10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________ 

Form 10-Q

(Mark one)
	þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended November 1, 2009
		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,	27103
Winston-Salem, North Carolina	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:
(336) 725-2981

     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  þ  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o	Accelerated filer  þ
Non-accelerated filer  o	Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No  þ

Number of shares of Common Stock, no par value, outstanding as of November 29, 2009: 67,438,295.

1

TABLE OF CONTENTS

		Page
FORWARD-LOOKING STATEMENTS		3
PART I - FINANCIAL INFORMATION		5
Item 1.	FINANCIAL STATEMENTS	5
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
	RESULTS OF OPERATIONS	26
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
Item 4.	CONTROLS AND PROCEDURES	46
PART II - OTHER INFORMATION		47
Item 1.	LEGAL PROCEEDINGS	47
Item 1A.	RISK FACTORS	48
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
Item 3.	DEFAULTS UPON SENIOR SECURITIES	48
Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	48
Item 5.	OTHER INFORMATION	48
Item 6.	EXHIBITS	48
	SIGNATURES	49

2

     As used herein, unless the context otherwise requires, “Krispy Kreme,” the “Company,” “we,” “us” and “our” refer to Krispy Kreme Doughnuts, Inc. and its subsidiaries. The Company’s fiscal year ends on the Sunday closest to January 31. References to fiscal 2010 and fiscal 2009 mean the fiscal years ended January 31, 2010 and February 1, 2009, respectively.

FORWARD-LOOKING STATEMENTS

     This quarterly report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that relate to our plans, objectives, estimates and goals. Statements expressing expectations regarding our future and projections relating to products, sales, revenues and earnings are typical of such statements, and are made under 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, considering 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. The words “believe,” “may,” “could,” “will,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “strive” or similar words, or the negative of these words, identify forward-looking statements. Factors that could contribute to these differences include, but are not limited to:

• the quality of Company and franchise store operations;

• our ability, and our dependence on the ability of our franchisees, to execute on our and their business plans;

• our relationships with our franchisees;

• our ability to implement our international growth strategy;

• our ability to implement our new domestic operating model;

• currency, economic, political and other risks associated with our international operations;

• the price and availability of raw materials needed to produce doughnut mixes and other ingredients;

• compliance with government regulations relating to food products and franchising;

• our relationships with off-premises customers;

• our ability to protect our trademarks and trade secrets;

• risks associated with the level of our indebtedness;

• restrictions on our operations and compliance with covenants contained in our secured credit facilities;

• changes in customer preferences and perceptions;

• risks associated with competition; and

• other factors in Krispy Kreme’s periodic reports and other information filed with the Securities and Exchange Commission (the “SEC”), including under Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2009 (the “2009 Form 10-K”).

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All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the impact of each such factor on the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

     We caution you that any forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differ materially from the facts, results, performance or achievements we have anticipated in such forward-looking statements except as required by the federal securities laws.

4

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

	Page
Index to Financial Statements
Consolidated balance sheet as of November 1, 2009 and February 1, 2009	6
Consolidated statement of operations for the three months and nine months ended November 1, 2009 and November 2, 2008	7
Consolidated statement of cash flows for the nine months ended November 1, 2009 and November 2, 2008	8
Consolidated statement of changes in shareholders’ equity for the nine months ended November 1, 2009 and November 2, 2008	9
Notes to financial statements	10

5

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED BALANCE SHEET
(Unaudited)

	Nov. 1,			Feb. 1,
	2009			2009
	(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	18,543		$	35,538
Receivables		18,197			19,229
Accounts and notes receivable — equity method franchisees		684			1,019
Inventories		14,474			15,587
Deferred income taxes		106			106
Other current assets		10,448			4,327
Total current assets		62,452			75,806
Property and equipment		77,029			85,075
Investments in equity method franchisees		526			1,187
Goodwill		23,856			23,856
Other assets		9,279			9,002
Total assets	$	173,142		$	194,926
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	902		$	1,413
Accounts payable		6,063			8,981
Accrued liabilities		33,465			29,222
Total current liabilities		40,430			39,616
Long-term debt, less current maturities		48,128			73,454
Deferred income taxes		106			106
Other long-term obligations		23,619			23,995
Commitments and contingencies
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value		—			—
Common stock, no par value		365,000			361,801
Accumulated other comprehensive loss		(331	)		(913	)
Accumulated deficit		(303,810	)		(303,133	)
Total shareholders’ equity		60,859			57,755
Total liabilities and shareholders’ equity	$	173,142		$	194,926

The accompanying notes are an integral part of the financial statements.

6

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

	Three Months Ended						Nine Months Ended
	Nov. 1,			Nov. 2,			Nov. 1,			Nov. 2,
	2009			2008			2009			2008
	(In thousands, except per share amounts)
Revenues	$	83,600		$	94,338		$	259,750		$	292,216
Operating expenses:
Direct operating expenses (exclusive of depreciation and
amortization shown below)		74,369			87,143			222,595			264,926
General and administrative expenses		6,128			5,842			17,259			17,406
Depreciation and amortization expense		2,154			2,107			6,146			6,609
Impairment charges and lease termination costs		109			345			3,922			(648	)
Other operating (income) and expense, net		207			213			474			626
Operating income (loss)		633			(1,312	)		9,354			3,297
Interest income		10			65			38			287
Interest expense		(2,295	)		(2,978	)		(8,424	)		(7,341	)
Equity in losses of equity method franchisees		(393	)		(335	)		(506	)		(685	)
Other non-operating income and (expense), net		144			(921	)		(356	)		71
Income (loss) before income taxes		(1,901	)		(5,481	)		106			(4,371	)
Provision for income taxes (benefit)		487			404			783			(613	)
Net loss	$	(2,388	)	$	(5,885	)	$	(677	)	$	(3,758	)
Loss per common share:
Basic	$	(.04	)	$	(.09	)	$	(.01	)	$	(.06	)
Diluted	$	(.04	)	$	(.09	)	$	(.01	)	$	(.06	)

The accompanying notes are an integral part of the financial statements.

7

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

	Nine Months Ended
	Nov. 1,			Nov. 2,
	2009			2008
	(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	$	(677	)	$	(3,758	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		6,146			6,609
Deferred income taxes		(380	)		(283	)
Impairment charges		916			(109	)
Accrued rent expense		(569	)		(460	)
Loss on disposal of property and equipment		599			344
Gain on disposal of interest in equity method franchisee		—			(931	)
Impairment of investment in equity method franchisee		500			—
Unrealized (gain) loss on interest rate derivatives		537			(62	)
Share-based compensation		3,448			4,263
Provision for doubtful accounts		40			534
Amortization of deferred financing costs		636			701
Equity in losses of equity method franchisees		506			685
Other		(137	)		1,237
Change in assets and liabilities:
Receivables		1,225			2,243
Inventories		1,063			2,114
Other current and non-current assets		(241	)		7
Accounts payable and accrued liabilities		2,105			(1,777	)
Other long-term obligations		180			(588	)
Net cash provided by operating activities		15,897			10,769
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(6,160	)		(2,618	)
Proceeds from disposals of property and equipment		156			427
Other investing activities		209			(46	)
Net cash used for investing activities		(5,795	)		(2,237	)
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of long-term debt		(25,894	)		(1,673	)
Deferred financing costs		(954	)		(434	)
Proceeds from exercise of stock options		—			3,103
Repurchase of common shares (Note 10)		(249	)		(2,069	)
Net cash used for financing activities		(27,097	)		(1,073	)
Effect of exchange rate changes on cash		—			(19	)
Net increase (decrease) in cash and cash equivalents		(16,995	)		7,440
Cash and cash equivalents at beginning of period		35,538			24,735
Cash and cash equivalents at end of period	$	18,543		$	32,175

The accompanying notes are an integral part of the financial statements.

8

KRISPY KREME DOUGHNUTS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

						Accumulated
	Common					Other
	Shares		Common			Comprehensive			Accumulated
	Outstanding		Stock			Income (Loss)			Deficit			Total
	(In thousands)
BALANCE AT FEBRUARY 1, 2009	67,512		$	361,801		$	(913	)	$	(303,133	)	$	57,755
Comprehensive income (loss):
Net loss for the nine months ended November 1,
2009										(677	)		(677	)
Foreign currency translation adjustment, net of
income taxes of $8							13						13
Amortization of unrealized loss on interest rate
derivative, net of income taxes of $372							569						569
Total comprehensive loss													(95	)
Cancellation of restricted shares	(52	)		—									—
Share-based compensation (Note 10)	54			3,448									3,448
Repurchase of common shares (Note 10)	(47	)		(249	)								(249	)
BALANCE AT NOVEMBER 1, 2009	67,467		$	365,000		$	(331	)	$	(303,810	)	$	60,859
BALANCE AT FEBRUARY 3, 2008	65,370		$	355,615		$	81		$	(299,072	)	$	56,624
Comprehensive income (loss):
Net loss for the nine months ended November 2,
2008										(3,758	)		(3,758	)
Foreign currency translation adjustment, net of
income taxes of $38							61						61
Unrealized loss on cash flow hedge, net of
income taxes of $14							(22	)					(22	)
Amortization of unrealized loss on interest rate
derivative, net of income taxes of $259							397						397
Total comprehensive loss													(3,322	)
Exercise of stock options	2,387			3,103									3,103
Cancellation of restricted shares	(113	)		—									—
Share-based compensation (Note 10)	430			4,263									4,263
Repurchase of common shares (Note 10)	(546	)		(2,069	)								(2,069	)
BALANCE AT NOVEMBER 2, 2008	67,528		$	360,912		$	517		$	(302,830	)	$	58,599

Total comprehensive loss was $2.2 million and $5.7 million for the three months ended November 1, 2009 and November 2, 2008, respectively.

The accompanying notes are an integral part of the financial statements.

9

KRISPY KREME DOUGHNUTS, INC.

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Overview

Significant Accounting Policies

     BASIS OF PRESENTATION. The consolidated financial statements contained herein should be read in conjunction with the Company’s 2009 Form 10-K. The accompanying interim consolidated financial statements are presented in accordance with the requirements of Article 10 of Regulation S-X and, accordingly, do not include all the disclosures required by generally accepted accounting principles (“GAAP”) with respect to annual financial statements. The interim consolidated financial statements have been prepared in accordance with the Company’s accounting practices described in the 2009 Form 10-K, but have not been audited. In management’s opinion, the financial statements include all adjustments, which consist only of normal recurring adjustments, necessary for a fair statement of the Company’s results of operations for the periods presented. The consolidated balance sheet data as of February 1, 2009 were derived from the Company’s audited financial statements but do not include all disclosures required by GAAP.

     NATURE OF BUSINESS. Krispy Kreme Doughnuts, Inc. (“KKDI”) and its subsidiaries (collectively, the “Company”) are engaged in the sale of doughnuts and complementary items to on-premises and off-premises customers through Company-owned stores. The Company also derives revenue from franchise and development fees and royalties from franchisees. Additionally, the Company sells doughnut mix, other ingredients and supplies and doughnut-making equipment to franchisees.

     BASIS OF CONSOLIDATION. The financial statements include the accounts of KKDI and its subsidiaries, the most significant of which is KKDI’s principal operating subsidiary, Krispy Kreme Doughnut Corporation. During the three months ended November 1, 2009, the Company refranchised three stores in Northern California to a new franchisee. The aggregate sales price of the stores’ assets was approximately $1.1 million, which was evidenced by a promissory note bearing interest at 7% and payable in weekly installments equal to a percentage of the stores’ retail sales, secured by the all the assets of the three stores. The new franchisee is a variable interest entity of which the Company is the primary beneficiary. Accordingly, the Company has consolidated the financial statements of the new franchisee for post-acquisition periods and has not recorded a divestiture of the three stores. In the future, should the Company no longer be the primary beneficiary of the new franchisee, the Company would be required to deconsolidate the financial statements of the franchisee and recognize a divestiture of the sold stores. Had a divestiture been recognized as of the sale date, the Company would have recognized a gain of approximately $1 million. Except for a guarantee (which dates from fiscal 2002) of 59% of the lease payments related to one of the three stores’ leases, the Company has no guarantee of any obligation of the new franchisee.

     Investments in entities over which the Company has the ability to exercise significant influence but which the Company does not control, and whose financial statements are not otherwise required to be consolidated, are accounted for using the equity method. These entities typically are 20% to 35% owned and are hereinafter sometimes referred to as “Equity Method Franchisees.”

     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 additional common shares that would have been outstanding if dilutive potential common shares had been issued, computed using the treasury stock method. Such potential common shares consist of shares issuable upon the exercise of stock options and warrants and the vesting of currently unvested shares of restricted stock and restricted stock units.

10

     The following table sets forth amounts used in the computation of basic and diluted earnings per share:

	Three Months Ended						Nine Months Ended
	Nov. 1,			Nov. 2,			Nov. 1,			Nov. 2,
	2009			2008			2009			2008
	(In thousands)
Numerator: net loss	$	(2,388	)	$	(5,885	)	$	(677	)	$	(3,758	)
Denominator:
Basic earnings per share - weighted average shares outstanding		67,612			66,794			67,354			65,587
Diluted earnings per share - weighted average shares outstanding
plus dilutive potential common shares		67,612			66,794			67,354			65,587

     Stock options and warrants with respect to 10.8 million and 10.4 million shares, as well as 1.3 million and 1.3 million unvested shares of restricted stock and restricted stock units, have been excluded from the computation of the number of shares used in the computation of diluted earnings per share for the three months ended November 1, 2009 and November 2, 2008, respectively, because the Company incurred a net loss for each of these periods and their inclusion would be antidilutive.

     Stock options and warrants with respect to 10.8 million and 10.6 million shares, as well as 1.2 million and 1.3 million unvested shares of restricted stock and restricted stock units have been excluded from the computation of the number of shares used in the computation of diluted earnings per share for the nine months ended November 1, 2009 and November 2, 2008, respectively, because the Company incurred a net loss for each of these periods and their inclusion would be antidilutive.

Recent Accounting Pronouncements

     In March 2008, the Financial Accounting Standards Board (“FASB”) issued new guidance on disclosures about derivative instruments and hedging activities. The new guidance is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The Company adopted this guidance as of February 2, 2009 on a prospective basis; accordingly, disclosures related to interim periods prior to the date of adoption have not been presented. Adoption of this guidance did not have any effect on the Company’s financial position or results of operations. See Note 12 for additional information about derivative financial instruments owned by the Company.

     In the first quarter of fiscal 2009, the Company adopted newly issued FASB guidance with respect to financial assets and liabilities measured at fair value on both a recurring and non-recurring basis and with respect to nonfinancial assets and liabilities measured on a recurring basis. In the first quarter of fiscal 2010, the Company adopted newly issued FASB guidance with respect to nonrecurring measurements of nonfinancial assets and liabilities. Adoption of this accounting guidance did not have any material effect on the Company’s financial position or results of operations. See Note 11 for additional information regarding fair value measurements.

     In May 2009, the FASB issued new guidance with respect to subsequent events which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The Company adopted this guidance prospectively during the second quarter ended August 2, 2009. The Company performed an evaluation of events through December 7, 2009, the date which the financial statements were issued, for the purpose of identifying events which required adjustment to, or disclosure in, the Company’s financial statements as of and for the period ended November 1, 2009.

     In June 2009, the FASB issued amended guidance related to the consolidation of variable-interest entities. These amendments require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the enterprise has the power to direct matters that most significantly impact the activities of the VIE and has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The amendments require an ongoing reconsideration of the identity of the VIE’s primary beneficiary, if any, and provide a framework for the events that trigger a reassessment of whether an entity is a VIE. The amended guidance is effective for the Company in the first quarter of fiscal 2011. The Company is evaluating the effects, if any, of adoption of this guidance on its financial position, results of operations and cash flows.

11

Note 2 — Business Conditions, Uncertainties and Liquidity

     The Company experienced a decline in revenues and incurred net losses in each of the last three fiscal years. The revenue decline reflects fewer Company stores in operation resulting principally from the closure of lower performing locations, a decline in domestic royalty revenues and lower sales of mixes and other ingredients resulting from lower sales by the Company’s domestic franchisees. Lower revenues have adversely affected operating margins because of the fixed or semi-fixed nature of many of the Company’s direct operating expenses. In addition, price increases in the Company Stores segment were not sufficient to fully offset steep rises in agricultural commodity costs in fiscal 2009, although recent economic conditions have led to significant reductions in the market prices of these commodities, which has had a positive effect on the Company’s results of operations in fiscal 2010. Sales volumes and changes in the cost of major ingredients and fuel can have a material effect on the Company’s results of operations and cash flows. In addition, royalty revenues and most of KK Supply Chain revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

     The Company generated net cash from operating activities of $15.9 million in the first nine months of fiscal 2010 and $10.8 million in the first nine months of fiscal 2009.

     The Company’s Secured Credit Facilities described in Note 5 are the Company’s principal source of external financing. These facilities consist of a term loan having an outstanding principal balance of $48.8 million as of November 1, 2009 maturing in February 2014 and a $25 million revolving credit facility maturing in February 2013.

     The Secured Credit Facilities contain significant financial covenants as described in Note 5. Effective April 15, 2009, the Company executed amendments to the Secured Credit Facilities which, among other things, relaxed the interest coverage ratio covenant contained therein through fiscal 2012. In connection with the amendments, the Company prepaid $20 million of the principal balance outstanding under the term loan, paid fees of approximately $1.9 million, and agreed to increase the rate of interest on outstanding loans by 200 basis points annually. Any future amendments or waivers could result in additional fees or rate increases.

     Based on the Company’s current working capital and its operating plans, management believes the Company will be able to comply with the amended financial covenants and be able to meet its projected operating, investing and financing cash requirements.

     Failure to comply with the financial covenants contained in the Secured Credit Facilities, or the occurrence or failure to occur of certain events, would cause the Company to default under the facilities. The Company would attempt to negotiate waivers of any such default, should one occur. There can be no assurance that the Company would be able to negotiate any such waivers, and the costs or conditions associated with any such waivers could be significant. In the absence of a waiver of, or forbearance with respect to, any such default, the Company’s lenders would be able to exercise their rights under the credit agreement including, but not limited to, accelerating maturity of outstanding indebtedness and asserting their rights with respect to the collateral. Acceleration of the maturity of indebtedness under the Secured Credit Facilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows. In the event that credit under the Secured Credit Facilities were not available to the Company, there can be no assurance that alternative sources of credit would be available to the Company or, if they are available, under what terms or at what cost.

12

Note 3 — Receivables

The components of receivables are as follows:

	Nov. 1,			Feb. 1,
	2009			2009
	(In thousands)
Receivables:
Off-premises customers	$	9,707		$	10,413
Unaffiliated franchisees		10,142			11,573
Current portion of notes receivable		68			100
		19,917			22,086
Less — allowance for doubtful accounts:
Off-premises customers		(301	)		(313	)
Unaffiliated franchisees		(1,419	)		(2,544	)
		(1,720	)		(2,857	)
	$	18,197		$	19,229
Receivables from Equity Method Franchisees (Note 9):
Trade	$	1,432		$	1,268
Less — allowance for doubtful accounts		(748	)		(249	)
	$	684		$	1,019

     The allowance for doubtful accounts related to unaffiliated franchisees decreased from February 1 to November 1, 2009 principally due to improved payment performance and reduced credit exposure with respect to certain franchisees and, to a lesser extent, chargeoffs.

Note 4 — Inventories

The components of inventories are as follows:

	Nov. 1,		Feb. 1,
	2009		2009
	(In thousands)
Raw materials	$	5,383	$	5,625
Work in progress		79		6
Finished goods		3,749		4,905
Purchased merchandise		5,171		4,936
Manufacturing supplies		92		115
	$	14,474	$	15,587

Note 5 — Long Term Debt

Long-term debt and capital lease obligations consist of the following:

	Nov. 1,			Feb. 1,
	2009			2009
	(In thousands)
Secured Credit Facilities	$	48,754		$	74,416
Capital lease obligations		276			451
		49,030			74,867
Less: current maturities		(902	)		(1,413	)
	$	48,128		$	73,454

In February 2007, the Company closed secured credit facilities totaling $160 million (as amended, the “Secured Credit Facilities”). The facilities then consisted of a $50 million revolving credit facility maturing in February 2013 (the “Revolver”) and a $110 million term loan maturing in February 2014 (the “Term Loan”). The Secured Credit Facilities are secured by a first lien on substantially all the assets of the Company.

