 to 18 years and contain provisions for renewal
options of 5 to 10 years.

                                        57


AT FEBRUARY 2, 2003, FUTURE MINIMUM ANNUAL RENTAL COMMITMENTS, GROSS, UNDER
NONCANCELABLE OPERATING LEASES, INCLUDING LEASE COMMITMENTS OF CONSOLIDATED
JOINT VENTURES, ARE AS FOLLOWS:



                                                             IN THOUSANDS
- -------------------------------------------------------------------------
FISCAL YEAR ENDING IN                                              AMOUNT
- -------------------------------------------------------------------------
                                                          
2004                                                         $    10,969
2005                                                               9,187
2006                                                               6,707
2007                                                               5,018
2008                                                               5,433
Thereafter                                                        32,397
                                                             ------------
                                                             $    69,711
                                                             ============


Rental expense, net of rental income, totaled $8,540,000 in fiscal 2001,
$10,576,000 in fiscal 2002 and $13,169,000 in fiscal 2003.

9. INCOME TAXES

THE COMPONENTS OF THE PROVISION FOR FEDERAL AND STATE INCOME TAXES ARE
SUMMARIZED AS FOLLOWS:



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                              JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
Currently payable                                        $     7,390          $    13,615          $    19,663
Deferred                                                       1,668                2,553                1,632
                                                         ------------------------------------------------------
                                                         $     9,058          $    16,168          $    21,295
                                                         ======================================================


A RECONCILIATION OF THE STATUTORY FEDERAL INCOME TAX RATE WITH THE COMPANY'S
EFFECTIVE RATE IS AS FOLLOWS:



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                              JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
Federal taxes at statutory rate                          $     8,321          $    14,891          $    19,170
State taxes, net of federal benefit                              673                1,158                1,405
Other                                                             64                  119                  720
                                                         ------------------------------------------------------
                                                         $     9,058          $    16,168          $    21,295
                                                         ======================================================


Income tax payments, net of refunds, were $5,894,000 in fiscal 2001, $6,616,000
in fiscal 2002 and $5,298,000 in fiscal 2003. The income tax payments in fiscal
2002 and fiscal 2003 were lower than the current provision due to the income tax
benefit of stock option exercises of $9,772,000 and $13,795,000 during fiscal
2002 and fiscal 2003, respectively.

THE NET CURRENT AND NON-CURRENT COMPONENTS OF DEFERRED INCOME TAXES RECOGNIZED
IN THE BALANCE SHEET ARE AS FOLLOWS:



                                                                                  IN THOUSANDS
- ----------------------------------------------------------------------------------------------
                                                             FEB. 3, 2002         FEB. 2, 2003
- ----------------------------------------------------------------------------------------------
                                                                            
Net current assets                                           $     4,607          $     9,824
Net non-current liabilities                                       (3,930)              (9,849)
                                                             ---------------------------------
                                                             $       677          $       (25)
                                                             =================================


                                        58


THE TAX EFFECTS OF THE SIGNIFICANT TEMPORARY DIFFERENCES WHICH COMPRISE THE
DEFERRED TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:



                                                                                  IN THOUSANDS
- ----------------------------------------------------------------------------------------------
                                                             FEB. 3, 2002         FEB. 2, 2003
- ----------------------------------------------------------------------------------------------
                                                                            
ASSETS
Compensation deferred (unpaid)                               $       676          $       663
Insurance                                                          1,859                2,368
Other long-term obligations                                          659                  395
Accrued restructuring expenses                                     1,183                  501
Deferred revenue                                                     791                1,165
Accounts receivable                                                  449                  556
Inventory                                                            436                  278
Charitable contributions carryforward                                 --                  714
Gain/loss on hedging transactions                                     --                  982
Accrued litigation                                                    --                3,494
Accrued payroll                                                       --                1,018
State tax credit carryforwards                                        --                  179
State NOL carryforwards                                            2,524                2,463
Other                                                                676                  687
                                                             ---------------------------------
  Gross deferred tax assets                                        9,253               15,463
                                                             ---------------------------------
LIABILITIES
Property and equipment                                             5,589               11,628
Goodwill                                                             198                1,037
Prepaid expenses                                                     265                  360
                                                             ---------------------------------
  Gross deferred tax liabilities                                   6,052               13,025
                                                             ---------------------------------
Valuation allowance -- State NOL carryforwards                    (2,524)              (2,463)
                                                             ---------------------------------
  Net asset/(liability)                                      $       677          $       (25)
                                                             =================================


At February 2, 2003, the Company has recorded a valuation allowance against the
state NOL carryforwards of $2,463,000. If these carryforwards are realized in
the future, $2,232,000 of the tax benefit would be recorded as an addition to
common stock as this portion of the carryforwards were a result of the tax
benefits of stock option exercises in fiscal 2002 and 2003.

The Company records deferred tax assets reflecting the benefit of future
deductible amounts. Realization of these assets is dependent on generating
sufficient future taxable income and the ability to carryback losses to previous
years in which there was taxable income. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets, for which a valuation allowance has not been established, will be
realized. The amount of the deferred tax assets considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced.

10. EARNINGS PER SHARE

The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during the period. The computation of
diluted earnings per share reflects the potential dilution that would occur if
stock options were exercised and the dilution from the issuance of restricted
shares. The treasury stock method is used to calculate dilutive shares. This
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. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- ----------------------------------------------------------------------------------------------------------
                                                                                     
Numerator:
Net income                                          $    14,725          $    26,378          $    33,478
                                                   ======================================================
Denominator:
Basic earnings per share -- weighted
  average shares                                     49,183,916           53,702,916           55,092,542
Effect of dilutive securities:
Stock options                                         4,471,576            4,734,371            4,395,864
Restricted stock                                             --                5,698                3,967
                                                   ------------------------------------------------------
Diluted earnings per share -- adjusted
  weighted average shares                            53,655,492           58,442,985           59,492,373
                                                   ======================================================


                                        59


Stock options in the amount of 215,000 and 350,000 shares have been excluded
from the diluted shares calculation for fiscal 2002 and 2003, respectively, as
the inclusion of these options would be antidilutive. There were no such
antidilutive options in fiscal 2001.

11. EMPLOYEE BENEFITS PLANS

The Company has a 401(k) savings plan, which provides that employees may
contribute from 1% to 100% of their base salary to the plan on a tax deferred
basis up to the Internal Revenue Service limitations. Until March 15, 2000, when
it ceased matching contributions to the 401(k) savings plan, the Company matched
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 $64,000 in
fiscal 2001.

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, on a tax deferred basis up to the Internal Revenue Service
limitations, 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 included in other assets in the consolidated balance sheet. The
corresponding liability to participants is included in other long-term
obligations. The balance in the asset and corresponding liability account was
$359,000 and $617,000 at February 3, 2002 and February 2, 2003, respectively.

