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Commission file number
001-16485 KRISPY KREME DOUGHNUTS,
INC.
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
þ 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 the 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
The aggregate market value of voting and
non-voting common equity of the registrant held by nonaffiliates of the
registrant as of July 27, 2007 was $449.8 million.
Number of shares of Common Stock, no par value, outstanding as of March
28, 2008: 65,370,272. DOCUMENTS INCORPORATED BY
REFERENCE: TABLE OF CONTENTS 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.
References contained herein to fiscal 2004, fiscal 2005, fiscal 2006, fiscal
2007, fiscal 2008 and fiscal 2009 mean the fiscal years ended February 1, 2004,
January 30, 2005, January 29, 2006, January 28, 2007, February 3, 2008 and
February 1, 2009, respectively. Please note that fiscal 2008 contained 53
weeks. FORWARD-LOOKING STATEMENTS
This Annual
Report on Form 10-K contains statements about future events and expectations,
including our business strategy and trends in or expectations regarding the
Companys operations, financing abilities and planned capital expenditures that
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are based
on managements 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, 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: 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. 2 PART I Item 1. BUSINESS. Overview Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts. Our
principal business, which began in 1937, is owning and franchising Krispy Kreme
doughnut stores where over 20 varieties of doughnuts, including our hot Original
Glazed® doughnut, are made, sold and distributed and where a broad
array of coffees and other beverages are offered. As of
February 3, 2008, there were 449 Krispy Kreme stores operated systemwide in 37
U.S. states and in the District of Columbia, Australia, Canada, Hong Kong,
Indonesia, Japan, Kuwait, Mexico, the Philippines, Qatar, Saudi Arabia, South
Korea, the United Arab Emirates and the United Kingdom, of which 105 were owned
by us and 344 were owned by franchisees. Of the 449 total stores, there were 295
factory stores and 154 satellites. Of the Krispy Kreme factory stores and
satellites in operation at February 3, 2008, 210 and 35, respectively, were
located in the United States. Factory
stores (stores which contain a doughnut-making production line) typically
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 our factory and satellite stores)
and off-premises sales (sales to convenience stores, grocery stores/mass
merchants and other food service and institutional accounts) as described
further under Business Operations Company Stores. Satellite stores consist
primarily of the fresh shop, kiosk and hot shop store formats. Hot shop stores
contain doughnut heating technology that allows customers to have a hot doughnut
experience throughout the day. Fresh shops and free-standing kiosk locations do
not contain doughnut heating technology. Business Operations We generate
revenues from three distinct sources: stores we operate, which we refer to as
Company Stores; franchise fees and royalties from our franchise stores, which we
refer to as Franchise; and a vertically integrated supply chain, which we refer
to as KK Supply Chain. Company Stores, Franchise and KK Supply Chain comprise
our three reportable segments under generally accepted accounting principles
(GAAP). Company Stores. The principal
source of revenue for our stores is the production and distribution of
doughnuts. Many of our factory stores are both retail outlets and wholesale
producers of our doughnuts and, as a result, can sell their products through
multiple channels. 3 fresh doughnuts,
both packaged and unpackaged, to our retail customers. Our off-premises
customers include Amerada Hess, BiLo/Brunos, Exxon/Mobil, Food Lion, Kroger,
QuikTrip, Sheetz, Speedway SuperAmerica, Wal-Mart and Wilco/Hess. Our route
drivers are capable of taking customer orders and delivering products directly
to our customers retail locations, where they are typically merchandised from
Krispy Kreme branded displays. We have also developed national account
relationships and implemented electronic invoicing and payment systems with many
large DSD customers. Franchise. Through our Franchise
segment, we generate revenues through the collection of franchise fees and
royalties. Franchisees sell doughnuts and other products through the same
channels discussed above under Company Stores and, as a result, our royalty
revenues are dependent on the on-premises and off-premises sales of our
franchisees. KK
Supply Chain. KK Supply Chain produces
doughnut mixes and manufactures our doughnut-making equipment, which all factory
stores are required to purchase. Additionally, KK Supply Chain operates two
distribution centers that provide Krispy Kreme stores with supplies for the
critical areas of their business. KK Supply Chain generates revenues on sales of
doughnut mixes, supplies, ingredients and equipment to franchisees and supports
both Company and franchisee stores through product knowledge and technical
skills, control of critical production and distribution processes and collective
buying power. The primary
raw materials used in our products are flour, sugar and shortening. We routinely
obtain ingredients under forward purchase agreements and in the commodity spot
markets; market risks associated with our purchases of ingredients are discussed
in Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
Although we own the recipe for our glaze flavoring a key ingredient in many of
our doughnuts we currently utilize a sole source for our supply. KK Supply Chain has four business
units: Receiving
truckloads of shipment of our main ingredients regularly; Testing each
incoming shipment of key ingredients; and Testing each
batch of mix. We closed our
mix manufacturing operation in Effingham, Illinois, and sold the facility in
January 2008. In connection with the closure, we consolidated mix manufacturing
operations into our Winston-Salem facility. We currently are in discussions and
conducting product testing with third party mix manufacturers regarding contract
mix production for regions outside the southeastern United States. Flexibility. We manufacture several models, with varying capacities,
which are capable of producing multiple products and fitting varying store
configurations; and Efficiency. We continually refine our equipment design to improve automation in
order to manage labor costs and/or improve consistency. 4 Our line of
doughnut-making machines includes machines that produce doughnuts at rates of
approximately 65, 150, 270, 600 and 1,000 dozen doughnuts per hour. The largest
of these machines (the 600 and 1,000 dozen per hour machines) are used primarily
in a subset of our factory stores called commissaries, which are production
facilities used principally to serve off-premises customers domestically and to
supplement factory stores focused on on-premises sales
internationally. We also sell
smaller machines, which we refer to as tunnel ovens and which are used in hot
shops, that are manufactured by others and that complete the final steps of the
production process by preparing unglazed doughnuts for the glazing process. We
also refurbish for resale used machines that we have as a result of store
closings. Economies of
scale. We are able to purchase key supplies at volume discount prices, which we
believe are often lower than those that would be available to our operators
individually. In addition, we are selective in choosing our suppliers and
require that they meet certain standards with regard to quality and reliability.
Also, inventory is managed on a systemwide basis rather than at the store
level. Convenience.
Our distribution centers carry the key
items necessary for store operation. We believe this strategy of having one
ordering and delivery system for store operations enables the store operators to
focus their time and energies on running their stores, rather than managing
multiple supplier and distribution relationships. Krispy Kreme Brand
Elements Krispy Kreme
has several important brand elements which we believe have created a bond with
many of our customers. The key elements are: 5 Store Format and
Development Store
Format. We classify a store as either a
factory store or a satellite store. Our traditional factory store has the
capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily.
Commissaries, which are production facilities used principally to serve
off-premises customers domestically and to supplement factory stores focused on
on-premises sales internationally, have the highest production capabilities of
our factory stores. As of February 3, 2008, there were 22 commissaries
systemwide, six of which were operated by the Company. Our other factory stores
generally engage in both on-premises and off-premises sales. Satellite
stores consist primarily of the hot shop, fresh shop and kiosk store formats,
each of which is substantially smaller than a traditional factory store. Hot
shop stores contain tunnel oven doughnut heating technology that allows
customers to have a hot doughnut experience throughout the day. Our fresh shops
and our free-standing kiosk locations do not contain doughnut heating
technology. In each of these formats, we typically sell fresh doughnuts and
beverages, but the doughnuts are supplied by nearby factory stores. Each of
these formats requires less space than our traditional factory store. We began
our tests of the fresh shop concept during fiscal 2004 and our tests of the hot
shop store and kiosk formats in fiscal 2005. As of February 3, 2008, 67 fresh
shops, 48 hot shop stores and 39 kiosks were open systemwide. We continue to
view the fresh shop, hot shop store and kiosk formats as additional ways to
achieve market penetration in a variety of market sizes and settings. Domestic Store Development. As of
February 3, 2008, there were a total of 245 domestic stores, of which 210 were
factory stores and 35 were satellite stores. These store numbers reflect the
opening in fiscal 2008 of four domestic stores and the closing of 31 domestic
stores. Of the four stores opened in fiscal 2008, one was a Company store. Of
the 31 stores closed in fiscal 2008, eight were Company stores. As we work to
improve our operations and to refine our store format for new domestic stores,
we do not expect that we or our franchisees will open a significant number of
domestic factory stores in the near future, although we plan to begin
construction of a limited number of Company-operated satellite stores in fiscal
2009, and domestic franchisees also may open satellite stores. We have
converted several of the stores we operate from traditional factory stores to
hot shops using tunnel oven technology to reduce operating costs and increase
the number of hours each day we offer our hot Original Glazed®
doughnuts. Certain of our franchisees also have converted factory stores to hot
shops. We have converted additional factory stores to hot shops in fiscal 2009.
International Store Development. Markets outside the United States are a source of growth. As of February
3, 2008, there were a total of 204 Krispy Kreme stores (including 119
satellites) operated internationally, which were located in Australia, Canada,
Hong Kong, Indonesia, Japan, Kuwait, Mexico, the Philippines, Qatar, Saudi
Arabia, South Korea, the United Arab Emirates and the United Kingdom. In fiscal
2008, 85 new international stores were opened, and four international
stores were closed. Based upon our continued research and experience with our
international stores, we are focusing additional international development
efforts primarily on opportunities in markets in Asia and the Middle East. We
are focusing on these two geographic areas because of their favorable population
demographics, relatively high levels of consumer sweet goods consumption and the
popularity of Western brands in these markets. The development and franchise
agreements for territories outside the United States (which include the
countries listed above) provide for the development of over 170 additional
stores in fiscal 2009 and thereafter. Our ability to expand in these or other
international markets, however, will depend on a number of factors, including
attracting experienced and well capitalized franchisees, demand for our product,
our ability to supply or obtain the ingredients and equipment necessary to
produce our products and local laws or policies of the particular
countries. 6 Set forth
below is a table containing certain store information as of the end of fiscal
2008, fiscal 2007 and fiscal 2006. Store Operations General store operations. We
outline uniform specifications and designs for each Krispy Kreme store format
and require compliance with our standards regarding the operation of each store,
including, but not limited to, varieties of products, product specifications,
sales channels, packaging, sanitation and cleaning, signage, furniture and
fixtures, image and use of logos and trademarks, training and marketing and
advertising. We also require the use of a computer and cash register system with
specified capabilities to ensure the collection of sales information necessary
for effective store management. Our franchisees are required to provide us with
weekly sales reports. We generally
assist our franchisees with issues such as operating procedures, advertising and
marketing programs, public relations, store design, training and technical
matters. We also provide an opening team to provide on-site training and
assistance both for the week prior to and during the first week of operation for
each initial store opened by a new franchisee. The number of opening team
members providing this assistance is reduced with each subsequent store opening
for an existing franchisee. Our stores
generally operate seven days a week, excluding some major holidays.
Traditionally, our sales have been slower during the winter holiday season and
the summer months. Quality standards and customer service. We encourage our employees to be courteous, helpful, knowledgeable and
attentive. We emphasize the importance of performance by linking a portion of
both a Company store managers and an assistant Company store managers
incentive compensation to profitability and customer service. We also encourage
high levels of customer service and the maintenance of our quality standards
7 by frequently monitoring our stores
through a variety of methods, including periodic quality audits, mystery
shoppers and a toll-free number. In addition, our customer experience
department handles customer comments and conducts routine satisfaction surveys
of our off-premises customers. Management and staffing. Our
Senior Vice President and General Manager of U.S. Operations, along with other
corporate officers responsible for store operations, is responsible for
corporate interaction with our store operations divisional directors and store
management. Through our divisional directors, each of whom is responsible for a
specific geographic region, we communicate frequently with all store managers
and their staff using store audits, weekly communications by telephone or e-mail
and both scheduled and surprise store visits. We offer a
comprehensive manager training program covering the critical skills required to
operate a Krispy Kreme store and a training program for all positions in the
store. The manager training program, conducted both at our headquarters and at
certified training stores, includes classroom instruction, computer-based
training modules and in-store training. Our staffing
varies depending on a stores size, volume of business and number of sales
channels. Stores, depending on the sales channels they serve, have employees
handling on-premises sales, processing, production, bookkeeping, sanitation and
delivery. Hourly employees, along with delivery personnel, are trained by local
store management through hands-on experience and training manuals. Store Ownership We divide
our stores into three categories: Company stores, associate stores and area
developer stores. We refer to associates and area developers collectively as
franchisees. The store counts below include both factory stores and
satellites. Company stores. As of February 3,
2008, Krispy Kreme owned 105 stores. Many of these stores were developed between
1937 and 1996 and are located predominantly in the Southeastern United States.
These stores were designed as wholesale bakeries and generate a majority of
their revenues through off-premises sales. Through acquisitions of associate and
area developer franchisees market rights and related stores, as well as through
new store construction, the number of Company stores located outside the
Southeast has increased. In the past three fiscal years, we have examined the
performance of each of our Company stores and closed 70 underperforming stores.
Franchisee stores. Our franchisees
generally consist of associates who operate under our original franchising
program developed in the 1940s and area developers who operate under our
franchising program developed in the mid-1990s. We prefer that franchisees have
ownership and successful operating experience in multi-unit food operations
within the territory they propose for development. To ensure a consistent
high-quality product, we require each franchisee to purchase our proprietary
mixes and doughnut-making equipment. We devote resources to providing our
franchisees with assistance in site selection, store design, employee training
and marketing. We expect that in the near term the majority of franchisee growth
will be primarily through international rather than domestic
expansion. As of
February 3, 2008, a total of 44 franchisees operated 344 stores systemwide.
Approximately 60% of those franchisees are area developers, and those area
developers operated approximately 85% of the total number of franchise
stores. Associates. Associate stores have
attributes which are similar to those of Company stores located in the
Southeast, and associates typically have many years of experience operating
Krispy Kreme stores. This group generally concentrates on growing sales within
the current base of stores rather than developing new stores or new territories.
Generally, our associates are not obligated to develop additional stores within
their territories. We cannot grant licenses to other franchisees within an
associates territory during the term of the license agreement. Associates
are typically parties to 15-year licensing agreements that are renewed
automatically for successive five-year periods, unless previously terminated by
either party. These licensing agreements generally permit associates to operate
stores using the Krispy Kreme system within a specific territory. Associates
generally pay royalties of 3.0% of on-premises sales and 1.0% of all other
sales. Some associates also contribute 1.0% of all sales 8 to the Company-administered public
relations and advertising fund, which we refer to as the Brand Fund. The Company
has informed its associate franchisees that it will reduce the brand fund
contribution rate to 0.75% for fiscal 2009. Our associates who were shareholders
prior to our initial public offering in April 2000 have license agreements which
were extended for a period of 20 years following that offering. We do not plan
to license any new Krispy Kreme franchisees under the terms of the associate
license agreement. Area
developers. Under our area developer
franchise program, which we introduced in the mid-1990s to strategically expand
into new territories in the United States and Canada, we licensed territories,
usually defined by metropolitan statistical areas, to area developers which we
believed were capable of developing a prescribed number of stores within a
specified time period. We have also used area developers through a modified
franchise program to expand outside of the United States and Canada. As of
February 3, 2008, we had an equity interest in seven of the area developers. We
do not currently expect to own any equity interests in any area developers that
may be formed in the future. Many of our
area developers are multi-unit food operators with knowledge about their local
territory or territories. Our area developer program includes a royalty and fee
structure that is more attractive to Krispy Kreme than that of our associate
program. Each of our
domestic and Canadian area developers has been required to enter into two types
of agreements: a development agreement, which establishes the number of stores
to be developed in an area, and a franchise agreement for each store opened.
With respect to our international area developers, most have entered into one
agreement covering both store development and store operations for each store
opened. Area developers typically pay development and franchise fees ranging
from $20,000 to $50,000 for each store they develop. Domestic and international
area developers generally pay royalties of 4.5% and 6.0%, respectively, of all
sales. The Company has informed its area developers that it will reduce the
royalty rate on off-premises sales to 3.5% in fiscal 2009. Off-premises sales
represented approximately 37% of domestic area developer sales and less than 1%
of international area developer sales in fiscal 2008. Our current
standard franchise agreement for domestic and Canadian area developers provides
for a 15-year term. Upon expiration of the term, an area developer typically has
the right to acquire a successor franchise on terms and conditions of the
franchise agreement that we are then using and subject to certain conditions.
The agreement can be terminated for a number of reasons, including the failure
of the franchisee to comply with system standards or to make timely payments
within applicable grace periods, subject to state law. Domestic area developers
are required to contribute 1.0% of their sales to the Brand Fund. The Company
has informed its domestic area developer franchisees that it will reduce the
brand fund contribution rate to 0.75% for fiscal 2009. International area
developers generally are required to contribute 0.25% of their sales to the
Brand Fund. In addition
to a franchise agreement, all domestic area developers have signed development
agreements which require them to develop a specified number of stores on or
before specific dates. Generally, these agreements expire upon the conclusion of
the store development schedule stated in the agreement, which schedule varies
among area developers. Most international franchisees have executed a single
agreement that includes both franchise rights and development obligations. If
franchisees fail to develop their stores on schedule, we have the right to
terminate the agreement and develop Company stores or develop stores through
other franchisees in their territories. Currently, we have several area
developers that are not in compliance with their development schedules and a
number of domestic development agreements have expired. Where we are
an equity investor in an area developer, we contribute equity or guarantee debt
or lease commitments of the franchisee generally proportionate to our ownership
interest. See Note 18 to the consolidated financial statements appearing
elsewhere herein for additional information on our franchisee investments.
Franchisee financial performance. Over the past several years, domestic franchisees have closed a large
number of stores in an effort to improve overall financial performance. Several
franchisees have been experiencing financial pressures which, in certain
instances, became exacerbated during fiscal 2008. On August 22, 2007, Great
Circle, the Companys franchisee in Southern California, filed for
reorganization under Chapter 11 of the Bankruptcy Code. At the time of the
filing, Great Circle operated 11 franchise stores, which it continues to
9 operate. On September 4, 2007, Sweet
Traditions, the Companys franchisee in Northeastern Illinois and in Eastern
Missouri, filed for reorganization under Chapter 11 of the Bankruptcy Code. At
the time of the filing, Sweet Traditions operated 23 franchise stores. On
February 7, 2008, the bankruptcy court authorized Sweet Traditions to sell
substantially all of its assets, including 20 Krispy Kreme stores, to Hot Light
Brands, L.L.C., an affiliate of Allied Capital Corporation. Krispy Kreme
consented to the sale and the assignment of the franchise agreements to Hot
Light Brands, L.L.C., which currently operates these 20 stores. The Company
believes franchisees will close additional stores in the future, and the number
of such closures may be significant. Royalty revenues and most KK Supply Chain
revenues are directly correlated to sales by franchise stores and, accordingly,
franchise store closures have an adverse effect on the Companys revenues,
results of operations and cash flows. Products Doughnuts and Related Products. We
currently make and sell over 20 varieties of high-quality doughnuts, including
our hot Original Glazed® doughnut. Generally a product is first
tested in our Company stores and then rolled out to our franchise stores. We
have introduced doughnuts in non-traditional shapes and packaged doughnut
snacks, as well as non-traditional packaging offerings including doughnut hole
cups, for distribution through convenience stores. In December
2007, we completed the process of reducing artificial trans fats in our
doughnuts, which now contain zero grams of artificial trans fats per serving at
all U.S. and most international locations. Beverages. We have implemented in
the majority of our stores a complete beverage program, including drip coffees,
a complete line of espresso-based coffees including flavors, both coffee-based
and noncoffee-based frozen drinks and packaged and fountain beverages, and we
continue to seek to improve our beverage program. These drinks are designed to
complement our existing juices, sodas, milks and water. In September 2007, we
ceased production at our coffee roasting facility and sold our coffee roasting
assets, and we simultaneously entered into an agreement with the purchaser to
supply our coffee needs. Marketing Krispy
Kremes approach to marketing is a natural extension of our brand equity, brand
attributes, relationship with our customers and our values. To build our brand
and drive our sales in a manner aligned with our brand values, we have focused
our marketing activities in the following areas: Store Experience.