     The Revolver contains provisions which permit the Company to obtain letters of credit. Issuance of letters of credit under these provisions constitutes usage of the lending commitments and reduces the amount available for cash borrowings under the Revolver. The commitments under the Revolver were reduced from $50 million to $30 million in April 2008, and further reduced to $25 million in connection with amendments to the facilities in April 2009 (the “April 2009 Amendments”). In connection with the April 2009 Amendments, the Company prepaid $20 million of the principal balance outstanding under the Term Loan. Additionally, during the third quarter of fiscal 2010, the Company made a discretionary prepayment of $5 million of the principal balance outstanding under the Term Loan.

13

     Interest on borrowings under the Revolver and Term Loan is payable either (a) at the greater of LIBOR or 3.25% or (b) at the Alternate Base Rate (which is the greater of Fed funds rate plus 0.50% or the prime rate), in each case plus the Applicable Margin. After giving effect to the April 2009 Amendments, the Applicable Margin for LIBOR-based loans and for Alternate Base Rate-based loans was 7.50% and 6.50%, respectively (5.50% and 4.50%, respectively, prior to the April 2009 Amendments).

The Company is required to pay a fee equal to the Applicable Margin for LIBOR-based loans on the outstanding amount of letters of credit issued under the Revolver, as well as a fronting fee of 0.25% of the amount of such letter of credit payable to the letter of credit issuer. There also is a fee on the unused portion of the Revolver lending commitment, which increased from 0.75% to 1.00% in connection with the April 2009 Amendments.

Borrowings under the Revolver (and issuances of letters of credit) are subject to the satisfaction of usual and customary conditions, including the accuracy of representations and warranties and the absence of defaults.

The Term Loan currently is payable in quarterly installments of approximately $156,000 and a final installment equal to the remaining principal balance in February 2014. The Term Loan is required to be prepaid with some or all of the net proceeds of certain equity issuances, debt incurrences, asset sales and casualty events and with a percentage of excess cash flow (as defined in the agreement) on an annual basis.

The Secured Credit Facilities require the Company to meet certain financial tests, including a maximum consolidated leverage ratio (expressed as a ratio of total debt to Consolidated EBITDA) and a minimum consolidated interest coverage ratio (expressed as a ratio of Consolidated EBITDA to net interest expense), computed based upon Consolidated EBITDA and net interest expense for the most recent four fiscal quarters and total debt as of the end of such four-quarter period. As of November 1, 2009, the consolidated leverage ratio was required to be not greater than 4.0 to 1.0 and the consolidated interest coverage ratio was required to be not less than 2.2 to 1.0. As of November 1, 2009, the Company’s consolidated leverage ratio was approximately 2.2 to 1.0 and the Company’s consolidated interest coverage ratio was approximately 4.1 to 1.0. The maximum consolidated leverage ratio declines after fiscal 2010 and the minimum consolidated interest coverage ratio increases during the balance of fiscal 2010 and thereafter, as set forth in the following tables:

	Maximum
Period	Leverage Ratio
Fiscal 2010	4.00 to 1.00
First Quarter of Fiscal 2011	3.75 to 1.00
Second Quarter of Fiscal 2011	3.50 to 1.00
Third Quarter of Fiscal 2011	3.25 to 1.00
Fourth Quarter of Fiscal 2011	3.00 to 1.00
Fiscal 2012	2.50 to 1.00
Fiscal 2013 and thereafter	2.00 to 1.00
	Minimum Interest
Period	Coverage Ratio
Third Quarter of Fiscal 2010	2.20 to 1.00
Fourth Quarter of Fiscal 2010	2.35 to 1.00
First Quarter of Fiscal 2011	2.75 to 1.00
Second Quarter of Fiscal 2011	2.75 to 1.00
Third Quarter of Fiscal 2011	2.95 to 1.00
Fourth Quarter of Fiscal 2011	3.15 to 1.00
Fiscal 2012	3.75 to 1.00
Fiscal 2013 and thereafter	4.50 to 1.00

14

     “Consolidated EBITDA” is a non-GAAP measure and is defined in the Secured Credit Facilities to mean, generally, consolidated net income or loss, exclusive of unrealized gains and losses on hedging instruments, gains or losses on the early extinguishment of debt and provisions for payments on guarantees of franchisee obligations, plus the sum of interest expense (net of interest income), income taxes, depreciation and amortization, non-cash charges, store closure costs, costs associated with certain litigation and investigations, and extraordinary professional fees; and minus payments, if any, on guarantees of franchisee obligations in excess of $3 million in any rolling four-quarter period and the sum of non-cash credits. Effective in April 2009, “net interest expense” excludes amounts paid under the interest rate derivative contracts described below. In addition, the Secured Credit Facilities contain other covenants which, among other things, limit the incurrence of additional indebtedness (including guarantees), liens, investments (including investments in and advances to franchisees which own and operate Krispy Kreme stores), dividends, transactions with affiliates, asset sales, acquisitions, capital expenditures, mergers and consolidations, prepayments of other indebtedness and other activities customarily restricted in such agreements. The Secured Credit Facilities also prohibit the transfer of cash or other assets to KKDI from its subsidiaries, whether by dividend, loan or otherwise, but provide for exceptions to enable KKDI to pay taxes and operating expenses and certain judgment and settlement costs.

     The operation of the restrictive financial covenants described above may limit the amount the Company may borrow under the Revolver. In addition, the maximum amount which may be borrowed under the Revolver is reduced by the amount of outstanding letters of credit, which totaled approximately $15.0 million as of November 1, 2009, the substantial majority of which secure the Company’s reimbursement obligations to insurers under the Company’s self-insurance arrangements. The maximum additional borrowing available to the Company as of November 1, 2009 was approximately $10 million.

     The Secured Credit Facilities also contain customary events of default including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other indebtedness in excess of $5 million, certain events of bankruptcy and insolvency, judgment defaults in excess of $5 million and the occurrence of a change of control.

     In May 2007, the Company entered into interest rate derivative contracts having an aggregate notional principal amount of $60 million. The derivative contracts entitle the Company to receive from the counterparties the excess, if any, of three-month LIBOR over 5.40%, and require the Company to pay to the counterparties the excess, if any, of 4.48% over three-month LIBOR, in each case multiplied by the notional amount of the contracts. The contracts expire in April 2010. See Notes 11 and 12 for additional information about these derivative contracts.

Note 6 — Commitments and Contingencies

Pending Legal Matters

     Except as disclosed below, the Company currently is not a party to any material legal proceedings. Except as described below, the Company cannot predict the likelihood of an unfavorable outcome with respect to the these matters, or the amount or range of potential loss with respect to them and, accordingly, no provision for loss with respect to these matters has been reflected in the consolidated financial statements.

TAG Litigation

     In February 2008, the Company filed suit in the U.S. District Court for the Middle District of North Carolina against The Advantage Group Enterprise, Inc. (“TAG”), alleging that TAG failed to properly account for and pay the Company for sales of equipment that the Company consigned to TAG. Based on these allegations, the Company asserted various claims including breach of fiduciary duty and conversion, and it seeks an accounting and constructive trust. In addition, the Company seeks a declaration that it does not owe TAG approximately $1 million for storage fees and alleged lost profits. In March 2008, TAG answered the complaint, denying liability and asserting counterclaims against the Company including breach of contract, services rendered, unjust enrichment, violation of the North Carolina Unfair Trade Practices Act and fraud in the inducement. TAG sought approximately $1 million in actual damages as well as punitive and treble damages. The Company believes settlement negotiations among the parties are nearly complete. The accompanying balance sheet as of November 1, 2009 reflects an accrued liability of approximately $150,000 for potential settlement of this matter, which was recorded in the second quarter of fiscal 2010.

15

Fairfax County, Virginia Environmental Litigation

     Since 2004, the Company has operated a commissary in the Gunston Commerce Center in Fairfax County, Virginia (the “County”). The County has investigated alleged damage to its sewer system near the commissary. On May 8, 2009, the County filed a lawsuit in Fairfax County Circuit Court alleging that the Company caused damage to the sewer system and violated the County’s Sewer Use Ordinance and the Company’s Wastewater Discharge Permit. The County sought from the Company repair and replacement costs of approximately $2 million and civil penalties of approximately $18 million. The Company removed the case to the U.S. District Court for the Eastern Division of Virginia, and in December 2009 the parties reached an agreement to resolve the litigation. During the quarter ended November 1, 2009, the Company recorded a provision of $750,000 for the settlement of this matter, which is included in Company Stores direct operating expenses.

K² Asia Litigation

     On April 7, 2009, a Cayman Islands corporation, K² Asia Ventures, and its owners filed a lawsuit in Forsyth County, North Carolina Superior Court against the Company, its franchisee in the Philippines, and other persons associated with the franchisee. The suit alleges that the Company and the other defendants conspired to deprive the plaintiffs of claimed “exclusive rights” to negotiate franchise and development agreements with prospective franchisees in the Philippines, and seeks unspecified damages. The Company believes that these allegations are false and intends to vigorously defend against the lawsuit.

California Wage/Hour Litigation

     The Company is a defendant in a wage/hour suit pending in the Superior Court of Alameda County, California, in which the plaintiffs seek class action status and unspecified damages on behalf of a putative class of approximately 35 persons. Discovery in the case is substantially complete, and court-ordered mediation currently is scheduled for January 2010. The Company intends to vigorously defend the case.

Other Legal Matters

     The Company is engaged in various legal proceedings arising in the normal course of business. The Company maintains customary insurance policies against certain kinds of claims and suits, including insurance policies for workers’ compensation and personal injury, some of which provide for relatively large deductible amounts.

Other Commitments and Contingencies

     The Company has guaranteed certain loans from third-party financial institutions on behalf of Equity Method Franchisees primarily to assist the franchisees in obtaining third-party financing. The loans are collateralized by certain assets of the franchisee, generally the Krispy Kreme store and related equipment. The Company’s contingent liabilities related to these guarantees totaled approximately $4.0 million at November 1, 2009 and are summarized in Note 9. These guarantees require payment by the Company in the event of default on payment by the respective debtor and, if the debtor defaults, the Company may be required to pay amounts outstanding under the related agreements in addition to the principal amount guaranteed, including accrued interest and related fees.

     The aggregate recorded liability for these loan guarantees totaled $2.6 million as of November 1, 2009 and $2.7 million as of February 1, 2009, which is included in accrued liabilities in the accompanying consolidated balance sheet. These liabilities represent the estimated amount of guarantee payments which the Company believed to be probable. The Company made payments totaling approximately $650,000 related to guarantees of franchisee obligations during fiscal 2009. While there is no current demand on the Company to perform under any of the guarantees, there can be no assurance that the Company will not be required to perform and, if circumstances change from those prevailing at November 1, 2009, additional guarantee payments or provisions for guarantee payments could be required with respect to any of the guarantees.

     The Company from time to time purchases exchange-traded commodity futures contracts or options on such contracts for raw materials which are ingredients of the Company’s products or which are components of such ingredients, including wheat and soybean oil. The Company may also purchase futures and options on futures to hedge its exposure to rising gasoline prices. The Company typically assigns the agricultural futures contract to a supplier in connection with entering into a forward purchase contract for the related ingredient. See Note 12 for additional information about these derivative contracts.

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Note 7 — Impairment Charges and Lease Termination Costs

     The components of impairment charges and lease termination costs are as follows:

	Three Months Ended						Nine Months Ended
	Nov. 1,			Nov. 2,			Nov. 1,			Nov. 2,
	2009			2008			2009			2008
	(In thousands)
Impairment charges:
Impairment of long-lived assets	$	178		$	39		$	1,398		$	(109	)
Recovery from bankruptcy estate of former subsidiary		(482	)		—			(482	)		—
Total impairment charges		(304	)		39			916			(109	)
Lease termination costs:
Provision for termination costs		631			522			3,964			279
Less — reversal of previously recorded deferred rent
expense		(218	)		(216	)		(958	)		(818	)
Net provision		413			306			3,006			(539	)
	$	109		$	345		$	3,922		$	(648	)

The Company tests long-lived assets for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. These events and changes in circumstances include store closing decisions, the effects of changing costs on current results of operations, observed trends in operating results, and evidence of changed circumstances observed as a part of periodic reforecasts of future operating results and as part of the Company’s annual budgeting process. When the Company concludes that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), the Company records impairment charges to reduce the carrying value of those assets to their estimated fair values. During the three and nine months ended November 1, 2009, the Company recorded impairment charges related to long-lived assets to reduce the carrying value of those assets to their estimated fair values. Substantially all of such long-lived assets were real properties, the fair values of which were estimated based on independent appraisals or, in the case of properties which the Company is negotiating to sell, based on the Company’s negotiations with unrelated third-party buyers. During the three months ended November 1, 2009, the Company received $482,000 of cash proceeds from the bankruptcy estate of Freedom Rings, LLC (“Freedom Rings”), a former subsidiary which filed for bankruptcy in the third quarter of fiscal 2006. During fiscal 2006, the Company recorded impairment provisions related to long-lived assets of Freedom Rings under the assumption that there would be no recovery from the Freedom Rings bankruptcy estate. Had any such recovery been assumed, the impairment charges would have been reduced by the amount of the assumed recovery. Accordingly, the amount recovered in the third quarter of fiscal 2010 has been reported as a credit to impairment charges in the accompanying statement of operations.

Lease termination costs represent the estimated fair value of liabilities related to unexpired leases, after reduction by the amount of deferred rent expense, if any, related to the leases, and are recorded when the lease contracts are terminated or, if earlier, the date on which the Company ceases use of the leased property. The fair value of these liabilities were estimated as the excess, if any, of the contractual payments required under the unexpired leases over the current market lease rates for the properties, discounted at a credit-adjusted risk-free rate over the remaining term of the leases.

17

The transactions reflected in the accrual for lease termination costs are summarized as follows:

	Three Months Ended						Nine Months Ended
	Nov. 1,			Nov. 2,			Nov. 1,			Nov. 2,
	2009			2008			2009			2008
	(In thousands)
Balance at beginning of period	$	2,428		$	2,381		$	1,880		$	2,837
Provision for lease termination costs:
Provisions associated with store closings, net of estimated
sublease rentals		212			177			2,427			380
Adjustments to previously recorded provisions resulting from
settlements with lessors and adjustments of previous
estimates		372			289			1,395			(269	)
Accretion of discount		47			56			142			168
Total provision		631			522			3,964			279
Proceeds from assignment of leases		62			—			62			748
Payments on unexpired leases, including settlements with
lessors		(1,344	)		(488	)		(4,129	)		(1,449	)
Total reductions		(1,282	)		(488	)		(4,067	)		(701	)
Balance at end of period	$	1,777		$	2,415		$	1,777		$	2,415

Note 8 — Segment Information

     The Company’s reportable segments are Company Stores, Domestic Franchise, International Franchise and KK Supply Chain. The Company Stores segment is comprised of the stores operated by the Company. These stores sell doughnuts and complementary products through both on-premises and off-premises sales channels, although some stores serve only one of these distribution channels. The majority of the ingredients and materials used by Company stores are purchased from the KK Supply Chain segment, which supplies doughnut mix, equipment and other items to both Company and franchisee-owned stores. The Domestic Franchise and International Franchise segments consist of the Company’s store franchise operations. Under the terms of franchise agreements, domestic and international franchisees pay royalties and fees to the Company in return for the use of the Krispy Kreme name and ongoing brand and operational support. Expenses for these segments include costs to recruit new franchisees, to assist in store openings, to support franchisee operations and marketing efforts, as well as direct general and administrative expenses and allocated corporate costs.

Through fiscal 2009, the Company reported its results of operations of its franchise business as a single business segment. In the first quarter of fiscal 2010, the Company began disaggregating the results of operations of its franchise business into domestic and international components in its internal financial reporting. The Company has made the corresponding changes to its segment reporting, and now reports the revenues and expenses associated with its domestic and international franchise operations as separate segments, consistent with the provisions of FASB guidance on disclosures about segments of an enterprise and related information. The Company’s segment disclosures continue to be consistent with the way in which management views and evaluates the business. Amounts previously reported for the franchise segment for the three and nine months ended November 2, 2008 have been restated to conform to the new disaggregated segment presentation.

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The following table presents the results of operations of the Company’s operating segments for the three and nine months ended November 1, 2009 and November 2, 2008. Segment operating income is consolidated operating income before unallocated general and administrative expenses and impairment charges and lease termination costs.

	Three Months Ended						Nine Months Ended
	Nov. 1,			Nov. 2,			Nov. 1,			Nov. 2,
	2009			2008			2009			2008
	(In thousands)
Revenues:
Company Stores	$	60,020		$	64,708		$	185,730		$	201,961
Domestic Franchise		1,945			1,882			5,798			6,177
International Franchise		3,583			4,511			11,267			13,355
KK Supply Chain:
Total revenues		39,314			46,747			121,926			143,724
Less - intersegment sales eliminations		(21,262	)		(23,510	)		(64,971	)		(73,001	)
External KK Supply Chain revenues		18,052			23,237			56,955			70,723
Total revenues	$	83,600		$	94,338		$	259,750		$	292,216
Operating income (loss):
Company Stores	$	(1,380	)	$	(4,470	)	$	2,951		$	(8,985	)
Domestic Franchise		811			1,157			2,425			3,800
International Franchise		2,117			3,031			6,495			8,728
KK Supply Chain		5,549			5,449			19,375			17,440
Unallocated general and administrative expenses		(6,355	)		(6,134	)		(17,970	)		(18,334	)
Impairment charges and lease termination costs		(109	)		(345	)		(3,922	)		648
Total operating income (loss)	$	633		$	(1,312	)	$	9,354		$	3,297
Depreciation and amortization expense:
Company Stores	$	1,694		$	1,548		$	4,709		$	4,854
Domestic Franchise		14			21			57			64
International Franchise		—			—			—			—
KK Supply Chain		219			248			669			765
Corporate administration		227			290			711			926
Total depreciation and amortization expense	$	2,154		$	2,107		$	6,146		$	6,609

     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.

Note 9 — Investments in Equity Method Franchisees

As of November 1, 2009, the Company had investments in four franchisees. These investments have been made in the form of capital contributions and, in certain instances, loans evidenced by promissory notes. These investments are reflected as “Investments in Equity Method Franchisees” in the consolidated balance sheet.

The Company’s financial exposures related to franchisees in which the Company has an investment are summarized in the tables below.

	November 1, 2009
	Company		Investment
	Ownership		and			Trade			Loan
	Percentage		Advances			Receivables			Guarantees
	(Dollars in thousands)
Kremeworks, LLC	25.0	%	$	900		$	451		$	1,389
Kremeworks Canada, LP	24.5	%		—			23			—
Krispy Kreme of South Florida, LLC	35.3	%		—			159			2,569
Krispy Kreme Mexico, S. de R.L. de C.V.	30.0	%		526			799			—
				1,426			1,432		$	3,958
Less: reserves and allowances				(900	)		(748	)
			$	526		$	684

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	February 1, 2009
	Company		Investment						Loan and
	Ownership		and			Trade			Lease
	Percentage		Advances			Receivables			Guarantees
	(Dollars in thousands)
Kremeworks, LLC	25.0	%	$	900		$	378		$	1,754
Kremeworks Canada, LP	24.5	%		—			16			—
Krispy Kreme of South Florida, LLC	35.3	%		—			38			7,256
Krispy Kreme Mexico, S. de R.L. de C.V.	30.0	%		1,187			836			—
				2,087			1,268		$	9,010
Less: reserves and allowances				(900	)		(249	)
			$	1,187		$	1,019

     The guarantees at November 1, 2009 consist entirely of loan guarantees. As of February 1, 2009, the aggregate loan and lease guarantees consisted of $3.5 million of loan guarantees and $5.5 million of lease guarantees. The loan guarantee amounts were determined based upon the principal amount outstanding under the related loan and the lease guarantee amounts were determined based upon the gross amount of remaining lease payments.

Current liabilities at November 1, 2009 and February 1, 2009 include accruals for potential payments under loan guarantees of approximately $2.6 million and $2.7 million, respectively, related to Krispy Kreme of South Florida, LLC (“KKSF”). KKSF incurred defaults with respect to certain credit agreements with its lenders, including agreements related to KKSF indebtedness guaranteed, in part, by the Company. In the first quarter of fiscal 2010, KKSF completed a transaction which resulted in the Company’s release from a lease guarantee for which the Company’s potential obligation was approximately $5.5 million, but which increased the Company’s guarantee of KKSF debt obligations by approximately $1.0 million. There was no liability reflected in the financial statements for other guarantees of equity method franchisee obligations because the Company did not believe it was probable that the Company would be required to perform under such other guarantees. KKSF’s unaudited revenues, operating income and net income based upon information provided by the franchisee were $2.6 million, $220,000, and $170,000, respectively, for the three months ended November 1, 2009 and $8.5 million, $1.3 million and $1.1 million, respectively, for the nine months then ended.