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 $2,056,000, $3,255,000 and
$400,000 in fiscal 2001, fiscal 2002 and fiscal 2003, respectively, based on a
contribution of 7% of eligible compensation for fiscal 2001 and fiscal 2002 and
1% of eligible compensation for fiscal 2003. Under the terms of the plan, the
contribution can be made in the form of cash or newly issued shares of common
stock. Forfeitures of previously allocated shares may also be used to fund the
contribution. If cash is contributed, the plan acquires Krispy Kreme stock on
the open market. With the exception of the initial year of the plan, the
contribution is made annually in April. For fiscal 2001 and fiscal 2002,
contributions to the plan were made in cash. The contribution for fiscal 2003
will be made in cash as well. 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 $19,000 in fiscal 2001, $201,000 in fiscal 2002 and $30,000 in fiscal 2003
for amounts credited to certain employees under the nonqualified plan.

Effective February 1, 2002, the Company established the Krispy Kreme Doughnuts,
Inc. Employee Stock Purchase Plan ("ESPP") to provide eligible employees of the
Company an opportunity to purchase Company common stock. Under the terms of the
plan, participants may defer between 1% and 15% of their base compensation.
Amounts withheld are accumulated and, at the end of each quarter, used to
purchase shares of common stock of the Company. The purchase price will be the
fair market value on either the first or last day of the quarter, whichever is
lower. If the actual market price of the stock on the date purchased exceeds the
price at which shares can be acquired under the terms of the ESPP, the Company
will make a contribution to fund the shortfall, resulting in a charge to
operations in the period paid. The Company recorded compensation expense of
$2,000 in fiscal 2003 in connection with the ESPP. Shares may be purchased by
the ESPP directly from the Company or in the open market. There were no shares
issued under the ESPP in fiscal 2002 and all shares purchased by the ESPP in
fiscal 2003 were acquired in the open market. As of February 2, 2003, there were
2,000,000 shares reserved for issuance under the ESPP.

Effective May 1, 1994, the Company established the Retirement Income Plan for
Key Employees of Krispy Kreme Doughnut Corporation (the "Plan"), an unfunded
nonqualified noncontributory defined benefit pension plan. Benefits were based
on years of service and average final compensation during the employees' career.
The Plan at all times was 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. In fiscal 2001, the Plan was frozen and no additional employees were
covered under the Plan. Effective February 2, 2003, the Company elected to
terminate the Plan. As a result, vested accrued benefits will be paid to Plan
participants in fiscal 2004.

                                        60


THE FOLLOWING TABLES SUMMARIZE THE STATUS OF THE PLAN AND THE AMOUNTS RECOGNIZED
IN THE BALANCE SHEET:



                                                              IN THOUSANDS, EXCEPT PERCENTAGES
- ----------------------------------------------------------------------------------------------
YEAR ENDED                                                   FEB. 3, 2002         FEB. 2, 2003
- ----------------------------------------------------------------------------------------------
                                                                            
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year            $     1,162          $     1,641
Service cost                                                         181                  221
Interest cost                                                         87                  114
Actuarial loss                                                       211                  128
Benefits paid                                                         --                  (18)
Change in plan provisions                                             --               (1,257)
                                                             --------------------------------
Projected benefit obligation at end of year                  $     1,641          $       829
                                                             ================================
CHANGE IN PLAN ASSETS
Employer contributions                                       $        --          $        18
Benefits paid                                                         --                  (18)
                                                             --------------------------------
Fair value of plan assets at end of year                     $        --          $        --
                                                             ================================
NET AMOUNT RECOGNIZED
Funded status                                                $    (1,641)         $      (829)
Unrecognized net gain                                                125                   --
                                                             --------------------------------
Net amount recognized                                        $    (1,516)         $      (829)
                                                             ================================
ASSUMPTIONS
Weighted average assumed discount rate                              7.00%                6.50%
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                                                 $       181          $       221
Interest cost                                                         87                  114
One-time curtailment gain                                             --               (1,004)
                                                             --------------------------------
Total                                                        $       268          $      (669)
                                                             ================================
RECONCILIATION OF NET PERIODIC PENSION ASSET (LIABILITY) FOR
  FISCAL YEAR
Accrued pension cost as of end of prior year                 $    (1,248)         $    (1,516)
Contributions during the fiscal year                                  --                   18
Net periodic pension (cost) income for the fiscal year              (268)                 669
                                                             --------------------------------
Accrued pension cost as of fiscal year end                   $    (1,516)         $      (829)
                                                             ================================


12. INCENTIVE COMPENSATION

The Company has an incentive compensation plan for certain management and
non-management level employees. Incentive awards are paid based upon the
attainment of certain criteria, financial and non-financial, as outlined in the
plan. Incentive compensation amounted to $5,500,000 in fiscal 2001, $6,543,000
in fiscal 2002 and $2,472,000 in fiscal 2003.

Prior to fiscal 1999, 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, up 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
were 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 4,717,800 at a conversion
rate of $1.30 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 loaned to participants amounts equal to their tax liability. The
loans were executed via a 10-year promissory note (collateralized by the shares
of common stock issued) with a fixed interest rate of 6%. The amount of such
loans outstanding at February 3, 2002 was $1,845,000 and was recorded as a
reduction of shareholders' equity. In fiscal 2003, the

                                        61


outstanding amounts due under the loans of $1,926,000, including accrued
interest, was paid in full and the loans were cancelled.

During fiscal 2002, as part of a compensation arrangement with a former employee
of Digital Java, Inc., a Chicago-based coffee company which the Company acquired
in fiscal 2002 (see Note 20 -- Acquisitions), the Company issued 54,000 shares
of common stock in exchange for a note receivable in the amount of $879,000. The
note receivable bears interest at 6%, requires annual payments of principal and
interest for its five-year term and is collateralized by the shares of common
stock. Under the terms of the note, as long as certain employment and
performance criteria are met, the employee will receive a bonus in the amount of
the annual payment due. At February 3, 2002 and February 2, 2003 the balance of
this note was $735,000 and $558,000, respectively, and is recorded in the
consolidated balance sheet as a reduction of shareholders' equity.

13. SHAREHOLDERS' EQUITY

STOCK OPTION PLANS AND RESTRICTED STOCK AWARDS

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, 8,900,000 shares of common stock of the Company were
reserved for issuance to employees and Directors of the Company. Grants under
the 1998 Plan may be in the form of either incentive stock options or
nonqualified stock options. During fiscal 1999, 7,324,000 nonqualified options
with a 10-year life were issued to employees and Directors at an exercise price
of $1.30 per share, the fair market value of the common stock at the grant date.
In fiscal 2001, 1,130,800 stock options were issued under the 1998 Plan at
exercise prices ranging from $5.25 to $13.69. Stock options were granted at
prices equal to the fair market value on the date of grant.