Our factory stores and hot shops
are where most customers first experience a hot Original Glazed®
doughnut. Customers know that when our Hot Krispy Kreme Original Glazed
Now® sign in the store window is illuminated, they can see our
doughnuts being made and enjoy a hot Original Glazed® doughnut within
seconds after it is made. We believe this begins our relationship with our
customers and forms the foundation of the Krispy Kreme experience. Relationship Marketing. Many of
our brand-building activities are grassroots-based and focus on developing
relationships with various constituencies, including consumers, local non-profit
organizations, communities and businesses. Specific initiatives
include: Public
Relations. We utilize media relations,
product placement and event marketing as vehicles to generate brand awareness
and trial usage for our products. In the years following our initial public
offering, there were numerous product placements and references to our products
on leading television programs and films and favorable media mentions in print
publications. In recent years, there have been fewer such product placements,
references and favorable media mentions. 10 Advertising and Sales Promotions. Grass roots marketing has been central to building our brand awareness.
Although our marketing strategy has not historically employed traditional
advertising, we have occasionally utilized free-standing newspaper inserts,
direct mail, radio, television and sales promotions to generate awareness and
usage of our products. Brand
Fund. We administer a public relations
and advertising fund, which we refer to as the Brand Fund. We contribute 1.0% of
sales from Company stores to the Brand Fund. Domestic area developers are
required to contribute 1.0% of their sales to the Brand Fund. International area
developers generally are required to contribute 0.25% of their sales to the
Brand Fund. Some associates contribute 1.0% of their sales to the Brand Fund.
The Company has informed its associate and domestic area developer franchisees
that it will reduce the brand fund contribution rate to 0.75% for fiscal 2009,
and the Company also will reduce the contribution rate for its stores to this
amount. Proceeds from the Brand Fund are utilized to develop programs to
increase sales and brand awareness and build brand affinity. Brand Fund proceeds
are also utilized to measure consumer feedback and the performance of our
products and stores. In fiscal 2008, we and our franchisees contributed
approximately $3.4 million to the Brand Fund. Management Information
Systems Krispy Kreme
has a management information system that allows for communication among our
corporate office, support operations, Company stores, associates and area
developers. Our franchisees and other affiliates connect to this system through
our extranet and have access to e-mail and the ability to provide financial
reporting. An enterprise resource planning
system supports major financial and operating functions within the Company, including financial reporting and inventory control.
A data warehouse system supports the financial and operating needs of our
Company Stores and KK Supply Chain segments. All Company
stores have been retrofitted with a point of sale, or POS, system. This POS
system provides each store with the ability to manage on-premises sales. We
retrieve the sales information from each stores POS system, which gives us the
ability to analyze data. Two-way electronic communication with our stores
permits sales transactions to be uploaded and price changes to be downloaded to
in-store POS systems. Direct store
delivery sales operations have access to an internally-developed route
accounting system connected into the corporate network. Information from these
systems is retrieved at multiple times weekly and aggregated into the corporate
data warehouse. The Company
maintains business continuity plans for its locations to protect against
business interruption in the event of a system failure resulting from a
catastrophe, natural disaster, security breach, power loss, telecommunications
failure or other similar event. These plans include daily system backup
procedures and use of offsite data recovery centers. Competition Our
competitors include retailers of doughnuts and snacks sold through convenience
stores, supermarkets, restaurants and retail stores. We compete against Dunkin
Donuts, which has the largest number of outlets in the doughnut retail industry,
as well as against Tim Hortons and regionally and locally owned doughnut shops
and distributors. Dunkin Donuts and Tim Hortons have substantially greater
financial resources than we do and are expanding to other geographic regions,
including areas where we have a significant store presence. We also compete
against other retailers who sell sweet treats such as cookie stores and ice
cream stores. We compete on elements such as food quality, concept, convenience,
location, customer service and value. Customer service, including frequency of
deliveries and maintenance of fully stocked shelves, is an important factor in
successfully competing for convenience store and grocery/mass merchant business.
There is an industry trend moving towards expanded fresh product offerings at
convenience stores during morning and evening drive times, and products are
either sourced from a central commissary or brought in by local
bakeries. In the
packaged doughnut market, an array of doughnuts is typically merchandised on a
free-standing branded display. We compete primarily with other well-known
producers of baked goods, such as Dolly Madison, Entenmanns and Hostess, and
some regional brands. 11 Trademarks and Trade
Names Our doughnut
shops are operated under the Krispy Kreme name, and we use over 40 federally
registered trademarks and service marks, including Krispy Kreme® and
Hot Krispy Kreme Original Glazed Now® and the logos associated with
these marks. We have also registered some of our trademarks in approximately 40
other countries. We generally license the use of these trademarks to our
franchisees for the operation of their doughnut shops. We also license the use
of certain trademarks to convenience stores and groceries/mass merchants in
connection with the sale of some of our products at those locations. Although we
are not aware of anyone else using Krispy Kreme or Hot Krispy Kreme Original
Glazed Now as a trademark or service mark, we are aware that some businesses
are using Krispy or a phonetic equivalent, such as Crispie Creme, as part of
a trademark or service mark associated with retail doughnut stores. There may be
similar uses we are unaware of which could arise from prior users. When
necessary, we aggressively pursue persons who use our trademarks unlawfully and
without our consent. Government Regulation Local
regulation. Our stores, both those in the
United States and those in international markets, are subject to licensing and
regulation by a number of government authorities, which may include health,
sanitation, safety, fire, building and other agencies in the states or
municipalities in which the stores are located. Developing new doughnut stores
in particular areas could be delayed by problems in obtaining the required
licenses and approvals or by more stringent requirements of local government
bodies with respect to zoning, land use and environmental factors. Our
agreements with our franchisees require them to comply with all applicable
federal, state and local laws and regulations, and indemnify us for costs we may
incur attributable to their failure to comply. Food
product regulation. Our doughnut mixes
are produced at our manufacturing facility in Winston-Salem, North Carolina. We
closed our mix manufacturing operation in Effingham, Illinois and sold the
facility in January 2008. Production at and shipments from our Winston-Salem
facility are subject to the applicable federal and state governmental rules and
regulations. Similar state regulations may apply to products shipped from our
doughnut stores to convenience stores or groceries/mass merchants. Many of our
convenience store and grocery/mass merchant customers require us to guarantee
our products compliance with applicable food regulations. As is the
case for other food producers, numerous other government regulations apply to
our products. For example, the ingredient list, product weight and other aspects
of our product labels are subject to state and federal regulation for accuracy
and content. Most states periodically check products for compliance. The use of
various product ingredients and packaging materials is regulated by the United
States Department of Agriculture and the Federal Food and Drug Administration.
Conceivably, one or more ingredients in our products could be banned, and
substitute ingredients would then need to be found. In
connection with our international operations, we typically export our products,
principally our doughnut mixes (or concentrate which is combined with other
ingredients sourced locally to manufacture mix) to our franchisees in markets
outside the United States. Numerous government regulations apply to both the
export of food products from the United States as well as the import of food
products into other countries. If one or more of the ingredients in our products
are banned, alternative ingredients would need to be found. Although we intend
to be proactive in addressing any product ingredient issues, such requirements
may delay our ability to open stores in other countries in accordance with our
desired schedule. Franchise regulation. We must
comply with regulations adopted by the Federal Trade Commission (the FTC) and
with several state and foreign laws that regulate the offer and sale of
franchises. The FTCs Trade Regulation Rule on Franchising (FTC Rule) and
certain state and foreign laws require that we furnish prospective franchisees
with a franchise disclosure document containing information prescribed by the
FTC Rule and applicable state and foreign laws and regulations. We have amended
our Franchise Disclosure Document (FDD) to conform it to new FTC disclosure
requirements. We have submitted the amended FDD for registration in those states
in which we have registered our franchise offering. We currently are able to
offer franchises in all states except Maryland. 12 We also must
comply with a number of state and foreign laws that regulate some substantive
aspects of the franchisor-franchisee relationship. These laws may limit a
franchisors ability to: terminate or not renew a franchise without good cause;
interfere with the right of free association among franchisees; disapprove the
transfer of a franchise; discriminate among franchisees with regard to charges,
royalties and other fees; and place new stores near existing
franchises. Bills
intended to regulate certain aspects of franchise relationships have been
introduced into the United States Congress on several occasions during the last
decade, but none has been enacted. Employment regulations. We are
subject to state and federal labor laws that govern our relationship with
employees, such as minimum wage requirements, overtime and working conditions
and citizenship requirements. Many of our on-premises and delivery personnel are
paid at rates related to the federal minimum wage. Accordingly, further
increases in the minimum wage could increase our labor costs. Furthermore, the
work conditions at our facilities are regulated by the Occupational Safety and
Health Administration and are subject to periodic inspections by this
agency. Other
regulations. We are subject to a variety
of consumer protection and similar laws and regulations at the federal, state
and local level. Failure to comply with these laws and regulations could subject
us to financial and other penalties. We have several contracts to serve United
States military bases, which require compliance with certain applicable
regulations. The stores which serve these military bases are subject to health
and cleanliness inspections by military authorities. We are also subject to
federal and state environmental regulations, but we currently believe that these
will not have a material effect on our operations. Employees As of
February 3, 2008, we employed 4,033 people. Of these, 190 were employed in our
headquarters and administrative offices and 143 were employed in our
manufacturing and distribution centers. In our Krispy Kreme stores, we had 3,700
employees. Of our total workforce, 3,288 were full-time employees, including 549
managers and administrators. We are not a
party to any collective bargaining agreement although we have experienced
occasional unionization initiatives. We believe our relationships with our
employees are good. Available Information Krispy Kreme
files annual reports, quarterly reports, proxy statements and other documents
with the SEC under the Securities Exchange Act of 1934 (the Exchange Act). The
public may read and copy any materials that the Company files with the SEC at
the SECs Public Reference Room at 100 F Street N.E., Washington, D.C. 20549 or
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Additionally, the SEC maintains a website that contains
reports, proxy statements, information statements and other information
regarding issuers, including the Company, that file electronically with the SEC
at: http://www.sec.gov. We make
available free of charge through our website at:
http://www.krispykreme.com our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments
to those reports filed or furnished pursuant to the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
provide it to, the SEC. In addition,
many of our corporate governance documents are available on our website.
Specifically, our Nominating and Corporate Governance Committee Charter is
available at: http://www.krispykreme.com/gov_charter.pdf, our
Compensation Committee Charter is available at:
http://www.krispykreme.com/comp_charter.pdf, our Audit Committee Charter
is available at: http://www.krispykreme.com/audit_charter.pdf, our
Corporate Governance Guidelines are available at:
http://www.krispykreme.com/corpgovernance.pdf, our Code of Business
Conduct and Ethics is available at:
http://www.krispykreme.com/code_of_ethics.pdf, and our Code of Ethics for
Chief Executive and Senior Financial Officers is available at:
http://www.krispykreme.com/officers_ethics.pdf. Each of these documents
is available in print to any shareholder who requests it by sending a written
request to Krispy Kreme Doughnuts, Inc., 370 Knollwood Street, Suite 500,
Winston-Salem, NC 27103, Attention: Secretary. The content
on our website is available for information purposes only and shall not be
deemed to be a part of this Annual Report. 13 Item 1A. RISK FACTORS. Our
business, operations and financial condition are subject to various risks. Some
of these risks are described below, and you should take such risks into account
in evaluating us or any investment decision involving our Company. This section
does not describe all risks that may be applicable to us, our industry or our
business, and it is intended only as a summary of certain material risk factors.
More detailed information concerning the risk factors described below is
contained in other sections of this Annual Report on Form 10-K. RISKS RELATING TO OUR
BUSINESS We are subject to ongoing
governmental investigations which could require us to pay substantial
fines or other penalties or otherwise have a material adverse effect on
us. We and
certain of our former executive officers, directors and other employees are
currently subject to investigations by the SEC and the United States Attorneys
Office for the Southern District of New York. While we are cooperating with each
of these investigations, adverse developments in connection with the
investigations, including any expansion of the scope of the investigations,
could negatively impact us and could divert the efforts and attention of our
management team from our ordinary business operations. In connection with these
investigations, it is possible that we will be required to pay criminal or civil
fines, consent to injunctions on future conduct or suffer other penalties, any
of which could have a material adverse effect on us. See Item 3, Legal
Proceedings for a more detailed description of these investigations. Our potential indemnification
obligations and limitations of our director and officer liability
insurance could have a material adverse effect on our results of
operations and financial condition. As discussed
elsewhere herein, several of our former directors, officers and employees are
the subject of criminal, administrative and civil investigations and lawsuits.
Under North Carolina law, our bylaws and certain indemnification agreements, we
may have an obligation to indemnify our former officers and directors in
relation to these matters. Some of these indemnification obligations would be
covered by certain insurers under applicable directors and officers liability
policies. In connection with the settlement of the securities class action and
the partial settlement of the derivative litigation described below under Item
3, Legal Proceedings, however, we have agreed with these insurers to limit our
claims for reimbursement for legal fees and costs incurred in connection with
those proceedings, and the related criminal and administrative investigations,
to a specified reserve fund in the amount of $3.4 million (which currently has
approximately $1.4 million remaining). Two of our former officers have agreed to
limit their claims for indemnity from us in connection with these investigations
to a portion of the amount deposited into the reserve fund. This portion is not
available to us for our claims for reimbursement of the legal fees and costs
described above. If the sums provided for in this fund are not sufficient to
provide for reimbursement to us or if we incur significant uninsured indemnity
obligations, our indemnity obligations could have a material adverse effect on
our results of operations and financial condition. In addition, counsel for the
plaintiffs in several settled shareholder derivative actions have deferred their
application for fees until conclusion of the derivative actions and there can be
no assurance as to the amount that we will be required to pay to such counsel or
whether the remaining reserve fund at such time will be sufficient to reimburse
us for such amount. We have experienced declines in
revenues and have incurred net losses in each of the last three fiscal
years and may experience further declines and losses in the
future. We incurred
net losses of $135.8 million, $42.2 million and $67.1 million in fiscal 2006,
2007 and 2008, respectively. We also experienced a decline in revenues in each
of the last three fiscal years. The revenue decline reflects fewer Company
stores in operation, a decline in domestic royalty revenues and in sales of
mixes and other ingredients resulting from lower sales by the Companys domestic
franchisees. Lower revenues have adversely affected operating margins because of
the fixed or semi-fixed nature of many of our direct operating expenses. In
addition, we have recorded significant asset impairment charges, principally
related to underperforming Company stores and, in fiscal 2008, a manufacturing
and distribution facility we divested. Total impairment charges and lease
termination costs for fiscal 2008 were $62.1 million. We may experience further
revenue declines, asset impairments and net losses in the future. 14 Store profitability is sensitive to
changes in sales volume. Each factory
store has significant fixed or semi-fixed costs, and margins and profitability
are significantly affected by doughnut production volume and sales. While our
average weekly sales per store have risen over the past three years, the
improvement has been driven principally by the closure of underperforming
locations. We are in the process of reevaluating our business and have taken
steps to improve our sales. There can be no assurance, however, that these steps
will produce the desired results. Because significant fixed and semi-fixed costs
prevent us from reducing our operating expenses in proportion with declining
sales, our earnings are negatively impacted if sales decline. A number of
factors have historically affected, and will continue to affect, our sales
results, including, among other factors: Changes in our sales results could
cause the price of our common stock to fluctuate substantially. We rely in part on our
franchisees. Disputes with our franchisees, or failures by our franchisees
to operate successfully, to develop or finance new stores or build them on
suitable sites or open them on schedule, could adversely affect our growth
and our operating results. Area
developers and associates, which are all independent contractors and not Krispy
Kreme employees, contributed (including through purchases from KK Supply Chain)
approximately 29% of our total revenues in fiscal 2008. We rely in part on these
area developers and associates and the manner in which they operate their
locations to develop and promote our business. We occasionally have disputes
with franchisees. Future disputes could materially adversely affect our
business, financial condition and results of operations. We provide training and
support to area developers and associates, but the quality of franchised store
operations may be diminished by any number of factors beyond our control. The
failure of our area developers and associates to operate franchises successfully
could have a material adverse effect on us, our reputation and our brands and
could materially adversely affect our business, financial condition and results
of operations. In addition, although we do not control our franchisees and they
operate as independent contractors, actions taken by any of our franchisees may
be seen by the public as actions taken by us, which, in turn could adversely
affect our reputation or brands. Reduced
access to financing by our franchisees on reasonable terms could adversely
affect our future operations by leading to additional store closures by our
franchisees, which would in turn reduce our franchise revenues and KK Supply
Chain revenues. Most area development agreements specify a schedule for opening
stores in the territory covered by the agreement. These schedules form the basis
for our expectations regarding the number and timing of new Krispy Kreme store
openings. In the past, Krispy Kreme has agreed to extend or modify development
schedules for certain area developers and may do so in the future. Several
franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. We have guaranteed
certain obligations of franchisees in which we have an equity interest.
Financial pressures on these franchisees increase the likelihood that we would
be required to perform under these guarantees. In fiscal 2008, two of our other
franchisees filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. Franchisees closed 26 stores in fiscal 2008. We believe
franchisees will close additional stores in the future, and the number of such
closures may be significant. Royalty revenues and most of KK Supply Chain
revenues are directly correlated to sales by franchise stores and, accordingly,
franchise store closures have an adverse effect on our revenues, results of
operations and cash flows. 15 A portion of our growth strategy
depends on opening new Krispy Kreme stores internationally. Our ability to
expand our store base is influenced by factors beyond our and our
franchisees control, which may slow store development and impair our
strategy. As we work
to stabilize our operations and to refine our store format for new domestic
stores, we do not expect that we or our franchisees will open a significant
number of domestic factory stores in the near future, although we plan to begin
construction of a limited number of Company-operated satellite stores in fiscal
2009, and domestic franchisees also may open satellite stores. Our recent growth
strategy has depended on the opening of new Krispy Kreme stores internationally.
Our ability to expand our store base both domestically and internationally is
influenced by factors beyond our and our franchisees control, which may slow
store development and impair our strategy. The success of these new stores will
be dependent in part on a number of factors, which neither we nor our
franchisees can control. Our new domestic store operating model
and refranchising strategy may not be successful. We are
working to refine our domestic store operating model to focus on a hub and
spoke system, under which multiple satellite stores in a market are provided
doughnuts from a single traditional factory store or commissary at which all
doughnut production for the market takes place. Because the hub and spoke
concept has not been completely refined, we do not expect that the Company or
its franchisees will open a significant number of domestic factory stores in the
near future. In addition, we cannot predict whether this new model will be
successful in increasing our profitability. In addition,
we are developing a strategy to refranchise certain geographic markets. Because
we have not completed the development of our detailed refranchising plans and
have not entered into any new domestic franchise agreements in several years, we
cannot predict the likelihood of refranchising any such markets or the amount of
any proceeds 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. Currency, economic, political and
other risks associated with our international operations could adversely
affect our operating results. As of
February 3, 2008, there were 204 Krispy Kreme stores operated outside of the
United States. Such operations are transacted in the respective local currency.