The Company has a 25% interest in Kremeworks, LLC (“Kremeworks”), whose results of operations and operating cash flow have declined and, although Kremeworks has paid all interest, fees and scheduled amortization of principal due under its bank indebtedness, it failed to comply with certain financial covenants related to such indebtedness, a portion of which matured, by its terms, in January 2009. The Company has guaranteed 20% of such indebtedness. During the third quarter of fiscal 2010, Kremeworks completed an amendment to its debt agreement which, among other things, waived the defaults related to the failure to comply with the financial covenants and extended the maturity of the indebtedness until July 2010. In connection with that amendment, the Company and the majority owner of Kremeworks (which also is a guarantor of the indebtedness) made capital contributions to Kremeworks in the aggregate amount of $500,000, the proceeds of which were used to prepay a portion of the indebtedness. The Company’s portion of this capital contribution was $125,000. The aggregate amount of Kremeworks indebtedness as of November 1, 2009 was approximately $6.9 million, of which approximately $1.4 million is guaranteed by the Company. The amendment also requires Kremeworks to make an additional prepayment of principal in the amount of $500,000 on or before December 31, 2009, which could necessitate additional capital contributions to Kremeworks.

The Company has a $900,000 note receivable from Kremeworks which is subordinate to the Kremeworks bank indebtedness. The note arose from cash advances made by the Company to Kremeworks in fiscal 2005 and earlier years. During the quarter ended November 2, 2008, the Company established a reserve equal to the entire $900,000 balance of its note receivable in recognition of the uncertainty surrounding its ultimate collection, the charge related to which is included in “Other non-operating income and expense, net” in the accompanying consolidated statement of operations. Kremeworks’ unaudited revenues, operating loss and net loss for the three and nine month periods ending November 1, 2009 and November 2, 2008, based upon information provided by the franchisee, are set forth in the following table.

	Three Months Ended						Nine Months Ended
	Nov. 1,			Nov. 2,			Nov. 1,			Nov. 2,
	2009			2008			2009			2008
	(In thousands)
Revenues	$	3,933		$	4,344		$	13,015		$	13,902
Operating loss		(681	)		(583	)		(1,506	)		(950	)
Net loss		(785	)		(807	)		(1,832	)		(1,676	)

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     The Company has a 30% interest in Krispy Kreme Mexico, S. de R.L. de C.V. (“KK Mexico”), whose operating results have been adversely affected by economic weakness in that country. The franchisee also has been adversely affected by a decline in the value of the country’s currency relative to the U.S. dollar, which has made the cost of goods imported from the U.S. more expensive, and which has increased the amount of cash required to service the portion of the franchisee’s debt that is denominated in U.S. dollars. During the second quarter of fiscal 2010, management concluded that the decline in the value of the investment was other than temporary and, accordingly, the Company recorded a charge of approximately $500,000 during that period to reduce the carrying value of the investment in KK Mexico to its estimated fair value of $700,000. Such charge is included in “Other non-operating income and expense, net” in the accompanying consolidated statement of operations. In addition, during the nine months ended November 1, 2009, the Company increased its bad debt reserve related to KK Mexico by approximately $500,000, of which approximately $120,000 and $380,000 is included in KK Supply Chain and International Franchise direct operating expenses, respectively; such reserve at November 1, 2009 is equal to the Company’s aggregate receivables from this franchisee. KK Mexico’s unaudited revenues, operating loss and net loss for the three and nine month periods ending November 1, 2009 and November 2, 2008, based upon information provided by the franchisee, are set forth in the following table.

	Three Months Ended						Nine Months Ended
	Nov. 1,			Nov. 2,			Nov. 1,			Nov. 2,
	2009			2008			2009			2008
	(In thousands)
Revenues	$	3,110		$	4,532		$	8,849		$	13,240
Operating loss		(470	)		(76	)		(553	)		(222	)
Net loss		(487	)		(146	)		(606	)		(411	)

Note 10 — Shareholders’ Equity

Share-Based Compensation for Employees

The Company measures and recognizes compensation expense for share-based payment (“SBP”) awards based on their fair values in accordance with FASB guidance related to SBP under which the fair value of SBP awards with respect to which employees render the requisite service necessary for the award to vest is recognized over the related vesting period.

The aggregate cost of SBP awards charged to earnings for the three and nine months ended November 1, 2009 and November 2, 2008 is set forth in the following table. The Company did not realize any excess tax benefits from the exercise of stock options or the vesting of restricted stock or restricted stock units during any of the periods.

	Three Months Ended				Nine Months Ended
	Nov. 1,		Nov. 2,		Nov. 1,		Nov. 2,
	2009		2008		2009		2008
	(In thousands)
Costs charged to earnings related to:
Stock options	$	378	$	618	$	844	$	2,063
Restricted stock and restricted stock units		1,000		971		2,604		2,200
Total costs	$	1,378	$	1,589	$	3,448	$	4,263
Costs included in:
Direct operating expenses	$	524	$	620	$	1,246	$	1,659
General and administrative expenses		854		969		2,202		2,604
Total costs	$	1,378	$	1,589	$	3,448	$	4,263

During the nine months ended November 1, 2009 and November 2, 2008, the Company permitted holders of restricted stock and restricted stock unit awards to satisfy their obligations to reimburse the Company for the minimum required statutory withholding taxes arising from the vesting of such awards by surrendering vested common shares in lieu of reimbursing the Company in cash. In addition, the terms of certain stock options granted under the Company’s 1998 Stock Option Plan which were exercised during the third quarter of fiscal 2009 provided that reimbursement of minimum required withholdings taxes and payment of the exercise price could, at the election of the optionee, be made by surrendering common shares acquired upon the exercise of such options. The aggregate fair value of common shares surrendered related to the vesting of restricted stock and restricted stock unit awards was $249,000 for the nine months ended November 1, 2009 and has been reflected as a financing activity in the accompanying consolidated statement of cash flows and as a repurchase of common shares in the accompanying consolidated statement of changes in shareholders’ equity. The aggregate fair value of common shares surrendered related to the vesting of restricted stock awards and the exercise of stock options was $300,000 and $1.8 million, respectively, for the nine months ended November 2, 2008, and the aggregate fair value of $2.1 million has been reflected as a financing activity in the accompanying consolidated statement of cash flows and as a repurchase of common shares in the accompanying consolidated statement of changes in shareholders’ equity.

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Note 11 — Fair Value Measurements

Principles of Fair Value Measurements

     In the first quarter of fiscal 2009, the Company adopted newly issued FASB guidance with respect to financial assets and liabilities measured at fair value on both a recurring and non-recurring basis and with respect to nonfinancial assets and liabilities measured on a recurring basis. In the first quarter of fiscal 2010, the Company adopted newly issued FASB guidance with respect to nonrecurring measurements of nonfinancial assets and liabilities.

The accounting guidance for fair value measurements defines fair value as the price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This guidance is intended to establish a common definition of fair value to be used throughout GAAP, which is expected to make the measurement of fair value more consistent and comparable.

The accounting guidance for fair value measurements establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

• Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

• Level 2 - Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Adoption of this accounting guidance had no material effect on the Company’s financial position or results of operations.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at November 1, 2009.

	November 1, 2009
	Level 1		Level 2		Level 3
	(In thousands)
Assets:
401(k) mirror plan assets	$	434	$	—	$	—
Liabilities:
Interest rate derivatives	$	—	$	1,256	$	—
Commodity futures contracts		505		—		—

22

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The following tables present the nonrecurring fair value measurements recorded during the three and nine months ended November 1, 2009.

	Three Months Ended November 1, 2009
							Total gain
	Level 1		Level 2		Level 3		(loss)
	(In thousands)
Long-lived assets	$	—	$	2,838	$	—	$	(178	)
Lease termination liabilities		—		212		—		6

	Nine Months Ended November 1, 2009
							Total gain
	Level 1		Level 2		Level 3		(loss)
	(In thousands)
Long-lived assets	$	—	$	5,768	$	—	$	(1,398	)
Investment in Equity Method Franchisee		—		—		526		(500	)
Lease termination liabilities		—		2,427		—		(1,469	)

Long-Lived Assets

     During the three and nine months ended November 1, 2009, long-lived assets having an aggregate carrying value of $3.0 million and $7.2 million, respectively, were written down to their estimated fair values of $2.8 million and $5.8 million, respectively, resulting in recorded impairment charges of $178,000 and $1.4 million, respectively, as described in Note 7. Substantially all of such long-lived assets were real properties, the fair values of which were estimated based on independent appraisals or, in the case of properties which the Company is negotiating to sell, based on the Company’s negotiations with unrelated third-party buyers. These inputs are classified as Level 2 within the valuation hierarchy.

Investment in Equity Method Franchisee

During the nine months ended November 1, 2009, the Company concluded that a decline in the value of an Equity Method Franchisee was other than temporary and, accordingly, recorded a writedown in the second quarter of $500,000 to reduce the carrying value of the investment to its estimated fair value of $700,000 as described in Note 9. The fair value of the investment was estimated based upon a multiple of the investee’s current normalized trailing earnings before interest, income taxes and depreciation and amortization. These inputs are classified as Level 3 within the valuation hierarchy.

Lease Termination Liabilities

During the three and nine months ended November 1, 2009, the Company recorded provisions for lease termination costs related to closed stores based upon the estimated fair values of the liabilities under unexpired leases as described in Note 7; such provisions were reduced by previously recorded deferred rent expense related to those stores. The fair value of these liabilities were computed as the excess, if any, of the contractual payments required under the unexpired leases over the current market lease rates for the properties, discounted at a credit-adjusted risk-free rate over the remaining term of the leases. These inputs are classified as Level 2 within the valuation hierarchy.

The previously recorded deferred rent expense related to stores closed during the three months ended November 1, 2009 of $218,000 exceeded the $212,000 fair value of lease termination liabilities related to such stores, and such excess has been recorded as a credit to lease termination costs during the period. For the nine months ended November 1, 2009, the fair value of lease termination liabilities related to closed stores of $2.4 million exceeded the $958,000 of previously recorded deferred rent expense related to such stores, and such excess has been reflected as a charge to lease termination costs during the period.

23

Fair Values of Financial Instruments at the Balance Sheet Dates

The carrying values and approximate fair values of certain financial instruments as of November 1, 2009 and February 1, 2009 were as follows:

	Nov. 1, 2009				Feb. 1, 2009
	Carrying		Fair		Carrying		Fair
	value		value		value		value
	(In thousands)
Assets
Cash and cash equivalents	$	18,543	$	18,543	$	35,538	$	35,538
Trade receivables		18,197		18,197		19,229		19,229
Receivables from Equity Method Franchisees		684		684		1,019		1,019
Liabilities:
Accounts payable		6,063		6,063		8,981		8,981
Interest rate derivative instruments		1,256		1,256		2,348		2,348
Commodity futures contracts		505		505		—		—
Long-term debt (including current maturities)		49,030		47,314		74,867		58,022

Note 12 — Derivative Instruments

     The Company is exposed to certain risks relating to its ongoing business operations and utilizes derivative instruments as part of its management of commodity price risk and interest rate risk. The Company does not hold or issue derivative instruments for trading purposes.

The Company is exposed to credit-related losses in the event of non-performance by the counterparties to its derivative instruments. The Company mitigates this risk of nonperformance by dealing with highly rated counterparties. The Company did not have any significant exposure to any individual counterparty at November 1, 2009.

Commodity Price Risk

The Company is exposed to the effects of commodity price fluctuations in the cost of ingredients of its products, of which flour, shortening and sugar are the most significant. In order to bring greater stability to the cost of ingredients, the Company purchases, from time to time, exchange-traded commodity futures contracts, and options on such contracts, for raw materials which are ingredients of its products or which are components of such ingredients, including wheat and soybean oil. The Company is also exposed to the effects of commodity price fluctuations in the cost of gasoline used by its delivery vehicles. To mitigate the risk of fluctuations in the price of its gasoline purchases, the Company may purchase exchange-traded commodity futures contracts and options on such contracts. The difference between the cost, if any, and the fair value of commodity derivatives is reflected in earnings because the Company has not designated any of these instruments as hedges. Gains and losses on these contracts are intended to offset losses and gains on the hedged transactions in an effort to reduce the earnings volatility resulting from fluctuating commodity prices. The settlement of commodity derivative contracts is reported in the consolidated statement of cash flows as cash flow from operating activities. At November 1, 2009, the Company had commodity derivatives with an aggregate contract volume of 755,000 bushels of wheat. Other than the requirement to meet minimum margin requirements with respect to the commodity derivatives, there are no collateral requirements related to such contracts.

Interest Rate Risk

All of the borrowings under the Company’s Secured Credit Facilities bear interest at variable rates based upon either the Fed funds rate or LIBOR. The interest cost of the Company’s debt is affected by changes in these short-term interest rates and increases in those rates adversely affect the Company’s results of operations. In May 2007, the Company entered into interest rate derivative contracts having an aggregate notional principal amount of $60 million. The derivative contracts entitle the Company to receive from the counterparties the excess, if any, of three-month LIBOR over 5.40%, and require the Company to pay to the counterparties the excess, if any, of 4.48% over three-month LIBOR, in each case multiplied by the notional amount of the contracts. The contracts expire in April 2010. Settlements under these derivative contracts are reported as cash flow from operating activities in the consolidated statement of cash flows.

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These derivatives were accounted for as cash flow hedges from their inception through April 8, 2008. Hedge accounting was discontinued on that date because the derivative contracts could no longer be shown to be effective (as defined in FASB guidance related to accounting for derivative instruments and hedging activities) in hedging interest rate risk as a result of amendments to the Company’s Secured Credit Facilities, which provided that interest on LIBOR-based borrowings is payable based upon the greater of the LIBOR rate for the selected interest period or 3.25%. As a consequence of the discontinuance of hedge accounting, changes in the fair value of the derivative contracts subsequent to April 8, 2008 are reflected in earnings as they occur. Amounts included in accumulated other comprehensive income related to changes in the fair value of the derivative contracts for periods prior to April 9, 2008 are being charged to earnings in the periods in which the hedged forecasted transaction (interest on $60 million of the principal balance of the Term Loan) affects earnings, or earlier upon a determination that some or all of the forecasted transaction will not occur. Such charges totaled approximately $275,000 and $940,000 for the three and nine months ended November 1, 2009, respectively, and $320,000 and $655,000 for the three and nine months ended November 2, 2008, respectively. Accumulated other comprehensive income as of November 1, 2009 includes a remaining unamortized accumulated loss related to these derivatives of $219,000 (net of income taxes of $143,000).

     The counterparties to the interest rate derivatives are also lenders under the Secured Credit Facilities described in Note 5. Obligations under derivative instruments with counterparties that also are lenders under the Secured Credit Facilities are secured by the collateral that secures the Company’s obligations under the Secured Credit Facilities.

Quantitative Summary of Derivative Positions and Their Effect on Results of Operations

The following table presents the fair values of derivative instruments included in the consolidated balance sheet as of November 1, 2009:

Derivatives Not Designated as	Asset Derivatives			Liability Derivatives
Hedging Instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(In thousands)			(In thousands)
Interest rate contracts	Other current assets	$	—	Accrued liabilities	$	1,256
Commodity futures contracts	Other current assets		—	Accrued liabilities		505
Total derivatives not designated as
hedging instruments		$	—		$	1,761

The effect of derivative instruments on the consolidated statement of operations for the three and nine months ended November 1, 2009, was as follows:

Derivatives Not Designated as	Location of Derivative Gain or (Loss)	Amount of Derivative Gain or (Loss)
Hedging Instruments	Recognized in Income	Recognized in Income
		Three months ended			Nine months ended
		Nov. 1, 2009			Nov. 1, 2009
		(In thousands)
Interest rate contracts	Interest expense	$	(118	)	$	(537	)
Commodity futures contracts	Direct operating expenses		(278	)		(676	)
Total		$	(396	)	$	(1,213	)

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     Krispy Kreme is a leading branded retailer and wholesaler of high-quality doughnuts and packaged sweets. The Company’s principal business, which began in 1937, is owning and franchising Krispy Kreme doughnut stores at which over 20 varieties of high-quality doughnuts, including the Company’s Original Glazed^® doughnut, are made, sold and distributed together with complementary products, including a broad array of coffees and other beverages.

As of November 1, 2009, there were 563 Krispy Kreme stores operated systemwide in the United States, Australia, Bahrain, Canada, Indonesia, Japan, Kuwait, Lebanon, Malaysia, Mexico, the Philippines, Puerto Rico, Qatar, Saudi Arabia, South Korea, Turkey, the United Arab Emirates and the United Kingdom. The ownership and location of those stores is as follows:

	Domestic	International	Total
Number of stores at November 1, 2009:
Company	84	—	84
	13	34	47
Franchise	8	1	9
	22	34	56
Total	2	1	3

Of the 563 total stores, 265 were factory stores and 298 were satellite stores.

Factory stores (stores which contain a doughnut-making production line) often support multiple sales channels to more fully utilize production capacity and reach various consumer segments. These sales channels are comprised of on-premises sales (sales to customers visiting factory and satellite stores) and off-premises sales (sales to convenience stores, grocery stores/mass merchants and other food service and institutional accounts). Satellite stores, all of which serve only the on-premises distribution channel and which are supplied with doughnuts from a nearby factory store, consist primarily of the hot shop, fresh shop and kiosk formats. Hot shops contain doughnut heating equipment that allows customers to have a hot doughnut experience throughout the day. Fresh shops and free-standing kiosks do not contain doughnut heating equipment.

The Company generates revenues from four distinct sources: sales to on-premises and off-premises customers through stores operated by the Company, referred to as Company Stores; franchise fees and royalties from domestic franchise stores, referred to as Domestic Franchise; franchise fees and royalties from international franchise stores, referred to as International Franchise; and a vertically integrated supply chain, referred to as KK Supply Chain.

In the first quarter of fiscal 2010, the Company began disaggregating the results of operations of its franchise business into domestic and international components in its internal financial reporting. The Company has made the corresponding changes to its segment reporting, and now reports the revenues and expenses associated with its domestic and international franchise operations as separate segments, consistent with the provisions of FASB guidance on disclosures about segments of an enterprise and related information. The Company’s segment disclosures continue to be consistent with the way in which management views and evaluates the business. Amounts previously reported for the franchise segment for the three and nine months ended November 2, 2008 have been restated to conform to the new disaggregated segment presentation.

Franchisees opened 66 stores and closed 20 stores in the first nine months of fiscal 2010, including 22 and five stores, respectively, in the third quarter of fiscal 2010. In addition, the Company refranchised three stores to a new franchisee during the third quarter of fiscal 2010. Royalty revenues and most of KK Supply Chain revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

The following discussion of the Company’s financial condition and results of operations should be read together with the Company’s consolidated financial statements and notes thereto appearing elsewhere herein.

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RESULTS OF OPERATIONS

     The following table presents the Company’s operating results for the three and nine months ended November 1, 2009 and November 2, 2008, expressed as a percentage of total revenues (percentage amounts may not add to totals due to rounding).

	Three Months Ended				Nine Months Ended
	Nov. 1,		Nov. 2,		Nov. 1,		Nov. 2,
	2009		2008		2009		2008
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses:
Direct operating expenses (exclusive of depreciation and amortization shown below)	89.0		92.4		85.7		90.7
General and administrative expenses	7.3		6.2		6.6		6.0
Depreciation and amortization expense	2.6		2.2		2.4		2.3
Impairment charges and lease termination costs	0.1		0.4		1.5		(0.2	)
Other operating (income) and expense, net	0.2		0.2		0.2		0.2
Operating income (loss)	0.8	%	(1.4	)%	3.6	%	1.1	%

     Data on the number of factory stores (including commissaries) appear in the table below.

	NUMBER OF FACTORY STORES
			DOMESTIC		INTERNATIONAL
	COMPANY		FRANCHISE		FRANCHISE		TOTAL
Three months ended November 1, 2009:
AUGUST 2, 2009	77		100		93		270
Opened	—		—		2		2
Closed	(3	)	—		(2	)	(5	)
Converted to satellite stores	—		(2	)	—		(2	)
Transferred	(3	)	3		—		—
NOVEMBER 1, 2009	71		101		93		265
Nine months ended November 1, 2009:
FEBRUARY 1, 2009	83		104		94		281
Opened	1		—		5		6
Closed	(9	)	(3	)	(6	)	(18	)
Converted to satellite stores	(1	)	(3	)	—		(4	)
Transferred	(3	)	3		—		—
NOVEMBER 1, 2009	71		101		93		265
Three months ended November 2, 2008:
AUGUST 3, 2008	88		111		87		286
Opened	—		—		7		7
Closed	(2	)	(6	)	(3	)	(11	)
Converted from satellite stores	—		2		—		2
Converted to satellite stores	—		—		—		—
Transferred	—		—		—		—
NOVEMBER 2, 2008	86		107		91		284
Nine months ended November 2, 2008:
FEBRUARY 3, 2008	97		118		80		295
Opened	—		1		15		16
Closed	(4	)	(14	)	(4	)	(22	)
Converted from satellite stores	—		2		—		2
Converted to satellite stores	(6	)	(1	)	—		(7	)
Transferred	(1	)	1		—		—
NOVEMBER 2, 2008	86		107		91		284

Data on the number of satellite stores appear in the table below.