In July 2000, the Company's 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 9,996,000 shares,
including 496,000 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 3,000,000 shares for incentive stock options
and 1,200,000 shares, in the aggregate, for stock appreciation rights,
performance units, restricted stock and stock awards. During fiscal 2001,
732,800 stock options were issued under the 2000 Plan at exercise prices ranging
from $14.77 to $20.63. During fiscal 2002, 2,169,600 stock options were issued
under the 2000 Plan at exercise prices ranging from $15.13 to $42.11. During
fiscal 2003, 1,186,200 stock options were issued under the 2000 Plan at exercise
prices ranging from $30.98 to $37.25. Stock options were granted at prices equal
to the 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 30, 2000 TO FEBRUARY 2, 2003:



- ---------------------------------------------------------------------------------------------------------------------------------
                                       SHARES SUBJECT       WEIGHTED AVERAGE        SHARES SUBJECT TO        WEIGHTED AVERAGE
                                         TO OPTIONS     EXERCISE PRICE PER SHARE   EXERCISABLE OPTIONS   EXERCISE PRICE PER SHARE
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                             
OUTSTANDING, JANUARY 30, 2000            7,276,000               $ 1.30                   364,000                 $1.30
Granted                                  1,863,600                 9.77
Exercised                                   80,000                 1.30
Canceled                                    42,800                 2.58
                                       ------------------------------------------------------------------------------------------
OUTSTANDING, JANUARY 28, 2001            9,016,800               $ 3.04                   936,000                 $2.57
Granted                                  2,169,600                25.06
Exercised                                1,182,800                 3.30
Canceled                                   375,300                 4.97
                                       ------------------------------------------------------------------------------------------
OUTSTANDING, FEBRUARY 3, 2002            9,628,300               $ 7.90                 2,976,200                 $4.06
Granted                                  1,186,200                35.11
Exercised                                1,187,300                 6.01
Canceled                                   186,400                 4.84
                                       ------------------------------------------------------------------------------------------
OUTSTANDING, FEBRUARY 2, 2003            9,440,800               $11.60                 4,567,800                 $5.68
                                       ==========================================================================================


At February 2, 2003, there were approximately 6,511,900 shares of common stock
available for issuance pursuant to future stock option grants.

                                        62


ADDITIONAL INFORMATION REGARDING OPTIONS OUTSTANDING AS OF FEBRUARY 2, 2003 IS
AS FOLLOWS:



                        -----------------------------------------------------------    -----------------------------
                                            OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------------------------------
RANGE OF                             WEIGHTED AVERAGE REMAINING    WEIGHTED AVERAGE                 WEIGHTED AVERAGE
EXERCISE PRICES          SHARES       CONTRACTUAL LIFE (YEARS)      EXERCISE PRICE      SHARES       EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------
                                                                                     
$ 1.30 -- $ 4.21        5,454,900               5.5                     $ 1.30         3,553,500         $ 1.30
$ 4.22 -- $ 8.42          208,000               7.2                     $ 5.25            32,000         $ 5.25
$12.63 -- $16.84          899,800               7.1                     $15.17           497,500         $15.05
$16.85 -- $21.06          369,500               7.7                     $18.22            93,800         $19.03
$21.07 -- $25.26           50,000               8.2                     $22.06            12,500         $22.06
$25.27 -- $29.48          876,500               8.5                     $28.52           174,000         $28.55
$29.49 -- $33.69          311,400               6.3                     $31.73           180,600         $31.81
$33.70 -- $37.90        1,217,200               9.4                     $35.18            10,500         $36.24
$37.91 -- $42.11           53,500               8.8                     $39.45            13,400         $39.45


RESTRICTED STOCK AWARDS.  In fiscal 2001 and 2002, respectively, the Company
granted 11,052 and 1,187 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 $21.25. These shares vest ratably over either a three- or four-year period
from the date of grant.

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 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.

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 provisions.

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.

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.

                                        63


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, coffee 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.

INFORMATION ABOUT THE COMPANY'S OPERATIONS BY BUSINESS SEGMENT IS AS FOLLOWS:



                                                                                                   IN THOUSANDS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED                                              JAN. 28, 2001         FEB. 3, 2002         FEB. 2, 2003
- ---------------------------------------------------------------------------------------------------------------
                                                                                          
Revenues:
Company Store Operations                                 $   213,677          $   266,209          $   319,592
Franchise Operations                                           9,445               14,008               19,304
KKM&D                                                        201,406              269,396              347,642
Intercompany sales eliminations                             (123,813)            (155,259)            (194,989)
                                                         ------------------------------------------------------
        Total revenues                                   $   300,715          $   394,354          $   491,549
                                                         ======================================================
Operating income:
Company Store Operations                                 $    27,370          $    42,932          $    58,214
Franchise Operations                                           5,730                9,040               14,319
KKM&D                                                         11,712               18,999               26,843
Unallocated general and administrative expenses              (21,305)             (29,084)             (30,484)
Arbitration award                                                 --                   --               (9,075)
                                                         -----------------------------------------------------
        Total operating income                           $    23,507          $    41,887          $    59,817
                                                         =====================================================
Depreciation and Amortization Expenses:
Company Store Operations                                 $     4,838          $     5,859          $     8,854
Franchise Operations                                              72                   72                  108
KKM&D                                                            303                  507                1,723
Corporate administration                                       1,244                1,521                1,586
                                                         -----------------------------------------------------
        Total depreciation and amortization expenses     $     6,457          $     7,959          $    12,271
                                                         =====================================================


15. RELATED PARTY TRANSACTIONS

As of February 2, 2003, certain members of the Company's board of directors own
31 stores and are committed, under their respective franchise agreements, to
open an additional 7 stores.

Prior to March 5, 2002 (see Note 17 -- Joint Ventures), several officers were
investors in a pooled investment fund which held interests in six joint ventures
developing Krispy Kreme stores in new markets and four officers of the Company
were investors in groups that owned 36 stores. Certain of the investments held
by these four officers were in the same entities as those invested in by the
KKEG.

As of February 2, 2003, one officer of the Company was an investor in a group
that owned four stores and was committed to open five additional stores and
another officer of the Company was an investor in a group that owned five stores
and had the rights to develop certain markets in Kansas and Missouri. None of
these investments were in the same entities as those invested in by the Company.
As discussed in Note 21 -- Subsequent Events, on March 10, 2003, the Company
acquired from the franchisee the rights to the markets in Kansas and Missouri,
as well as the related assets, including the five stores, in exchange for cash
of approximately $32,000,000. An officer of the Company was an investor in the
groups that held the rights to these markets. As a result of this acquisition,
the officer who was an investor in this franchise no longer has an interest in
any franchisees.

Scott Livengood, the Company's Chairman, President and CEO, currently has the
right to develop the Alamance, Durham, and Orange County areas of North
Carolina.

All franchisees are required to purchase mix and equipment from the Company.
Total revenues includes $22,515,000 in fiscal 2001, $44,870,000 in fiscal 2002
and $69,539,000 in fiscal 2003 of sales to franchise doughnut stores owned, in
whole or in part, by directors, employees of the Company, and Company joint
venture investments. Total revenues also includes royalties

                                        64


from these stores of $1,689,000 in fiscal 2001, $3,646,000 in fiscal 2002 and
$7,013,000 in 2003. Trade accounts receivable from these stores, shown as
accounts receivable, affiliates on the consolidated balance sheet, totaled
$9,017,000 and $11,062,000 at February 3, 2002 and February 2, 2003,
respectively.