Amounts payable to us by our international franchisees are based on a conversion
of the royalties and other fees to U.S. dollars using the prevailing exchange
rate. In particular, the royalties are based on a percentage of net sales
generated by our foreign franchisees operations. Our revenues from
international franchisees are exposed to the potentially adverse effects of our
franchisees operations, currency exchange rates, local economic conditions,
political instability and other risks associated with doing business in foreign
countries. To the extent that the portion of our revenues generated from
international operations increases in the future, our exposure to changes in
foreign economic conditions and currency fluctuations will increase. In
connection with our international operations, we typically export our products,
principally our doughnut mixes and doughnut mix concentrates, to our franchisees
in markets outside the United States. Numerous government regulations apply to
both the export of food products from the United States as well as the import of
food products into other countries. If one or more of the ingredients in our
products are banned, alternative ingredients would need to be found. Although we
intend to be proactive in addressing any product ingredient issues, such
requirements may delay our ability to open stores in other countries in
accordance with our desired schedule. Our profitability is sensitive to
changes in the cost of raw materials. Although we
utilize 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 commodity price risk, particularly over the
longer term. In addition, the portion of our anticipated future commodity
requirements that is subject to such contracts varies from time to
time. 16 Flour and
shortening are our two most significant raw materials. The prices of wheat and
soybean oil, which are the principal components of flour and shortening
respectively, reached record highs in fiscal 2008 and have continued to rise in
fiscal 2009. Continued high prices or further adverse changes in commodity
prices could adversely affect our profitability and liquidity and that of our
franchisees. We are the exclusive supplier of
doughnut mixes, other key ingredients and flavors to all domestic Krispy
Kreme Company stores. If we have any problems supplying these ingredients,
our and our franchisees ability to make doughnuts will be negatively
affected. In addition, changes in vendor credit terms could adversely
affect our profitability and liquidity. We are the
exclusive supplier of doughnut mixes and other key ingredients and flavors to
all domestic Company stores and most domestic franchise stores. We supply the
doughnut mixes and other key ingredients and flavors out of our mix
manufacturing facility located in Winston-Salem, North Carolina. Although we
have a backup source to manufacture our doughnut mixes in the event of the loss
of our Winston-Salem plant, we do not have a contract with that source and its
facilities do not regularly produce our doughnut mixes. Any interruption of
existing or planned production capacity at our manufacturing plants could impede
our ability or that of our franchisees to make doughnuts. In addition, in the
event that any of our supplier relationships terminate unexpectedly, even where
we have multiple suppliers for the same ingredient, we may not be able to obtain
adequate quantities of the same high-quality ingredient at competitive
prices. We are the only manufacturer of
our doughnut-making equipment. If we have any problems producing this
equipment, our stores ability to make doughnuts will be negatively
affected. We
manufacture our custom doughnut-making equipment in one facility in
Winston-Salem, North Carolina. Although we have limited backup sources for the
production of our equipment, obtaining new equipment quickly in the event of the
loss of our Winston-Salem plant would be difficult and would jeopardize our
ability to supply equipment to new stores or new parts for the maintenance of
existing equipment in established stores on a timely basis. We have only one supplier of
glaze flavoring, and any interruption in supply could impair our ability
to make our signature hot Original Glazed®
doughnut. We utilize a
sole supplier for our glaze flavoring. Any interruption in the distribution from
our current supplier could affect our ability to produce our signature hot
Original Glazed® doughnut. We are subject to franchise laws
and regulations that govern our status as a franchisor and regulate some
aspects of our franchise relationships. Our ability to develop new
franchised stores and to enforce contractual rights against franchisees
may be adversely affected by these laws and regulations, which could cause
our franchise revenues to decline. We, as a
franchisor, are subject to both regulation by the FTC and state laws regulating
the offer and sale of franchises. Our failure to obtain or maintain approvals to
offer franchises would cause us to lose franchise revenues and KK Supply Chain
revenues. In addition, state laws that regulate substantive aspects of our
relationships with franchisees may limit our ability to terminate or otherwise
resolve conflicts with our franchisees. Because we plan to grow primarily
through franchising, any impairment of our ability to develop new franchise
stores will negatively affect us and our growth strategy. Off-premises sales represent a
significant portion of our sales. The infrastructure necessary to support
off-premises sales results in significant fixed and semi-fixed costs.
Also, the loss of one of our large wholesale customers could adversely
affect our financial condition and results of
operations. The Company
operates a fleet network to support off-premises sales. Declines in off-premises
sales without a commensurate reduction in operating expenses, as well as rising
fuel costs, may adversely affect our business. 17 We have
several large wholesale customers. Our top two such customers accounted for
approximately 10.2% of total Company store sales during fiscal 2008. The loss of
one of our large national wholesale customers could adversely affect our results
of operations across all business segments. These customers do not enter into
long-term contracts; instead, they make purchase decisions based on a
combination of price, product quality, consumer demand and service quality. They
may in the future use more of their shelf space, including space currently used
for our products, for other products, including private label products. If our
sales to one or more of these customers are reduced, this reduction may
adversely affect our business. Our failure or inability to enforce our
trademarks could adversely affect the value of our brands. We own
certain common law trademark rights in the United States, as well as numerous
trademark and service mark registrations in the United States and in other
jurisdictions. We believe that our trademarks and other intellectual property
rights are important to our success and our competitive position. We therefore
devote appropriate resources to the protection of our trademarks and proprietary
rights and aggressively pursue persons who unlawfully and without our consent
use or register our trademarks. The protective actions that we take, however,
may not be sufficient, in some jurisdictions, to secure our trademark rights for
some of the goods and services that we offer and/or to prevent imitation by
others, which could adversely affect the value of our trademarks and service
marks. In
jurisdictions outside the United States, specifically Costa Rica, Guatemala,
Indonesia, Nigeria, Peru, the Philippines, Thailand and Venezuela, we are aware
that some businesses have registered, used and/or may be using Krispy Kreme
(or its phonetic equivalent) in connection with doughnut-related goods and
services. There may be similar such uses or registrations of which we are
unaware and which could perhaps arise from prior users. These uses and/or
registrations could limit our operations and possibly cause us to incur
litigation costs, or pay damages or licensing fees to a prior user or registrant
of similar intellectual property. We have substantial indebtedness
under our secured credit facilities that could adversely impact cash
availability for growth and operations and may increase our vulnerability
to general adverse economic and industry
conditions. Our
indebtedness for borrowed money as of February 3, 2008 was approximately $76.7
million, including $76.1 million under our secured credit facilities. Our debt
service obligations with respect to this indebtedness could have an adverse
impact on our earnings and cash flow for as long as the indebtedness is
outstanding. Our
substantial level of indebtedness could have important consequences, including
the following: If our cash
flows and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay capital expenditures, sell
assets, seek additional capital or restructure or refinance our indebtedness.
These alternative measures may not be successful and may not permit us to meet
our scheduled debt service obligations. In the absence of such operating results
and resources, we could face substantial liquidity problems and might be
required to dispose of material assets to meet our debt service
requirements. 18 Our secured credit facilities
impose restrictions and obligations upon us that significantly limit our
ability to operate our business, and in the past we have sought and
received waivers relating to these restrictions and
obligations. Our secured
credit facilities impose financial and other restrictive covenants that limit
our ability to plan for and respond to changes in our business. Under our
secured credit facilities, we are required to meet certain financial tests,
including a maximum leverage ratio and a minimum interest coverage ratio. In
addition, we must comply with covenants which, among other things, limit the
incurrence of additional indebtedness, liens, investments, dividends,
transactions with affiliates, asset sales, acquisitions, capital expenditures,
mergers and consolidations, prepayments of other indebtedness and other matters
customarily restricted in such agreements. Any failure to comply with these
covenants could result in an event of default under our secured credit
facilities. We have
sought and received waivers of defaults and amendments to covenants from the
lenders under our current and former secured credit facilities. While we were
able to obtain these waivers and amendments, in some cases at a significant
additional cost, there is no assurance that we will not require additional
waivers or amendments or that any future waivers or amendments will be granted.
In the event of a default, the absence of waivers or amendments could result in
acceleration of all or substantially all of our indebtedness and the loss of
earning assets securing our indebtedness. As a result of amendments and waivers
in fiscal 2008 and 2009, we have paid fees of approximately $835,000 and the
interest rate on the loans has increased from LIBOR + 2.75% to LIBOR + 5.50%
(with a LIBOR floor of 3.25%). Any future amendments or waivers could result in
additional fees or rate increases, which could have a material adverse effect on
our financial position, results of operations and cash flows. RISKS RELATING TO THE FOOD SERVICE
INDUSTRY The food service industry is
affected by consumer preferences and perceptions. Changes in these
preferences and perceptions may lessen the demand for our doughnuts, which
would reduce sales and harm our
business. Food service
businesses are often affected by changes in consumer tastes, national, regional
and local economic conditions and demographic trends. Individual store
performance may be adversely affected by traffic patterns, the cost and
availability of labor, purchasing power, availability of products and the type,
number and location of competing stores. Our sales have been and may continue to
be affected by changing consumer tastes, such as health or dietary preferences,
including the reduction of consumption of food products containing high levels
of carbohydrates, that cause consumers to avoid doughnuts in favor of foods that
are perceived as healthier. Moreover, because we are primarily dependent on a
single product, if consumer demand for doughnuts should decrease, our business
would suffer more than if we had a more diversified menu. The food service industry is
affected by litigation, regulation and publicity concerning food quality,
health and other issues, which can cause customers to avoid our products
and result in liabilities. Food service
businesses can be adversely affected by litigation, by regulation and by
complaints from customers or government authorities resulting from food quality,
illness, injury or other health concerns or operating issues stemming from one
store or a limited number of stores, including stores operated by our
franchisees. In addition, class action lawsuits have been filed and may continue
to be filed against various food service businesses (including quick service
restaurants) alleging, among other things, that food service businesses have
failed to disclose the health risks associated with high-fat foods and that
certain food service business marketing practices have encouraged obesity.
Adverse publicity about these allegations may negatively affect us and our
franchisees, regardless of whether the allegations are true, by discouraging
customers from buying our products. Because one of our competitive strengths is
the taste and quality of our doughnuts, adverse publicity or regulations
relating to food quality or other similar concerns affects us more than it would
food service businesses that compete primarily on other factors. We could also
incur significant liabilities if such a lawsuit or claim results in a decision
against us or as a result of litigation costs regardless of the
result. 19 Our success depends on our ability to
compete with many food service businesses. We compete
with many well-established food service companies. At the retail level, we
compete with other doughnut retailers and bakeries, specialty coffee retailers,
bagel shops, fast-food restaurants, delicatessens, take-out food service
companies, convenience stores and supermarkets. At the wholesale level, we
compete primarily with grocery store bakeries, packaged snack foods and vending
machine dispensers of snack foods. Aggressive pricing by our competitors or the
entrance of new competitors into our markets could reduce our sales and profit
margins. Moreover, many of our competitors offer consumers a wider range of
products. Many of our competitors or potential competitors have substantially
greater financial and other resources than we do which may allow them to react
to changes in pricing, marketing and the quick service restaurant industry
better than we can. As competitors expand their operations, we expect
competition to intensify. In addition, the start-up costs associated with retail
doughnut and similar food service establishments are not a significant
impediment to entry into the retail doughnut business. We also compete with
other employers in our markets for hourly workers and may be subject to higher
labor costs. RISKS RELATING TO OWNERSHIP OF OUR
COMMON STOCK The market price of our common
stock has been volatile and may continue to be volatile, and the value of
any investment may decline. The market
price of our common stock has been volatile and may continue to be volatile.
This volatility may cause wide fluctuations in the price of our common stock,
which is listed on the New York Stock Exchange (NYSE). The market price may
fluctuate in response to many factors including: Our charter, bylaws and
shareholder rights agreement contain anti-takeover provisions that may
make it more difficult or expensive to acquire us in the future or may
negatively affect our stock price. Our articles
of incorporation, bylaws and shareholder rights agreement contain several
provisions that may make it more difficult for a third party to acquire control
of us without the approval of our board of directors. These provisions may make
it more difficult or expensive for a third party to acquire a majority of our
outstanding voting common stock. They may also delay, prevent or deter a merger,
acquisition, tender offer, proxy contest or other transaction that might
otherwise result in our shareholders receiving a premium over the market price
for their common stock. 20 Item 1B. UNRESOLVED STAFF COMMENTS.
None. Item 2. PROPERTIES. Stores. As of February 3, 2008,
there were 449 Krispy Kreme stores systemwide, of which 105 were Company stores
and 344 were operated by franchisees. KK
Supply Chain facilities. We own a 147,000
square foot mix manufacturing plant and distribution center in Winston-Salem,
North Carolina. We lease a 102,000 square foot facility near Los Angeles,
California, which is used as a distribution center, under a lease that expires
on May 31, 2008. We currently are considering either relocating the Los Angeles
facility or outsourcing distribution in the western United States to a third
party. Additionally, we own a 103,000 square foot facility in Winston-Salem,
which we use primarily as our equipment manufacturing facility and training
facility. Other
properties. Our corporate headquarters is
located in Winston-Salem, North Carolina. We occupy approximately 59,000 square
feet of this multi-tenant facility under a lease that expires on September 30,
2012, with one five-year renewal option. 21 Item 3. LEGAL PROCEEDINGS.
From time to
time we are subject to claims and suits arising in the course of our business.
We maintain customary insurance policies against certain kinds of claims and
suits which arise in the course of our business, including insurance policies
for workers compensation and personal injury, some of which provide for
relatively large deductible amounts. Except as disclosed below, we are
currently not a party to any material legal proceedings. Governmental
Investigations SEC
Investigation. On October 7, 2004, the staff
of the SEC advised us that the SEC had entered a formal order of investigation
concerning the Company. The Company is cooperating with the
investigation. United
States Attorney Investigation. On February
24, 2005, the United States Attorneys Office for the Southern District of New
York advised us that it would seek to conduct interviews of certain current and
former officers and employees of the Company. The Company is cooperating with
the investigation. Litigation Federal
Securities Class Actions and Settlement Thereof and Federal Court Shareholder
Derivative Actions and Partial Settlement Thereof. On May 12, 2004, a purported securities class action was filed on behalf
of persons who purchased the Companys publicly traded securities between August
21, 2003 and May 7, 2004 against the Company and certain of its former officers
in the United States District Court for the Middle District of North Carolina,
alleging violations of federal securities law in connection with various public
statements made by the Company and seeking damages in an unspecified amount.
Thereafter, 14 substantially identical purported class actions were filed in the
same court. All the actions ultimately were consolidated. The court appointed
lead plaintiffs in the consolidated action, who filed a second amended complaint
on May 23, 2005, alleging claims under federal securities law on behalf of
persons who purchased the Companys publicly-traded securities between March 8,
2001 and April 18, 2005. In addition
to the purported securities class action, three shareholder derivative actions
were filed in the United States District Court for the Middle District of North
Carolina against certain current and former directors of the Company, certain
former officers of the Company, including Scott Livengood (the Companys former
Chairman and Chief Executive Officer), as well as certain persons or entities
that sold franchises to the Company. The complaints in these actions alleged
that the defendants breached their fiduciary duties in connection with their
management of the Company and the Companys acquisitions of certain franchises.
The complaints sought damages, rescission of the franchise acquisitions,
disgorgement of the proceeds from these acquisitions and other unspecified
relief. In October
2004, the Companys Board of Directors elected Michael Sutton and Lizanne Thomas
to the Board and appointed them members and co-chairpersons of a Special
Committee to investigate the matters raised in connection with a formal
investigation of the Company by the SEC described below, the allegations in the
purported derivative lawsuits, issues raised by the Companys independent
auditors and other matters relevant to the foregoing. On October
31, 2006, the Company and the Special Committee entered into a Stipulation and
Settlement Agreement (the Stipulation) with the lead plaintiffs in the
securities class action, the derivative plaintiffs and all defendants named in
the class action and derivative litigation, except for Mr. Livengood, providing
for the settlement of the securities class action and a partial settlement of
the derivative action. On February 14, 2007, the Court granted final approval of
the proposed partial settlement in the derivative action and entered final
judgment dismissing all claims with respect to all defendants, except for claims
that the Company may assert against Mr. Livengood. On February 15, 2007, the
court granted final approval of the proposed settlement in the securities class
action and entered final judgment dismissing all claims with respect to all
defendants. The final judgments were entered as contemplated by the terms of the
Stipulation. 22 With respect
to the securities class action, the Stipulation provided for the certification
of a class consisting of all persons who purchased the Companys publicly-traded
securities between March 8, 2001 and April 18, 2005, inclusive. The settlement
class received total consideration of approximately $76.0 million, consisting of
a cash payment of approximately $35.0 million made by the Companys directors
and officers insurers, cash payments of $100,000 each made by John Tate (the
Companys former Chief Operating Officer) and Randy Casstevens (a former Chief
Financial Officer), a cash payment of $4 million made by the Companys
independent registered public accounting firm and common stock and warrants to
purchase common stock issued by the Company having an estimated aggregate value
of approximately $36.9 million as of their issuance on March 2, 2007. Claims
against all defendants were dismissed with prejudice; however, claims that the
Company may have against Mr. Livengood that may be asserted by the Company in
the derivative action for contribution to the securities class action settlement
or otherwise under applicable law are expressly preserved. The Stipulation
contained no admission of fault or wrongdoing by the Company or the other
defendants. With respect
to the derivative litigation, the Stipulation provided for the settlement and
dismissal with prejudice of claims against all defendants except for claims
against Mr. Livengood. The Company, acting through its Special Committee,
settled claims against Mr. Tate and Mr. Casstevens for the following
consideration: Messrs. Tate and Casstevens each agreed to contribute $100,000 in
cash to the settlement of the securities class action; Mr. Tate agreed to cancel
his interest in 6,000 shares of the Companys common stock; and Messrs. Tate and
Casstevens agreed to limit their claims for indemnity from the Company in
connection with future proceedings before the SEC or by the United States
Attorney for the Southern District of New York to specified amounts. The
Company, acting through its Special Committee, has been in negotiations with Mr.
Livengood but has not reached agreement to resolve the derivative claims against
him. All other claims against defendants named in the derivative actions were
dismissed with prejudice without paying any consideration. However, counsel for
the derivative plaintiffs have deferred their application for fees until
conclusion of the derivative actions against Mr. Livengood. See Other
Contingencies and Commitments below. On March 2,
2007, the Company issued 1,833,828 shares of its common stock and warrants to
purchase 4,296,523 shares of its common stock at a price of $12.21 per share in
connection with the Stipulation. The warrants expire on March 2,
2012. The Company
recorded a non-cash charge to earnings in fiscal 2006 of approximately $35.8
million, representing the estimated fair value, as of late October 2006, of the
common stock and warrants to be issued by the Company. In addition, the Company
recorded a related receivable from its insurers in the amount of approximately
$35.0 million, because the Company considered receipt of this amount to be
probable based on the insurance companies agreements to contribute this amount
to the settlement and the Companys assessment of the insurance companies
financial condition. Simultaneously, the Company recorded a liability in the
amount of $70.8 million representing the then estimated aggregate fair value of
the securities to be issued by the Company and the cash to be paid by the
insurers. In the fourth quarter of fiscal 2007, the Company recorded an
additional non-cash charge to earnings and an increase in the related liability
of approximately $16.0 million, representing the increase from October 2006 to
January 28, 2007 in the estimated fair value of the securities issued by the
Company in connection with the Stipulation. The provision for settlement costs
was adjusted downward by approximately $14.9 million in the first quarter of
fiscal 2008 to reflect the decrease in the fair value of the securities from
January 28, 2007 until their issuance on March 2, 2007. The fair value of the
common shares was determined based upon the market price of the Companys common
stock on March 2, 2007, and the fair value of the warrants to acquire common
shares was estimated as of that date as described in Note 16 to the consolidated
financial statements appearing elsewhere herein. State
Court Books and Records Action. On February
21, 2005, a lawsuit was filed against the Company in a North Carolina court
seeking an order requiring the Company to permit the plaintiff to inspect and
copy the books and records of the Company. On February 14, 2007, the federal
district court approved the partial settlement of the consolidated derivative
actions described above and entered an order dismissing those actions. On
February 14, 2007, the North Carolina court filed a copy of that order and, on
March 23, 2007, administratively dismissed the plaintiffs books and records
action. 23 FACTA
litigation. On October 3, 2007, a purported
nationwide class action (Peter Jackson v. Krispy Kreme Doughnut
Corporation (Case No. CV07-06449 ABC (VBC)), United States District Court,
Central District of California) was filed against the Company and ten
fictitiously named defendants. Plaintiff asserts a single cause of action for
alleged willful violation of the federal Fair and Accurate Credit Transactions
Act (FACTA). Specifically, plaintiff alleges a violation concerning electronic
printing of certain credit card and debit card receipts that were not in
compliance with the applicable information truncation provisions of FACTA.