27

	NUMBER OF SATELLITE STORES
			DOMESTIC		INTERNATIONAL
	COMPANY		FRANCHISE		FRANCHISE		TOTAL
Three months ended November 1, 2009:
AUGUST 2, 2009	12		33		233		278
Opened	2		2		18		22
Closed	(1	)	—		(3	)	(4	)
Converted from factory stores	—		2		—		2
NOVEMBER 1, 2009	13		37		248		298
Nine months ended November 1, 2009:
FEBRUARY 1, 2009	10		28		204		242
Opened	4		7		54		65
Closed	(2	)	(1	)	(10	)	(13	)
Converted from factory stores	1		3		—		4
NOVEMBER 1, 2009	13		37		248		298
Three months ended November 2, 2008:
AUGUST 3, 2008	12		27		169		208
Opened	—		4		26		30
Closed	(1	)	(1	)	(9	)	(11	)
Converted from factory stores	—		—		—		—
Converted to factory stores	—		(2	)	—		(2	)
Transferred	—		—		—		—
NOVEMBER 2, 2008	11		28		186		225
Nine months ended November 2, 2008:
FEBRUARY 3, 2008	8		27		119		154
Opened	—		4		76		80
Closed	(2	)	(3	)	(9	)	(14	)
Converted from factory stores	6		1		—		7
Converted to factory stores	—		(2	)	—		(2	)
Transferred	(1	)	1		—		—
NOVEMBER 2, 2008	11		28		186		225

     Data on the aggregate number of factory and satellite stores as of November 1, 2009 appear in the table below.

	NUMBER OF STORES
		DOMESTIC	INTERNATIONAL
	COMPANY	FRANCHISE	FRANCHISE	TOTAL
FACTORY STORES	71	101	93	265
SATELLITE STORES:
Hot shops	11	14	26	51
Fresh shops	2	23	158	183
Kiosks	—	—	64	64
Total satellite stores	13	37	248	298

     Systemwide sales, a non-GAAP financial measure, include sales by both Company and franchise stores. The Company believes systemwide sales data are useful in assessing the overall performance of the Krispy Kreme brand and, ultimately, the performance of the Company. The Company’s consolidated financial statements appearing elsewhere herein include sales by Company stores, sales to franchisees by the KK Supply Chain business segment and royalties and fees received from franchisees, but exclude sales by franchise stores to their customers.

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     The table below presents average weekly sales per store (which represents, on a Company and systemwide basis, total sales of all stores divided by the number of operating weeks for both factory and satellite stores). In addition, the table presents fiscal 2010 systemwide average weekly sales per store on a pro forma basis assuming the average rate of exchange between the U.S. dollar and each of the foreign currencies in which the Company’s international franchisees conducts business had been the same in the three and nine months ended November 1, 2009 as in the three and nine months ended November 2, 2008. Store operating weeks represent, on a Company and systemwide basis, the aggregate number of weeks in the period that both factory and satellite stores were in operation.

	Three Months Ended				Nine Months Ended
	Nov. 1,		Nov. 2,		Nov. 1,		Nov. 2,
	2009		2008		2009		2008
	(Dollars in thousands)
Average weekly sales per store (1):
Company	$	52.0	$	49.9	$	52.1	$	51.0
Systemwide	$	25.3	$	29.5	$	26.4	$	32.6
Systemwide, exclusive of the effects of changes in foreign currency exchange rates	$	25.3		NA	$	27.3		NA
Store operating weeks:
Company		1,148		1,287		3,553		3,939
Systemwide		7,026		6,319		20,434		17,993

____________________
 

(1) Excludes sales between Company and franchise stores.

THREE MONTHS ENDED NOVEMBER 1, 2009 COMPARED TO THREE MONTHS ENDED NOVEMBER 2, 2008

   Overview

     Systemwide sales for the third quarter of fiscal 2010 decreased approximately 4.7% compared to the third quarter of fiscal 2009. The systemwide sales decrease reflects a 3.2% decrease in franchisee store sales and a 7.2% decrease in Company store sales. Foreign currency exchange rates had no material effect on the change in aggregate systemwide sales or on the change in aggregate franchisee sales in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009. Systemwide average weekly sales per store are lower than Company average weekly sales per store principally because satellite stores, which generally have lower average weekly sales than factory stores, have to date been operated almost exclusively by franchisees. In addition, the increasing percentage of total stores that are satellite stores has the effect of reducing the overall systemwide average weekly sales per store.

Revenues

     Total revenues decreased 11.4% to $83.6 million for the three months ended November 1, 2009 from $94.3 million for the three months ended November 2, 2008. The decrease was comprised of a 7.2% decrease in Company Stores revenues to $60.0 million, a 3.3% increase in Domestic Franchise revenues to $1.9 million, a 20.6% decrease in International Franchise revenues to $3.6 million, and a 22.3% decrease in KK Supply Chain revenues to $18.1 million.

29

     Revenues by business segment (expressed in dollars and as a percentage of total revenues) are set forth in the table below (percentage amounts may not add to totals due to rounding).

	Three Months Ended
	Nov. 1,			Nov. 2,
	2009			2008
	(Dollars in thousands)
REVENUES BY BUSINESS SEGMENT:
Company Stores	$	60,020		$	64,708
Domestic Franchise		1,945			1,882
International Franchise		3,583			4,511
KK Supply Chain:
Total revenues		39,314			46,747
Less - intersegment sales eliminations		(21,262	)		(23,510	)
External KK Supply Chain revenues		18,052			23,237
Total revenues	$	83,600		$	94,338
PERCENTAGE OF TOTAL REVENUES:
Company Stores		71.8	%		68.6	%
Domestic Franchise		2.3			2.0
International Franchise		4.3			4.8
KK Supply Chain		21.6			24.6
Total revenues		100.0	%		100.0	%

     Company Stores Revenues. Company Stores revenues decreased 7.2% to $60.0 million in the third quarter of fiscal 2010 from $64.7 million in the third quarter of fiscal 2009. The decrease reflects a 10.8% decline in store operating weeks, partially offset by a 4.2% increase in average weekly sales per store. The decrease in store operating weeks reflects the refranchising or closure of 21 Company stores since the beginning of the third quarter of fiscal 2009. The Company continuously reviews the performance of its stores and may decide to refranchise or close additional locations.

     On-premises sales (which include fundraising sales) comprised approximately 47% and 45% of total Company Stores revenues in the third quarter of fiscal 2010 and 2009, respectively, with the balance comprised of off-premises sales.

     The following table sets forth statistical data with respect to on- and off-premises sales by Company stores. The change in “same store sales” is computed by dividing the aggregate on-premises sales (including fundraising sales) during the current year period for all stores which had been open for more than 56 consecutive weeks during the current year period (but only to the extent such sales occurred in the 57^th or later week of each store’s operation) by the aggregate on-premises sales of such stores for the comparable weeks in the preceding year period. Once a store has been open for at least 57 consecutive weeks, its sales are included in the computation of same stores sales for all subsequent periods. In the event a store is closed temporarily (for example, for remodeling) and has no sales during one or more weeks, such store’s sales for the comparable weeks during the earlier or subsequent period are excluded from the same store sales computation. For off-premises sales, “average weekly number of doors” represents the average number of customer locations to which product deliveries are made during a week, and “average weekly sales per door” represents the average weekly sales to each such location.

	Three Months Ended
	Nov. 1,		Nov. 2,
	2009		2008
ON-PREMISES:
Change in same store sales	5.1	%	(1.3	)%
OFF-PREMISES:
Change in average weekly number of doors	(11.4	)%	(5.9	)%
Change in average weekly sales per door	6.6	%	(9.1	)%

     On-premises same stores sales increased in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009, generally reflecting an increase in customer traffic. The Company is implementing programs designed to improve on-premises sales, including increased focus on local store marketing efforts, improved employee training, store refurbishment efforts and the testing of new products. In the off-premises distribution channel, the decrease in the average weekly number of doors reflects a decrease in both the grocery/mass merchant channel and in the convenience store channel. The increase in average weekly sales per door reflects an increase in the grocery/mass merchant channel partially offset by a decrease in the convenience store channel. The Company is implementing strategies to increase average per door sales and reduce costs in the off-premises channel. These strategies include improved route management and route consolidation (including elimination of or reduction in the number of stops at relatively low volume doors), new sales incentives and performance-based pay programs, and increased emphasis on relatively longer shelf-life products.

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     Domestic Franchise Revenues. Domestic Franchise revenues consist principally of royalties payable to the Company by domestic franchisees based upon the franchisees’ sales. The components of Domestic Franchise revenues are as follows:

	Three Months Ended
	Nov. 1,		Nov. 2,
	2009		2008
	(In thousands)
Royalties	$	1,891	$	1,828
Other		54		54
Total Domestic Franchise revenues	$	1,945	$	1,882

     Domestic royalty revenues increased slightly to $1.9 million in the third quarter of fiscal 2010 from $1.8 million in the third quarter of fiscal 2009. Sales by domestic franchise stores, as reported by the franchisees, were approximately $53 million in the third quarter of fiscal 2010 and $56 million in the third quarter of fiscal 2009.

     Domestic franchisees opened two stores in the third quarter of fiscal 2010. In addition, the Company refranchised three stores to a new franchisee during the third quarter of fiscal 2010. Royalty revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

     International Franchise Revenues. International Franchise revenues consist principally of royalties payable to the Company by international franchisees based upon the franchisees’ sales and initial franchise fees earned by the Company in connection with new store openings by international franchisees. The components of International Franchise revenues are as follows:

	Three Months Ended
	Nov. 1,		Nov. 2,
	2009		2008
	(In thousands)
Royalties	$	3,165	$	3,698
Development and franchise fees		418		813
Total International Franchise revenues	$	3,583	$	4,511

     International royalty revenues fell to $3.2 million in the third quarter of fiscal 2010 from $3.7 million in the third quarter of fiscal 2009. Sales by international franchise stores, as reported by the franchisees, were approximately $65 million in the third quarter of fiscal 2010 and $66 million in the third quarter of fiscal 2009. Changes in the rates of exchange between the U.S. dollar and the foreign currencies in which the Company’s international franchisees do business had no material effect on the aggregate sales by international franchisees or aggregate international royalty revenues measured in U.S. dollars in the third quarter of fiscal 2010 compared to the third quarter of last year. The Company did not recognize as revenue approximately $559,000 and $96,000 of uncollected international royalties which accrued during the third quarter of fiscal 2010 and 2009, respectively, because the Company did not believe collection of these royalties was reasonably assured.

     International development and franchise fees decreased $395,000 in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009 due to fewer store openings by international franchisees in the third quarter of fiscal 2010 compared to the third quarter of last year.

     International franchisees opened 20 stores and closed five stores in the third quarter of fiscal 2010. Royalty revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

31

     KK Supply Chain Revenues. KK Supply Chain revenues before intersegment sales eliminations decreased 15.9% to $39.3 million in the third quarter of fiscal 2010 from $46.7 million in the third quarter of fiscal 2009. The decline in KK Supply Chain revenues reflects selling price reductions for doughnut mixes and certain other ingredients instituted by KK Supply Chain in fiscal 2010 in order to pass along to Company and franchise stores reductions in KK Supply Chain’s cost of flour and shortening. The decrease in KK Supply Chain revenues also reflects lower unit sales of mixes, ingredients and supplies by KK Supply Chain resulting from lower sales by Company and domestic franchise stores. In addition, an increasing percentage of franchisee sales is attributable to sales by franchisees outside North America. Many of the ingredients and supplies used by international franchisees are acquired locally instead of from KK Supply Chain.

     Franchisees opened 22 stores and closed five stores in the third quarter of fiscal 2010. In addition, the Company refranchised three stores to a new franchisee during the third quarter of fiscal 2010. A significant majority of KK Supply Chain’s revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

   Direct Operating Expenses

     Direct operating expenses, which exclude depreciation and amortization expense, were 89.0% of revenues in the third quarter of fiscal 2010 compared to 92.4% of revenues in the third quarter of fiscal 2009. Direct operating expenses by business segment (expressed in dollars and as a percentage of applicable segment revenues) are set forth in the table below. Such operating expenses are consistent with the segment operating income data set forth in Note 8 to the consolidated financial statements appearing elsewhere herein.

	Three Months Ended
	Nov. 1,			Nov. 2,
	2009			2008
	(Dollars in thousands)
DIRECT OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Stores	$	59,538		$	67,429
Domestic Franchise		1,120			704
International Franchise		1,466			1,480
KK Supply Chain:
Total direct operating expenses		33,409			41,139
Less - intersegment eliminations		(21,164	)		(23,609	)
KK Supply Chain direct operating expenses, less intersegment eliminations		12,245			17,530
Total direct operating expenses	$	74,369		$	87,143
DIRECT OPERATING EXPENSES AS A PERCENTAGE OF SEGMENT REVENUES:
Company Stores		99.2	%		104.2	%
Domestic Franchise		57.6	%		37.4	%
International Franchise		40.9	%		32.8	%
KK Supply Chain (before intersegment eliminations)		85.0	%		88.0	%
Total direct operating expenses		89.0	%		92.4	%

     Company Stores Direct Operating Expenses. Company Stores direct operating expenses as a percentage of Company Stores revenues decreased to 99.2% in the third quarter of fiscal 2010 from 104.2% in the third quarter of fiscal 2009. The decrease reflects, among other things, lower costs of doughnut mix and certain other ingredients resulting from price decreases instituted by KK Supply Chain in fiscal 2010 to reflect lower raw materials costs. While the cost of doughnut mix and other ingredients has been relatively stable in fiscal 2010, the Company’s cost of sugar will rise approximately 20% in the fourth quarter as a result of price increases resulting from the expiration of a favorable KK Supply Chain sugar supply contract. The Company estimates that the increase in the cost of sugar will increase Company stores’ cost of ingredients by approximately $2 million annually. Decreased delivery costs resulting from lower gasoline prices and improved route management and route consolidation favorably affected costs in the third quarter of fiscal 2010 compared to the third quarter of last year.

     Company Stores direct operating expenses for the third quarter of fiscal 2010 include a charge of $750,000 for the settlement of the environmental litigation described in Note 6 to the consolidated financial statements appearing elsewhere herein.

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     The Company is implementing programs intended to improve store operations and reduce costs as a percentage of revenues, including improved employee training and the introduction of improved food and labor cost management tools. In addition, the Company is implementing programs designed to improve the profitability of sales into the off-premises distribution channel, where declines in the average weekly sales per door adversely affect profitability because of the increased significance of delivery costs in relation to sales. Those strategies include improved route management and route consolidation (including elimination of or reduction in the number of stops at relatively low volume doors), performance-based pay programs, and increased emphasis on relatively longer shelf-life products.

     Domestic Franchise Direct Operating Expenses. Domestic Franchise direct operating expenses include costs to recruit new domestic franchisees, to assist in domestic store openings, and to monitor and aid in the performance of domestic franchise stores, as well as direct general and administrative expenses and allocated corporate costs. Domestic Franchise direct operating expenses rose in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009, primarily due to increased resources devoted to the development and support of domestic franchisees.

     International Franchise Direct Operating Expenses. International Franchise direct operating expenses include costs to recruit new international franchisees, to assist in international store openings, and to monitor and aid in the performance of international franchise stores, as well as direct general and administrative expenses and allocated corporate costs. International Franchise direct operating expenses were flat in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009. International Franchise direct operating expenses include approximately $230,000 and $240,000 of bad debt expense in the three months ended November 1, 2009 and November 2, 2008, respectively, related to franchisee credit exposure.

     KK Supply Chain Direct Operating Expenses. KK Supply Chain direct operating expenses as a percentage of KK Supply Chain revenues before intersegment eliminations decreased to 85.0% in the third quarter of fiscal 2010 from 88.0% in the third quarter of fiscal 2009. While the selling prices of doughnut mixes and shortening in the third quarter of fiscal 2010 were significantly lower than in the third quarter of fiscal 2009 as a result of lower raw materials costs, overall gross margins widened because the Company attempts to maintain the gross profit on sales of doughnut mixes relatively constant on a per unit basis. Among other things, cost reduction efforts also contributed to the reduction in direct operating expenses as a percentage of KK Supply Chain revenues.

   General and Administrative Expenses

     General and administrative expenses increased to $6.1 million, or 7.3% of total revenues, in the third quarter of fiscal 2010 from $5.8 million, or 6.2% of total revenues, in the third quarter of fiscal 2009. The increase in general and administrative expenses includes a provision of approximately $420,000 for incentive compensation in the third quarter of fiscal 2010 to reflect management’s current estimate of fiscal 2010 results (with an additional charge of approximately $340,000 included in direct operating expenses); there were no incentive compensation provisions for the third quarter of fiscal 2009. General and administrative expenses also increased in the third quarter of fiscal 2010 as a result of legal costs totaling approximately $870,000 associated with the environmental litigation discussed in Note 6 to the consolidated financial statements appearing elsewhere herein.

     General and administrative expenses include professional fees and other costs associated with certain securities litigation and related investigations, including costs arising from the Company’s obligation to indemnify certain former officers of the Company for costs incurred by them in connection with those matters. Those costs and expenses were approximately $400,000 and $150,000 in the third quarter of fiscal 2010 and fiscal 2009, respectively. Except for one remaining matter with respect to which the Company is the plaintiff and the final determination of plaintiffs’ legal counsel fees with respect to settled shareholder derivative claims, these matters have been resolved, and the Company does not anticipate that future costs associated with these matters will be significant.

Impairment Charges and Lease Termination Costs

     Impairment charges and lease termination costs were $109,000 in the third quarter of fiscal 2010 compared to $345,000 in the third quarter of fiscal 2009.

     Impairment charges related to long-lived assets was $178,000 in the third quarter of fiscal 2010. The Company tests long-lived assets for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. These events and changes in circumstances include store closing decisions, the effects of changing costs on current results of operations, observed trends in operating results, and evidence of changed circumstances observed as a part of periodic reforecasts of future operating results and as part of the Company’s annual budgeting process. When the Company concludes that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), the Company records impairment charges to reduce the carrying value of those assets to their estimated fair values. In addition to the foregoing, impairment charges for the third quarter of fiscal 2010 reflect a one-time recovery of $482,000 from the bankruptcy estate of Freedom Rings, LLC, a former subsidiary which filed for bankruptcy in the third quarter of fiscal 2006, as more fully described in Note 7 to the consolidated financial statements appearing elsewhere herein.

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     In the third quarter of fiscal 2010, the Company recorded lease termination costs of $413,000 compared to $306,000 in the third quarter of fiscal 2009. Lease termination costs represent the estimated fair value of liabilities related to unexpired leases, after reduction by the amount of deferred rent expense, if any, related to the leases, and are recorded when the lease contracts are terminated or, if earlier, the date on which the Company ceases use of the leased property. The fair value of these liabilities were estimated as the excess, if any, of the contractual payments required under the unexpired leases over the current market lease rates for the properties, discounted at a credit-adjusted risk-free rate over the remaining term of the leases.

     The Company intends to refranchise certain geographic markets, expected to consist principally of, but not necessarily limited to, markets outside the Company’s traditional base in the Southeastern United States. The franchise rights and other assets in many of these markets were acquired by the Company in business combinations in prior years.

     In fiscal 2009, the Company refranchised one idled store acquired by the Company from a failed franchisee, refranchised two domestic operating stores to a new franchisee, and refranchised the four Company stores in Canada to a new franchisee. The Company received no proceeds in connection with any of these transactions. With the exception of a non-cash gain recorded in the fourth quarter of fiscal 2009 related to foreign currency translation arising from the Canadian disposal, no significant gain or loss was recognized as a result of these refranchisings. In the third quarter of fiscal 2010, the Company refranchised three operating Company stores to a new franchisee, as more fully described under Basis of Consolidation in Note 1 to the consolidated financial statements appearing elsewhere herein.

      The Company cannot predict the likelihood of refranchising any additional stores or markets or the amount of proceeds, if any, which might be received therefrom, including the amounts which might be realized from the sale of store assets and the execution of any related franchise agreements. Refranchising could result in the recognition of impairment losses on the related assets.