16. COMMITMENTS AND CONTINGENCIES

In order to assist certain associate and franchise operators in obtaining
third-party financing, the Company from time-to-time enters into collateral
repurchase agreements involving both Company stock and doughnut-making
equipment. The Company's contingent liability related to these agreements was
approximately $70,000 at February 3, 2002. The Company was not contingently
liable under any such agreements at February 2, 2003. Additionally, primarily
for the purpose of providing financing guarantees in a percentage equivalent to
the Company's ownership percentage in various joint venture investments, the
Company has guaranteed certain leases and loans from third-party financial
institutions on behalf of franchise operators. The Company's contingent
liability related to these guarantees was approximately $3,805,000 at February
3, 2002 and $7,652,000 at February 2, 2003. Of the total guaranteed amount of
$7,652,000 at February 2, 2003, $6,450,000 are for franchisees in which we have
an ownership interest and $1,202,000 are for franchisees in which we have no
ownership interest. The expirations of these guarantees for the five fiscal
years ending after February 2, 2003 are $2,903,000, $498,000, $517,000, $357,000
and $355,000, respectively.

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. JOINT VENTURES

From time to time, the Company enters into joint venture agreements with
partners to develop and operate Krispy Kreme stores. Each party's investment is
determined based on their proportionate share of equity obtained. The Company's
ability to control the management committee of the joint venture is the primary
determining factor as to whether or not the joint venture results are
consolidated with the Company. See "Basis of Consolidation" under Note
2 -- Nature of Business and Significant Accounting Policies.

At February 3, 2002, the Company had invested in nine area developer joint
ventures. The Company's interest in these joint ventures ranged from 3.3% to
70.0%. As of February 2, 2003, the Company had invested in 15 area developer
joint ventures and held interests ranging from 25.0% to 74.7%. The Company will
continue to seek opportunities to develop markets through joint ventures or to
increase its ownership in existing joint ventures when there are sound business
reasons to do so.

On March 5, 2002, the Company increased its ownership in six joint ventures by
acquiring from members of the Krispy Kreme Equity Group, LLC ("KKEG") the
members' respective interest in the KKEG. The KKEG, a pooled investment fund,
was established in March 2000 upon approval by the Company's board of directors.
The purpose of the KKEG was to invest in joint ventures with new area developers
in certain markets. The Company's officers were eligible to invest in the fund.
Members of the board of directors who were not officers of the Company were not
eligible to invest in the fund. The Company did not provide any funds to its
officers to invest in the fund nor did it provide guarantees for the investment.
The fund invested exclusively in a fixed number of joint ventures with certain
new area developers as approved by its manager, obtaining a 5% interest in them.
If any member of the fund withdrew, the fund had a right of first refusal with
respect to the withdrawing member's interest. The remaining members then had the
right to purchase any interest the fund did not purchase. Finally, the Company
was obligated to purchase any remaining interest. At February 3, 2002, the fund
had investments in six joint ventures. On March 5, 2002, the members of the KKEG
voted to dissolve the KKEG and agreed to sell their interests in the KKEG to the
Company, upon approval of the Company's board of directors, in an amount equal
to the member's original investment, totaling an aggregate of $940,100. On March
6, 2002, the KKEG was dissolved.

Also on March 5, 2002, the Company increased its ownership interest in six joint
ventures by acquiring from Scott Livengood, Chairman, President and CEO, his
interests in these joint ventures. In February 2000, the compensation committee
of the Company's board of directors approved investments by Mr. Livengood, in
joint ventures with certain new area developers in exchange for his giving up
his rights to develop the Northern California market. The Company did not
provide any funds to Mr. Livengood to invest in the joint ventures nor did it
provide guarantees for the investments. Mr. Livengood had 3% investments in six
area developers as of February 3, 2002. On March 5, 2002, after approval of the
Company's board of directors, Mr. Livengood sold his interests in the joint
ventures to the Company at his original cost of $558,800.

The Company increased its ownership interest in KremeWorks, LLC, the area
developer with rights to develop markets in the northwestern portion of the
United States and western Canada, effective March 5, 2002 by acquiring from John
McAleer, the Company's Executive Vice President and Vice Chairman of the Board,
his interest in this joint venture. In February 2000, the compensation committee
of the Company's board of directors approved an investment by Mr. McAleer, in
this joint venture. The Company did not provide any funds to Mr. McAleer to
invest in the joint venture nor did it provide guarantees for the investment.
Mr. McAleer had a 21.7% investment in this joint venture as of February 3, 2002.
On March 5, 2002, Mr. McAleer, upon approval of the Company's board of
directors, sold his ownership interest in KremeWorks, LLC to the Company at his
original cost of $75,800. With this acquisition, the Company increased its
interest in the joint venture to

                                        65


25.0% and gained one of the four seats on the management committee. As a result,
the Company began accounting for its investment in KremeWorks, LLC using the
equity method effective March 5, 2002.

AS A RESULT OF THE TRANSACTIONS ON MARCH 5, 2002 IN WHICH THE COMPANY ACQUIRED
THE KKEG'S, MR. LIVENGOOD'S AND MR. MCALEER'S INVESTMENTS IN THE JOINT VENTURES
AS DESCRIBED ABOVE, THE OWNERSHIP PERCENTAGES OF THE COMPANY AND OTHER INVESTORS
(WHICH DO NOT INCLUDE THE KKEG, MR. LIVENGOOD OR MR. MCALEER) IN CERTAIN JOINT
VENTURES INCREASED AS FOLLOWS:



- ------------------------------------------------------------------------------------------------------------
                                                                        OWNERSHIP INTERESTS
                                                        ----------------------------------------------------
                                                         PRIOR TO MARCH 5, 2002       AS OF MARCH 5, 2002
                                                        ------------------------    ------------------------
                                                        KKDC     OTHER INVESTORS    KKDC     OTHER INVESTORS
- ------------------------------------------------------------------------------------------------------------
                                                                                 
A-OK, LLC                                               22.3%         77.7%         30.3%         69.7%
Amazing Glazed, LLC                                     22.3%         77.7%         30.3%         69.7%
Glazed Investments, LLC                                 22.3%         77.7%         30.3%         69.7%
Golden Gate Doughnuts, LLC                              59.0%         41.0%         67.0%         33.0%
KKNY, LLC                                               22.3%         77.7%         30.3%         69.7%
KremeWorks, LLC                                          3.3%         96.7%         25.0%         75.0%
New England Dough, LLC                                  49.0%         51.0%         57.0%         43.0%


CONSOLIDATED JOINT VENTURES

On March 22, 2000, the Company entered into a joint venture, Golden Gate, to
develop the Northern California market. The Company invested $2,060,000 for a
59% interest and holds two of the joint venture's three management committee
seats. As discussed above, at February 3, 2002, the KKEG and Scott Livengood
held interests in Golden Gate of 5% and 3%, respectively, which the Company
acquired effective March 5, 2002. As a result, the Company's ownership interest
in Golden Gate increased to 67%. The interest in the joint venture not owned by
the Company, included in minority interest in the consolidated balance sheet,
was reduced to 33% from 41%. The financial statements of this joint venture are
consolidated in the results of the Company. The Company has guaranteed the
payments on several leases and 67% of Golden Gate's line of credit and term
loans (see Note 7 -- Debt). The terms of the guarantees range from four to
twenty years.