Plaintiff seeks statutory and punitive damages for these alleged violations, as
well as injunctive relief on behalf of a putative nationwide class. The Company
intends to defend vigorously against the claims asserted. 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 on 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. TAG alleges that the
Company acted improperly by failing to execute a written contract between the
companies and claims damages for breach of contract, services rendered, unjust
enrichment, violation of the North Carolina Unfair Trade Practices Act and fraud
in the inducement. TAG seeks approximately $1 million of actual damages as well
as punitive and treble damages. The Company intends to vigorously prosecute
its claims against TAG and to vigorously defend against the counterclaims, which
the Company believes are without merit. Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS. No matters were submitted to a vote
of security holders during the fourth quarter of fiscal 2008. 24 PART II MARKET FOR REGISTRANTS COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES. Market Information Our common
stock is listed on the NYSE under the symbol KKD. The following table sets
forth the high and low sales prices for our common stock in composite trading as
reported by the NYSE for the fiscal periods shown. Holders As of April 10, 2008, there were
approximately 14,494 shareholders of record of our common stock. Dividends We did not
pay any dividends in fiscal 2007 or 2008. We intend to retain any earnings to
finance our business and do not anticipate paying cash dividends in the
foreseeable future. Furthermore, the terms of our secured credit facilities
prohibit the payment of dividends on our common stock. Securities Authorized for Issuance
Under Equity Compensation Plans The
information required by Item 201(d) of Regulation S-K is provided under Item 12,
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, which is incorporated herein by reference. Recent Sales of Unregistered
Securities None. Purchases of Equity
Securities No purchases were made by or on
behalf of the Company of its equity securities in fiscal 2008. 25 Stock Performance Graph The
performance graph shown below compares the percentage change in the cumulative
total shareholder return on our common stock against the cumulative total return
of the NYSE Composite Index and Standard & Poors Restaurants Index for the
period from January 31, 2003 through February 1, 2008. The graph assumes an
initial investment of $100 and the reinvestment of dividends. Comparison of Cumulative Total Return
26 Item 6. SELECTED FINANCIAL
DATA. The
following selected financial data should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, and the Companys consolidated financial statements appearing
elsewhere herein. 27 Item 7. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The
following discussion of the Companys financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere herein. Company Overview Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts. The
Companys 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 Companys signature hot Original Glazed®
doughnut, are made, sold and distributed together with complementary products,
and where a broad array of coffees and other beverages are offered. The
Companys stores include factory stores and satellite stores. Factory stores
have a doughnut-making production line and are versatile in that many supply
multiple sales channels to more fully utilize production capacity. These sales
channels are comprised of: Traditional
factory stores have the capacity to produce from 4,000 dozen to over 10,000
dozen doughnuts daily. Commissaries, which are production facilities used
principally to serve off-premises customers domestically and to supplement
factory stores focused on on-premises sales internationally, have the highest
production capacities of factory stores. As of February 3, 2008, there were 22
commissaries systemwide, six of which were operated by the Company. Other
factory stores often engage in both on-premises and off-premises sales, with the
allocation between such channels dependent on the particular capacity of the
store and the characteristics of the markets in which the stores operate. Each
factory store has significant fixed or semi-fixed costs, and margins and
profitability are significantly affected by doughnut production volume and
sales. As of February 3, 2008, there were 295 Krispy Kreme factory stores
systemwide, consisting of 97 Company stores and 198 franchise stores.
Satellite
stores consist primarily of the hot shop, fresh shop and kiosk formats. The
Company has begun introducing hot shops, which utilize tunnel oven doughnut
heating and finishing technology scaled to accommodate principally on-premises
sales in a store approximately one-half the size of a traditional factory store.
Hot shop technology allows customers to have a hot doughnut experience
throughout the day. Fresh shops and free-standing kiosks are satellite stores
that do not contain doughnut heating technology, and are substantially smaller
than a traditional factory store. In each of these three formats, the Company
typically sells fresh doughnuts and beverages, with the doughnuts supplied by
nearby factory stores. As of February 3, 2008, 48 hot shops, 67 fresh shops and
39 kiosks were open systemwide; the Company operated five of those hot shops and
three of those fresh shops. The Company views the hot shop, fresh shop and kiosk
formats as additional ways to achieve market penetration in a variety of market
sizes and settings. The Company
is working to refine its domestic store operating model to focus on a hub and
spoke system, under which multiple satellite stores in a market are provided
doughnuts from a single traditional factory store or commissary at which
all doughnut production for the market takes place. The objectives of the hub
and spoke model are to, among other things: 28 Because the
hub and spoke concept has not been completely refined, the Company does not
expect that the Company or its franchisees will open a significant number of
domestic factory stores in the near future. The Company has converted several of
its traditional factory stores to hot shops using tunnel oven technology to
reduce operating costs and increase the number of hours each day the stores
offer the Companys hot Original Glazed® doughnuts. Certain
franchisees also have converted factory stores to hot shops. The Company plans
to convert additional factory stores to hot shops in fiscal 2009, and to begin
construction of a limited number of satellite locations in order to
continue development and demonstrate the operation of the hub and spoke
concept. In addition,
the Company is developing a strategy to refranchise certain geographic markets,
expected to consist principally of, but not necessarily limited to, markets
outside the Companys traditional base in the Southeast. The franchise rights
and other assets in many of these markets were acquired by the Company in
business combinations in prior years. Because the Company has not completed the
development of its detailed refranchising plans and has not entered into any new
domestic franchise agreements in several years, the Company cannot predict the
likelihood of refranchising any such markets or the amount of any proceeds 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. Like other
retail and restaurant companies, the Company constantly evaluates the
performance of its stores and from time to time decides to close locations whose
performance no longer meets Company standards. Markets
outside the United States are a source of growth. As of February 3, 2008, there
were a total of 204 Krispy Kreme stores (including 119 satellites) operated
internationally, which were located in Australia, Canada, Hong Kong, Indonesia,
Japan, Kuwait, Mexico, the Philippines, Qatar, Saudi Arabia, South Korea, the
United Arab Emirates and the United Kingdom. The Company owned five of the
Canadian stores and had an equity interest in the franchisees operating stores
in Mexico and Western Canada. The Company currently does not expect to own
equity interests in international area developers formed in the future. Based on
continued research and experience with international stores, the Company is
focusing international development efforts primarily on opportunities in markets
in Asia and the Middle East. The development and franchise agreements for
territories outside the United States (which include the countries listed above)
provide for the development of over 170 additional stores in fiscal 2009 and
thereafter. The Company
is vertically integrated to help maintain the consistency and quality of
products throughout the Krispy Kreme system. In addition, through vertical
integration, the Company utilizes volume-buying power, which the Company
believes helps lower the cost of supplies to stores and enhances profitability.
The supply chain business unit, KK Supply Chain, produces doughnut mixes and
manufactures doughnut-making equipment, which all factory stores are required to
purchase. Additionally, this business unit operates two distribution centers
that are capable of supplying domestic stores and certain international stores
with key supplies. This business unit is volume-driven, and its economics are
enhanced by the opening of new stores and the growth of sales by existing
stores. 29 The Company
has three reportable segments as defined in Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, as described below. The FTCs
Trade Regulation Rule on Franchising (FTC Rule) and certain state and foreign
laws require the Company to furnish prospective franchisees with a franchise
disclosure document containing information prescribed by the FTC Rule and
applicable state and foreign laws and regulations. The Company has amended its
Franchise Disclosure Document (FDD) to conform it to new FTC disclosure
requirements, and has submitted the amended FDD for registration in those states
in which the Company has registered its franchise offering. The Company
currently is able to offer franchises in all states except Maryland. Several
franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. The Company has
guaranteed certain obligations of franchisees in which it has an equity
interest, as described in Other Commitments and Contingencies in Note 12 to
the consolidated financial statements appearing elsewhere herein. In the fourth
quarter of fiscal 2008, the Company recorded a provision for estimated
payments under guarantees related to a franchisee of $3.0 million; during the
quarter, the franchisee defaulted on certain of the obligations guaranteed by
the Company. During the year ended February 3, 2008, two of the Companys other
franchisees filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. One of these bankruptcy cases was substantially concluded in
February 2008 upon the sale of the franchisees assets to, and assumption of
most of its franchise agreements by, a successor franchisee; the other franchise
operation is continuing to operate under court supervision. Franchisees opened
88 stores and closed 26 stores in fiscal 2008. While franchisees have
contractual commitments to open over 170 additional stores in 30 fiscal 2009 and thereafter, the Company
believes franchisees also will close additional stores in the future, and the
number of such closures may be significant. Royalty revenues and most of KK
Supply Chain revenues are directly correlated to sales by franchise stores and,
accordingly, franchise store closures have an adverse effect on the Companys
revenues, results of operations and cash flows. Results of Operations The
following table presents the Companys operating results for fiscal 2008, 2007
and 2006 expressed as a percentage of total revenues (amounts may not add to
totals due to rounding). To
facilitate an understanding of the Companys operating results, data on the
number of factory stores (including commissaries) appear in the table
below. 31 Data on the number of satellite
stores appear in the table below. Franchisees
closed 26 stores in fiscal 2008. The Company believes franchisees will close
additional stores in the future, and the number of such closures may be
significant. 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 Companys 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. 32 The table
below presents average weekly sales per factory store (which represents, on a
Company and systemwide basis, total sales of all stores divided by the number of
operating weeks for factory stores) and 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 stores and satellites).
Operating weeks represent, on a Company and systemwide basis, the aggregate
number of weeks in the fiscal year that factory stores or both factory and
satellite stores were in operation. The
Companys fiscal year ends on the Sunday closest to January 31, which
periodically results in a 53-week year. Fiscal 2008 contained 53 weeks. To
enhance comparability among the last three fiscal years, amounts in the table
set forth below for fiscal 2008 have been computed based upon the 52-week period
ended January 27, 2008. (1) Excludes
intersystem sales between company and franchise stores. FISCAL 2008 COMPARED TO FISCAL
2007 Overview Excluding
sales for the 53rd week, systemwide sales decreased 0.9% compared to fiscal
2007, reflecting a 5.8% decrease in average weekly sales per store, partially
offset by a 5.2% increase in store operating weeks. The systemwide sales
decrease reflects an 8.4% decrease in Company Stores sales and a 4.4% increase
in franchise store sales. During fiscal 2008, one new Company factory store and
32 new franchise factory stores were opened, nine Company factory stores and 18
franchise factory stores were closed, and three Company factory stores and four
franchise factory stores were converted from factory stores to satellite stores.
The total number of factory stores at the end of fiscal 2008 was 295, consisting
of 97 Company stores and 198 franchise stores. Satellite stores made up 34.3% of
the total systemwide store count as of February 3, 2008 compared to 25.1% at
January 28, 2007. 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, are
operated almost exclusively by franchisees. In addition, the increasing
percentage of total stores which are satellite stores has the effect of reducing
the overall systemwide average weekly sales per store. 33 Revenues For fiscal
2008, revenues decreased to $429.3 million from $461.2 million in fiscal 2007.
Excluding revenues for the 53rd week, revenues for fiscal 2008 decreased 8.6% to
$421.3 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). Company
Stores Revenues. Company Stores revenues were
$304.4 million in fiscal 2008. Excluding revenues for the 53rd week, Company
Stores revenues were $298.9 million, a decrease of 8.4% from $326.2 million in
fiscal 2007. The decrease in revenues (measured on a 52-week basis) reflects a
7.6% decline in store operating weeks partially offset by a 0.2% increase in
average weekly sales per store. The decrease in store operating weeks reflects
the sale or closure of 17 factory stores since the end of fiscal 2006. The
increase in the average weekly sales per store reflects, among other things, the
closure of relatively poorer performing locations and the benefits of
consolidating production for wholesale customers into a smaller number of
factory stores, as well as the effects of price increases. On-premises
sales (which include fundraising sales) comprised approximately 43% and 41% of
total Company Stores revenues in fiscal 2008 and 2007, respectively, with the
balance comprised of off-premises sales. 34 The
following table sets forth statistical data with respect to on- and off-premises
sales by Company stores. The data have been computed by comparing the 52 weeks
ended January 27, 2008 to the 52 weeks ended January 28, 2007. 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
(but only to the extent such sales occurred in the 57th or later week of each
stores operation) by the aggregate on-premises sales of such stores for the
comparable weeks in the preceding year. 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
stores 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. On-premises
same stores sales were flat for the year, generally reflecting an increase in
the average guest check offset by reduced customer traffic. The decrease in the
average weekly number of doors represents a decrease in the grocery/mass
merchant channel, partially offset by an increase in the average weekly number
of doors in the convenience store channel. The average weekly sales per door
fell in both channels. A decrease in average weekly sales per door generally
adversely affects profitability because of the increased significance of
delivery costs in relation to sales. In addition, delivery costs have been
rising due to, among other things, rising fuel costs. Franchise
Revenues. Franchise revenues consist
principally of royalties payable to the Company by franchisees based upon the
franchisees sales and initial franchise fees earned by the Company in
connection with new store openings by franchisees. The components of Franchise
revenues are as follows: Excluding
the 53rd week, franchise revenues were $22.5 million in fiscal 2008, a 6.8%
increase from $21.1 million in fiscal 2007. Royalty
revenues measured on a 52-week basis rose to $19.9 million in fiscal 2008 from
$17.9 in fiscal 2007. Sales by franchise stores, as reported by the franchisees,
were approximately $476 million (measured on a 52-week basis) in fiscal 2008 and
$456 million in fiscal 2007. The Company did not recognize as revenue
approximately $2.6 million of uncollected royalties which accrued during each of
fiscal 2008 and 2007 because the Company did not believe collection of these
royalties was reasonably assured. All of the growth in franchisee sales in
fiscal 2008 was attributable to an increase in the number of franchise stores
outside the United States. Domestic franchisee sales fell in fiscal 2008,
principally due to store closings in fiscal 2008 and 2007. 35 Franchisee
fees declined approximately $550,000 in fiscal 2008 compared to fiscal 2007.
Fiscal 2007 franchise fee revenue included approximately $660,000 of fees
related to amendments to agreements with certain international franchisees. The
development and franchise agreements with these franchisees contemplated
development only of factory stores, and were amended to provide for initial
franchise fees for satellite stores and to provide for development of satellite
stores to be partially creditable against the franchisees store development
obligations. The Company did not record initial franchise fees related to these
franchisees satellite stores until the Company agreed with the franchisees on
the amount of initial franchise fee to be paid with respect to these stores.
This decrease in franchise fees was offset by an increase in franchise fees
arising from an increase in store openings by franchisees in 2008 compared to
2007. Franchisees
opened 88 stores in fiscal 2008. The Company currently expects that the number
of franchise store openings in fiscal 2009 will be fewer than in fiscal 2008.
Franchisees closed 26 stores in fiscal 2008. The Company believes franchisees
will close additional stores in the future, and the number of such closures may
be significant. Royalty revenues are directly correlated to sales by franchise
stores and, accordingly, franchise store closures have an adverse effect on
Franchise revenues. KK Supply
Chain Revenues. KK Supply Chain revenues were
$101.9 million in fiscal 2008. Excluding the 53rd week, KK Supply Chain revenues
were $99.9 million, a 12.3% decrease from $113.9 million in fiscal 2007. The
most significant reason for the decrease in revenues (measured on a 52-week
basis) was lower sales by domestic franchisees, which resulted in an approximate
13.3% decrease in sales of mixes, icings and fillings, sugar, shortening and
supplies by KK Supply Chain. In addition, an increasing percentage of franchisee
sales is attributable to sales by franchisees outside North America. In certain
instances, instead of selling finished doughnut mix to international
franchisees, the Company sells doughnut mix concentrate, which is combined with
other ingredients sourced locally to produce doughnut mix. While the KK Supply
Chains profit on sales of concentrate is intended to be similar to the profit
which would be earned on the finished mix made from that concentrate, sales of
concentrate generate less revenue than would sales of an equivalent amount of
finished mix. In addition, many of the other ingredients and supplies used by
international franchisees are acquired locally instead of from KK Supply Chain.
The KK Supply Chain revenue decrease was also attributable to a 4.1% decrease in
sales of equipment and equipment services in fiscal 2008 compared to fiscal
2007. Franchisee expansion in fiscal 2008 was comprised principally of satellite
stores, which require less equipment than do factory stores. Sales of equipment
and related services measured on a 52-week basis (including signage, beverage
equipment; furniture, fixtures and similar items sold through the KK Supply
Chain distribution centers) represented approximately 12% and 11% of KK Supply
Chain revenues in fiscal 2008 and 2007, respectively. Franchisees
opened 88 stores in fiscal 2008. The Company currently expects that the number
of franchise store openings in fiscal 2009 will be fewer than in fiscal 2008.
Franchisees closed 26 stores in fiscal 2008. The Company believes franchisees
will close additional stores in the future, and the number of such closures may
be significant. A significant majority of KK Supply Chains revenues are
directly correlated to sales by franchise stores and, accordingly, franchise
store closures have an adverse effect on KK Supply Chain revenues. In fiscal
2008, the Company divested a KK Supply Chain manufacturing and distribution
facility (see Note 13 to the consolidated financial statements appearing
elsewhere herein). The business conducted by the divested facility was
transferred to other KK Supply Chain locations and, accordingly, the divestiture
has had no significant effect on KK Supply Chain revenues. The Company also is
evaluating strategic options related to other aspects of the supply chain. In
particular, we currently are in discussions and conducting product testing with
third party mix manufacturers regarding contract mix production for regions
outside the southeastern United States. In addition, the lease on our Los
Angeles facility expires in May 2008, and we currently are considering either
relocating the facility or outsourcing distribution in the western United States
to a third party. Direct Operating Expenses Direct
operating expenses, which exclude depreciation and amortization expense, were
88.5% of revenues in fiscal 2008 compared to 84.4% of revenues in fiscal 2007.
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 17 to the consolidated 36 financial statements appearing elsewhere
herein. Amounts shown below for the Company Stores and KK Supply Chain segments
for fiscal 2007 differ from those amounts as previously reported. As previously
reported, the estimated profit earned by the KK Supply Chain segment on sales to
the Company Stores segment was deducted from Company Stores direct operating
expenses to illustrate the effects of the Companys vertical integration on the
overall profit earned on Company Stores revenues. The Company has discontinued
that profit attribution technique because management concluded that presenting
direct operating expenses on a basis consistent with that used for reporting
segment operating results was more relevant to users of the financial
statements. Amounts previously reported for fiscal 2007 have been reclassified
to be consistent with the presentation for fiscal 2008. In fiscal
2008, the Company revised its allocation of corporate overhead costs to its
operating segments to make such allocations more consistent with the current
cost of providing support services to the operating segments; such revision
resulted in an increase of $6.0 million in costs allocated to segment direct
operating expenses in fiscal 2008 compared to fiscal 2007, and a corresponding
reduction in general and administrative expenses. The effect of the change in
allocated costs is discussed within the discussion of each segments direct
operating expenses below. Company
Stores Direct Operating Expenses. Company
Stores direct operating expenses as a percentage of Company Stores revenues
increased to 98.5% in fiscal 2008 from 94.3% in fiscal 2007. The increase
reflects, among other things, higher costs of doughnut mix and certain other
ingredients resulting from price increases instituted by KK Supply Chain in
order to partially offset higher raw materials costs, as well as increased
direct labor and higher delivery vehicle and marketing costs as a percentage of
revenues. KK Supply Chain instituted additional price increases in the first
quarter of fiscal 2009 as a result of a continued rise in the cost of certain
materials, of which flour and shortening are the most significant. The Company
has been experiencing a decline in the average weekly sales per door in the
off-premises distribution channel. A decrease in average weekly sales per door
generally adversely affects profitability because of the increased significance
of delivery costs in relation to sales. In addition, delivery costs have been
rising due to, among other things, rising fuel costs. The increase
in Company Stores direct operating expenses as a percentage of Company stores
revenues is also a result of a $3.1 million increase in the allocation of
corporate overhead costs in fiscal 2008 compared to fiscal 2007. 37 In fiscal
2008, the Company refined the attribution of the cost of certain insurance and
employee benefits among its business segments and general and administrative
functions in order to attribute these costs to the Companys different
operations more precisely. While the procedural refinement had no effect on
total operating income, the Company estimates the refinement had the effect of
increasing Company Stores direct operating expenses by approximately $3.0
million in fiscal 2008 compared to fiscal 2007, with a corresponding decrease in
general and administrative expenses. Franchise
Direct Operating Expenses. Franchise direct
operating expenses include costs to recruit new franchisees, to assist in store
openings, and to monitor and aid the performance of franchise stores, as well as
direct general and administrative expenses and allocated corporate costs.