   Interest Expense

     Interest expense was $2.3 million in the third quarter of fiscal 2010 and $3.0 million in the third quarter of fiscal 2009. Interest expense accruing on outstanding indebtedness was $1.7 million in the third quarter of fiscal 2010 compared to $1.9 million in the third quarter of fiscal 2009. The decrease is primarily due to the reduction in the past year in the outstanding principal balance of the Term Loan described in Note 5 to the consolidated financial statements appearing elsewhere herein. The reduction in interest expense resulting from the reduced principal balance of the term loan was partially offset by the effects of higher lender margin and fees resulting from amendments to the Company’s Secured Credit Facilities in April 2009. The April 2009 amendments to the Company’s credit facilities increased the interest rate on the Company’s outstanding borrowings and letters of credit by 200 basis points annually.

     Interest expense for the third quarter of fiscal 2010 and fiscal 2009 reflects charges of approximately $118,000 and $582,000, respectively, resulting from marking to market the Company’s liabilities related to interest rate derivatives. As more fully described in Note 12 to the consolidated financial statements appearing elsewhere herein, effective April 9, 2008, the Company discontinued hedge accounting for these derivatives as a result of amendments to its credit facilities. As a consequence of the discontinuance of hedge accounting, changes in the fair value of the derivative contracts subsequent to April 8, 2008 are reflected in earnings as they occur. Amounts included in accumulated other comprehensive income related to changes in the fair value of the derivative contracts for periods prior to April 9, 2008 are being charged to earnings in the period in which the forecasted transaction (interest expense on long-term debt) affect earnings, or earlier upon determination that some or all of the forecasted transaction will not occur. Such charges totaled approximately $275,000 and $320,000 for the three months ended November 1, 2009 and November 2, 2008, respectively.

Equity in Losses of Equity Method Franchisees

     Equity in losses of equity method franchisees totaled $393,000 in the third quarter of fiscal 2010 compared to $335,000 in the third quarter of fiscal 2009. This caption represents the Company’s share of operating results of unconsolidated franchisees which develop and operate Krispy Kreme stores.

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Other Non-Operating Income and Expense, Net

     Other non-operating income and expense in the third quarter of fiscal 2009 includes a charge of approximately $900,000 to establish a reserve for collectability risk on a note receivable from an Equity Method Franchisee as described in Note 9 to the consolidated financial statements appearing elsewhere herein.

Provision for Income Taxes

     The provision for income taxes was $487,000 in the third quarter of fiscal 2010 compared to $404,000 in the third quarter of fiscal 2009. Each of these amounts includes adjustments to the valuation allowance for deferred income tax assets to maintain such allowance at an amount sufficient to reduce the Company’s aggregate net deferred income tax assets to zero, as well as a provision for income taxes estimated to be payable currently.

Net Loss

     The Company reported a net loss of $2.4 million for the three months ended November 1, 2009 compared to a net loss of $5.9 million for the three months ended November 2, 2008.

NINE MONTHS ENDED NOVEMBER 1, 2009 COMPARED TO NINE MONTHS ENDED NOVEMBER 2, 2008

Overview

     Systemwide sales for the first nine months of fiscal 2010 decreased approximately 8.2% compared to the first nine months of fiscal 2009. Exclusive of the effects of changes in foreign currency exchange rates, systemwide sales decreased approximately 5.0%. The systemwide sales decrease reflects an 8.3% decrease in franchisee store sales and an 8.0% decrease in Company stores sales. Adjusted to exclude the effects of changes in foreign currency exchange rates, franchisee sales decreased approximately 3.4%.

Revenues

     Total revenues decreased 11.1% to $259.8 million for the nine months ended November 1, 2009 from $292.2 million for the nine months ended November 2, 2008. The decrease was comprised of an 8.0% decrease in Company Stores revenues to $185.7 million, a 6.1% decrease in Domestic Franchise revenues to $5.8 million, a 15.6% decrease in International Franchise revenues to $11.3 million, and a 19.5% decrease in KK Supply Chain revenues to $57.0 million.

     Revenues by business segment (expressed in dollars and as a percentage of total revenues) are set forth in the table below (percentage amounts may not add to totals due to rounding).

	Nine Months Ended
	Nov. 1,			Nov. 2,
	2009			2008
	(Dollars in thousands)
REVENUES BY BUSINESS SEGMENT:
Company Stores	$	185,730		$	201,961
Domestic Franchise		5,798			6,177
International Franchise		11,267			13,355
KK Supply Chain:
Total revenues		121,926			143,724
Less - intersegment sales eliminations		(64,971	)		(73,001	)
External KK Supply Chain revenues		56,955			70,723
Total revenues	$	259,750		$	292,216
PERCENTAGE OF TOTAL REVENUES:
Company Stores		71.5	%		69.1	%
Domestic Franchise		2.2			2.1
International Franchise		4.3			4.6
KK Supply Chain		21.9			24.2
Total revenues		100.0	%		100.0	%

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     Company Stores Revenues. Company Stores revenues decreased 8.0% to $185.7 million in the first nine months of fiscal 2010 from $202.0 million in the first nine months of fiscal 2009. The decrease reflects a 9.8% decline in store operating weeks, partially offset by a 2.2% increase in average weekly sales per store. The decrease in store operating weeks reflects the refranchising or closure of 26 Company stores since the end of fiscal 2008. The Company continuously reviews the performance of its stores and may decide to refranchise or close additional locations.

     On-premises sales (which include fundraising sales) comprised approximately 47% and 45% of total Company Stores revenues in the first nine months of fiscal 2010 and 2009, respectively, with the balance comprised of off-premises sales.

     The following table sets forth statistical data with respect to on- and off-premises sales by Company stores. The basis of presentation of these data is described under “Results of Operations — Three Months Ended November 1, 2009 Compared to Three Months Ended November 2, 2008 — Revenues — Company Stores Revenues” above.

	Nine Months Ended
	Nov. 1,		Nov. 2,
	2009		2008
ON-PREMISES:
Change in same store sales	4.2	%	(1.3	)%
OFF-PREMISES:
Change in average weekly number of doors	(11.0	)%	(7.0	)%
Change in average weekly sales per door	2.7	%	(8.5	)%

     On-premises same stores sales increased in the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009, generally reflecting an increase in customer traffic partially offset by a lower average guest check. The Company is implementing programs designed to improve on-premises sales, including increased focus on local store marketing efforts, improved employee training, store refurbishment efforts and the testing of new products. In the off-premises distribution channel, the decrease in the average weekly number of doors reflects a decrease in both the grocery/mass merchant channel and in the convenience store channel. The increase in average weekly sales per door reflects an increase in the grocery/mass merchant channel partially offset by a decrease in the convenience store channel. The Company is implementing strategies to increase average per door sales and reduce costs in the off-premises channel. These strategies include improved route management and route consolidation (including elimination of or reduction in the number of stops at relatively low volume doors), new sales incentives and performance-based pay programs, and increased emphasis on relatively longer shelf-life products.

     Domestic Franchise Revenues. Domestic Franchise revenues consist principally of royalties payable to the Company by domestic franchisees based upon the franchisees’ sales. The components of Domestic Franchise revenues are as follows:

	Nine Months Ended
	Nov. 1,		Nov. 2,
	2009		2008
	(In thousands)
Royalties	$	5,636	$	5,999
Development and franchise fees		—		3
Other		162		175
Total Domestic Franchise revenues	$	5,798	$	6,177

     Domestic royalty revenues decreased to $5.6 million in the first nine months of fiscal 2010 from $6.0 million in the first nine months of fiscal 2009. Sales by domestic franchise stores, as reported by the franchisees, were approximately $165 million in the first nine months of fiscal 2010 and $181 million in the first nine months of fiscal 2009.

     Domestic franchisees opened seven stores and closed four stores in the first nine months of fiscal 2010. In addition, the Company refranchised three stores to a new franchisee during the first nine months of fiscal 2010. Royalty revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

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     International Franchise Revenues. International Franchise revenues consist principally of royalties payable to the Company by international franchisees based upon the franchisees’ sales and initial franchise fees earned by the Company in connection with new store openings by international franchisees. The components of International Franchise revenues are as follows:

	Nine Months Ended
	Nov. 1,		Nov. 2,
	2009		2008
	(In thousands)
Royalties	$	10,119	$	11,264
Development and franchise fees		1,148		1,998
Other		—		93
Total International Franchise revenues	$	11,267	$	13,355

     International royalty revenues fell to $10.1 million in the first nine months of fiscal 2010 from $11.3 million in the first nine months of fiscal 2009. Sales by international franchise stores, as reported by the franchisees, were approximately $189 million in the first nine months of fiscal 2010 and $205 million in the first nine months of fiscal 2009. Changes in the rates of exchange between the U.S. dollar and the foreign currencies in which the Company’s international franchisees do business reduced sales by international franchisees measured in U.S. dollars by approximately $19 million in the first nine months of fiscal 2010 compared to the first nine months of last year, which adversely affected international royalty revenues by approximately $1.1 million. Additionally, the Company did not recognize as revenue approximately $722,000 and $646,000 of international uncollected royalties which accrued during the first nine months of fiscal 2010 and 2009, respectively, because the Company did not believe collection of these royalties was reasonably assured.

     International development and franchise fees decreased $850,000 in the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009 due to fewer store openings by international franchisees in the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009.

     International franchisees opened 59 stores and closed 16 stores in the first nine months of fiscal 2010. Royalty revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

     KK Supply Chain Revenues. KK Supply Chain revenues before intersegment sales eliminations decreased 15.2% to $121.9 million in the first nine months of fiscal 2010 from $143.7 million in the first nine months of fiscal 2009. The most significant reason for the decrease in revenues was lower unit sales of mixes, ingredients and supplies by KK Supply Chain resulting from lower sales by Company and domestic franchise stores. The decline in KK Supply Chain revenues also reflects selling price reductions for doughnut mixes and certain other ingredients instituted by KK Supply Chain in the first nine months of fiscal 2010 in order to pass along to Company and franchise stores reductions in KK Supply Chain’s cost of flour and shortening. In addition, an increasing percentage of franchisee sales is attributable to sales by franchisees outside North America. Many of the ingredients and supplies used by international franchisees are acquired locally instead of from KK Supply Chain.

     Franchisees opened 66 stores and closed 20 stores in the first nine months of fiscal 2010. In addition, the Company refranchised three stores to a new franchisee during the first nine months of fiscal 2010. A significant majority of KK Supply Chain’s revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

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   Direct Operating Expenses

     Direct operating expenses, which exclude depreciation and amortization expense, were 85.7% of revenues in the first nine months of fiscal 2010 compared to 90.7% of revenues in the first nine months of fiscal 2009. Direct operating expenses by business segment (expressed in dollars and as a percentage of applicable segment revenues) are set forth in the table below. Such operating expenses are consistent with the segment operating income data set forth in Note 8 to the consolidated financial statements appearing elsewhere herein.

	Nine Months Ended
	Nov. 1,			Nov. 2,
	2009			2008
	(Dollars in thousands)
DIRECT OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Stores	$	177,686		$	205,540
Domestic Franchise		3,316			2,313
International Franchise		4,772			4,627
KK Supply Chain:
Total direct operating expenses		101,629			125,809
Less - intersegment eliminations		(64,808	)		(73,363	)
KK Supply Chain direct operating expenses, less intersegment eliminations		36,821			52,446
Total direct operating expenses	$	222,595		$	264,926
DIRECT OPERATING EXPENSES AS A PERCENTAGE OF SEGMENT REVENUES:
Company Stores		95.7	%		101.8	%
Domestic Franchise		57.2	%		37.4	%
International Franchise		42.4	%		34.6	%
KK Supply Chain (before intersegment eliminations)		83.4	%		87.5	%
Total direct operating expenses		85.7	%		90.7	%

     Company Stores Direct Operating Expenses. Company Stores direct operating expenses as a percentage of Company Stores revenues decreased to 95.7% in the first nine months of fiscal 2010 from 101.8% in the first nine months of fiscal 2009. The decrease reflects, among other things, lower costs of doughnut mix and certain other ingredients resulting from price decreases instituted by KK Supply Chain in fiscal 2010 to reflect lower raw materials costs. While the cost of doughnut mix and other ingredients has been relatively stable in fiscal 2010, the Company’s cost of sugar will rise approximately 20% in the fourth quarter as a result of price increases resulting from the expiration of a favorable KK Supply Chain sugar supply contract. The Company estimates that the increase in the cost of sugar will increase Company stores’ cost of ingredients by approximately $2 million annually. Decreased delivery costs resulting from lower gasoline prices favorably affected costs in the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009.

     Additionally during the first nine months of fiscal 2010, Company Stores direct operating expenses include a charge of $750,000 for the settlement of environmental litigation as described in Note 6 to the consolidated financial statements appearing elsewhere herein.

     The Company is implementing programs intended to improve store operations and reduce costs as a percentage of revenues, including improved employee training and the introduction of improved food and labor cost management tools. In addition, the Company is implementing programs designed to improve the profitability of sales into the off-premises distribution channel, where declines in the average weekly sales per door adversely affect profitability because of the increased significance of delivery costs in relation to sales. Those strategies include improved route management and route consolidation (including elimination of or reduction in the number of stops at relatively low volume doors), performance-based pay programs, and increased emphasis on relatively longer shelf-life products.

     Domestic Franchise Direct Operating Expenses. Domestic Franchise direct operating expenses include costs to recruit new domestic franchisees, to assist in domestic store openings, and to monitor and aid in the performance of domestic franchise stores, as well as direct general and administrative expenses and allocated corporate costs. Domestic Franchise direct operating expenses rose in the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009 primarily due to increased resources devoted to the development and support of domestic franchisees, a bad debt provision of approximately $165,000 related principally to a single domestic franchisee and to higher incentive compensation provisions.

     International Franchise Direct Operating Expenses. International Franchise direct operating expenses include costs to recruit new international franchisees, to assist in international store openings, and to monitor and aid in the performance of international franchise stores, as well as direct general and administrative expenses and allocated corporate costs. International Franchise direct operating expenses increased slightly in the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009. The increase is primarily due to an increase in resources devoted to the development and support of franchisees outside the United States and to higher incentive compensation provisions. This increase was partially offset by a decrease in the bad debt provision to $630,000 in the first nine months of fiscal 2010 from $1.3 million in the first nine months of fiscal 2009.

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     KK Supply Chain Direct Operating Expenses. KK Supply Chain direct operating expenses as a percentage of KK Supply Chain revenues before intersegment eliminations decreased to 83.4% in the first nine months of fiscal 2010 from 87.5% in the first nine months of fiscal 2009. A significant component of the decrease was a charge of approximately $1.7 million (approximately 1.2% of KK Supply Chain revenues before intersegment eliminations) in the first nine months of fiscal 2009 related to payments made by the Company to its former third-party freight consolidator which were improperly not remitted to the freight carriers by the freight consolidator. The actions of the third-party freight consolidator, which filed for bankruptcy protection, resulted in a loss to the Company which the Company has not recovered.

     While the selling prices of doughnut mixes and shortening in the first nine months of fiscal 2010 were significantly lower than in the first nine months of fiscal 2009 as a result of lower raw materials costs, overall gross margins widened because the Company attempts to maintain the gross profit on sales of doughnut mixes relatively constant on a per unit basis. Among other things, cost reduction efforts also contributed to the reduction in direct operating expenses as a percentage of KK Supply Chain revenues.

     In addition, KK Supply Chain direct operating expenses include a net credit of approximately $860,000 to the bad debt provision in the first nine months of fiscal 2010 compared to a net credit of approximately $730,000 in the first nine months of fiscal 2009. The net credits principally reflect sustained improved payment performance and/or reduced credit exposure with respect to a small number of franchisees and, in the first nine months of fiscal 2009, a recovery of receivables previously written off. Net credits to the bad debt provision do not occur on a regular basis.

   General and Administrative Expenses

     General and administrative expenses were $17.3 million, or 6.6% of total revenues, in the first nine months of fiscal 2010 compared to $17.4 million, or 6.0% of total revenues, in the first nine months of fiscal 2009. General and administrative expenses in the first nine months of fiscal 2010 include approximately $1.9 million of incentive compensation provisions to reflect management’s current estimate of fiscal 2010 results (with an additional charge of approximately $1.6 million included in direct operating expenses); there were no incentive compensation provisions for the first nine months of fiscal 2009.

     General and administrative expenses include professional fees and other costs associated with certain securities litigation and related investigations, including costs arising from the Company’s obligation to indemnify certain former officers of the Company for costs incurred by them in connection with those matters. Those costs and expenses were a net credit of approximately $600,000 in the first nine months of fiscal 2010 and a charge of approximately $1.1 million in the first nine months of fiscal 2009. The net credit in the first nine months of fiscal 2010 reflects a one-time insurance reimbursement of approximately $1.2 million of costs incurred in prior periods in connection with such litigation and investigations. Except for one remaining matter with respect to which the Company is the plaintiff and the final determination of plaintiffs’ legal counsel fees with respect to settled shareholder derivative claims, these matters have been resolved, and the Company does not anticipate that future costs associated with these matters will be significant.

   Depreciation and Amortization Expense

     Depreciation and amortization expense decreased to $6.1 million in the first nine months of fiscal 2010 from $6.6 million in the first nine months of fiscal 2009. The decline in depreciation and amortization expense is attributable principally to the reduction in the number of Company factory stores operating in the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009.

Impairment Charges and Lease Termination Costs

     Impairment charges and lease termination costs were $3.9 million in the first nine months of fiscal 2010 compared to a net credit of $648,000 in the first nine months of fiscal 2009.

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     Impairment charges related to long-lived assets were $1.4 million in the first nine months of fiscal 2010. The Company tests long-lived assets for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. These events and changes in circumstances include store closing decisions, the effects of changing costs on current results of operations, observed trends in operating results, and evidence of changed circumstances observed as a part of periodic reforecasts of future operating results and as part of the Company’s annual budgeting process. When the Company concludes that the carrying value of long-lived assets is not recoverable (based on future projected undiscounted cash flows), the Company records impairment charges to reduce the carrying value of those assets to their estimated fair values. During the nine months ended November 1, 2009, the Company recorded impairment charges related to long-lived assets to reduce the carrying value of those assets to their estimated fair values. Substantially all of such long-lived assets were real properties, the fair values of which were estimated based on independent appraisals or, in the case of properties which the Company is negotiating to sell, based on the Company’s negotiations with unrelated third-party buyers. In addition to the foregoing, impairment charges for the first nine months of fiscal 2010 reflect a one-time recovery of $482,000 from the bankruptcy estate of Freedom Rings, LLC, a former subsidiary of the Company which filed for bankruptcy in the third quarter of fiscal 2006, as more fully described in Note 7 to the consolidated financial statements appearing elsewhere herein.

     Lease termination costs represent the estimated fair value of liabilities related to unexpired leases, after reduction by the amount of deferred rent expense, if any, related to the leases, and are recorded when the lease contracts are terminated or, if earlier, the date on which the Company ceases use of the leased property. The fair value of these liabilities were estimated as the excess, if any, of the contractual payments required under the unexpired leases over the current market lease rates for the properties, discounted at a credit-adjusted risk-free rate over the remaining term of the leases.

     In the first nine months of fiscal 2010, the Company recorded lease termination charges related to closed stores of approximately $3.0 million, compared to a net credit related to lease terminations of $539,000 in the first nine months of fiscal 2009. The charges in fiscal 2010 relate principally to terminations of two leases having rental rates substantially above current market levels. Changes in estimated sublease rentals on a closed store and the realization of proceeds on an assignment of another closed store lease resulted in the credit in the lease termination provision in the fiscal 2009 period. This credit, along with the reversal of previously recorded deferred rent associated with stores closed, partially offset by charges related to other closed store leases, resulted in a net credit in the provision for lease termination costs in the first nine months of fiscal 2009.

     The Company intends to refranchise certain geographic markets, expected to consist principally of, but not necessarily limited to, markets outside the Company’s traditional base in the Southeastern United States. The franchise rights and other assets in many of these markets were acquired by the Company in business combinations in prior years.

     In fiscal 2009, the Company refranchised one idled store acquired by the Company from a failed franchisee, refranchised two domestic operating stores to a new franchisee, and refranchised the four Company stores in Canada to a new franchisee. The Company received no proceeds in connection with any of these transactions. With the exception of a non-cash gain recorded in the fourth quarter of fiscal 2009 related to foreign currency translation arising from the Canadian disposal, no significant gain or loss was recognized as a result of these refranchisings. In the first nine months of fiscal 2010, the Company refranchised three operating Company stores to a new franchisee, as more fully described under Basis of Consolidation in Note 1 to the consolidated financial statements appearing elsewhere herein.

     The Company cannot predict the likelihood of refranchising any additional stores or markets or the amount of proceeds, if any, which might be received therefrom, including the amounts which might be realized from the sale of store assets and the execution of any related franchise agreements. Refranchising could result in the recognition of impairment losses on the related assets.