On February 27, 2000, the Company entered into a joint venture, Glazed
Investments, to develop the Colorado, Minnesota and Wisconsin markets. The
Company invested $500,000 for a 22.3% interest and held two of the joint
venture's six management committee seats. As noted above, at February 3, 2002,
the KKEG and Mr. Livengood held interests in Glazed Investments of 5% and 3%,
respectively, which the Company acquired effective March 5, 2002, increasing its
ownership interest in the joint venture to 30.3%. Effective August 22, 2002, the
Company acquired an additional 44.4% interest in Glazed Investments, increasing
its total investment in this joint venture to 74.7% (see Note
20 -- Acquisitions). Effective with the acquisition in August, the Company
gained the right to designate four of the six management committee seats. As a
result, the Company gained the ability to control the operations of the joint
venture and, therefore, began consolidating the financial statements of Glazed
Investments with those of the Company effective August 22, 2002. As a result of
the Company's acquisitions of additional interests in Glazed Investments in
fiscal 2003, the interest in the joint venture not owned by the Company,
included in minority interest in the consolidated balance sheet, was reduced to
25.3%. The Company has guaranteed 74.7% of the amounts outstanding on certain
bank and non-bank debt of Glazed Investments (see Note 7 -- Debt).

On March 6, 2001, the Company entered into a joint venture, Freedom Rings, to
develop the Philadelphia market. The Company invested $1,167,000 for a 70%
interest and holds three of four management committee seats. The Company has
guaranteed payments on certain leases and 70% of the bank debt of Freedom Rings
(see Note 7 -- Debt). The terms of the guarantees range from two to ten years.
The financial statements of this joint venture are consolidated with those of
the Company and the 30% not owned by Krispy Kreme is included in minority
interest.

SUMMARIZED INFORMATION FOR THE COMPANY'S INVESTMENTS IN CONSOLIDATED JOINT
VENTURES AS OF FEBRUARY 2, 2003, INCLUDING OUTSTANDING LOAN AND LEASE
GUARANTEES, IS AS FOLLOWS:



- ----------------------------------------------------------------------------------------------------------------------
                                                        NUMBER OF                                 In Thousands
                                                       STORES AS OF       OWNERSHIP %     ----------------------------
                                                    FEBRUARY 2, 2003/   ---------------       LOAN/
                              GENERAL GEOGRAPHICAL  TOTAL STORES TO BE           THIRD        LEASE        FISCAL 2003
                                     MARKET           DEVELOPED (1)     KKDC    PARTIES   GUARANTEES (2)    REVENUES
- ----------------------------------------------------------------------------------------------------------------------
                                                                                         
Freedom Rings, LLC              Philadelphia, PA           4/18         70.0%   30.0%        $ 2,936         $11,391
                                                    Manager Allocation    3         1

Glazed Investments, LLC       Colorado, Minnesota,        12/28         74.7%   25.3%        $11,370         $10,892(3)
                                   Wisconsin        Manager Allocation    4         2

Golden Gate Doughnuts, LLC    Northern California         13/25         67.0%   33.0%        $14,016         $36,218
                                                    Manager Allocation    2         1


(1) The amount shown as "Total Stores to be Developed" represents the number of
    stores in the initial development agreement with the joint venture as well
    as commissary locations which have been opened. The number of stores in the
    initial development agreement will be re-evaluated as the market is
    developed and the number of stores to be opened may change.

(2) Outstanding debt amounts are reflected in Note 7 -- Debt. The gross amount
    of commitments under leases is included in the future minimum annual rental
    commitments disclosed in Note 8 -- Lease Commitments.

                                        66


(3) Fiscal 2003 revenues for Glazed Investments represent the amounts reported
    for the period subsequent to the Company's acquisition of a controlling
    interest in the joint venture. Total revenues of Glazed Investments for
    fiscal 2003 were $28,290,000.

EQUITY METHOD JOINT VENTURES

As of February 2, 2003, the Company had entered into twelve joint ventures as a
minority interest party. Investments in these joint ventures have been made in
the form of capital contributions and/or notes receivable. Notes receivable bear
interest, payable semi-annually, at rates ranging from 5.5% to 10.0% per annum,
and have maturity dates ranging from October 2010 to the dissolution of the
joint venture. These investments and notes receivable are recorded in
investments in unconsolidated joint ventures in the consolidated balance sheets.

INFORMATION RELATED TO THE MARKETS, OWNERSHIP INTERESTS AND MANAGER ALLOCATIONS
FOR JOINT VENTURES, WHICH ARE ACCOUNTED FOR BY THE EQUITY METHOD, IS SUMMARIZED
AS FOLLOWS:



- -------------------------------------------------------------------------------------------------------------
                                                                        NUMBER OF
                                                                       STORES AS OF           OWNERSHIP %
                                                                    FEBRUARY 2, 2003/     -------------------
                                         GENERAL GEOGRAPHICAL       TOTAL STORES TO BE                 THIRD
                                                MARKET                DEVELOPED (1)          KKDC     PARTIES
- -------------------------------------------------------------------------------------------------------------
                                                                                          
A-OK, LLC                                 Arkansas, Oklahoma               4/10              30.3%     69.7%
                                                                    Manager Allocation         2        4

Amazing Glazed, LLC                   Pennsylvania (Pittsburgh)            4/9               30.3%     69.7%
                                                                    Manager Allocation         2        4

Amazing Hot Glazers, LLC                 Pennsylvania (Erie)               0/5               33.3%     66.7%
                                                                    Manager Allocation         2        4

Entrepreneurship and Economic         North Carolina (Greensboro)          1/1               49.0%     51.0%
  Development Investment, LLC                                       Manager Allocation         1        1

KK-TX I, L.P.                         Texas (Amarillo, Lubbock)            1/2               33.3%     66.7%
                                                                    Manager Allocation       --(2)     --(2)

KKNY, LLC                                   New York City,                 6/25              30.3%     69.7%
                                         Northern New Jersey        Manager Allocation         2        4

KremeKo, Inc.                               Eastern Canada                 5/33              39.4%(3)  60.6%(3)
                                                                    Manager Allocation       2(4)      9(4)

KremeWorks, LLC (5)                    Alaska, Hawaii, Oregon,             4/31              25.0%     75.0%
                                      Washington, Western Canada    Manager Allocation         1        3

Krispy Kreme Australia Pty Limited            Australia/                   1/31              35.0%     65.0%
                                             New Zealand            Manager Allocation         2        3

Krispy Kreme of South Florida, LLC         Southern Florida                1/8               35.3%     64.7%
                                                                    Manager Allocation         2        3

Krispy Kreme U.K. Limited                  United Kingdom,                 0/25              35.9%     64.1%
                                         Republic of Ireland        Manager Allocation         3        3

New England Dough, LLC                       Connecticut,                  3/17              57.0%(6)  43.0%
                                            Massachusetts,          Manager Allocation         2        2
                                             Rhode Island
- --------------------------------------------------------------------------------------------------------------


(1) The amount shown as "Total Stores to be Developed" represents the number of
    stores in the initial development agreement with the joint venture as well
    as commissary locations which have been opened. This number of stores in the
    initial development agreement will be re-evaluated as the market is
    developed and the number of stores to be opened may change.