Franchise direct operating expenses rose primarily due to increased costs
associated with recruitment and development of international franchisees and
related store opening assistance. The increase in Franchise direct operating
expenses also reflects a $1.4 million increase in the allocation of corporate
overhead costs in fiscal 2008 compared to fiscal 2007. KK Supply
Chain Direct Operating Expenses. KK Supply
Chain direct operating expenses as a percentage of KK Supply Chain revenues
before intersegment eliminations increased to 85.0% in fiscal 2008 from 83.3% in
fiscal 2007. The cost of raw materials used in the production of doughnut mix
and of other goods sold to Company and franchise stores was higher in fiscal
2008 compared to fiscal 2007. In particular, the prices of flour and shortening
and the products from which they are made rose significantly in fiscal 2008
compared to fiscal 2007. During 2008, KK Supply Chain increased the prices
charged to Company and franchise stores for doughnut mixes, shortening and other
goods in order to mitigate increased costs; however, those price increases did
not fully offset the rise in KK Supply Chains costs compared to fiscal 2007.
The Company has implemented additional price increases in the first quarter of
fiscal 2009 as a result of continuing increases in the cost of certain raw
materials, particularly flour and shortening. KK Supply
Chain direct operating expenses include bad debt provisions related to certain
franchisee receivables of approximately $1.5 million (approximately 0.7% of KK
Supply Chain revenues before intersegment eliminations) in fiscal 2008 compared
to approximately $2.9 million (approximately 1.3% of revenues before
intersegment eliminations) in fiscal 2007. As of February 3, 2008, the Companys
allowance for doubtful accounts from affiliated and unaffiliated franchisees
totaled approximately $5.6 million. KK Supply
Chain direct operating expenses in fiscal 2008 reflect a $1.5 million increase
in the allocation of corporate overhead costs compared to fiscal
2007. In fiscal
2008, the Company refined the attribution of the cost of certain insurance and
employee benefits among its business segments and general and administrative
functions in order to attribute these costs to the Companys different
operations more precisely. While the procedural refinement had no effect on
total operating income, the Company estimates the refinement had the effect of
increasing KK Supply Chain direct operating expenses by approximately $625,000
for fiscal 2008 compared to fiscal 2007, with a corresponding decrease in
general and administrative expenses. General and Administrative
Expenses General and
administrative expenses were $26.3 million (6.1% of total revenues) in fiscal
2008 compared to $48.9 million (10.6% of total revenues) in fiscal 2007. General
and administrative expenses include professional fees paid to the interim
management firm engaged by the Company in January 2005 through March 2006, and
professional fees related to the internal and external investigations and
litigation described in Note 12 to the consolidated financial statements
included elsewhere herein, totaling approximately $1.1 million in fiscal 2008
and approximately $9.0 million (net of estimated insurance recoveries of
approximately $4.9 million) in fiscal 2007. The professional fees for fiscal
2007 include approximately $3.9 million related to the warrant to acquire 1.2
million shares of the Companys common stock issued to the interim management
firm as part of its compensation for services rendered to the Company, as more
fully described under Warrant Issued in Exchange for Services in Note 16 to
the consolidated financial statements appearing elsewhere herein. General and
administrative expenses in fiscal 2008 include approximately $2.7 million
recorded in the fourth quarter for severance costs related to the resignation of
the Companys former chief executive officer, of which approximately $1.6
million relates to share-based compensation (including accelerated vesting of
certain equity awards). 38 In fiscal
2008, the Company revised its allocation of corporate overhead costs to its
operating segments to make such allocations more consistent with the current
cost of providing support services to the operating segments. Such revision
resulted in an increase of $6.0 million in costs allocated to segment direct
operating expenses in fiscal 2008 compared to fiscal 2007, and a corresponding
reduction in general and administrative expenses. In addition, in fiscal 2008
the Company refined the attribution of the cost of certain insurance and
employee benefits among its business segments and general and administrative
functions in order to attribute these costs to the Companys different
operations more precisely. While the procedural refinement had no effect on
total operating income, the Company estimates the refinement had the effect of
decreasing general and administrative expenses by approximately $3.6 million in
fiscal 2008, with a corresponding increase in segment direct operating expenses,
the substantial majority of which is reflected in Company Stores direct
operating expenses. Exclusive of
the effects of unusual professional fees, of officer severance pay and of
changes in the allocation of corporate overhead, insurance and benefits costs,
general and administrative expenses were $32.1 million (7.5% of revenues) and
$39.9 million (8.7% of revenues) in fiscal 2008 and fiscal 2007, respectively.
The decrease reflects, among other things, a decline in other professional fees
of $4.2 million. In fiscal 2007, the Company incurred increased accounting,
legal and other costs associated with work on the Companys financial statements
and filings with the Commission, the initial cost of strategic initiatives
related to product, customer and market research and initiatives designed to
achieve cost reductions related to the procurement of goods and services.
Depreciation and Amortization
Expense Depreciation
and amortization expense decreased to $18.4 million in fiscal 2008 from $21.0
million in fiscal 2007. The decline in depreciation and amortization expense is
attributable to the reduction in the number of Company factory stores operating
in fiscal 2008 compared to fiscal 2007 and to a lower depreciable base of
property and equipment resulting from impairment charges in the current and
prior years related to stores which continue to operate. These decreases were
partially offset by approximately $2.3 million of increased depreciation charges
related to the Companys mix manufacturing and distribution facility in
Effingham, Illinois, which the Company divested in January 2008, the estimated
useful life of which was adjusted downward at the end of the second quarter of
fiscal 2008 as a consequence of the Companys decision to divest the facility.
Total depreciation expense related to the Effingham facility was approximately
$4.3 million in fiscal 2008. Impairment Charges and Lease Termination
Costs Impairment
charges and lease termination costs were $62.1 million in fiscal 2008 compared
to $12.5 million in fiscal 2007. Impairment
charges related to long-lived assets totaled $56.0 million in fiscal 2008 and
$9.4 million in fiscal 2007, of which approximately $44.1 million and $9.4
million, respectively, related to the Company Stores segment. Approximately
$23.3 million of the fiscal 2008 charges in the Company Stores segment were
recorded in the fourth quarter. The charges relate to stores closed or expected
to be closed, as well as charges with respect to stores management believes will
not generate sufficient future cash flows to enable the Company to recover the
carrying value of the stores assets, but which management has not yet decided
to close. The Company closed nine factory stores in fiscal 2008 and eight
factory stores in fiscal 2007. The Company tests other 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 (including the impact of
rising commodity costs) on current results of operations, observed trends
in operating results, and evidence of a change in circumstances observed as a
part of periodic reforecasts of future operating results and as part of the
Companys annual budgeting process. The Company records impairment charges
associated with stores in the accounting period in which a store closing
decision is made or in which the carrying value of the store is otherwise
determined to be nonrecoverable. In addition, during fiscal 2008 the Company
recorded an impairment charge of approximately $10.4 million related to its
manufacturing and distribution facility in Effingham, Illinois, which the
Company divested as described in Note 13 to the consolidated financial
statements appearing elsewhere herein. Such charge is net of a credit of
approximately $0.6 million recorded upon the sale of the facility in the fourth
quarter to adjust earlier estimates of its net realizable value. Finally, the
Company recorded an impairment charge of approximately $1.5 million fiscal 2008
to reduce the carrying value of its KK Supply Chain coffee roasting assets to
their estimated fair value upon disposition. The Company sold these assets for
approximately $1.9 million during the third quarter of fiscal 2008. 39 Impairment
charges related to goodwill were approximately $4.6 million and $1.1 million in
fiscal 2008 and 2007, respectively, substantially all of which relate to the
Company Stores segment. Such charges were recorded in the fourth quarter of each
fiscal year. The goodwill impairment charges were recorded to reduce the
carrying value of goodwill to its estimated fair value, which the Company
estimates using the present value of expected future cash flows. Such charges
reflect reductions in the Companys forecasted sales and earnings in certain of
the reporting units comprising the Company Stores and KK Supply Chain segments,
which caused a reduction in the estimated fair value of those reporting units.
Such reductions reflect current operating results, including the effects of
higher materials and labor costs, as well as recent trends in operating results.
The Company conducts its annual goodwill impairment testing as of December
31. Lease
termination costs represent the net present value of remaining contractual lease
payments related to closed stores, after reduction by estimated sublease rental,
and are recorded when the lease contract is terminated or, if earlier, the date
on which the Company ceases use of the leased property. Lease termination costs
were approximately $1.0 million and $1.8 million, respectively, in fiscal 2008
and fiscal 2007. The Company received $966,000 in connection with its assignment
of leases related to closed stores in fiscal 2008; lease termination charges
related to other closed stores offset the credit to earnings resulting from
these assignments. The Company
is developing a strategy to refranchise certain geographic markets, expected to
consist principally of, but not necessarily limited to, markets outside the
Companys traditional base in the Southeast. The franchise rights and other
assets in many of these markets were acquired by the Company in business
combinations in prior years. Because the Company has not completed the
development of its detailed refranchising plans and has not entered into any new
domestic franchise agreements in several years, the Company cannot predict the
likelihood of refranchising any such markets or the amount of any proceeds 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. Settlement of Litigation On October
31, 2006, the Company agreed to settle a federal securities class action and to
settle, in part, certain shareholder derivative actions, as more fully described
in Item 3, Legal Proceedings, and in Note 12 to the consolidated financial
statements appearing elsewhere herein. As part of the settlement, the Company
issued to the plaintiffs 1,833,828 shares of the Companys common stock and
warrants to acquire 4,296,523 shares of common stock at a price of $12.21 per
share. At the time the settlement was agreed upon, the Companys fiscal 2006
financial statements had not been issued; accordingly, the Company charged a
provision for the settlement of approximately $35.8 million against fiscal 2006
earnings, representing the estimated fair value as of late October 2006 of the
common stock and warrants to be issued by the Company. In the fourth quarter of
fiscal 2007, the Company recorded an additional charge to earnings of
approximately $16.0 million relating to the settlement, representing the
increase from October 2006 to January 28, 2007 in the estimated fair value of
the securities to be issued by the Company. The provision for settlement costs
was adjusted downward by $14.9 million in the first quarter of fiscal 2008 to
reflect the decrease in the fair value of the securities from January 28, 2007
until their issuance on March 2, 2007. The fair value of the common shares was
determined based upon the market price of the Companys common stock on March 2,
2007, and the fair value of the warrants to acquire common shares was estimated
as of that date as described in Note 16 to the consolidated financial statements
appearing elsewhere herein. Interest Income Interest
income was $1.4 million in fiscal 2008 compared to $1.6 million in fiscal 2007.
The decrease principally reflects lower invested balances in fiscal 2008
compared to fiscal 2007. Interest Expense Interest
expense decreased to $9.8 million in fiscal 2008 from $20.3 million in fiscal
2007. The decrease principally reflects decreased costs resulting from lower
lender margin and amortization of deferred financing costs in fiscal 2008
compared to fiscal 2007 as a result of the Companys refinancing its long-term
debt in the first quarter of fiscal 2008 as described under Liquidity and
Capital Resources below and in Note 10 to the 40 consolidated financial statements
appearing elsewhere herein. The reduction in interest expense also reflects a
reduction in the amount of outstanding indebtedness. Amendments to the Companys
credit facilities effective after February 3, 2008 will increase the Companys
interest expense in fiscal 2009; such amendments also are described in Note 10
and in Liquidity and Capital Resources below. Loss on Extinguishment of
Debt During the
first quarter of fiscal 2008, the Company refinanced its long-term debt and
revolving credit facilities as more fully described in Note 10 to the
consolidated financial statements appearing elsewhere herein. The Company
recorded a loss on extinguishment of the refinanced term debt of approximately
$9.6 million, consisting of a $4.1 million prepayment fee and a $5.5 million
write-off of unamortized deferred financing costs related to refinanced
facilities. Equity in Losses of Equity Method
Franchisees The
Companys share of the losses incurred by equity method franchisees totaled
$933,000 in fiscal 2008 compared to $842,000 in fiscal 2007. This caption
represents the Companys share of operating results of equity method franchisees
which develop and operate Krispy Kreme stores. Other Non-Operating Income and Expense,
Net Other
non-operating income and expense in fiscal 2008 includes a provision of $3.0
million recorded in the fourth quarter for estimated payments under the
Companys guarantees of certain debt and leases related to a franchisee. During
the quarter, the franchisee defaulted on certain of the obligations guaranteed
by the Company and, while there is no current demand on the Company to perform
under the guarantees, the Company believes it is probable that demand will be
made on the Company to perform under some, and potentially all, of them. The
charge is comprised of $2.1 million representing 100% of the portion of
principal balance of the franchisees loans guaranteed by the Company, and
$900,000 representing the guaranteed portion of approximately one years total
payments on the guaranteed leases. The estimated aggregate maximum remaining
potential obligation on guaranteed leases over their remaining lives (which
range from 11 to 16 years) and for which no provision has been recorded is
approximately $8.8 million, assuming no sublease rentals or other loss
mitigation benefits and no reduction for rights of setoff or other defenses the
Company may have to the guarantees. In addition, other non-operating income and
expense in fiscal 2008 includes an impairment charge of approximately $550,000
to reduce the carrying value of the Companys investment in a franchisee to its
estimated fair value, partially offset by a gain of approximately $260,000
resulting from additional proceeds from the prior sale of an interest in another
franchisee. Other
non-operating income and expense in fiscal 2007 includes gains of approximately
$7.3 million arising principally from the sale of the Companys investments in
Krispy Kreme Australia and Krispy Kreme UK and a charge of approximately
$450,000 for estimated payments under a Company guarantee of certain obligations
of a franchisee. Provision for Income Taxes The
provision for income taxes was $2.3 million and $1.2 million in fiscal 2008 and
fiscal 2007, respectively. 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 Companys 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 incurred a net loss of
$67.1 million and $42.2 million for fiscal 2008 and fiscal 2007,
respectively. 41 FISCAL 2007 COMPARED TO FISCAL
2006 Overview Systemwide
sales for fiscal 2007 decreased 11.9% compared to fiscal 2006, reflecting a 4.6%
decrease in average weekly sales per store and a 7.6% decrease in store
operating weeks. The systemwide sales decrease reflects an 18.1% decrease in
Company Stores sales and a 7.0% decrease in franchise store sales. Revenues 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). KK Supply Chain revenues exclude intersegment sales eliminated in
consolidation. Company
Stores Revenues. Company Stores revenues
decreased 18.1% to $326.2 million in fiscal 2007 from $398.5 million in fiscal
2006. The decrease in revenues reflects a 26.2% decrease in store operating
weeks, partially offset by a 10.9% increase in average weekly sales per store.
The decrease in store operating weeks reflects the significant number of factory
stores sold or closed since the end of fiscal 2005. The increase in the average
weekly sales per store reflects, among other things, the closure of relatively
poorer performing locations, the benefits of consolidating production for
wholesale customers into a smaller number of factory stores, the effects of
certain price increases implemented late in the second quarter of fiscal 2007 on
products sold through certain off-premises distribution channels, and improved
sales volume through convenience store outlets, partially offset by lower
volumes through the grocery store and mass merchant channels. Franchise
Revenues. Franchise revenues, consisting
principally of franchise fees and royalties, increased 14.6% to $21.1 million in
fiscal 2007 from $18.4 million in fiscal 2006. Franchisee fees rose
approximately $2.3 million in fiscal 2007 compared to fiscal 2006, of which
approximately $660,000 represents revenue arising from amendments to agreements
with certain international franchisees. The development and franchise agreements
with these franchisees contemplated development only of factory stores, and were
amended to provide for initial franchise fees for satellite stores and to
provide for development of satellite stores to be partially creditable against
the franchisees store development obligations. The Company did not record
initial franchisee fees related to these franchisees satellite stores until the
Company agreed with the franchisees on the amount of initial franchise fee to be
paid with respect to these stores. The balance of the increase in franchise fees
principally reflects an increase in new store openings in fiscal 2007 compared
to fiscal 2006. In addition, royalty revenues rose to $17.9 million in fiscal
2007 from $17.5 million in fiscal 2006. While sales by franchise stores fell to
approximately $456 million in fiscal 2007 compared to approximately $490 million
in fiscal 2006, the resolution of disputes with two 42 major franchisees substantially eliminated
collectability concerns with respect to royalties accruing on sales by these
franchisees during fiscal 2007. The amount of royalty revenue not recognized
during fiscal 2007 due to collectability concerns fell to approximately $2.6
million from approximately $3.7 million in fiscal 2006. KK Supply
Chain Revenues. KK Supply Chain sales to
franchise stores decreased 10.0% to $113.9 million in fiscal 2007 from $126.5
million in fiscal 2006. The most significant reason for the decrease in revenues
was lower sales by franchisees, which resulted in an approximate 13% decrease in
sales of mixes, icings and fillings, sugar, shortening, coffee and supplies by
KK Supply Chain. In addition, an increasing percentage of franchisee sales is
attributable to sales by franchisees outside North America; while the Company
sells the doughnut mixes used by such franchisees, many of the other ingredients
and supplies used by these franchisees are acquired locally instead of from KK
Supply Chain. The decline in sales of mixes and other supplies was partially
offset by a 26% increase in sales of equipment and equipment services in fiscal
2007 compared to fiscal 2006, principally as a result of increased store
expansion by franchisees in fiscal 2007. Franchisees opened 30 new factory
stores in fiscal 2007 compared to 13 in fiscal 2006. Sales of equipment and
related services (including signage, beverage equipment, furniture, fixtures and
similar items sold through the KK Supply Chain distribution centers) represented
approximately 11% and 8% of KK Supply Chain revenues in fiscal 2007 and 2006,
respectively. Direct Operating Expenses Direct
operating expenses, which exclude depreciation and amortization expense, were
84.4% of revenues in fiscal 2007 compared to 87.3% of revenues in fiscal 2006.
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 17 to the consolidated financial statements appearing
elsewhere herein. Amounts shown below for the Company Stores and KK Supply Chain
segments differ from those amounts as previously reported. As previously
reported, the estimated profit earned by the KK Supply Chain segment on sales to
the Company Stores segment was deducted from Company Stores direct operating
expenses to illustrate the effects of the Companys vertical integration on the
overall profit earned on Company Stores revenues. The Company has discontinued
that profit attribution technique because management concluded that presenting
direct operating expenses on a basis consistent with that used for reporting
segment operating results was more relevant to users of the financial
statements. Amounts previously reported for fiscal 2007 and 2006 have been
reclassified to be consistent with the presentation for fiscal 2008. 43 Company
Stores Direct Operating Expenses. Company
Stores direct operating expenses as a percentage of Company Stores revenues
decreased to 94.3% in fiscal 2007 from 95.0% in fiscal 2006. The improvement
reflects the benefits of the sale or closure of relatively poorer performing
locations, the benefits of higher average weekly sales per store resulting, in
part, from consolidating production of products for sale through off-premises
channels into a smaller number of factory stores, and the effects of certain
price increases implemented late in the second quarter of fiscal 2007 on
products sold though certain off-premises distribution channels. Many store
operating costs are fixed or semi-fixed in nature and, accordingly, store profit
margins are sensitive to changes in sales volumes. Company Stores direct
operating expenses for fiscal 2007 include a charge of approximately $1.3
million recorded in the fourth quarter related to the proposed settlement of
claims alleging violation of wage and hour laws by the Company. Franchise
Direct Operating Expenses. Franchise direct
operating expenses include costs to recruit new franchisees, to assist in store
openings, and to monitor and aid in the performance of franchise stores, as well
as direct general and administrative expenses and allocated corporate costs.