Interest Expense

     Interest expense increased to $8.4 million in the first nine months of fiscal 2010 from $7.3 million in the first nine months of fiscal 2009. Interest expense accruing on outstanding indebtedness was $5.3 million in the first nine months of fiscal 2010 compared to $5.5 million in the first nine months of fiscal 2009. The decrease is primarily due to the reduction in the past year in the outstanding principal balance of the Term Loan described in Note 5 to the consolidated financial statements appearing elsewhere herein. The reduction in interest expense resulting from the reduced principal balance of the term loan was partially offset by the effects of higher lender margin and fees resulting from amendments to the Company’s Secured Credit Facilities in April 2009. The April 2009 amendments to the Company’s credit facilities increased the interest rate on the Company’s outstanding borrowings and letters of credit by 200 basis points annually, as described in Note 5 to the consolidated financial statements appearing elsewhere herein.

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     In the first nine months of fiscal 2010, the Company charged to interest expense approximately $925,000 of fees and expenses associated with the April 2009 amendments to the Company’s secured credit facilities and expensed approximately $100,000 of unamortized debt issuance costs associated with the reduction in the size of the Company’s revolving credit facility from $30 million to $25 million as described in Note 5 to the consolidated financial statements appearing elsewhere herein. In the first nine months of fiscal 2009, the Company charged to interest expense approximately $260,000 of fees and expenses associated with the April 2008 amendments to the Company’s credit facilities, and wrote off to interest expense approximately $290,000 of unamortized debt issuance costs associated with the reduction in the size of the Company’s revolving credit facility from $50 million to $30 million.

     Interest expense for the first nine months of fiscal 2010 reflects a charge of approximately $537,000 compared to a credit of approximately $62,000 for the first nine months of fiscal 2009 resulting from marking to market the Company’s liabilities related to interest rate derivatives. As more fully described in Note 12 to the consolidated financial statements appearing elsewhere herein, effective April 9, 2008, the Company discontinued hedge accounting for these derivatives as a result of amendments to its credit facilities. As a consequence of the discontinuance of hedge accounting, changes in the fair value of the derivative contracts subsequent to April 8, 2008 are reflected in earnings as they occur. Amounts included in accumulated other comprehensive income related to changes in the fair value of the derivative contracts for periods prior to April 9, 2008 are being charged to earnings in the period in which the forecasted transaction (interest expense on long-term debt) affect earnings, or earlier upon determination that some or all of the forecasted transaction will not occur. Such charges totaled approximately $940,000 and $655,000 for the nine months ended November 1, 2009 and November 2, 2008, respectively.

Equity in Losses of Equity Method Franchisees

     Equity in losses of equity method franchisees totaled $506,000 in the first nine months of fiscal 2010 compared to $685,000 in the first nine months of fiscal 2009. This caption represents the Company’s share of operating results of unconsolidated franchisees which develop and operate Krispy Kreme stores.

Other Non-Operating Income and Expense, Net

     Other non-operating income and expense in the first nine months of fiscal 2010 includes a charge of approximately $500,000 to reflect a decline in the value of an investment in an Equity Method Franchisee that management concluded is other than temporary as described in Note 9 to the consolidated financial statements appearing elsewhere herein.

     Other non-operating income and expense for the nine months ended November 2, 2008 includes a charge of $900,000 to establish a reserve for collectability risk on a note receivable from an Equity Method Franchisee as described in Note 9 to the consolidated financial statements appearing elsewhere herein.

     In April 2008, the Company completed an agreement with two franchisees under common control pursuant to which, among other things, the Company conveyed to the majority owner of the franchisees the Company’s equity interests in the franchisees and compromised and settled certain disputed and past due amounts owed by them to the Company. In connection with this agreement, the Company was released from its obligations under all of its partial guarantees of certain of the franchisees’ indebtedness and lease obligations. The Company recorded a non-cash gain of $931,000 as a result of this transaction which is included in “Other non-operating income and expense, net” in the accompanying consolidated statement of operations for the nine months ended November 2, 2008.

Provision for Income Taxes

     The provision for income taxes was $783,000 in the first nine months of fiscal 2010 compared to a benefit of $613,000 in the first nine months of fiscal 2009. Each of these amounts includes adjustments to the valuation allowance for deferred income tax assets to maintain such allowance at an amount sufficient to reduce the Company’s aggregate net deferred income tax assets to zero, as well as a provision for income taxes estimated to be payable currently. In addition, as a result of the dissolution of one of the Company’s foreign subsidiaries and the resolution of related income tax uncertainties during the first nine months of fiscal 2009, the Company recorded a credit of approximately $1.7 million to the provision for income taxes to reduce the Company’s accruals for uncertain tax positions.

Net Loss

     The Company reported a net loss of $677,000 compared to a net loss of $3.8 million for the nine months ended November 1, 2009 and November 2, 2008, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

     The following table presents a summary of the Company’s cash flows from operating, investing and financing activities for the first nine months of fiscal 2010 and 2009.

	Nine Months Ended
	Nov. 1,			Nov. 2,
	2009			2008
	(In thousands)
Net cash provided by operating activities	$	15,897		$	10,769
Net cash used for investing activities		(5,795	)		(2,237	)
Net cash used for financing activities		(27,097	)		(1,073	)
Effect of exchange rate changes on cash		—			(19	)
Net increase (decrease) in cash and cash equivalents	$	(16,995	)	$	7,440

Cash Flows from Operating Activities

     Net cash provided by operating activities was $15.9 million and $10.8 million in the first nine months of fiscal 2010 and 2009, respectively. The increase in fiscal 2010 resulted primarily from improved financial results.

Cash Flows from Investing Activities

     Net cash used for investing activities was $5.8 million in the first nine months of fiscal 2010 and $2.2 million in the first nine months of fiscal 2009. An increase in capital expenditures from $2.6 million to $6.2 million, reflecting the construction of new stores and increased store refurbishment efforts in the first nine months of fiscal 2010, drove the increase in cash used for investing activities. The Company currently expects that capital expenditures in fiscal 2010 will range from $10 million to $13 million. The Company is currently marketing for sale certain stores closed or to be closed. Assets held for sale as of November 1, 2009 had a carrying value of approximately $5.6 million, which is included in other current assets in the accompanying consolidated balance sheet at that date.

Cash Flows from Financing Activities

     Net cash used for financing activities was $27.1 million in the first nine months of fiscal 2010, compared to $1.1 million in the first nine months of fiscal 2009. During the first nine months of fiscal 2010, the Company repaid approximately $25.9 million of outstanding term loan and capitalized lease indebtedness, consisting of approximately $900,000 of scheduled payments, a prepayment of $20 million on the term loan in connection with amendments to the Company’s credit facilities in April 2009 as described in Note 5 to the consolidated financial statements appearing elsewhere herein, and a discretionary prepayment of $5 million made on the term loan during the third quarter. During the first nine months of fiscal 2009, the Company repaid approximately $1.7 million of outstanding term loan and capitalized lease indebtedness, consisting of approximately $920,000 of scheduled payments and a prepayment of approximately $750,000 from the proceeds of the assignment of a lease related to a closed store. The Company paid approximately $1.9 million and $695,000 in fees to its lenders in the first nine months of fiscal 2010 and 2009, respectively, to amend its credit facilities. Of such aggregate amounts, $954,000 and $434,000, respectively, was capitalized as deferred financing costs, and the balance of approximately $925,000 and $260,000, respectively, was charged to interest expense.

     During the first nine months of fiscal 2010, employees surrendered common shares having an aggregate fair value of $249,000 to reimburse the Company for the minimum statutory withholding taxes paid by the Company on behalf of employees arising from the vesting of restricted stock awards. During the first nine months of fiscal 2009, the Company received $3.1 million in proceeds from the exercise of stock options. During the same period, current and former employees surrendered common shares having an aggregate fair value of $2.1 million to pay the exercise price of options exercised and to reimburse the Company for the minimum statutory withholding taxes paid by the Company on behalf of present and former employees arising from such exercise and from the vesting of restricted stock awards.

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Business Conditions, Uncertainties and Liquidity

     The Company experienced a decline in revenues and incurred net losses in each of the last three fiscal years. The revenue decline reflects fewer Company stores in operation resulting principally from the closure of lower performing locations, a decline in domestic royalty revenues and lower sales of mixes and other ingredients resulting from lower sales by the Company’s domestic franchisees. Lower revenues have adversely affected operating margins because of the fixed or semi-fixed nature of many of the Company’s direct operating expenses. In addition, price increases in the Company Stores segment were not sufficient to fully offset steep rises in agricultural commodity costs in fiscal 2009, although recent economic conditions have led to significant reductions in the market prices of these commodities, which has had a positive effect on the Company’s results of operations in fiscal 2010. Sales volumes and changes in the cost of major ingredients and fuel can have a material effect on the Company’s results of operations and cash flows. In addition, royalty revenues and most of KK Supply Chain revenues are directly related to sales by franchise stores and, accordingly, the success of franchisees’ operations has a direct effect on the Company’s revenues, results of operations and cash flows.

     The Company generated net cash from operating activities of $15.9 million in the first nine months of fiscal 2010 and $10.8 million in the first nine months of fiscal 2009.

     The Company’s Secured Credit Facilities described in Note 5 to the consolidated financial statements appearing elsewhere herein are the Company’s principal source of external financing. These facilities consist of a term loan having an outstanding principal balance of $48.8 million as of November 1, 2009 which matures in February 2014 and a $25 million revolving credit facility maturing in February 2013.

     The Secured Credit Facilities contain significant financial covenants as described in Note 5 to the consolidated financial statements appearing elsewhere herein. Effective April 15, 2009, the Company executed amendments to the Secured Credit Facilities which, among other things, relaxed the interest coverage ratio covenant contained therein through fiscal 2012. In connection with the amendments, the Company prepaid $20 million of the principal balance outstanding under the term loan, paid fees of approximately $1.9 million, and agreed to increase the rate of interest on outstanding loans by 200 basis points annually. Any future amendments or waivers could result in additional fees or rate increases.

     Based on the Company’s current working capital and its operating plans, management believes the Company will be able to comply with the amended financial covenants and be able to meet its projected operating, investing and financing cash requirements.

     Failure to comply with the financial covenants contained in the Secured Credit Facilities, or the occurrence or failure to occur of certain events, would cause the Company to default under the facilities. The Company would attempt to negotiate waivers of any such default, should one occur. There can be no assurance that the Company would be able to negotiate any such waivers, and the costs or conditions associated with any such waivers could be significant. In the absence of a waiver of, or forbearance with respect to, any such default, the Company’s lenders would be able to exercise their rights under the credit agreement including, but not limited to, accelerating maturity of outstanding indebtedness and asserting their rights with respect to the collateral. Acceleration of the maturity of indebtedness under the Secured Credit Facilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows. In the event that credit under the Secured Credit Facilities were not available to the Company, there can be no assurance that alternative sources of credit would be available to the Company or, if they are available, under what terms or at what cost.

Recent Accounting Pronouncements

     In March 2008, the FASB issued new guidance on disclosures about derivative instruments and hedging activities. The new guidance is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The Company adopted this guidance as of February 2, 2009 on a prospective basis; accordingly, disclosures related to interim periods prior to the date of adoption have not been presented. Adoption of this guidance did not have any effect on the Company’s financial position or results of operations. See Note 12 to the consolidated financial statements appearing elsewhere herein for additional information about derivative financial instruments owned by the Company.

     In the first quarter of fiscal 2009, the Company adopted newly issued FASB guidance with respect to financial assets and liabilities measured at fair value on both a recurring and non-recurring basis and with respect to nonfinancial assets and liabilities measured on a recurring basis. In the first quarter of fiscal 2010, the Company adopted newly issued FASB guidance with respect to nonrecurring measurements of nonfinancial assets and liabilities. Adoption of this accounting guidance did not have any material effect on the Company’s financial position or results of operations. See Note 11 to the consolidated financial statements appearing elsewhere herein for additional information regarding fair value measurements.

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     In May 2009, the FASB issued new guidance with respect to subsequent events which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The Company adopted this guidance prospectively during the second quarter ended August 2, 2009. The Company performed an evaluation of events through December 7, 2009, the date which the financial statements were issued, for the purpose of identifying events which required adjustment to, or disclosure in, the Company’s financial statements as of and for the period ended November 1, 2009.

     In June 2009, the FASB issued amended guidance related to the consolidation of variable-interest entities. These amendments require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the enterprise has the power to direct matters that most significantly impact the activities of the VIE and has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The amendments require an ongoing reconsideration of the identity of the VIE’s primary beneficiary, if any, and provide a framework for the events that trigger a reassessment of whether an entity is a VIE. The amended guidance is effective for the Company in the first quarter of fiscal 2011. The Company is evaluating the effects, if any, of adoption of this guidance on its financial position, results of operations and cash flows.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

     The Company is exposed to market risk from increases in interest rates on its outstanding debt. All of the borrowings under the Company’s secured credit facilities bear interest at variable rates based upon either the Fed funds rate or LIBOR. The interest cost of the Company’s debt is affected by changes in these short-term interest rates and increases in those rates adversely affect the Company’s results of operations. On May 16, 2007, the Company entered into interest rate derivative contracts having an aggregate notional principal amount of $60 million. The derivative contracts entitle the Company to receive from the counterparties the excess, if any, of three-month LIBOR over 5.40%, and require the Company to pay to the counterparties the excess, if any, of 4.48% over three-month LIBOR, in each case multiplied by the notional amount of the contracts. The contracts expire in April 2010.

     As of November 1, 2009, the Company had approximately $49.0 million in borrowings outstanding. A hypothetical increase of 100 basis points in short-term interest rates would result in a decrease in the Company’s annual interest expense of approximately $600,000. The hypothetical rate increase would reduce amounts payable by the Company on the $60 million outstanding notional balance of interest rate derivatives, while resulting in no increase in interest expense on the Company’s term debt due to the operation of an interest rate floor provision in the Company’s credit agreement. The Company’s credit facilities and the related interest rate derivatives are described in Notes 5 and 12, respectively, to the consolidated financial statements appearing elsewhere herein.

Currency Risk

     The substantial majority of the Company’s revenue, expense and capital purchasing activities are transacted in U.S. dollars. The Company’s investment in its franchisee operating in Mexico exposes the Company to exchange rate risk. In addition, although royalties from international franchisees are payable to the Company in U.S. dollars, changes in the rate of exchange between the U.S. dollar and the foreign currencies used in the countries in which the international franchisees operate affect the Company’s royalty revenues. In recent quarters, the U.S. dollar generally has strengthened relative to many other currencies, which has adversely affected International Franchise revenue. Because royalty revenues are derived from a relatively large number of foreign countries, and royalty revenues are not highly concentrated in a small number of such countries, the Company believes that the relatively small size of any currency hedging activities would adversely affect the economics of hedging strategies and, accordingly, the Company historically has not attempted to hedge these exchange rate risks.

Commodity Price Risk

     The Company is exposed to the effects of commodity price fluctuations on the cost of ingredients of its products, of which flour, sugar and shortening are the most significant. In order to secure adequate supplies of materials and bring greater stability to the cost of ingredients, the Company routinely enters into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, the Company commits to purchasing agreed-upon quantities of ingredients at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month’s to two years’ anticipated requirements, depending on the ingredient. Other purchase arrangements typically are contractual arrangements with vendors (for example, with respect to certain beverages and ingredients) under which the Company is not required to purchase any minimum quantity of goods, but must purchase minimum percentages of its requirements for such goods from these vendors with whom it has executed these contracts.

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     In addition to entering into forward purchase contracts, from time to time the Company purchases exchange-traded commodity futures contracts, and options on such contracts, for raw materials which are ingredients of its products or which are components of such ingredients, including wheat and soybean oil. The Company typically assigns the futures contract to a supplier in connection with entering into a forward purchase contract for the related ingredient.

     The Company operates a large fleet of delivery vehicles and is exposed to the effects of changes in gasoline prices. In the first nine months of fiscal 2010, the Company began periodically using futures and options on futures to hedge a portion of its exposure to rising gasoline prices.

Commodity Derivatives Outstanding at November 1, 2009

     Quantitative information about the Company’s unassigned option contracts and futures contracts and options on such contracts as of November 1, 2009, which mature in fiscal 2010 and fiscal 2011, is set forth in the table below.

		Weighted		Aggregate		Aggregate
		Average Contract Price		Contract Price		Fair
	Contract Volume	or Strike Price		or Strike Price		Value
	(Dollars in thousands, except average prices)
Futures contracts:
Wheat	755,000 bu.	$	5.85/bu.	$	4,418	$	(505	)

     Although the Company utilizes forward purchase contracts and futures contracts and options on such contracts to mitigate the risks related to commodity price fluctuations, such contracts do not fully mitigate price risk. In addition, the portion of the Company’s anticipated future commodity requirements that are subject to such contracts vary from time to time. Prices for wheat and soybean oil have been volatile in the past two years and traded at record high prices during fiscal 2009, although recent economic conditions have led to significant reductions in the market prices of agricultural and other commodities during the first nine months of fiscal 2010, including wheat and soybean oil. Adverse changes in commodity prices could adversely affect the Company’s profitability and liquidity.

Sensitivity to Price Changes in Agricultural Commodities

     The following table illustrates the potential effect on the Company’s costs resulting from hypothetical changes in the cost of the Company’s three most significant ingredients.

	Approximate	Approximate Range			Approximate Annual
	Anticipated Fiscal 2010	of Prices Paid In	Hypothetical Price		Effect Of Hypothetical
Ingredient	Purchases	Fiscal 2009	Increase		Price Increase
					(In thousands)
Flour	74.0 million lbs.	$0.179 – $0.268/lb.	$	0.01/lb.	$	740
Shortening	34.4 million lbs.	$0.466 – $0.746/lb.	$	0.01/lb.		344
Sugar	60.6 million lbs.	$0.280 – $0.295/lb.	$	0.01/lb.		606

     The range of prices paid for fiscal 2009 set forth in the table above reflect the effects of any forward purchase contracts entered into at various times prior to delivery of the goods and, accordingly, do not necessarily reflect the range of prices of these ingredients prevailing in the market during the fiscal year.

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Item 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

     As of November 1, 2009, the end of the period covered by this Quarterly Report on Form 10-Q, management performed, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, an evaluation of the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of November 1, 2009, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

     During the quarter ended November 1, 2009, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

Pending Legal Matters

     Except as disclosed below, the Company currently is not a party to any material legal proceedings. Except as described below, the Company cannot predict the likelihood of an unfavorable outcome with respect to the these matters, or the amount or range of potential loss with respect to them and, accordingly, no provision for loss with respect to these matters has been reflected in the consolidated financial statements.

TAG Litigation

     In February 2008, the Company filed suit in the U.S. District Court for the Middle District of North Carolina against The Advantage Group Enterprise, Inc. (“TAG”), alleging that TAG failed to properly account for and pay the Company for sales of equipment that the Company consigned to TAG. Based on these allegations, the Company asserted various claims including breach of fiduciary duty and conversion, and it seeks an accounting and constructive trust. In addition, the Company seeks a declaration that it does not owe TAG approximately $1 million for storage fees and alleged lost profits. In March 2008, TAG answered the complaint, denying liability and asserting counterclaims against the Company including breach of contract, services rendered, unjust enrichment, violation of the North Carolina Unfair Trade Practices Act and fraud in the inducement. TAG sought approximately $1 million in actual damages as well as punitive and treble damages. The Company believes settlement negotiations among the parties are nearly complete. The accompanying balance sheet as of November 1, 2009 reflects an accrued liability of approximately $150,000 for potential settlement of this matter, which was recorded in the second quarter of fiscal 2010.

Fairfax County, Virginia Environmental Litigation

     Since 2004, the Company has operated a commissary in the Gunston Commerce Center in Fairfax County, Virginia (the “County”). The County has investigated alleged damage to its sewer system near the commissary. On May 8, 2009, the County filed a lawsuit in Fairfax County Circuit Court alleging that the Company caused damage to the sewer system and violated the County’s Sewer Use Ordinance and the Company’s Wastewater Discharge Permit. The County sought from the Company repair and replacement costs of approximately $2 million and civil penalties of approximately $18 million. The Company removed the case to the U.S. District Court for the Eastern Division of Virginia, and in December 2009 the parties reached an agreement to resolve the litigation. During the quarter ended November 1, 2009, the Company recorded a provision of $750,000 for the settlement of this matter.