(2) KK-TX I, L.P. is a limited partnership. The Company holds a 33.3% interest
    in the joint venture as a limited partner. Under the terms of the
    partnership agreement, the general partner has full responsibility for
    managing the business of the partnership.

(3) On September 5, 2002, KremeKo, Inc. ("KremeKo") completed an equity offering
    to raise funds for store development and general working capital purposes.
    The Company subscribed for its proportionate share of the offering and
    further agreed to purchase any shares not subscribed for by other existing
    shareholders. The Company paid approximately $4,000,000 for its subscribed
    shares as well as the over-allotment it received and, as a result, the
    Company's ownership interest increased from 34% to 39.4%, effective
    September 5, 2002.

(4) KremeKo's shareholders' agreement requires that its board consist of eleven
    directors. The Company has the right to designate two of the directors and
    three other shareholders each have the right to designate one director. The
    remaining six directors are nominated by the board and elected by the
    shareholders.

(5) Prior to March 5, 2002, KremeWorks, LLC ("KremeWorks") was accounted for
    using the cost method; however, as explained above, on March 5, 2002, John
    McAleer sold his interest in KremeWorks to the Company. As a result, Krispy
    Kreme's investment in KremeWorks has increased to 25%. Krispy Kreme now has
    one of four seats on the management committee. Subsequent to March 5, 2002,
    the Company's investment in KremeWorks has been accounted for by the equity
    method.

                                        67


(6) Although the Company's ownership interest in New England Dough, LLC exceeds
    50%, the Company accounts for this interest under the equity method as the
    Company does not have the ability to designate a majority of the members of
    the joint venture's management committee.

INFORMATION RELATED TO THE COMPANY'S INVESTMENT AS WELL AS SUMMARIZED FINANCIAL
INFORMATION AS OF FEBRUARY 2, 2003, FOR EACH JOINT VENTURE ACCOUNTED FOR BY THE
EQUITY METHOD IS AS FOLLOWS:



                                                                                                             In Thousands
- -------------------------------------------------------------------------------------------------------------------------
                                            SUMMARY FINANCIAL INFORMATION (1)
- -------------------------------------------------------------------------------------------------------------------------
                                                       NET                NON-                      NON-       INVESTMENT
                                   NET      GROSS    INCOME/   CURRENT   CURRENT     CURRENT       CURRENT     AND NOTES
                                  SALES    PROFIT    (LOSS)    ASSETS    ASSETS    LIABILITIES   LIABILITIES   IN JV (2)
- -------------------------------------------------------------------------------------------------------------------------
                                                                                       
A-OK, LLC                        $12,523   $ 9,021   $   912   $   868   $ 6,573     $   860       $ 6,121       $  393
Amazing Glazed, LLC                7,567     3,171      (297)      856     6,509       3,453         3,763          124
Amazing Hot Glazers, LLC (3)          --        --        --        --        --          --            --           --
Entrepreneurship and Economic
  Development Investment, LLC        290        92      (225)      149     1,246          98            --          676
KK-TX I, L.P.                        618       120      (401)      118     2,244         683         1,846         (134)
KKNY, LLC                         18,366     8,689    (2,332)    3,839    11,204       7,491         3,359        1,052
KremeKo, Inc.                     10,184     3,257    (2,915)    7,670     8,454       3,924         2,332        3,393
KremeWorks, LLC                   14,448     6,808       970     1,115     9,042       2,691         2,343          204
Krispy Kreme Australia Pty
  Limited                             --        --    (1,100)    1,645     2,865       1,155           530          989
Krispy Kreme of South Florida,
  LLC                              1,478       545        98        56     4,605         337         4,707           --
Krispy Kreme U.K. Limited             --        --       (93)      699        19          19            --          227
New England Dough, LLC             3,616     1,024      (843)    2,907     4,849       7,882            --          (53)
                                 --------------------------------------------------------------------------------------
        Total                    $69,090   $32,727   $(6,226)  $19,922   $57,610     $28,593       $25,001       $6,871
                                 ======================================================================================


(1) The net sales, gross profit and net income (loss) shown for each of these
    joint ventures represents the amounts reported by the joint ventures for the
    period corresponding with the Company's fiscal year end, February 2, 2003,
    and the amounts shown as current assets, non-current assets, current
    liabilities and non-current liabilities represent the corresponding amounts
    reported by each of the joint ventures at February 2, 2003.

(2) This amount represents the Company's investment in the joint venture plus
    the Company's portion of the joint venture's income or loss to date, net of
    distributions received. KK-TX I, L.P. and New England Dough, LLC are in the
    initial stages of operations. The Company's share of the cumulative net loss
    of each of these joint ventures exceeds its capital contribution. The
    Company has recorded the full loss attributable to its interest in the joint
    ventures as it believes these operations will become profitable in the
    short-term and the investments will be recovered.

(3) Operating activities for Amazing Hot Glazers, LLC have not yet commenced.

The Company is a guarantor of debt and lease obligations for various joint
ventures accounted for under the equity method. The debt is also collateralized
by the assets acquired by the joint venture. In accordance with generally
accepted accounting principles existing at the time we made these commitments,
these guarantees are not recorded as liabilities on our consolidated balance
sheet. To date the Company has not experienced any losses in connection with
these guarantees. The terms of the guarantees range from 4 to 20 years.