Franchise direct operating expenses as a percentage of Franchise revenues
decreased to 21.8% in fiscal 2007 from 27.3% in fiscal 2006, primarily due to
reduced provisions for uncollectible receivables. Increased costs associated
with recruitment and development of international franchisees were offset by a
reduction in costs associated with domestic franchise expansion. KK Supply
Chain Direct Operating Expenses. KK Supply
Chain direct operating expenses as a percentage of KK Supply Chain revenues
before intersegment eliminations were 83.3% in fiscal 2007 compared with 85.9%
in fiscal 2006. The improvement reflects the benefit of certain price increases
instituted in the first quarter of fiscal 2007 to offset higher costs, as well
as lower bad debt provisions and lower allocated corporate costs in fiscal 2007
compared to fiscal 2006. KK Supply Chain direct operating expenses include bad
debt provisions relating to receivables from franchisees of approximately $2.9
million in fiscal 2007 (of which approximately $1.4 million was recorded in the
fourth quarter) and $4.8 million for fiscal 2006. These improvements were
partially offset by the adverse effects of lower operating levels in fiscal 2007
compared to fiscal 2006 resulting from lower revenue levels and by increases in
the cost of certain ingredients. In fiscal 2007, KK Supply Chain was adversely
affected by increases in certain raw materials costs, including the cost of
flour and shortening. The prices of these materials and the products from which
they are made were volatile in fiscal 2007 and reached record highs during the
year. General and Administrative
Expenses General and
administrative expenses were $48.9 million (10.6% of total revenues) in fiscal
2007 compared to $67.7 million (12.5% of total revenues) in fiscal 2006. General
and administrative expenses include professional fees paid to the interim
management firm engaged by the Company in January 2005 and professional fees
related to the internal and external investigations and litigation described in
Note 12 to the consolidated financial statements included elsewhere herein
totaling approximately $9.0 million (net of estimated insurance recoveries of
approximately $4.9 million) in fiscal 2007 and approximately $31.8 million (net
of estimated insurance recoveries of approximately $14.4 million) in fiscal
2006. The professional fees for fiscal 2007 include a credit of approximately
$2.3 million recorded in the fourth quarter of fiscal 2007 resulting from
reimbursements from insurance companies of costs and expenses in excess of
amounts previously estimated. The professional fees for fiscal 2007 and fiscal
2006 include approximately $3.9 million and $2.8 million, respectively, related
to the warrant to acquire 1.2 million shares of the Companys common stock
issued to the interim management firm as part of its compensation for services
rendered to the Company, as more fully described in Note 16 to the consolidated
financial statements appearing elsewhere herein. In addition, general and
administrative expenses in fiscal 2006 include approximately $4.0 million of
out-of-period costs related to stock-based compensation. The Company erroneously
failed to record these costs in prior years, but concluded that such error was
not material to the consolidated financial statements of the affected periods or
to the fiscal 2006 consolidated financial statements. Accordingly, the Company
recorded the costs in the first quarter of fiscal 2006 rather than restating
prior periods financial statements, as more fully described in Note 1 to the
consolidated financial statements. Exclusive of these costs, general and
administrative expenses were 8.7% of revenues in fiscal 2007 compared to 5.9% in
fiscal 2006. The increase in these costs in absolute terms and as a percentage
of revenue reflects, among other things, approximately $3.4 million of stock
compensation costs incurred in fiscal 2007 and included in general and
administrative expenses (resulting, in part, from adoption of FAS 123(R) as
described in Note 16 to 44 the consolidated financial statements),
increased legal and other costs associated with work on the Companys financial
statements and filings with the SEC, the initial cost of strategic initiatives
related to product, customer and market research and initiatives designed to
achieve cost reductions related to the procurement of goods and services, higher
cash compensation costs, and the effects of the fixed nature of many of these
costs on a smaller revenue base. Depreciation and Amortization
Expense Depreciation
and amortization expense decreased to $21.0 million, or 4.6% of total revenues,
in fiscal 2007 from $28.9 million, or 5.3% of total revenues, in fiscal 2006.
The decrease in depreciation and amortization expense relates almost entirely to
the Company Stores segment, in which depreciation and amortization expense
declined principally due to the sale and closure of stores. Impairment Charges and Lease Termination
Costs Impairment
charges and lease termination costs were $12.5 million in fiscal 2007 compared
to $55.1 million in fiscal 2006, including approximately $1.1 million and $3.5
million, respectively, of goodwill impairment charges. The remaining charges in
fiscal 2007 and 2006 consist principally of impairment charges related to
long-lived assets at Company stores of approximately $9.4 million and $49.7
million, respectively, and lease termination costs of approximately $1.8 million
and $1.3 million, respectively. While the majority of the impairment charges
relate to closed stores, in the fourth quarter of fiscal 2007, the Company also
recorded approximately $3.0 million of impairment charges with respect to stores
management believes are unlikely to generate sufficient future cash flows to
enable the Company to recover the carrying value of the stores assets, but
which management has not yet decided to close. The Company closed eight
factory stores in fiscal 2007 and 46 factory stores in fiscal 2006. The Company
generally records impairment charges associated with a decision to close a store
in the accounting period in which the closing decision is made; lease
termination costs are recorded when the lease contract is terminated or, if
earlier, the date on which the Company ceases use of the leased
property. Settlement of Litigation On October
31, 2006, the Company agreed to settle a federal securities class action and to
settle, in part, certain shareholder derivative actions, as more fully described
in Item 3, Legal Proceedings, and Note 12 to the consolidated financial
statements appearing elsewhere herein. As part of the settlement, the Company
issued to the plaintiffs 1,833,828 shares of the Companys common stock and
warrants to acquire 4,296,523 shares of common stock at a price of $12.21 per
share. At the time the settlement was agreed upon, the Companys fiscal 2006
financial statements had not been issued; accordingly, the Company charged a
provision for the settlement of approximately $35.8 million against fiscal 2006
earnings, representing the estimated fair value as of late October 2006 of the
common stock and warrants to be issued by the Company. In the fourth quarter of
fiscal 2007, the Company recorded an additional charge to earnings of
approximately $16.0 million relating to the settlement, representing the
increase from October 2006 to January 28, 2007 in the estimated fair value of
the securities to be issued by the Company. The provision for settlement costs
was adjusted downward by $14.9 million in the first quarter of fiscal 2008 to
reflect the decrease in the fair value of the securities from January 28, 2007
until their issuance on March 2, 2007. The fair value of the common shares was
determined based upon the market price of the Companys common stock, and the
fair value of the warrants to acquire common shares was estimated as described
in Note 16 to the consolidated financial statements. Interest Income Interest
income was $1.6 million in fiscal 2007 compared to $1.1 million in fiscal 2006.
The increase principally reflects higher invested balances in fiscal 2007
compared to fiscal 2006. 45 Interest Expense Interest
expense increased to $20.3 million in fiscal 2007 from $20.2 million in fiscal
2006. The aggregate costs, including interest, fees and amortization of deferred
financing costs, associated with the Companys credit facilities increased
approximately $4.9 million during fiscal 2007 compared to fiscal 2006,
principally reflecting higher interest rates and lender margin in fiscal 2007
compared to fiscal 2006. In addition, interest expense in fiscal 2006 included
one-time fees and expenses of approximately $1.2 million associated with a bank
credit facility prior to its retirement using proceeds of the 2005 Secured
Credit Facilities, the write-off of approximately $840,000 of unamortized
financing costs associated with the retired bank financing and approximately
$640,000 charged to earnings upon termination of an interest rate hedge related
to the retired bank financing. Interest expense in fiscal 2006 also included
approximately $2.0 million of interest expense associated indebtedness of
certain subsidiaries which has since been retired. Equity in Losses of Equity Method
Franchisees The
Companys share of the losses incurred by equity method franchisees totaled
$842,000 in fiscal 2007 compared to $4.3 million in fiscal 2006. This caption
represents the Companys share of operating results of unconsolidated
franchisees which develop and operate Krispy Kreme stores. The fiscal 2006
losses included approximately $2.4 million of losses related to KremeKo, the
Companys former franchisee in Eastern and Central Canada, which arose from
impairment provisions associated principally with store closures. In addition,
the Companys equity in the losses of equity method franchisees has declined as
a result of the Companys sale or other disposal of these investments in fiscal
2006 and fiscal 2007. Minority Interests in Results of
Consolidated Franchisees The minority
interest in the results of operations of consolidated franchisees represents the
portion of the income or loss of less than wholly-owned franchise subsidiaries
allocable to other investors interests in those franchisees. In fiscal 2006,
minority investors absorbed losses in such subsidiaries totaling $4.2 million.
There were no minority interests in the results of operations of consolidated
subsidiaries in fiscal 2007 because the minority interests in the franchisee had
been reduced to zero or the franchisee had ceased operations. Other Non-Operating Income and Expense,
Net Other
non-operating income and expense in fiscal 2007 includes gains of approximately
$7.3 million arising principally from the sale of the Companys investments in
Krispy Kreme Australia and Krispy Kreme UK, and a charge of approximately
$450,000 for estimated payments under a Company guarantee of certain obligations
of an equity method franchisee. Provision for Income Taxes The
provision for income taxes was $1.2 million in fiscal 2007 and a benefit of
$776,000 in fiscal 2006. 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 Companys aggregate net deferred income tax
assets to zero, as well as a provision for income taxes estimated to be payable
currently. The provision for income taxes in fiscal 2006 also includes an
out-of-period credit of approximately $1.5 million. This credit corrects an
overstatement of the valuation allowance for deferred income tax assets recorded
by a charge to earnings in fiscal 2005. The Company concluded that this error
was not material to the consolidated financial statements of the affected
periods or to the fiscal 2006 consolidated financial statements. Accordingly,
the Company recorded the credit in the first quarter of fiscal 2006 rather than
restating prior periods financial statements. Net Loss The Company
incurred a net loss of $42.2 million in fiscal 2007 compared to a net loss of
$135.8 million in fiscal 2006. 46 Liquidity and Capital
Resources The
following table summarizes the Companys cash flows from operating, investing
and financing activities for fiscal 2008, 2007 and 2006: Cash Flows from Operating
Activities Net cash
provided by operating activities was $9.7 million in fiscal 2008, $22.1 million
in fiscal 2007 and $1.9 million in fiscal 2006. Cash
provided by operating activities in fiscal 2008 reflects a cash outflow of
approximately $4.1 million for the prepayment fee associated with the
refinancing of the Companys 2005 Secured Credit Facilities as described below
and in Note 10 to the consolidated financial statements appearing elsewhere
herein. Operating cash flow was adversely affected in fiscal 2008 compared to
fiscal 2007 by a $4.2 million reduction in accrued interest from year end 2007
to year end 2008 arising from the change in the last day of the fiscal year
relative to the last day of January. In addition, receipts of development and
franchise fees were approximately $5.0 million higher in fiscal 2007 than in
fiscal 2008; such fees are deferred and not recognized in earnings until the
related stores are opened. Cash
provided by operating activities in fiscal 2008, 2007 and 2006 was affected by
professional and other fees related to the investigations and litigation
described in Note 12 to the consolidated financial statements appearing
elsewhere herein. Additionally, fiscal 2006 cash provided by operating
activities was reduced by fees paid to the corporate recovery and advisory firm
engaged by the Company to provide interim management services to the Company
from late January 2005 through March 2006. These fees and expenses, net of
related insurance recoveries, reduced operating cash flow by $4.2 million, $8.4
million and $26.9 million in fiscal 2008, 2007 and 2006,
respectively. Cash Flows from Investing
Activities Net cash
provided by investing activities was $13.1 million in fiscal 2008 and $14.0 in
fiscal 2007. Net cash used for investing activities was $11.7 million in fiscal
2006. Cash used
for capital expenditures increased to $5.5 million in fiscal 2008 from $4.0
million in fiscal 2007. Cash used for capital expenditures decreased in both
fiscal 2008 and fiscal 2007 from $10.4 million in fiscal 2006 because the
Company substantially eliminated store expansion early in fiscal 2006. In fiscal
2008, 2007 and 2006, the Company realized proceeds from the sale of property and
equipment of $18.3 million, $9.7 million and $7.3 million, respectively, which,
except for approximately $10.9 million (net of expenses) received in fiscal 2008
from the sale of a mix manufacturing and distribution facility, related
principally to closed stores. During
fiscal 2007, the Company recovered $2.5 million related to its investment in
Freedom Rings (a former franchisee which filed for bankruptcy protection in
October 2005) and received approximately $9.6 million from the sale of its
interests in franchisees in Australia and the United Kingdom and from the sale
of the Companys equity interest in another franchisee. 47 In addition,
in fiscal 2007, the Company paid approximately $818,000 (net of a recovery of
$282,000) to settle its obligations under its guarantees of a portion of the
indebtedness of Glazed Investments, a subsidiary which filed for bankruptcy
protection in February 2006. In fiscal 2006, the Company advanced approximately
$12.2 million to franchisees in which the Company had an ownership interest,
including approximately $9.3 million paid to settle the Companys obligations
under certain guarantees of indebtedness of KremeKo. Each of these amounts is
included in Investments in and advances to equity method franchisees in the
consolidated statement of cash flows. During fiscal 2007, the Company
purchased three stores from one of its franchisees for $2.9 million
cash. Cash Flows from Financing
Activities Net cash
used for financing activities was $34.4 in fiscal 2008 and $15.5 million in
fiscal 2007. Net cash provided by financing activities was $0.1 million in
fiscal 2006. In February
2007 the Company closed new secured credit facilities totaling $160 million. At
closing, the Company borrowed the full $110 million available under the 2007
Term Loan , and used the proceeds to retire approximately $107 million of
indebtedness outstanding under the 2005 Secured Credit Facilities (which were
terminated) and to pay prepayment fees under the 2005 Secured Credit Facilities
and fees and expenses associated with the 2007 Secured Credit Facilities. In
fiscal 2008, the Company prepaid approximately $32.8 million of the 2007 Term
Loan, of which $17.8 million was from the proceeds of sales of certain property
and equipment and $15.0 million represented discretionary prepayments made in
order to reduce the likelihood of violating the leverage ratio covenant
contained in the facilities. During
fiscal 2007, financing activities included scheduled principal payments of
long-term debt. In addition, pursuant to the provisions of the 2005 Secured
Credit Facilities described in Note 10 to the consolidated financial statements
appearing elsewhere herein, in fiscal 2007 the Company prepaid approximately
$7.6 million of the debt thereunder using proceeds from the sale of certain
property and equipment, and repaid an additional $3.6 million using proceeds
from the sale of the Companys interest in its franchisee in the United
Kingdom. In fiscal
2006, the Company closed the 2005 Secured Credit Facilities. The Company
borrowed $120 million under these facilities at closing, and used approximately
$88 million to repay borrowing outstanding under the credit facility existing at
that time, which was then terminated. The Company paid approximately $9.5
million of fees, costs and expenses associated with the 2005 Secured Credit
Facilities. Other retirements of long-term debt in fiscal 2006 included
approximately $16.2 million related to a majority-owned franchise subsidiary and
payments on capital lease obligations. Cash inflows from financing activities in
fiscal 2006 included a $7.7 million capital contribution to a majority-owned
franchise subsidiary by the minority investors in that franchisee. Other Balance Sheet
Changes Other
current assets declined by approximately $6.4 million in fiscal 2008 compared to
fiscal 2007 principally due to the disposal of assets held for sale. Other
accrued liabilities declined by approximately $2.5 million in fiscal 2008,
principally due to the timing of the January 2008 interest payment date relative
to fiscal year end and the payment of certain accrued professional
fees. Business Conditions, Uncertainties and
Liquidity The Company
incurred net losses of $135.8 million, $42.2 million and $67.1 million in fiscal
2006, 2007 and 2008, respectively, which include non-cash impairment charges of
$53.7 million, $10.8 million and $61.0 million, respectively. In addition,
fiscal 2006 and 2007 results include non-cash charges of $35.8 million and $16.0
million, respectively, related to the settlement of certain litigation, and
fiscal 2008 results reflect a non-cash credit of $14.9 million related to the
same settlement, as described in Note 12 to the consolidated financial
statements appearing elsewhere herein. 48 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, a decline in domestic royalty revenues and lower sales of mixes and
other ingredients resulting from lower sales by the Companys domestic
franchisees. Lower revenues have adversely affected operating margins because of
the fixed or semi-fixed nature of many of the Companys direct operating
expenses. In addition, the Company has recorded significant asset impairment
charges, principally related to underperforming Company stores and, in fiscal
2008, a manufacturing and distribution facility the Company divested. Total
impairment charges and lease termination costs for fiscal 2008 were $62.1
million. The Company
had net cash flow from operations of $1.9 million, $22.1 million and $9.7
million in fiscal 2006, 2007, and 2008, respectively. Asset dispositions
generated investing cash flows of $9.7 million in fiscal 2007 and $18.3 million
in fiscal 2008, with the majority of such proceeds used to reduce the
outstanding borrowings under the Companys credit facilities. The Companys fiscal 2009 operating
plan reflects a decline in revenues and an increase in certain costs, including
the impact of commodity prices on its raw materials costs, compared to
fiscal 2008. The Company is taking measures to reduce controllable costs and has
implemented, and, to the extent feasible, plans to implement in the future,
price increases to offset increases in raw material costs. Based on the
Companys current working capital and the fiscal 2009 operating plan, management
believes the Company can meet its projected operating, investing and financing
cash requirements. In February
2007, the Company completed a refinancing using the proceeds of the 2007 Secured
Credit Facilities described in Note 10 to the consolidated financial statements
appearing elsewhere herein, which are the Companys principal source of external
financing. These facilities consist of a $110 million term loan maturing in
February 2014 and a $30 million revolving credit facility maturing in February
2013. The 2007
Secured Credit Facilities contain significant financial and other covenants.
Based on its operating plan, the Company projected that it would not be able to
comply with the financial covenants in fiscal 2009. Subsequent to the end of
fiscal 2008, the Company executed amendments to the 2007 Secured Credit
Facilities which, among other things, relaxed the financial covenants contained
therein for fiscal 2009 and 2010. The financial covenants as of February 3,
2008, and the amended financial covenants for future years, are described in
Note 10 to the consolidated financial statements appearing elsewhere herein.
While the Company was in compliance with the financial covenants as of February
3, 2008, and the Company expects to be able to comply with the amended financial
covenants based on its operating plan, there can be no assurance that the
Company will be able to do so. As a result of amendments and waivers in fiscal
2008 and 2009, the Company paid fees of approximately $835,000 and the interest
rate on the loans has increased from LIBOR plus 2.75% to LIBOR plus 5.50% (with
a LIBOR floor of 3.25%). The increase in rates will result in approximately $1.9
million of additional annual interest expense based on the current
level of borrowings. Any future amendments or waivers could result in additional
fees or rate increases. The Company
has prepaid approximately $32.8 million of the $110 million term loan; such
prepayments included prepayments of approximately $17.8 million from sales of
property and equipment and discretionary prepayments of $5 million in each of
the first, second and third quarters of fiscal 2008 made in order to reduce the
likelihood of violating the leverage ratio covenant contained in the facilities.