K² Asia Litigation

     On April 7, 2009, a Cayman Islands corporation, K² Asia Ventures, and its owners filed a lawsuit in Forsyth County, North Carolina Superior Court against the Company, its franchisee in the Philippines, and other persons associated with the franchisee. The suit alleges that the Company and the other defendants conspired to deprive the plaintiffs of claimed “exclusive rights” to negotiate franchise and development agreements with prospective franchisees in the Philippines, and seeks unspecified damages. The Company believes that these allegations are false and intends to vigorously defend against the lawsuit.

California Wage/Hour Litigation

     The Company is a defendant in a wage/hour suit pending in the Superior Court of Alameda County, California, in which the plaintiffs seek class action status and unspecified damages on behalf of a putative class of approximately 35 persons. Discovery in the case is substantially complete, and court-ordered mediation currently is scheduled for January 2010. The Company intends to vigorously defend the case.

Other Legal Matters

     The Company is engaged in various legal proceedings arising in the normal course of business. The Company maintains customary insurance policies against certain kinds of claims and suits, including insurance policies for workers’ compensation and personal injury, some of which provide for relatively large deductible amounts.

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Item 1A. RISK FACTORS.

     There have been no material changes from the risk factors disclosed in Part I, Item 1A, “Risk Factors,” in the 2009 Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES.

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

Item 5. OTHER INFORMATION.

None.

Item 6. EXHIBITS.

Exhibit
Number		Description of Exhibits
3.1	—	Amended Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-97787))
3.2	—	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed December 15, 2008)
10.1	—	Employment Agreement, dated as of September 14, 2009, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Cynthia A. Bay
31.1	—	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2	—	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
32.1	—	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	—	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

     Pursuant to the requirements 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.

		Krispy Kreme Doughnuts, Inc.
Date: December 7, 2009	By:	/s/ James H. Morgan
		Name:	James H. Morgan
		Title:	Chief Executive Officer
Date: December 7, 2009	By:	/s/ Douglas R. Muir
		Name:	Douglas R. Muir
		Title:	Chief Financial Officer

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EX-10.1

EMPLOYMENT AGREEMENT

     EMPLOYMENT AGREEMENT (“Agreement”) dated as of September 14, 2009 among Krispy Kreme Doughnut Corporation, a North Carolina corporation (“KKDC”), Krispy Kreme Doughnuts, Inc., a North Carolina corporation (the “Company” and, together with KKDC, the “Companies”), and Cynthia A. Bay (the “Executive”).

The parties hereto agree as follows:

ARTICLE 1

DEFINITIONS

     SECTION 1.01.Definitions. For purposes of this Agreement, the following terms have the meanings set forth below:

“Base Salary” has the meaning set forth in Section 4.01.

“Board” means the Board of Directors of the Company.

     “Cause” shall mean (i) the Executive’s failure or refusal to perform the Executive’s lawful and proper duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness or a court or governmental order), (ii) the Executive’s conviction of or plea of nolo contendere to any felony (other than a traffic infraction), (iii) an act or acts on the Executive’s part constituting fraud, theft or embezzlement or that otherwise constitutes a felony under the laws of the United States or any state thereof which results or was intended to result directly or indirectly in gain or personal enrichment by the Executive at the expense of the Companies, or (iv) the Executive’s insubordination to the Companies’ most senior executive officer or willful violation of any material provision of the code of ethics of the Companies applicable to the Executive. In the case of any item described in the previous sentence, the Executive shall be given written notice of the alleged act or omission constituting Cause, which notice shall set forth in reasonable detail the reason or reasons that the Board believes the Executive is to be terminated for Cause, including any act or omission that is the basis for the decision to terminate the Executive. In the case of an act or omission described in clause (i) or (iv) of the definition of Cause, (A) if reasonably capable of being cured, the Executive shall be given 30 days from the date of such notice to effect a cure of such alleged act or omission constituting “Cause” which, upon such cure to the reasonable satisfaction of the Board, shall no longer constitute a basis for Cause, and (B) the Executive shall be given an opportunity to make a presentation to the Board (accompanied by counsel or other representative, if the Executive so desires) at a meeting of the Board held promptly following such 30-day cure period if the Board intends to determine that no cure has occurred. At or following such meeting, the Board shall determine whether or not to terminate the Executive for “Cause” and shall notify the Executive in writing of its determination and the effective date of such termination (which date may be no earlier than the date of the aforementioned Board meeting).

“Change in Control” means any of the following events:

     (a)the acquisition by any Person of “beneficial ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of the combined voting power of the Company’s then outstanding voting securities; provided, however, that a Change in Control shall not be deemed to occur solely because fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its Subsidiaries, or (ii) any Person, which, immediately prior to such acquisition, is owned directly or indirectly by the shareholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition;

     (b)consummation of (i) a merger or consolidation involving the Company if the shareholders of the Company, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation, or (ii) a sale or other disposition of all or substantially all of the assets of the Company other than to a Person which is owned directly or indirectly by the shareholders of the Company in the same proportion as their ownership of stock in the Company;

     (c)a change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (such Board shall be hereinafter referred to as the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; provided further, however, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, including any successor to such Rule), or other actual or threatened solicitation or proxies or consents by or on behalf of a Person other than the Board, shall not be so considered as a member of the Incumbent Board; or

     (d)approval by shareholders of the Company of a complete liquidation or dissolution of the Company.

“Code” means the Internal Revenue Code of 1986, as amended.

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     “Confidential Information” means information that is not generally known to the public and that was or is used, developed or obtained by the Company or its Subsidiaries in connection with the business of the Company and its Subsidiaries and which constitutes trade secrets or information which they have attempted to protect, which may include, but is not limited to, trade “know-how”, customer information, supplier information, cost and pricing information, marketing and sales techniques, strategies and programs, computer programs and software and financial information. It shall not include information (a) required to be disclosed by court or administrative order; (b) lawfully obtainable from other sources or which is in the public domain through no fault of the Executive; or (c) the disclosure of which is consented to in writing by the Company.

“Date of Termination” has the meaning set forth in Section 5.07.

“Effective Date” has the meaning set forth in Section 2.01.

“Employment Period” has the meaning set forth in Section 2.01.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

     “Good Reason” shall mean (i) the failure of the Companies to pay any material amount of compensation to the Executive when due hereunder, (ii) the Executive is no longer at least the second most senior officer in charge of Company Store operations of (A) the Company or (B) in the event of a merger, consolidation or other business combination involving the Company, the successor to the Company’s business or assets or (C) if all or substantially all of the voting stock of the Company is held by another public company, such public company, (iii) the assignment to the Executive of any duties or responsibilities materially inconsistent with the Executive’s status under clause (ii) of this sentence or her failure at any time to report directly to the most senior executive officer of the applicable company described in such clause (ii), (iv) any failure by the Companies to maintain the Executive’s principal place of employment and the executive offices of the Companies within 25 miles of the Winston-Salem, North Carolina area, (v) any material breach by the Companies of this Agreement, or (vi) the term of the Employment Period ending as a result of the Companies giving the Executive notice of nonextension of the term of this Agreement in accordance with Section 5.01 solely at either the end of the initial term or the end of the first, second or third one year extensions of the term under Section 5.01 (but, for the avoidance of doubt, not at the end of any further extension of the term); provided, however, that for any of the foregoing to constitute Good Reason, the Executive must provide written notification of her intention to resign within 60 days after the Executive knows or has reason to know of the occurrence of any such event, and the Companies shall have 30 days (10 days in the case of a material breach related to payment of any amounts due hereunder) from the date of receipt of such notice to effect a cure of the condition constituting Good Reason, and, upon cure thereof by the Companies, such event shall no longer constitute Good Reason.

“Notice of Termination” has the meaning set forth in Section 5.06.

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     “Permanent Disability” means the Executive becomes permanently disabled within the meaning of the long-term disability plan of the Companies applicable to the Executive, and the Executive commences to receive benefits under such plan.

     “Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, an estate, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

“Reimbursable Expenses” has the meaning set forth in Section 4.04.

“Securities Act” means the Securities Act of 1933, as amended.

     “Subsidiary” or “Subsidiaries” means, with respect to any Person, any corporation, partnership, limited liability company, association or other business entity of which (a) if a corporation, 50 percent or more of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or combination thereof; or (b) if a partnership, limited liability company, association or other business entity, 50 percent or more of the partnership or other similar ownership interests thereof are at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes of this definition, a Person or Persons will be deemed to have a 50 percent or more ownership interest in a partnership, limited liability company, association or other business entity if such Person or Persons are allocated 50 percent or more of partnership, limited liability company, association or other business entity gains or losses or control the managing director or member or general partner of such partnership, limited liability company, association or other business entity.

ARTICLE 2

EMPLOYMENT

     SECTION 2.01.Employment. The Executive is a current employee of KKDC and a current officer of the Companies. However, under this Agreement, and beginning the Effective Date, both Companies shall employ the Executive, and the Executive shall accept employment with the Companies, upon the terms and conditions set forth in this Agreement for the new period beginning September 14, 2009 (the “Effective Date”) and ending as provided in Section 5.01 (the “Employment Period”).

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ARTICLE 3

POSITION AND DUTIES

     SECTION 3.01.Position and Duties. During the Employment Period, the Executive shall serve as Senior Vice President – Company Store Operations of the Company reporting directly to the most senior officer in charge of Company Store operations. During the Employment Period, the Executive also shall serve as Senior Vice President – Company Store Operations of KKDC. The Executive shall have such responsibilities, powers and duties as may from time to time be prescribed by the Board or the most senior executive officer of the Companies or the most senior officer in charge of Company Store operations; provided that such responsibilities, powers and duties are substantially consistent with those customarily assigned to individuals serving in such position at comparable companies or as may be reasonably required for the proper conduct of the business of the Companies. During the Employment Period, the Executive shall devote substantially all of her working time and efforts to the business and affairs of the Company and its Subsidiaries. The Executive shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or organization not related to the business of the Company or its Subsidiaries, whether for compensation or otherwise, without the prior approval of the Board; provided, however, the Executive may serve on the board of directors of one for-profit corporation with the prior approval of the Board, which will not be unreasonably withheld, and the Executive may serve as a director of not-for-profit organizations or engage in other charitable, civic or educational activities, so long as the activities described in this proviso do not interfere with the Executive’s performance of her duties hereunder or result in any conflict of interest with the Companies.

ARTICLE 4

BASE SALARY AND BENEFITS

     SECTION 4.01.Base Salary. During the Employment Period, the Executive will receive base salary from the Companies equal to $230,000 per annum (the “Base Salary”). The Base Salary will be payable in accordance with the normal payroll practices of the Companies. Annually during the Employment Period the Company shall review with the Executive her job performance and compensation, and if deemed appropriate by the Board or its Compensation Committee, in their discretion, the Executive’s Base Salary may be increased but not decreased. After any such increase, the term “Base Salary” as used in this Agreement will thereafter refer to the increased amount.

     SECTION 4.02.Bonuses. In addition to Base Salary, the Executive shall be eligible to be considered for an annual bonus, and the Executive’s annual target bonus shall be equal to 50% of Base Salary. The Compensation Committee of the Board and the Board shall set targets with respect to and otherwise determine Executive’s bonus in accordance with the Company’s then current incentive plans.

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     SECTION 4.03.Benefits. During the Employment Period, the Executive shall be entitled to participate in all employee benefit, perquisite and fringe benefit plans and arrangements made available by the Companies to their executives and key management employees upon the terms and subject to the conditions set forth in the applicable plan or arrangement. Such benefits shall include medical, life and disability insurance provided in accordance with the policies of the Companies. Executive shall be entitled to four weeks of paid vacation annually during the Employment Period.

     SECTION 4.04.Expenses. The Companies shall reimburse the Executive for all reasonable expenses incurred by her in the course of performing her duties under this Agreement which are consistent with the Companies’ policies in effect from time to time with respect to travel, entertainment and other business expenses (“Reimbursable Expenses”), subject to the Companies’ requirements with respect to reporting and documentation of expenses.

ARTICLE 5

TERM AND TERMINATION

     SECTION 5.01.Term. The Employment Period will terminate on September 14, 2012, unless sooner terminated as hereinafter provided; provided, however, that the Employment Period will be automatically extended for successive one-year periods following the original term ending September 14, 2012 until either the Companies, on the one hand, or the Executive, on the other hand, at least 180 days prior to the expiration of the original term or any extended term, shall give written notice to the other of their intention not to so extend the Employment Period.

     SECTION 5.02.Termination Due to Death or Permanent Disability. If the Employment Period shall be terminated due to death or Permanent Disability of the Executive, the Executive (or her estate or legal representative) shall be entitled solely to the following: (i) Base Salary through the Date of Termination; and (ii) medical benefits as provided in Section 5.05 below. The Executive’s entitlements under any other benefit plan or program shall be as determined thereunder. In addition, promptly following any such termination, the Executive (or her estate or legal representative) shall be reimbursed for all Reimbursable Expenses incurred by the Executive prior to such termination.

     SECTION 5.03.Termination for Good Reason or Without Cause. Except as otherwise set forth in Section 5.09 below, if the Employment Period shall be terminated (a) by the Executive for Good Reason, or (b) by the Companies not for Cause, provided the Executive has executed an irrevocable (except to the extent required by law, and to the extent required by law to be revocable, has not revoked) general release of claims, in the form attached hereto as Exhibit A, the Executive shall be entitled solely to the following: (i) Base Salary through the Date of Termination; (ii) an amount equal to one times the Base Salary, provided that, the Executive shall be entitled to any unpaid amounts only if the Executive has not breached and does not breach the provisions of Sections 6.01, 7.01, 8.01 or 9 below; (iii) a bonus for the year of termination of employment equal to the Executive’s target annual bonus for such year pro rated for the number of full months during the bonus year prior to such termination of employment, payable as soon as practicable following such termination of employment; and (iv) medical benefits as provided in Section 5.05 below. The Executive’s entitlements under any other benefit plan or program shall be as determined thereunder, except that duplicative severance benefits shall not be payable under any other plan or program. Amounts described in clause (ii) above will be payable in equal monthly installments for a period of 12 months commencing on the first month anniversary of the Date of Termination, except, to the extent required by Section 409A of the Code, amounts otherwise payable under clause (ii) within six months after the Executive’s termination of employment shall be deferred to and paid on the day following the six month anniversary of such termination of employment. In addition, promptly following any such termination, the Executive shall be reimbursed for all Reimbursable Expenses incurred by the Executive prior to such termination.

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     SECTION 5.04.Termination for Cause or Other Than Good Reason. If the Employment Period shall be terminated (a) by the Companies for Cause, or (b) as a result of the Executive’s resignation or leaving of her employment other than for Good Reason, the Executive shall be entitled to receive solely Base Salary through the Date of Termination and reimbursement of all Reimbursable Expenses incurred by the Executive prior to such termination. The Executive’s rights under the benefit plans and programs shall be as determined thereunder. A voluntary resignation by the Executive shall not be deemed to be a breach of this Agreement.

     SECTION 5.05.Benefits. If the Employment Period is terminated as a result of a termination of employment as specified in Section 5.02, 5.03 or 5.09, the Executive and her covered dependents shall continue to receive medical insurance coverage benefits from the Companies, with the same contribution toward such coverage from the Executive or her estate, for a period equal to the lesser of (x) eighteen months following the Date of Termination, or (y) until the Executive is provided by another employer with benefits substantially comparable to the benefits provided by the Companies’ medical plan. Furthermore, in the event of Executive’s Permanent Disability, insurance benefits will continue under the Companies’ long term disability plan in accordance with its terms.

     SECTION 5.06.Notice of Termination. Any termination by the Companies for Permanent Disability or Cause or without Cause or by the Executive with or without Good Reason shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision indicated.

     SECTION 5.07.Date of Termination. “Date of Termination” shall mean (a) if the Employment Period is terminated as a result of a Permanent Disability, five days after a Notice of Termination is given, (b) if the Employment Period is terminated as a result of her death, on the date of her death, and (c) if the Employment Period is terminated for any other reason, the later of the date of the Notice of Termination and the end of any applicable correction period.

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     SECTION 5.08.No Duty to Mitigate. The Executive shall have no duty to seek new employment or other duty to mitigate following a termination of employment as described in this Article 5, and no compensation or benefits described in this Article 5 shall be subject to reduction or offset on account of any subsequent compensation, other than as provided in Section 5.05.

     SECTION 5.09.Termination for Good Reason or Without Cause Following a Change in Control. If the Employment Period shall be terminated within two years after a Change in Control (a) by the Executive for Good Reason, or (b) by the Companies not for Cause, then Executive’s compensation and benefits upon termination shall be governed by this Section 5.09 instead of the provisions of Section 5.03 above, and, provided the Executive has executed an irrevocable (except to the extent required by law, and to the extent required by law to be revocable, has not revoked) general release of claims, in the form attached hereto as Exhibit A, the Executive shall be entitled solely to the following: (i) Base Salary through the Date of Termination; (ii) an amount equal to 1.25 times the sum of her Base Salary and her target annual bonus for the year of termination, provided that, the Executive shall be entitled to any unpaid amounts only if the Executive has not breached and does not breach the provisions of Sections 6.01, 7.01, 8.01 or 9 below; (iii) a bonus for the year of termination of employment equal to the Executive’s target annual bonus for such year pro rated for the number of full months during the bonus year prior to such termination of employment; and (iv) medical benefits as provided in Section 5.05. The Executive’s entitlements under any other benefit plan or program shall be as determined thereunder, except that duplicative severance benefits shall not be payable under any other plan or program. In addition, promptly following any such termination, the Executive shall be reimbursed for all Reimbursable Expenses incurred by the Executive prior to such termination. The amounts due under clauses (i), (ii) and (iii) of this Section 5.09 shall be paid in a lump sum upon termination of employment.

ARTICLE 6

CONFIDENTIAL INFORMATION

     SECTION 6.01.Nondisclosure and Nonuse of Confidential Information. The Executive will not disclose or use at any time during or after the Employment Period any Confidential Information of which the Executive is or becomes aware, whether or not such information is developed by her, except to the extent she reasonably believes that such disclosure or use is directly related to and appropriate in connection with the Executive’s performance of duties assigned to the Executive pursuant to this Agreement. Under all circumstances and at all times, the Executive will take all appropriate steps to safeguard Confidential Information in her possession and to protect it against disclosure, misuse, espionage, loss and theft. Executive also agrees to execute and comply with such other confidentiality agreements or provisions as required of executive officers of the Company.

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ARTICLE 7

INTELLECTUAL PROPERTY

     SECTION 7.01.Ownership of Intellectual Property. In the event that the Executive as part of her activities on behalf of the Companies generates, authors or contributes to any invention, design, new development, device, product, method of process (whether or not patentable or reduced to practice or comprising Confidential Information), any copyrightable work (whether or not comprising Confidential Information) or any other form of Confidential Information relating directly or indirectly to the business of the Company or its Subsidiaries as now or hereafter conducted (collectively, “Intellectual Property”), the Executive acknowledges that such Intellectual Property is the sole and exclusive property of the Company and its Subsidiaries and hereby assigns all right, title and interest in and to such Intellectual Property to the Company or its designated Subsidiary. Any copyrightable work prepared in whole or in part by the Executive during the Employment Period will be deemed “a work made for hire” under Section 201(b) of the Copyright Act of 1976, as amended, and the Company or its designated Subsidiary will own all of the rights comprised in the copyright therein. The Executive will promptly and fully disclose all Intellectual Property and will cooperate with the Companies to protect their interests in and rights to such Intellectual Property (including providing reasonable assistance in securing patent protection and copyright registrations and executing all documents as reasonably requested by the Companies, whether such requests occur prior to or after termination of Executive’s employment hereunder).

ARTICLE 8

DELIVERY OF MATERIALS UPON TERMINATION OF EMPLOYMENT

     SECTION 8.01.Delivery of Materials upon Termination of Employment. As requested by the Companies from time to time, and upon the termination of the Executive’s employment with the Companies for any reason, the Executive will promptly deliver to the Companies all property of the Company or its Subsidiaries, including, without limitation, all copies and embodiments, in whatever form or medium, of all Confidential Information in the Executive’s possession or within her control (including written records, notes, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information) irrespective of the location or form of such material and, if requested by the Companies, will provide the Companies with written confirmation that to the best of her knowledge all such materials have been delivered to the Companies or destroyed.