THE FOLLOWING TABLE SUMMARIZES THE COMPANY'S OBLIGATIONS UNDER THESE GUARANTEES
AS OF FEBRUARY 2, 2003 AND THE AGGREGATE MATURITIES FOR THE FIVE FISCAL YEARS
ENDING AFTER FEBRUARY 2, 2003:


                                                              In Thousands, Except Percentages
- ----------------------------------------------------------------------------------------------
                                         TOTAL LOAN/             AMOUNTS EXPIRING IN
                           GUARANTEE        LEASE      ---------------------------------------
                          PERCENTAGES    GUARANTEES    FISCAL 2004   FISCAL 2005   FISCAL 2006
- ----------------------------------------------------------------------------------------------
                                                                    
A-OK, LLC                    22.3%         $1,325        $   79         $ 86          $ 94
KK-TX I, L.P.                33.3%            647            35           38            41
KremeKo, Inc.            34.0% - 36.2%        909           102          109           155
Krispy Kreme of South
  Florida, LLC               35.3%          1,266           298           39            39
New England Dough, LLC   54.0% - 60.0%      2,303         2,221           61            21
                         ---------------------------------------------------------------------
Total                                      $6,450        $2,735         $333          $350
                                         =====================================================


                               In Thousands, Except Percentages
- ---------------------------------------------------------------
                                  AMOUNTS EXPIRING IN
                         --------------------------------------
                         FISCAL 2007   FISCAL 2008   THEREAFTER
- ---------------------------------------------------------------
                                            
A-OK, LLC                   $102          $112         $  852
KK-TX I, L.P.                 44            48            441
KremeKo, Inc.                 79            86            378
Krispy Kreme of South
  Florida, LLC                39            39            812
New England Dough, LLC        --            --             --
                         --------------------------------------
Total                       $264          $285         $2,483
                         ======================================


18. LEGAL CONTINGENCIES

On March 9, 2000, a lawsuit was filed against the Company, management, and
Golden Gate, one of the Company's consolidated joint ventures, in Superior Court
in the State of California. The plaintiffs alleged, among other things, breach
of contract, and sought compensation for damages and punitive damages. In
September 2000, after the case was transferred to Sacramento Superior Court,
that court granted the motion to compel arbitration of the action and stay the
lawsuit pending the

                                        68


outcome of arbitration. After an appeal to the California appellate courts, on
October 1, 2001, plaintiffs filed a demand for arbitration with the American
Arbitration Association against KKDC, Golden Gate, and others. After an extended
series of arbitration hearings, the Arbitration Panel dismissed all claims
against all parties, except the claim for breach of contract against KKDC and
Golden Gate. The Panel entered a preliminary award of $7,925,000 against KKDC
and Golden Gate, which was substantially less than the damages claimed. The
Company recorded a provision of $9,075,000 in fiscal 2003, consisting of the
$7,925,000 award plus an estimate of the plaintiff's legal fees and other costs
expected to be awarded of $1,150,000. Although further hearings have been
scheduled to determine issues concerning litigation fees and costs, the Company
anticipates that all claims will be concluded in early fiscal 2004 in a manner
acceptable to the Company without further substantial adverse consequences.

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.

19. SYNTHETIC LEASE

On April 26, 2001, the Company entered into a synthetic lease agreement in which
the lessor, a bank, had agreed to fund up to $35,000,000 for construction of the
Company's new mix and distribution facility in Effingham, Illinois (the
"Facility"). Under the terms of the synthetic lease, the bank was to pay all
costs associated with the construction of the building and the equipment to be
used in the manufacturing and distribution processes. Lease payments were to
begin upon completion of the Facility (the "Completion Date"). Construction of
the Facility began in May 2001. The initial term of the lease was five years
following the Completion Date.

On March 21, 2002, the Company terminated the synthetic lease and purchased the
Facility from the bank. To finance the purchase, the Company entered into a
credit agreement with the bank. See Note 7 -- Debt for further information on
the terms of the Credit Agreement.

20. ACQUISITIONS

The Company from time to time acquires market rights from either Associate or
Area Developer franchisees if they are willing to sell to the Company and if
there are sound business reasons for the Company to make the acquisition. These
reasons may include a franchise market being contiguous to a Company store
market where an acquisition would provide operational synergies; upside
opportunity in the market because the franchisee has not fully developed
on-premises or off-premises sales; or if the Company believes an acquisition of
the market would improve the brand image in the market. The purchase price for
each acquisition is based upon an analysis of historical performance as well as
estimates of future revenues and earnings in the respective markets acquired.

Effective June 16, 2002, the Company acquired the rights to the Akron, OH
market, as well as the related assets, from an associate franchisee. Effective
June 30, 2002, the Company acquired the rights to the Toledo, OH market, as well
as the related assets, from an Area Developer franchisee. Effective November 4,
2002, the Company acquired the rights to the Destin, FL and Pensacola, FL
markets, as well as the related assets, from an associate franchisee. The total
purchase price for these acquisitions was $10,948,000, consisting of cash of
$2,221,000 and approximately 241,000 shares of common stock, valued at
$8,727,000. The purchase price was allocated to accounts receivable -- $368,000,
inventory -- $74,000, property and equipment -- $835,000, accounts
payable -- $93,000, accrued expenses -- $77,000, repayment of a note
receivable - $249,000 and reacquired franchise rights, an intangible asset not
subject to amortization -- $10,090,000.

Effective August 22, 2002, the Company acquired an additional 44.4% interest in
Glazed Investments, an Area Developer franchisee with the rights to develop
Krispy Kreme stores in markets in Colorado, Minnesota and Wisconsin. The total
consideration paid was $23,048,000, consisting of cash of $800,000 and
approximately 596,000 shares of stock, valued at $22,248,000. In connection with
the acquisition, the Company also acquired a note receivable, payable by Glazed
Investments, with a principal amount of $3,015,000 plus accrued interest of
$111,000. Prior to the acquisition of an additional interest, the Company owned
a 30.3% interest in this joint venture and had the right to designate two of the
joint venture's six management committee seats. As a result of the acquisition,
the Company now owns a 74.7% interest in the joint venture and has the right to
designate four of the six management committee seats. As such, the Company has
the ability to control the operations of the joint venture and, therefore, began
consolidating the financial statements of Glazed Investments with those of the
Company effective August 22, 2002.

                                        69


The following unaudited pro forma financial information presents the combined
results of Krispy Kreme Doughnuts, Inc. and the acquired markets as if the
acquisitions discussed above had occurred as of the beginning of the periods
presented. The unaudited pro forma financial information is not intended to
represent or be indicative of the consolidated results of operations of the
Company that would have been reported had the acquisitions been completed as of
the dates presented, and should not be taken as representative of the future
consolidated results of operations of the Company.



                                                        In Thousands, Except Per Share Amounts
- ----------------------------------------------------------------------------------------------
                                                              FEB. 3, 2002        FEB. 2, 2003
- ----------------------------------------------------------------------------------------------
                                                                        (Unaudited)
                                                                            
Total revenues                                                  $406,988            $507,345
Net income                                                      $ 27,745            $ 34,516
Diluted earnings per share                                      $   0.47            $   0.58


The unaudited pro forma financial information presented above includes the
revenues and net income of the acquired markets. Adjustments to the combined
amounts were made to eliminate franchise fees and royalties previously earned by
the Company from these operations for the periods presented, as well as to
eliminate KKM&D revenues and corresponding expenses resulting from sales to
these operations.

Of the remaining approximately 25% interest in Glazed Investments not owned by
the Company, approximately 22% is owned by certain members of Glazed
Investments' management. As a condition to the acquisition, the Company entered
into a put option agreement which gives each of these members of management the
option to sell to the Company ultimately up to 100% of their respective interest
in Glazed Investments during certain defined exercise periods, subject to
certain limitations. The purchase price for the individual's respective interest
is determined based upon a formula defined in the agreement, which is generally
based upon earnings growth and cash flows of Glazed Investments' operations. The
options become exercisable, in part, beginning in April 2004. If exercised, the
Company has the option to pay the purchase price in cash or shares of the
Company's common stock. The Company cannot estimate the likelihood of any of the
options being exercised or the maximum amount the Company would be required to
pay upon exercise.