In addition to scheduled amortization of principal, 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. As of
February 3, 2008, the maximum additional borrowing available to the Company was
approximately $9.7 million, computed on a pro forma basis after giving effect to
the reduction in lender commitments under the Companys revolving credit
facility described in Note 10 to the consolidated financial statements appearing
elsewhere herein. Failure to
comply with the financial covenants contained in the 2007 Credit Facilities, or
the occurrence or failure to occur of certain events, would cause the Company to
default under the facilities. In the absence of a waiver of, or forbearance with
respect to, any such default from the Companys lenders, the Company could be
obligated to repay outstanding indebtedness under the facilities in advance of
its scheduled maturity, and the Companys ability to access additional
borrowings under the facilities would be restricted. In the event the Company
were to fail to comply 49 with one or more such covenants, the
Company would attempt to negotiate waivers of any such noncompliance. 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 event that credit under the 2007 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. Many factors
could adversely affect the Companys business. In particular, the Company is
vulnerable to further increases in the cost of raw materials, which could
adversely affect the Companys operating results and cash flows. In addition,
several franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. The Company has
guaranteed certain obligations of franchisees in which it has an equity
interest, as described in Other Commitments and Contingencies in Note 12 to
the consolidated financial statements appearing elsewhere herein. In the fourth
quarter of fiscal 2008, the Company recorded a provision of $3.0 million for
estimated payments under these guarantees. The Company may be required to make
payments under any of these guarantees in the next 12 months. During the year
ended February 3, 2008, two of the Companys other franchisees filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. One of
these bankruptcy cases was substantially concluded in February 2008 upon the
sale of the franchisees assets to, and assumption of most of its franchise
agreements by, a successor franchisee; the other franchise operation is
continuing to operate under court supervision. Franchisees opened 88 stores and
closed 26 stores in fiscal 2008. Franchisees have contractual commitments to
open over 170 additional stores after fiscal 2008; however, the Company believes
franchisees also will close additional stores in the future, and the number of
such closures may be significant. Royalty revenues and most of KK Supply Chain
revenues are directly correlated to sales by franchise stores and, accordingly,
franchise store closures have an adverse effect on the Companys revenues,
results of operations and cash flows. Capital Resources, Contractual
Obligations and Off-Balance Sheet Arrangements In addition
to cash flow generated from operations, the Company utilizes other capital
resources and financing arrangements to fund its business. These other resources
and arrangements have assumed increased importance in light of the reduced cash
flows provided by operations. A discussion of these capital resources and
financing techniques is included below. Debt The Company
continuously monitors its funding requirements for general working capital
purposes and other financing and investing activities. In the last three fiscal
years, management focused on reducing or eliminating the Companys investments
in franchisees and the related guarantees of franchisees obligations, and on
restructuring the Companys borrowing arrangements to maintain credit
availability to facilitate accomplishing the Companys business restructuring
initiatives. On February
16, 2007, the Company closed new secured credit facilities totaling $160 million
(the 2007 Secured Credit Facilities). The facilities then consisted of a $50
million revolving credit facility maturing in February 2013 (the 2007
Revolver) and a $110 million term loan maturing in February 2014 (the 2007
Term Loan). The 2007 Secured Credit Facilities are secured by a first lien on
substantially all of the assets of the Company and its domestic subsidiaries. At
closing, the Company borrowed the full $110 million available under the 2007
Term Loan, and used the proceeds to retire approximately $107 million of
indebtedness outstanding under the 2005 Secured Credit Facilities described
below (which were then terminated), to pay prepayment premiums under the 2005
Secured Credit Facilities and to pay fees and expenses associated with the 2007
Secured Credit Facilities. The Company recorded a pretax charge related to the
refinancing of approximately $9.6 million in the first quarter of fiscal 2008,
representing the approximately $4.1 million prepayment fee related to the 2005
Secured Credit Facilities and the write-off of approximately $5.5 million of
unamortized deferred financing costs related to that facility. The 2007
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 2007 Revolver. The commitments under the 2007 Revolver were reduced to
$30 million from $50 million in connection with the amendments to the 2007
Secured Credit Facilities executed in April 2008 (the April
Amendments). 50 Interest on
borrowings under the 2007 Revolver and Term Loan is payable either at LIBOR or
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. As of February 3,
2008, the Applicable Margin for LIBOR-based loans was 3.50% and for Alternate
Base Rate-based loans was 2.50%. The April Amendments to the 2007 Secured Credit
Facilities more fully described below increased the Applicable Margin for
LIBOR-based loans to 5.50% and for Alternate Base Rate-based loans to 4.50%. In
addition, those amendments provide that LIBOR-based loans shall be computed
based upon the greater of the relevant LIBOR rate or 3.25%. 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 2007 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 of 0.50% on the unused
portion of the 2007 Revolver lending commitment, which increased to 0.75%
simultaneously with the reduction in the revolver lending commitments pursuant
to the April Amendments. Borrowings
under the 2007 Revolver (and issuances of letters of credit) are subject to the
satisfaction of usual and customary conditions, including accuracy of
representations and warranties and the absence of defaults. The 2007
Term Loan is payable in quarterly installments of approximately $240,000 (after
adjustment for the effects of certain principal prepayments) and a final
installment equal to the remaining principal balance in February 2014. The 2007
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 2007
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
February 3, 2008, 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 3.25 to 1.0. As of February 3, 2008, the Companys consolidated
leverage ratio was approximately 3.03 to 1.0 and the Companys consolidated
interest coverage ratio was approximately 4.23 to 1.0. The April Amendments
provide that the consolidated leverage ratio shall not exceed 4.75 to 1.0 and
the consolidated interest coverage ratio shall not be less than 2.5 to 1.0 in
fiscal 2009. The maximum consolidated leverage ratio for periods after fiscal
2009 declines over time until it reaches 2.75 to 1.0 in fiscal 2013, and the
minimum consolidated interest coverage ratio increases over time until it
reaches 4.5 to 1.0 in fiscal 2011. Consolidated EBITDA is a non-GAAP measure
and is defined in the 2007 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
net interest expense, 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
12-month period and the sum of non-cash credits. In addition, the 2007 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 2007 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 2007 Revolver. In addition, the maximum
amount which may be borrowed under the 2007 Revolver is reduced by the amount of
outstanding letters of credit, of which approximately $20.3 million were
outstanding as of February 3, 2008. The maximum additional borrowing available
to the Company as of February 3, 2008 was approximately $9.7 million (computed
on a pro forma basis after giving effect to the April Amendments). 51 The 2007
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 eliminate the
Companys exposure, with respect to such notional amount, to increases in three
month LIBOR beyond 5.40% through April 2010, and eliminate the Companys ability
to benefit from a reduction in three month LIBOR below 4.48% for the same
period.
Leases The Company
conducts some of its operations from leased facilities and leases certain
equipment. Generally, these leases have initial terms of three to twenty years
and contain provisions for renewal options of five to ten years. In determining
whether to enter into a lease for an asset, the Company evaluates the nature of
the asset and the associated lease terms to determine if leasing is an effective
financing tool.
Off-Balance Sheet Arrangements The
Companys only off-balance sheet arrangements, as defined by Item 303(a)(4) of
SEC Regulation S-K, consist of the Companys guarantees of indebtedness and
lease obligations of certain franchisees, as discussed in Notes 12 and 18 to the
consolidated financial statements appearing elsewhere herein, and certain
potential indemnification obligations also discussed in Note 12. Contractual Cash Obligations at
February 3, 2008 The Companys contractual cash
obligations as of February 3, 2008 are as follows: 52 The
preceding table of contractual cash obligations excludes income tax liabilities
of approximately $2.2 million as of February 3, 2008 for unrecognized tax
benefits due to uncertainty in predicting the timing of any such related
payments. Capital Requirements In the next five years, the Company
plans to use cash primarily for the following activities: The
Companys capital requirements for these activities may be significant. These
capital requirements will depend on many factors including the Companys overall
performance, the pace of store expansion and Company store remodels and
infrastructure needs for both personnel and facilities. These capital outlays
are subject to limitations contained in the 2007 Secured Credit
Facilities. Inflation The Company does not believe that
inflation has had a material effect on its results of operations in recent
years. Critical Accounting
Policies The
Companys discussion and analysis of its financial condition and results of
operations is based upon its financial statements that have been prepared in
accordance with GAAP. The preparation of financial statements in accordance with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures, including disclosures of contingencies and uncertainties. GAAP
provides the framework from which to make these estimates, assumptions and
disclosures. The Company chooses accounting policies within GAAP that management
believes are appropriate to accurately and fairly report the Companys operating
results and financial position in a consistent manner. Management regularly
assesses these policies in light of changes in facts and circumstances and
discusses the selection of accounting policies and significant accounting
judgments with the audit committee of the Board of Directors. The Company
believes that application of the following accounting policies involves
judgments and estimates that are among the more significant used in the
preparation of the financial statements, and that an understanding of these
policies is important to understanding the Companys financial condition and
results of operations. Allowance for Doubtful
Accounts Accounts
receivable arise primarily from royalties earned on sales by the Companys
franchisees, sales by KK Supply Chain to our franchisees of equipment, mix and
other supplies necessary to operate a Krispy Kreme store, as well as from
off-premises sales by company stores to convenience and grocery stores and other
customers. During the three years in the period ended February 3, 2008, some of
the Companys franchisees experienced financial difficulties or for other
reasons did not comply with the normal payment terms for settlement of amounts
due to the Company. The Company has recorded provisions for doubtful accounts
related to its accounts receivable, including receivables from franchisees, in
amounts which management believes are sufficient to provide for losses estimated
to be sustained on realization of these receivables. Such estimates inherently
involve uncertainties and assessments of the outcome of future events, and
changes in facts and circumstances may result in adjustments to the provision
for doubtful accounts. 53 Goodwill and Identifiable Intangible
Assets FAS 142,
Goodwill and Other Intangible Assets (FAS 142), addresses the accounting and
reporting of goodwill and other intangible assets subsequent to their
acquisition. FAS 142 requires intangible assets with definite lives to be
amortized over their estimated useful lives, while those with indefinite lives
and goodwill are not subject to amortization but must be tested annually for
impairment, or more frequently if events and circumstances indicate potential
impairment. For
intangible assets with indefinite lives, the Company performs the annual test
for impairment as of December 31. The impairment test involves determining the
fair values of the reporting units to which goodwill is assigned and comparing
those fair values to the reporting units carrying values, including goodwill.
To determine fair value for each reporting unit, the Company uses the fair value
of the cash flows that the reporting unit can be expected to generate in the
future. This valuation method requires management to project revenues, operating
expenses, working capital investment, capital spending and cash flows for the
reporting units over a multiyear period, as well as determine the weighted
average cost of capital to be used as a discount rate. Significant management
judgment is involved in preparing these estimates. Changes in projections or
estimates could significantly change the estimated fair value of reporting units
and affect the recorded balances of goodwill. In addition, if management uses
different assumptions or estimates in the future or if conditions exist in
future periods that are different than those anticipated, future operating
results and the balances of goodwill in the future could be affected by
impairment charges. Impairment analyses of goodwill in fiscal 2008, 2007 and
2006 resulted in impairment charges of approximately $4.6 million, $1.1 million
and $3.5 million, respectively. As of February 3, 2008, the remaining goodwill
had a carrying value of $23.5 million, all of which was associated with the
Franchise segment. Asset Impairment When an
asset group (typically a store) is identified as underperforming or when a
decision is made to abandon an asset group or to close a store, the Company
makes an assessment of the potential impairment of the related assets. The
assessment is based upon a comparison of the carrying amount of the assets,
primarily property and equipment, to the estimated undiscounted cash flows
expected to be generated from those assets. To estimate cash flows, management
projects the net cash flows anticipated from continuing operation of the asset
group or store until its closing or abandonment, as well as cash flows, if any,
anticipated from disposal of the related assets. If the carrying amount of the
assets exceeds the sum of the undiscounted cash flows, the Company records an
impairment charge in an amount equal to the excess of the carrying value of the
assets over their estimated fair value. Determining
undiscounted cash flows and the fair value of an asset group involves estimating
future cash flows, revenues, operating expenses and disposal values. The
projections of these amounts represent managements best estimates at the time
of the review. If different cash flows had been estimated, property and
equipment balances and related impairment charges could have been affected.
Further, if management uses different assumptions or estimates in the future or
if conditions exist in future periods that are different than those anticipated,
future operating results could be affected. In fiscal 2008, 2007 and 2006, the
Company recorded impairment charges related to long-lived assets totaling
approximately $56.0 million, $9.4 million and $49.7, respectively. Additional
impairment charges may be necessary in future years. Insurance The Company
is subject to workers compensation, vehicle and general liability claims. The
Company is self-insured for the cost of all workers compensation, vehicle and
general liability claims up to the amount of stop-loss insurance coverage
purchased by the Company from commercial insurance carriers. The Company
maintains accruals for the estimated cost of claims, without regard to the
effects of stop-loss coverage, using actuarial methods which evaluate known open
and incurred but not reported claims and consider historical loss development
experience. In addition, the Company records receivables from the insurance
carriers for claims amounts estimated to be recovered under the stop-loss
insurance policies when these amounts are estimable and probable of collection.
The Company estimates such stop-loss receivables using the same actuarial
methods used to establish the related 54 claims accruals, and taking into account
the amount of risk transferred to the carriers under the stop-loss policies.
Many estimates and assumptions are involved in estimating future claims, and
differences between future events and prior estimates and assumptions could
affect future operating results and result in adjustments to these loss accruals
and related insurance receivables. Income Taxes The Company
recognizes deferred tax assets and liabilities based upon managements
expectation of the future tax consequences of temporary differences between the
income tax and financial reporting bases of assets and liabilities. Deferred tax
liabilities generally represent tax expense recognized for which payment has
been deferred, or expenses which already have been deducted in the Companys tax
return but which have not yet been recognized as an expense in the consolidated
financial statements. Deferred tax assets generally represent tax deductions or
credits that will be reflected in future tax returns for which the Company has
already recorded a tax benefit in its consolidated financial statements. The
Company establishes valuation allowances for deferred income tax assets as
required under FAS 109, Accounting for Income Taxes. At February 3, 2008, the
Company has recorded a valuation allowance against deferred income tax assets of
$177.0 million, representing the total amount of such assets in excess of the
Companys deferred income tax liabilities. The valuation allowance was recorded
because management was unable to conclude, in light of the cumulative losses
realized by the Company, that realization of the net deferred income tax asset
was more likely than not. The determination of income tax expense and the
related balance sheet accounts, including valuation allowances for deferred
income tax assets, requires management to make estimates and assumptions
regarding future events, including future operating results and the outcome of
tax-related contingencies. If future events are different from those assumed or
anticipated, the amount of income tax assets and liabilities, including
valuation allowances for deferred income tax assets, could be materially
affected. Guarantee Liabilities The Company
has guaranteed a portion of loan and lease obligations of certain franchisees in
which the Company owns an interest. The Company assesses the likelihood of
making any payments under the guarantees and records liabilities for the present
value of anticipated payments when the Company believes that an obligation to
perform under the guarantees is probable. No liabilities for the guarantees were
recorded at the time they were issued because the Company believed the value of
the guarantees was immaterial. As of February 3, 2008, the Company has recorded
liabilities of approximately $3.4 million related to such guarantees, which
totaled approximately $17.5 million at that date. Assessing the probability of
future guarantee payments involves estimates and assumptions regarding future
events, including the future operating results of the franchisees. If future
events are different from those assumed or anticipated, the amounts estimated to
be paid pursuant to such guarantees could change, and additional provisions to
record such liabilities could be required. Investments in Franchisees The Company
has investments in certain Equity Method Franchisees. While the Company believes
that the recorded amounts of such investments are realizable, these franchisees
typically do not have an extensive operating history, and the value of the
Companys investments in the franchisees cannot be verified by reference to
quoted market prices. The Companys assessment of the realizability of these
investments involves assumptions concerning future events, including the future
operating results of the franchisees. If future events are different from those
assumed or anticipated by the Company, the assessment of realizability of the
recorded investments in these entities could change, and impairment provisions
related to these investments could be required. As of February 3, 2008, the
Companys investment in Equity Method Franchisees was approximately $2.0
million. Stock-Based Compensation In fiscal
2007 the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, which requires that stock awards,
including stock options, granted to employees and which ultimately vest be
recognized as compensation expense based on their fair value at the grant date.
Because 55 options granted to employees differ from
options on the Companys common shares traded in the financial markets, the
Company cannot determine the fair value of options granted to employees based on
observed market prices. Accordingly, the Company estimates the fair value of
stock options subject only to service conditions using the Black-Scholes option
valuation model, which requires inputs including interest rates, expected
dividends, volatility measures and employee exercise behavior patterns. Some of
the inputs the Company uses are not market-observable and must be estimated. The
fair value of stock options which contain market conditions as well as service
conditions is estimated using Monte Carlo simulation techniques. In addition,
the Company must estimate the number of awards which ultimately will vest, and
periodically adjust such estimates to reflect actual vesting events. Use of
different estimates and assumptions would produce different option values, which
in turn would affect the amount of compensation expense recognized. The
Black-Scholes model is capable of considering the specific features included in
the options granted to the Companys employees that are subject only to service
conditions. However, there are other models which could be used to estimate
their fair value, and techniques other than Monte Carlo simulation could be used
to estimate the value of stock options which are subject to both service and
market conditions. If the Company were to use different models, the option
values would differ despite using the same inputs. Accordingly, using different
assumptions coupled with using different valuation models could have a
significant impact on the fair value of employee stock options. Recent Accounting
Pronouncements The Company
adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 during first quarter of fiscal 2008 as described in Note 1 to the
consolidated financial statements appearing elsewhere herein. In March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (FAS 161). The new standard 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 entitys financial position, financial performance, and cash
flows. FAS 161 is effective for the Company in fiscal 2010. In February
2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115 (FAS 159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. FAS 159
does not affect any existing accounting literature that requires certain assets
and liabilities to be carried at fair value. Management does not intend to adopt
any fair value measurement options permitted by FAS 159 and, accordingly, does
not expect FAS 159 to have any effect on the Companys financial position or
results of operations. In September
2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157),
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under GAAP.
As a result of FAS 157, there is now 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 Company must adopt FAS 157 in fiscal 2009.
Management does not expect adoption of FAS 157 to have a material effect on the
Companys financial position or results of operations. 56 Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK. The Company
is exposed to market risk from increases in interest rates on its outstanding
debt. All of the borrowings under the Companys secured credit facilities bear
interest at variable rates based upon either the prime rate, Fed funds rate or
LIBOR. The interest cost of the Companys debt is affected by changes in
short-term interest rates and increases in those rates adversely affect the
Companys results of operations. The Company has entered into interest rate
derivative contracts having an aggregate notional principal amount of $60
million. The derivative contracts eliminate the Companys exposure, with respect
to such notional amount, to increases in three month LIBOR beyond 5.40% through
April 2010, and eliminate the Companys ability to benefit from a reduction in
three month LIBOR below 4.48% for the same period. As of
February 3, 2008, the Company had approximately $76.7 million in borrowings
outstanding. A hypothetical increase of 100 basis points in short-term interest
rates would result in an increase in the Companys annual interest expense of
approximately $167,000, after giving effect to the change in payments due to or
from the Company from the interest rate hedge described above. Because the
substantial majority of the Companys revenue, expense and capital purchasing
activities are transacted in United States dollars, the exposure to foreign
currency exchange risk is limited. The Companys investment in its franchisee
operating in Mexico and the Companys operations in Canada expose the Company to
exchange rate risk. In addition, although royalties from international
franchisees are payable to the Company in United States dollars, changes in the
rate of exchange between the United States dollar and the foreign currencies
used in the countries in which the international franchisees operate will affect
the Companys royalty revenues. The Company historically has not attempted to
hedge these exchange rate risks. The Company
is exposed to the effects of commodity price fluctuations in 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 months 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. 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. Quantitative
information about the Companys unassigned commodity futures contracts as of
February 3, 2008, all of which mature in fiscal 2009, is set forth in the table
below. 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 commodity price risk. In addition, the
portion of the Companys anticipated future commodity requirements that is
subject to such contracts varies from time to time. Recently, prices for wheat
and soy bean oil have been at or near all-time highs and dairy prices have
risen. Continued high prices or further adverse changes in commodity prices
could adversely affect the Companys profitability and liquidity. 57 The
following table illustrates the potential effect on the Companys costs
resulting from hypothetical changes in the cost of the Companys three most
significant ingredients. The range of
prices paid for fiscal 2008 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. 58 Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA. 59 REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders
of Krispy Kreme Doughnuts, Inc. In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Krispy Kreme
Doughnuts, Inc. and its subsidiaries (the Company) at February 3, 2008 and
January 28, 2007, and the results of their operations and their cash flows for
each of the three years in the period ended February 3, 2008 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of February 3,
2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible for these financial
statements and financial statement schedules, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Managements Report on
Internal Control over Financial Reporting under Item 9A. Our responsibility is
to express opinions on these financial statements, on the financial statement
schedules, and on the Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions. As discussed
in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for share-based compensation effective January 30,
2006 and uncertain tax positions effective January 29, 2007. A companys
internal control over financial reporting is a process designed 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. A companys internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial
statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP 60 KRISPY KREME DOUGHNUTS,
INC. CONSOLIDATED BALANCE
SHEET The accompanying notes are an integral
part of the financial statements. 61 KRISPY KREME DOUGHNUTS,
INC. CONSOLIDATED STATEMENT OF
OPERATIONS The accompanying notes are an integral
part of the financial statements. 62 KRISPY KREME DOUGHNUTS,
INC. CONSOLIDATED STATEMENT OF CASH
FLOWS The accompanying notes are an integral
part of the financial statements. 63 KRISPY KREME DOUGHNUTS,
INC. CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY The accompanying notes are an integral
part of the financial statements. 64 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL
STATEMENTS Note 1 Overview Significant Accounting
Policies NATURE OF
BUSINESS. Krispy Kreme Doughnuts, Inc.