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ARTICLE 9

NON-COMPETITION AND NONSOLICITATION

     SECTION 9.01.Noncompetition. The Executive acknowledges that, during her employment with the Companies, she will become familiar with trade secrets and other Confidential Information concerning the Company and its Subsidiaries and her services will be of special, unique and extraordinary value to the Companies. In addition, the Executive hereby agrees that at any time during the Noncompetition Period (as defined below), she will not directly or indirectly own, manage, control, participate in, consult with, become employed by or otherwise render services to any business listed on Exhibit B hereto in the Territory. During the Noncompetition Period, the Company shall have the right to, in good faith, add other entities which are in substantial competition with the Companies to the list of businesses on Exhibit B, subject to the consent of the Executive which shall not be unreasonably withheld. Notwithstanding the foregoing, if the Executive’s termination of employment occurs at the end of the Employment Period due to the Companies giving written notice after the fifth anniversary of the Effective Date pursuant to Section 5.01 of its intention not to extend the Employment Period, this Section 9.01 will only apply if the Companies elect and agree in writing to pay the Executive her Base Salary and her annual target bonus in effect for the year during which her employment is terminated for an additional one-year period following the termination of employment, such amount to be payable in monthly installments over the additional one-year period, except that, to the extent required by Section 409A of the Code, amounts otherwise payable under this sentence within six months after the Executive’s termination of employment shall be deferred to and paid on the day following the six month anniversary of such termination of employment. It shall not be considered a violation of this Section 9.01 for the Executive to be a passive owner of not more than 2% of the outstanding stock of any class of any corporation which is publicly traded, so long as the Executive has no active participation in the business of such corporation.

     SECTION 9.02.Nonsolicitation. The Executive hereby agrees that (a) during the Nonsolicitation Period (as defined below), the Executive will not, directly or indirectly through another Person, induce or attempt to induce any employee of the Company or its Subsidiaries to leave the employ of the Company or its Subsidiaries, or in any way interfere with the relationship between the Company or its Subsidiaries and any person employed by them at any time during such Nonsolicitation Period, and (b) during the Nonsolicitation Period, the Executive will not induce or attempt to induce any customer, supplier, client or other business relation of the Company or its Subsidiaries to cease doing business with the Company or its Subsidiaries.

     SECTION 9.03.Definitions. It is agreed that the “Territory,” for purposes of this Article 9, shall mean:

          (i)The entire United States and any other country where the Company or any of its Subsidiaries, joint venturers, franchisees or affiliates has operated a retail facility at which the Company’s products have been sold at any time in the one-year period ending on the last day of the Executive’s employment with the Companies;

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          (ii)In the event that the preceding clause shall be determined by judicial action to define too broad a territory to be enforceable, then “Territory” shall mean the entire United States;

          (iii)In the event that the preceding clauses shall be determined by judicial action to define too broad a territory to be enforceable, then “Territory” shall mean the states in the United States where the Company or any of its Subsidiaries, joint venturers, franchisees or affiliates has operated a retail facility at which the Company’s products have been sold at any time in the one-year period ending on the last day of Executive’s employment with the Companies;

          (iv)In the event that the preceding clauses shall be determined by judicial action to define too broad a territory to be enforceable, then “Territory” shall mean the area that includes all of the areas that are within a 50-mile radius of any retail store location in the United States at which the Company’s products have been sold at any time in the one-year period ending on the last day of the Executive’s employment with the Companies; and

          (v)In the event that the preceding clauses shall be determined by judicial action to define too broad a territory to be enforceable, then “Territory” shall mean the entire state of North Carolina.

     It is also agreed that “Noncompetition Period,” for purposes hereof, shall mean:

          (i)the Employment Period and a period ending one year after the Date of Termination; and

          (ii)In the event that the preceding clause shall be determined by judicial action to define too long a period to be enforceable, “Noncompetition Period” shall mean the Employment Period and a period ending six months after the Date of Termination.

     It is also agreed that “Nonsolicitation Period,” for purposes hereof, shall mean:

          (i)the Employment Period and a period ending two years after the Date of Termination;

          (ii)In the event that the preceding clause shall be determined by judicial action to define too long a period to be enforceable, “Nonsolicitation Period” shall mean the Employment Period and a period ending eighteen months after the Date of Termination;

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          (iii)In the event that the preceding clauses shall be determined by judicial action to define too long a period to be enforceable, “Nonsolicitation Period” shall mean the Employment Period and a period ending one year after the Date of Termination; and

          (iv)In the event that the preceding clauses shall be determined by judicial action to define too long a period to be enforceable, “Nonsolicitation Period” shall mean the Employment Period and a period ending six months after the Date of Termination.

ARTICLE 10

EQUITABLE RELIEF

     SECTION 10.01.Equitable Relief. The Executive acknowledges that (a) the covenants contained herein are reasonable, (b) the Executive’s services are unique, and (c) a breach or threatened breach by her of any of her covenants and agreements with the Companies contained in Sections 6.01, 7.01, 8.01 or Article 9 could cause irreparable harm to the Companies for which they would have no adequate remedy at law. Accordingly, and in addition to any remedies which the Companies may have at law, in the event of an actual or threatened breach by the Executive of her covenants and agreements contained in Sections 6.01, 7.01, 8.01 or Article 9, the Companies shall have the absolute right to apply to any court of competent jurisdiction for such injunctive or other equitable relief, without the necessity to post bond, as such court may deem necessary or appropriate in the circumstances.

ARTICLE 11

EXECUTIVE REPRESENTATION AND INDEMNIFICATION

     SECTION 11.01.Executive Representation. The Executive hereby represents and warrants to the Companies that (a) the execution, delivery and performance of this Agreement by the Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which the Executive is a party or by which she is bound, (b) the Executive is not a party to or bound by any employment agreement, noncompetition agreement or confidentiality agreement with any other Person, and (c) upon the execution and delivery of this Agreement by the Companies, this Agreement will be the valid and binding obligation of the Executive, enforceable in accordance with its terms. Notwithstanding Section 11.02 below, in the event that any action is brought against Executive involving any breach of any employment agreement, noncompetition agreement or confidentiality agreement with any other Person, the Executive shall bear her own costs incurred in defending such action, including but not limited to court fees, arbitration costs, mediation costs, attorneys’ fees and disbursements.

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SECTION 11.02.General Indemnification. The Companies, jointly and severally, agree that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (each, a “Proceeding”), by reason of the fact that she is or was a director, officer or employee of the Company or any of its Subsidiaries or is or was serving at the request of the Company or any of its Subsidiaries as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive’s alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Companies to the fullest extent permitted or authorized by applicable law and their bylaws, against all cost, expense, liability and loss (including, without limitation, advancement of attorneys’ and other fees and expenses) reasonably incurred or suffered by the Executive in connection therewith. The Companies agree to use their best efforts to maintain a directors’ and officers’ liability insurance policy covering the Executive during the Employment Period and for at least four years thereafter to the extent available on commercially reasonable terms.

ARTICLE 12

CERTAIN ADDITIONAL PAYMENTS

     SECTION 12.01.Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (including, without limitation, the acceleration of any payment, award, distribution or benefit) by the Company or its Subsidiaries to or for the benefit of the Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Article 12) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any corresponding provisions of state or local tax law, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any Excise Tax, income tax or employment tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. The payment of a Gross-Up Payment under this Section 12.01 shall not be conditioned upon the Executive’s termination of employment. Notwithstanding the foregoing provisions of this Section 12.01, if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the portion of the Payments that would be treated as “parachute payments” under Section 280G of the Code does not exceed the lesser of 110% of the Safe Harbor Amount (as defined in the following sentence) or $200,000, then no Gross-Up Payment shall be made to the Executive and the amounts payable under this Agreement shall be reduced so that the Payments, in the aggregate, are reduced to the Safe Harbor Amount. The “Safe Harbor Amount” is the greatest amount of payments in the nature of compensation that are contingent on a Change in Control for purposes of Section 280G of the Code that could be paid to the Executive without giving rise to any Excise Tax. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the cash payments under Article 5 hereof. For purposes of reducing the payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amounts payable under this Agreement would not result in a reduction of the Payments to the Safe Harbor Amount, no amounts payable under this Agreement shall be reduced pursuant to this Section 12.01.

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     SECTION 12.02.Subject to the provisions of Section 12.03, all determinations required to be made under this Article 12, including the determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by the Company’s independent auditors or such other accounting firm agreed by the parties hereto (the “Accounting Firm”), which shall provide detailed supporting calculations to the Companies within 15 business days after the receipt of notice from the Companies that the Executive has received a Payment, or such earlier time as is requested by the Companies, provided that any determination that an Excise Tax is payable by the Executive shall be made on the basis of substantial authority. The Companies will promptly provide copies of such supporting calculations to the Executive on which the Executive may rely. The initial Gross-Up Payment, if any, as determined pursuant to this Section 12.02, shall be paid to the Executive (or for the benefit of the Executive to the extent of the Companies’ withholding obligation with respect to applicable taxes) no later than one day prior to the due date for the payment of any Excise Tax. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Companies with a written opinion that substantial authority exists for the Executive not to report any Excise Tax on her Federal income tax return and, as a result, the Companies are not required to withhold Excise Tax from payments to the Executive. The Companies will promptly provide a copy of any such opinion to the Executive on which the Executive may rely. Any determination by the Accounting Firm meeting the requirements of this Section 12.02 shall be binding upon the Companies and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Companies should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Companies exhaust their remedies pursuant to Section 12.03 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred, and any such Underpayment shall be promptly paid by the Companies to or for the benefit of the Executive. The fees and disbursements of the Accounting Firm shall be paid by the Companies.

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SECTION 12.03.The Executive shall notify the Companies in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Companies of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Executive receives written notice of such claim and shall apprise the Companies of the nature of such claim and the date on which such Claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Companies (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Companies notify the Executive in writing prior to the expiration of such period that they desire to contest such claim, the Executive shall:

          (i)give the Companies any information reasonably requested by the Companies relating to such claim,

          (ii)take such action in connection with contesting such claim as the Companies shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Companies,

          (iii)cooperate with the Companies in good faith in order effectively to contest such claim, and

          (iv)permit the Companies to participate in any proceedings relating to such claim;

provided, however, that the Companies shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 12.03, the Companies shall control all proceedings taken in connection with such contest and, at their sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at their sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Companies shall determine; provided, however, that if the Companies direct the Executive to pay such claim and sue for a refund, the Companies shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax, including interest or penalties with respect thereto, imposed with respect to such advance (except that if such a loan would not be permitted under applicable law, the Companies may not direct the Executive to pay the claim and sue for a refund); and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Companies’ control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

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     SECTION 12.04.If, after the receipt by the Executive of an amount advanced by the Companies pursuant to Section 12.03, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the compliance by the Companies with the requirements of Section 12.03) promptly pay to the Companies the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Companies pursuant to Section 12.03, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Companies do not notify the Executive in writing of their intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid.

ARTICLE 13

MISCELLANEOUS

     SECTION 13.01.Binding Arbitration. The parties agree that, except as provided in Articles 9 and 10 above, any disputes under this Agreement shall be settled exclusively by arbitration conducted in Winston-Salem, North Carolina. Except to the extent inconsistent with this Agreement, such arbitration shall be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in effect at the time of the arbitration and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Companies and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be decided by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators or if the two arbitrators do not agree, appointed by the American Arbitration Association. The costs of arbitration incurred by the Executive (or her beneficiaries) will be borne by the Companies (including, without limitation, reasonable attorneys’ fees and other reasonable charges of counsel) (i) if the arbitration occurs prior to a Change in Control, if the Executive prevails on a majority of the material issues in the dispute, and (ii) if the arbitration occurs after a Change in Control, if the Executive prevails on at least one material issue in the dispute. Judgment upon the final award rendered by such arbitrator(s) may be entered in any court having jurisdiction thereof.

     SECTION 13.02.Consent to Amendments; No Waivers. The provisions of this Agreement may be amended or waived only by a written agreement executed and delivered by the Companies and the Executive. No other course of dealing between the parties to this Agreement or any delay in exercising any rights hereunder will operate as a waiver of any rights of any such parties.

     SECTION 13.03.Successors and Assigns. All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors, assigns, heirs, executors and estates of the parties hereto whether so expressed or not, provided that the Executive may not assign her rights or delegate her obligations under this Agreement without the written consent of the Companies (other than to her estate or heirs) and the Company may assign this Agreement only to a successor to all or substantially all of the assets of the Company.

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     SECTION 13.04.Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

     SECTION 13.05.Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all of which counterparts taken together will constitute one and the same agreement.

     SECTION 13.06.Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.

     SECTION 13.07.Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when delivered personally to the recipient, two business days after the date when sent to the recipient by reputable express courier service (charges prepaid) or four business days after the date when mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications will be sent to the Executive and to the Companies at the addresses set forth below.

If to the Executive:	To the last address delivered to the Companies
	by the Executive in the manner set forth herein.
If to the Companies:	Krispy Kreme Doughnuts, Inc.
	Krispy Kreme Doughnut Corporation
	Suite 500
	370 Knollwood Street
	Winston-Salem, NC 27103
	Attn: Senior Vice President – Human Resources

or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party.

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     SECTION 13.08.Withholding. The Companies may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

     SECTION 13.09.No Third-Party Beneficiary. This Agreement will not confer any rights or remedies upon any person other than the Companies, the Executive and their respective heirs, executors, successors and assigns.

     SECTION 13.10.Entire Agreement. This Agreement (including any other documents referred to herein) constitutes the entire agreement among the parties and supersedes any prior understandings, agreements or representations by or among the parties, written or oral, that may have related in any way to the subject matter hereof.

     SECTION 13.11.Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party. Any reference to any federal, state, local or foreign statute or law will be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise.

     SECTION 13.12.Survival. Sections 6.01, 7.01, 8.01 and Articles 5, 9, 11, 12 and 13 will survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period, and the Agreement shall otherwise remain in full force to the extent necessary to enforce any rights and obligations arising hereunder during the Employment Period.

     SECTION 13.13.GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW OF NORTH CAROLINA, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.

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     SECTION 13.14.Section 409A. It is intended that this Agreement will comply with Section 409A of the Code (and any regulations and guidelines issued thereunder) to the extent the Agreement is subject thereto, and the Agreement shall be interpreted on a basis consistent with such intent. If an amendment of the Agreement is necessary in order for it to comply with Section 409A, the parties hereto will negotiate in good faith to amend the Agreement in a manner that preserves the original intent of the parties to the extent reasonably possible.

     SECTION 13.15.Representations of the Companies. The Companies represent and warrant that (i) the execution, delivery and performance of this Agreement by the Companies has been fully and validly authorized by all necessary corporate action, (ii) the officer(s) signing this Agreement on behalf of the Companies is duly authorized to do so, (iii) the execution, delivery and performance of this Agreement does not violate any applicable law, regulation, order, judgment or decree or any agreement, plan or corporate governance document to which the Companies are a party or by which they are bound, and (iv) upon execution and delivery of this Agreement by the parties hereto, it will be a valid and binding obligation of the Companies enforceable against the Companies and their successors and assigns in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

[remainder of page left intentionally blank]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.

KRISPY KREME DOUGHNUTS, INC.
By:	/s/ James H. Morgan
	James H. Morgan
	Chief Executive Officer
KRISPY KREME DOUGHNUT CORPORATION
By:	/s/ Douglas R. Muir
	Douglas R. Muir
	Chief Financial Officer
EXECUTIVE
	/s/ Cynthia A. Bay
	Cynthia A. Bay

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Exhibit A

MUTUAL RELEASE

This mutual release (this “Release”) is entered into as of this ____ day of ______, ____ (the “Release Date”) among Krispy Kreme Doughnut Corporation, a North Carolina corporation (“KKDC”), Krispy Kreme Doughnuts, Inc., a North Carolina corporation (the “Company” and, together with KKDC, the “Companies”) and Cynthia A. Bay (the “Executive”).

1. Reference is hereby made to the employment agreement dated as of September 14, 2009 (the “Employment Agreement”) by the parties hereto setting forth the agreements among the parties regarding the termination of the employment relationship between the Executive and the Companies. Capitalized terms used but not defined herein have the meanings ascribed to them in the Employment Agreement.

2. The Executive, for herself, her spouse, heirs, executors, administrators, successors and assigns, hereby releases and discharges the Companies and its respective direct and indirect parents and subsidiaries, and other affiliated companies, and each of their respective past and present officers, directors, agents and employees, from any and all actions, causes of action, claims, demands, grievances and complaints, known and unknown, which the Executive or her spouse, heirs, executors, administrators, successors or assigns ever had or may have at any time through the Release Date. The Executive acknowledges and agrees that this Release is intended to and does cover, but is not limited to, (i) any claim of employment discrimination of any kind whether based on a federal, state or local statute or court decision, including the Age Discrimination in Employment Act with appropriate notice and rescission periods observed; (ii) any claim, whether statutory, common law or otherwise, arising out of the terms or conditions of the Executive’s employment at the Companies and/or the Executive’s separation from the Companies; enumeration of specific rights, claims and causes of action being released shall not be construed to limit the general scope of this Release. It is the intent of the parties that by this Release the Executive is giving up all rights, claims and causes of action occurring prior to the Release Date, whether or not any damage or injury therefrom has yet occurred. The Executive accepts the risk of loss with respect to both undiscovered claims and with respect to claims for any harm hereafter suffered arising out of conduct, statements, performance or decisions occurring before the Release Date.

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3. The Companies hereby release and discharge the Executive, her spouse, heirs, executors, administrators, successors and assigns, from any and all actions, causes of actions, claims, demands, grievances and complaints, known and unknown, which the Companies ever had or may have at any time through the Release Date. The Companies acknowledge and agree that this Release is intended to and does cover, but is not limited to, (i) any claim, whether statutory, common law or otherwise, arising out of the terms or conditions of the Executive’s employment at the Companies and/or the Executive’s separation from the Companies, and (ii) any claim for attorneys’ fees, costs, disbursements or other like expenses. The enumeration of specific rights, claims and causes of action being released shall not be construed to limit the general scope of this Release. It is the intent of the parties that by this Release the Companies are giving up all of their respective rights, claims and causes of action occurring prior to the Release Date, whether or not any damage or injury therefrom has yet occurred. The Companies accept the risk of loss with respect to both undiscovered claims and with respect to claims for any harm hereafter suffered arising out of conduct, statements, performance or decisions occurring before the Release Date.

4. This Release shall in no event (i) apply to any claim by either the Executive or the Companies arising from any breach by the other party of its obligations under the Employment Agreement occurring on or after the Release Date, (ii) waive the Executive’s claim with respect to compensation or benefits earned or accrued prior to the Release Date to the extent such claim survives termination of the Executive’s employment under the terms of the Employment Agreement, (iii) waive the Executive’s right to indemnification under the charters and by-laws of the Companies, or (iv) waive the Executive’s rights as a shareholder.

5. This Mutual Release shall be effective as of the Release Date and only if executed by both parties.

6. All questions concerning the construction, validity and interpretation of this Mutual Release will be governed by the internal law of North Carolina, without regard to principles of conflict of laws.

IN WITNESS WHEREOF, each party hereto, intending to be legally bound, has executed this Mutual Release on the date indicated below.

KRISPY KREME DOUGHNUTS, INC.
By:
KRISPY KREME DOUGHNUT CORPORATION
By:
EXECUTIVE
	Cynthia A. Bay

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Exhibit B

The following businesses, together with their Subsidiaries, are the businesses for purposes of Section 9.01 hereof:

Dunkin Brands Inc.
Tim Hortons, Inc.
George Weston Limited
Interstate Bakeries Corporation
Flowers Foods, Inc.
McKee Foods Inc.
Starbucks

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EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, James H. Morgan, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Krispy Kreme Doughnuts, Inc.;

     2. Based on my knowledge, this 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 report;

     3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

     a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

     b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

     a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 7, 2009

/s/ James H. Morgan 

James H. Morgan 

Chief Executive Officer 

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EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Douglas R. Muir, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Krispy Kreme Doughnuts, Inc.;

     2. Based on my knowledge, this 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 report;

     3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

     a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

     b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

     a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 7, 2009

/s/ Douglas R. Muir 

Douglas R. Muir 

Chief Financial Officer 

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EX-32.1

EXHIBIT 32.1

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

     I, James H. Morgan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the accompanying this Quarterly Report on Form 10-Q of Krispy Kreme Doughnuts, Inc. (the “Company”) for the fiscal quarter ended November 1, 2009 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.

/s/ James H. Morgan 

James H. Morgan 

Chief Executive Officer 

Date: December 7, 2009

     This certification shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference.

     A signed original of this written statement required by Section 906 has been provided to Krispy Kreme Doughnuts, Inc. and will be retained by Krispy Kreme Doughnuts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-32.2

EXHIBIT 32.2

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

     I, Douglas R. Muir, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the accompanying this Quarterly Report on Form 10-Q of Krispy Kreme Doughnuts, Inc. (the “Company”) for the fiscal quarter ended November 1, 2009 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.

/s/ Douglas R. Muir 

Douglas R. Muir 

Chief Financial Officer 

Date: December 7, 2009

     This certification shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference.

     A signed original of this written statement required by Section 906 has been provided to Krispy Kreme Doughnuts, Inc. and will be retained by Krispy Kreme Doughnuts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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