21. SUBSEQUENT EVENTS

On January 23, 2003, the Company signed an agreement and plan of merger ("Merger
Agreement") under which it will acquire Montana Mills Bread Co., Inc. ("Montana
Mills"), an owner and operator of upscale "village bread stores" in the
Northeastern and Midwestern United States. Montana Mills' stores produce and
sell a variety of breads and baked goods prepared in an open-view format. In
addition to providing operating synergies, the acquisition of Montana Mills is
expected to provide the Company with the ability to leverage its existing
capabilities, such as its distribution chain, its off-premises sales and its
coffee-roasting expertise, in order to expand Montana Mills' business. The
acquisition is also expected to provide an opportunity to apply the Company's
experience and strength in creating a national franchise network towards
building a franchise network for Montana Mills.

Under the terms of the Merger Agreement, each outstanding share of Montana
Mills' common stock will be converted into the right to receive 0.1501 shares
(the "Exchange Ratio") of Company common stock and cash in lieu of fractional
shares. The Company filed a registration statement on Form S-4 with the
Securities and Exchange Commission to register the shares to be issued in
connection with the merger. The acquisition will become effective 20 business
days after the information statement related to the merger is mailed to Montana
Mills' shareholders. The information statement was mailed March 7, 2003 and the
acquisition is expected to become effective April 7, 2003. Upon consummation of
the merger, the Company expects to issue approximately 1,224,500 shares of the
Company's common stock in exchange for all outstanding shares of common stock of
Montana Mills. The shares issued will be valued at approximately $39,000,000,
based on the closing price of the Company's common stock for a range of trading
days around the announcement date, January 24, 2003. The Company will also
reserve approximately 460,500 shares of common stock for issuance upon the
exercise of warrants and options for Montana Mills' common stock currently
outstanding, all of which will become exercisable for shares of the Company's
common stock based upon the Exchange Ratio.

The results of operations of Montana Mills will be included in the Company's
consolidated financial statements as of the effective time of the acquisition.
The Company expects to report Montana Mills operating results as a separate
segment of its business.

Effective March 10, 2003, the Company acquired the rights to certain franchise
markets in Kansas and Missouri, as well as the related assets, which included
five stores, from an Area Developer franchisee, in exchange for cash of
approximately $32,000,000. Of the total purchase price, $8,000,000 was placed in
escrow and will be released in accordance with the terms of the purchase
agreement upon conclusion of audits of the financial statements of the
operations of the Area Developer. The operations and assets acquired, primarily
inventory and equipment, will be included with those of the Company effective
March 10, 2003.

The Company has not completed the allocation of the purchase price related to
these acquisitions as it is in the process of identifying and determining the
fair value of all assets acquired and liabilities assumed.

On February 12, 2003, the Company entered into a joint venture to develop Krispy
Kreme stores in El Paso, Texas and Cuidad Juarez, Mexico with an existing
franchisee. The Company will own approximately 33% of the joint venture, Priz
Doughnuts, L.P., a limited partnership, which will develop three stores in these
markets over the next three years.

                                        70


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 February 3, 2002 and
February 2, 2003, and the results of their operations and their cash flows for
each of the three years in the period ended February 2, 2003, 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 the opinion expressed above.

As discussed in Note 2 to the consolidated financial statements, effective
February 4, 2002, the Company changed its method of accounting for goodwill and
other intangible assets to conform to Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."

Greensboro, North Carolina
March 13, 2003

                                        71

EX-21.1

                                                                               .
                                                                               .
                                                                               .

                                                                    EXHIBIT 21.1
                              LIST OF SUBSIDIARIES



                                                                   STATE OF INCORPORATION
              SUBSIDIARY(1)                                           OR ORGANIZATION
                                                                
Krispy Kreme Doughnut Corporation                                      North Carolina
Krispy Kreme Distributing Company, Inc.                                North Carolina
Krispy Kreme Coffee Company, LLC                                       North Carolina
Krispy Kreme Mobile Store Company                                      North Carolina
HD Capital Corporation                                                 Delaware
HDN Development Corporation                                            Kentucky
Panhandle Doughnuts, LLC                                               North Carolina
Oliver Acquisition Corp.                                               Delaware
Krispy Kreme International Ltd.                                        Switzerland
Hot Doughnuts Now International Ltd.                                   Switzerland
Krispy Kreme Europe Limited                                            United Kingdom
Freedom Rings, LLC(2)                                                  Delaware
Glazed Investments, LLC(2)                                             Delaware
Golden Gate Doughnuts, LLC(2)                                          North Carolina
New England Dough, LLC(2)                                              Rhode Island


- -----------------
(1)  Montana Mills Bread Co., Inc. became our wholly-owned subsidiary effective
     April 7, 2003.

(2)  Franchisees in which the registrant held a majority equity interest as of
     February 2, 2003.

EX-23.1

                                                                    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, 333-47326, 333-87092,
333-97787), S-4 (No. 333-103434) and S-3 (Nos. 333-70336, 333-101365, 333-99211,
333-88758) of Krispy Kreme Doughnuts, Inc. of our report dated March 13, 2003
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 13, 2003
relating to the financial statement schedule, which appears in this Form 10-K.

Greensboro, North Carolina
May 2, 2003

EX-99.1

                                                                    EXHIBIT 99.1

    CERTIFICATION PURSUANT TO CHAPTER 63, TITLE 18 UNITED STATES CODE SS.1350
           AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                   ACCOMPANYING ANNUAL REPORT ON FORM 10-K OF
     KRISPY KREME DOUGHNUTS, INC. FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2003

         I, Scott A. Livengood, President and Chief Executive Officer of Krispy
Kreme Doughnuts, Inc. (the "Company"), certify that the accompanying Annual
Report on Form 10-K of the Company for the fiscal year ended February 2, 2003
fully complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and the information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

                                           Date: May 2, 2003

                                           /s/ Scott A. Livengood
                                           -------------------------------------
                                           Scott A. Livengood
                                           President and Chief Executive Officer

EX-99.2

                                                                    EXHIBIT 99.2

    CERTIFICATION PURSUANT TO CHAPTER 63, TITLE 18 UNITED STATES CODE SS.1350
           AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                   ACCOMPANYING ANNUAL REPORT ON FORM 10-K OF
     KRISPY KREME DOUGHNUTS, INC. FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2003

         I, Randy S. Casstevens, Chief Financial Officer of Krispy Kreme
Doughnuts, Inc. (the "Company"), certify that the accompanying Annual Report on
Form 10-K of the Company for the fiscal year ended February 2, 2003 fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and the information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

                                                       Date: May 2, 2003

                                                       /s/ Randy S. Casstevens
                                                       -------------------------
                                                       Randy S. Casstevens
                                                       Chief Financial Officer