(KKDI) and its subsidiaries (collectively, the Company) are engaged in the
sale of doughnuts and related items through Company-owned stores. The Company
also derives revenue from franchise and development fees and the collection of
royalties from franchisees. Additionally, the Company sells doughnut-making
equipment, doughnut mix and other ingredients and supplies to
franchisees. The
significant accounting policies followed by the Company in preparing the
accompanying consolidated financial statements are as follows: BASIS OF
CONSOLIDATION. The financial statements
include the accounts of KKDI and its wholly-owned subsidiaries, the most
significant of which is KKDIs principal operating subsidiary, Krispy Kreme
Doughnut Corporation (KKDC). The Company
also consolidated the financial statements of certain less than wholly-owned
franchisees in which the Company had a controlling financial interest and of
certain variable interest entities of which the Company was the primary
beneficiary under Financial Accounting Standards Board (FASB) Interpretation
No. 46 (Revised), Consolidation of Variable Interest Entities. The Company
referred to these investees as Consolidated Franchisees, each of which has
either ceased operations or its minority interest has been acquired by the
Company. Investments
in entities over which the Company has the ability to exercise significant
influence, and whose financial statements are not 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. REVENUE
RECOGNITION. A summary of the revenue
recognition policies for each of the Companys business segments is as
follows: FISCAL
YEAR. The Companys fiscal year ends on the
Sunday closest to January 31, which periodically results in a 53-week year.
Fiscal 2008 contained 53 weeks while fiscal 2007 and 2006 each contained 52
weeks. 65 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) CASH AND
CASH EQUIVALENTS. The Company considers cash
on hand, demand deposits in banks and all highly liquid debt instruments with an
original maturity of three months or less to be cash and cash
equivalents. INVENTORIES. Inventories are recorded
at the lower of cost or market, with cost determined using the first-in,
first-out method. PROPERTY
AND EQUIPMENT. Property and equipment are
stated at cost less accumulated depreciation. Major renewals and betterments are
capitalized, while replacements, maintenance and repairs which do not improve or
extend the lives of the respective assets are expensed as incurred. Depreciation
of property and equipment is provided using the straight-line method over the
assets estimated useful lives, which are as follows: buildings 15 to 35
years; machinery and equipment 3 to 15 years; and leasehold improvements
lesser of the useful life of the improvements or the lease term. GOODWILL
AND OTHER INTANGIBLE ASSETS. Goodwill
represents the excess of the purchase price over the value of identifiable net
assets acquired in business combinations. Goodwill has an indefinite life and is
not amortized, but is tested for impairment annually or more frequently if
events or circumstances indicate the carrying amount of the asset may be
impaired. Such impairment testing is performed for each reporting unit (as that
term is defined in Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets) to which goodwill has been
assigned. Other
intangible assets consist principally of franchise rights reacquired in
acquisitions of franchisees, which the Company determined have indefinite lives
and are not subject to amortization. Intangible assets with indefinite lives are
reviewed for impairment annually or more frequently if events or circumstances
indicate the carrying amount of the assets may be impaired. ADVERTISING COSTS. All costs
associated with advertising and promoting products are expensed as
incurred. STORE
OPENING COSTS. Store opening costs are
expensed as incurred. The Company incurred no store opening costs in fiscal
2007. Store opening costs were $449,000 in fiscal 2006 and $17,000 in fiscal
2008. LEGAL
COSTS. Legal costs associated with litigation
and other loss contingencies are charged to expense as services are
rendered. ASSET
IMPAIRMENT. When an asset group (typically a
store) is identified as underperforming or a decision is made to abandon an
asset group or to close a store, the Company makes an assessment of the
potential impairment of the related assets. The assessment is based upon a
comparison of the carrying amount of the asset group, consisting primarily of
property and equipment, to the estimated undiscounted cash flows expected to be
generated from the asset group. To estimate cash flows, management projects the
net cash flows anticipated from continuing operation of the asset group or store
until its closing or abandonment as well as cash flows, if any, anticipated from
disposal of the related assets. If the carrying amount of the assets exceeds the
sum of the undiscounted cash flows, the Company records an impairment charge in
an amount equal to the excess of the carrying value of the assets over their
estimated fair value. EARNINGS
PER SHARE. The computation of basic earnings
per share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share reflects the
potential dilution that would occur if stock options and warrants were exercised
and the dilution from the issuance of restricted shares, computed using the
treasury stock method. 66 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The
following table sets forth amounts used in the computation of basic and diluted
earnings per share: All
potentially dilutive securities have been excluded from the number of shares
used in the computation of diluted earnings per share in fiscal 2008, 2007 and
2006 because the Company incurred a net loss in each year and their inclusion
would be antidilutive. SHARE-BASED COMPENSATION. Effective
January 30, 2006 (the first day of fiscal 2007), the Company adopted Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
which requires the measurement and recognition of compensation expense for
share-based payment (SBP) awards, including stock options, based on their fair
values. Prior to fiscal 2007, the Company accounted for SBP awards using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). CONCENTRATION OF CREDIT RISK.
Financial instruments that subject the Company to credit risk consist
principally of receivables from wholesale customers and franchisees and
guarantees of leases and indebtedness of franchisees. Wholesale receivables are
primarily from grocery and convenience stores. The Company performs ongoing
credit evaluations of its customers financial condition and maintains
allowances for doubtful accounts which management believes are sufficient to
provide for losses which may be sustained on realization of these receivables.
In fiscal 2008, 2007 and 2006, no customer accounted for more than 10% of
Company-owned stores revenues. The Companys two largest wholesale customers
collectively accounted for approximately 10.2%, 10.2% and 10.3% of Company-owned
stores revenues in fiscal 2008, 2007 and 2006, respectively. The Companys two
wholesale customers with the largest trade receivables balances collectively
accounted for approximately 23.5% and 20.9% of wholesale doughnut customer trade
receivables at February 3, 2008 and January 28, 2007, respectively. The
foregoing percentages of revenues for fiscal 2007 and 2006 are computed based
upon Company Stores segment revenues exclusive of sales of Consolidated
Franchisees; revenues of Consolidated Franchisees accounted for 1.0% and 19.3%
of total Company Stores revenues in fiscal 2007 and 2006, respectively. The
Company had no Consolidated Franchisees in fiscal 2008. The Company
also evaluates the recoverability of receivables from its franchisees and
maintains allowances for doubtful accounts which management believes are
sufficient to provide for losses which may be sustained on realization of these
receivables. In addition, the Company evaluates the likelihood of potential
payments by the Company under loan and lease guarantees and records estimated
liabilities for the present value of any payments the Company considers
probable. SELF-INSURANCE RISKS AND RECEIVABLES FROM INSURERS. The Company is subject to workers compensation, vehicle and
general liability claims. The Company is self-insured for the cost of all
workers compensation, vehicle and general liability claims up to the amount of
stop-loss insurance coverage purchased by the Company from commercial insurance
carriers. The Company maintains accruals for the estimated cost of claims,
without regard to the effects of stop-loss coverage, using actuarial methods
which evaluate known open and incurred but not reported claims and consider
historical loss development experience. In addition, the 67 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Company records receivables from the
insurance carriers for claims amounts estimated to be recovered under the
stop-loss insurance policies when these amounts are estimable and probable of
collection. The Company estimates such stop-loss receivables using the same
actuarial methods used to establish the related claims accruals, and taking into
account the amount of risk transferred to the carriers under the stop-loss
policies. The stop-loss policies provide coverage for claims in excess of
retained self-insurance risks, which are determined on a claim-by-claim
basis. The Company
provides health and medical benefits to eligible employees, and purchases
stop-loss insurance from commercial insurance carriers which pays covered
medical costs in excess of a specified annual amount incurred by each
claimant. DERIVATIVE FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY
INSTRUMENTS. The Company reflects derivative
financial instruments, which consist primarily of interest rate derivatives and
commodity futures contracts and options on such contracts, in the consolidated
balance sheet at their fair value. The difference between the cost, if any, and
the fair value of the interest rate derivatives is reflected in income unless
the derivative instrument qualifies as a cash flow hedge and is effective in
offsetting future cash flows of the underlying hedged item, in which case such
amount is reflected in other comprehensive income. The difference between the
cost, if any, and the fair value of commodity derivatives is reflected in
earnings because the Company has not designated these instruments as cash flow
hedges. FOREIGN
CURRENCY TRANSLATION. The Company has
ownership interests in franchisees in Mexico and Canada and has store operations
in Canada. The functional currency of each of these operations is the local
currency. Assets and liabilities of these operations are translated into U.S.
dollars using exchange rates as of the balance sheet date, and revenues,
expenses and the Companys equity in the earnings or losses of the franchisee
are translated using the average exchange rate for the reporting period. The
resulting cumulative translation adjustments are reported, net of income taxes,
as a component of accumulated other comprehensive income. Transaction gains and
losses resulting from remeasuring transactions denominated in currencies other
than an entitys functional currency are reflected in earnings. COMPREHENSIVE INCOME. Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS
130), requires that certain items, including foreign currency translation
adjustments and mark-to-market adjustments on derivative contracts accounted for
as cash flow hedges (which are not reflected in net income) be presented as
components of comprehensive income. The cumulative amounts recognized by the
Company under FAS 130 are reflected in the consolidated balance sheet as
accumulated other comprehensive income, a component of shareholders equity, and
are summarized in the following table: USE OF
ESTIMATES. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. 68 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) UNCERTAIN
TAX POSITIONS. Effective January 29, 2007,
the first day of fiscal 2008, the Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48).
FIN 48 prescribes recognition thresholds that must be met before a tax position
is recognized in the financial statements and provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Under FIN 48, an entity may only recognize
or continue to recognize tax positions that meet a more likely than not
threshold. The Company recorded the cumulative effect of applying FIN 48 as a
$1.2 million credit to the opening balance of accumulated deficit as of January
29, 2007, the date of adoption. REVISIONS. At the beginning of fiscal
2008, the Company revised its presentation of gains and losses on disposals of
property and equipment and foreign currency transaction gains and losses related
to inventory purchases to report such amounts as components of income or loss
from operations. Such amounts previously had been reported as components of
non-operating income and expense. Gains and losses on disposals of property and
equipment are now reported consistently with depreciation and amortization
expense and impairment charges, and foreign currency gains and losses associated
with purchases of materials are now reported with other components of materials
purchases, as part of direct operating expenses. Amounts previously reported for
fiscal 2007 and 2006 have been revised to reflect the presentation adopted in
fiscal 2008; the effect of such revisions was not material. CORRECTION OF ACCOUNTING ERRORS RELATED TO STOCK-BASED
COMPENSATION. In connection with the
preparation of its fiscal 2006 consolidated financial statements, the Company
performed certain procedures with respect to grants of stock options in prior
fiscal years. In
performing such procedures, the Company identified certain grants of stock
options with respect to which the Company was unable to substantiate that the
grant date specified in the options was the appropriate date on which
compensation cost should have been measured under APB 25. Each of the stock
options was dated August 2, 2000 and had an exercise price equal to the closing
price of the Companys common stock on that date. The closing price on August 2,
2000 was the lowest closing price of the Companys common stock during the
fiscal quarter. Because the Company was unable to substantiate August 2, 2000 as
the measurement date, the Company considered all available relevant information
and concluded that it should use September 12, 2000, the date on which the
optionees were informed of the principal terms of the grants, as the measurement
date. The market
price of the Companys common stock on this revised measurement date was greater
than the exercise price specified in the options and, accordingly, the Company
should have recognized compensation expense related to the options in an
aggregate amount equal to such excess multiplied by the number of options
awarded, in accordance with APB 25. Such aggregate charges total approximately
$4.0 million, and should have been recorded in the Companys fiscal 2001 through
fiscal 2004 consolidated financial statements. These grants
were made principally to three new non-employee members of the board of
directors. The Company is aware of no evidence which suggests the optionees
influenced the selection of the grant date, were aware of how August 2, 2000 was
selected by the Company as the grant date, or believed the Companys accounting
for such options to be improper. The Company
concluded that the stock-based compensation amounts were not material either
quantitatively or qualitatively to the Companys consolidated financial
statements in the affected periods and were not material to the fiscal 2006
consolidated financial statements. Accordingly, the Company corrected the error
by recording the approximately $4.0 million aggregate charge to earnings in the
first quarter of fiscal 2006 rather than restating prior periods consolidated
financial statements. The
Companys income tax returns for certain years currently are under examination
by the Internal Revenue Service as described in Note 15. In connection with that
examination, the Company determined that certain income tax deductions related
to exercises of stock options reflected in its fiscal 2004 tax return were
overstated. The Company accounted for the tax benefit of such deductions as a
deferred income tax asset, with 69 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) a corresponding credit to common stock, in
fiscal 2004. These accounting entries constituted errors because the Company was
not entitled to the related income tax deductions. In fiscal 2005, the Company
established a valuation allowance against its deferred income tax assets via a
charge to earnings, and such charge was overstated as a consequence of the
fiscal 2004 error related to the tax benefit of stock option exercises. Because
the Company concluded that these amounts were not material to the Companys
consolidated financial statements in the affected periods, and were not material
to the fiscal 2006 consolidated financial statements, the Company corrected the
errors by recording an approximately $1.5 million charge to common stock and a
corresponding credit to the provision for income taxes in the first quarter of
fiscal 2006 rather than restating prior periods financial
statements. RECENT ACCOUNTING
PRONOUNCEMENTS In March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (FAS 161). The new standard 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 entitys financial position, financial performance, and cash
flows. FAS 161 is effective for the Company in fiscal 2010. In February
2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115 (FAS 159). FAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. FAS 159
does not affect any existing accounting literature that requires certain assets
and liabilities to be carried at fair value. Management does not intend to adopt
any fair value measurement options permitted by FAS 159 and, accordingly, does
not expect FAS 159 to have any effect on the Companys financial position or
results of operations. In September
2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157),
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under
generally accepted accounting principles (GAAP). As a result of FAS 157, there
is now 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 Company must adopt FAS 157 in fiscal 2009. Management does not expect
adoption of FAS 157 to have a material effect on the Companys financial
position or results of operations. Note 2 Business Conditions,
Uncertainties and Liquidity The Company
incurred net losses of $135.8 million, $42.2 million and $67.1 million in fiscal
2006, 2007 and 2008, respectively, which include non-cash impairment charges of
$53.7 million, $10.8 million and $61.0 million, respectively. In addition,
fiscal 2006 and 2007 results include non-cash charges of $35.8 million and $16.0
million, respectively, related to the settlement of certain litigation, and
fiscal 2008 results reflect a non-cash credit of $14.9 million related to the
same settlement, as described in Note 12. 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, a decline in domestic royalty revenues and lower sales of mixes and
other ingredients resulting from lower sales by the Companys domestic
franchisees. Lower revenues have adversely affected operating margins because of
the fixed or semi-fixed nature of many of the Companys direct operating
expenses. In addition, the Company has recorded significant asset impairment
70 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) charges, principally related to
underperforming Company stores and, in fiscal 2008, a manufacturing and
distribution facility the Company divested. Total impairment charges and lease
termination costs for fiscal 2008 were $62.1 million. The Company had net cash flow from
operations of $1.9 million, $22.1 million and $9.7 million in fiscal 2006, 2007,
and 2008, respectively. Asset dispositions generated investing cash flows of
$9.7 million in fiscal 2007 and $18.3 million in fiscal 2008, with the majority
of such proceeds used to reduce the outstanding borrowings under the Companys
credit facilities. The
Companys fiscal 2009 operating plan reflects a decline in revenues and an
increase in certain costs, including the impact of commodity prices on its
raw materials costs, compared to fiscal 2008. The Company is taking measures to
reduce controllable costs and has implemented, and, to the extent feasible,
plans to implement in the future, price increases to offset increases in raw
material costs. Based on the Companys current working capital and the fiscal
2009 operating plan, management believes the Company can meet its projected
operating, investing and financing cash requirements. In February
2007, the Company completed a refinancing using the proceeds of the 2007 Secured
Credit Facilities described in Note 10, which are the Companys principal source
of external financing. These facilities consist of a $110 million term loan
maturing in February 2014 and a $30 million revolving credit facility maturing
in February 2013. The 2007
Secured Credit Facilities contain significant financial and other covenants.
Based on its operating plan, the Company projected that it would not be able to
comply with the financial covenants in fiscal 2009. Subsequent to the end of
fiscal 2008, the Company executed amendments to the 2007 Secured Credit
Facilities which, among other things, relaxed the financial covenants contained
therein for fiscal 2009 and 2010. The financial covenants as of February 3,
2008, and the amended financial covenants for future years, are described in
Note 10. While the Company was in compliance with the financial covenants as of
February 3, 2008, and the Company expects to be able to comply with the amended
financial covenants based on its operating plan, there can be no assurance that
the Company will be able to do so. As a result of amendments and waivers in
fiscal 2008 and 2009, the Company paid fees of approximately $835,000 and the
interest rate on the loans has increased from LIBOR plus 2.75% to LIBOR plus
5.50% (with a LIBOR floor of 3.25%). The increase in rates will result in
approximately $1.9 million of additional annual interest expense based on
the current level of borrowings. Any future amendments or waivers could result
in additional fees or rate increases. The Company
has prepaid approximately $32.8 million of the $110 million term loan; such
prepayments included prepayments of approximately $17.8 million from sales of
property and equipment and discretionary prepayments of $5 million in each of
the first, second and third quarters of fiscal 2008 made in order to reduce the
likelihood of violating the leverage ratio covenant contained in the facilities.
In addition to scheduled amortization of principal, 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. As of
February 3, 2008, the maximum additional borrowing available to the Company was
approximately $9.7 million, computed on a pro forma basis after giving effect to
the reduction in lender commitments under the Companys revolving credit
facility described in Note 10. Failure to
comply with the financial covenants contained in the 2007 Credit Facilities, or
the occurrence or failure to occur of certain events, would cause the Company to
default under the facilities. In the absence of a waiver of, or forbearance with
respect to, any such default from the Companys lenders, the Company could be
obligated to repay outstanding indebtedness under the facilities in advance of
its scheduled maturity, and the Companys ability to access additional
borrowings under the facilities would be restricted. In the event the Company
were to fail to comply with one or more such covenants, the Company would
attempt to negotiate waivers of any such noncompliance. There can be no
assurance that the Company would be able to negotiate any 71 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) such waivers, and the costs or conditions
associated with any such waivers could be significant. In the event that credit
under the 2007 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. Many factors
could adversely affect the Companys business. In particular, the Company is
vulnerable to further increases in the cost of raw materials, which could
adversely affect the Companys operating results and cash flows. In addition,
several franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. The Company has
guaranteed certain obligations of franchisees in which it has an equity
interest, as described in Other Commitments and Contingencies in Note 12. In
the fourth quarter of fiscal 2008, the Company recorded a provision of $3.0
million for estimated payments under these guarantees. The Company may be
required to make payments under any of these guarantees in the next 12 months.
During the year ended February 3, 2008, two of the Companys other franchisees
filed for reorganization under Chapter 11 of the United States Bankruptcy Code.
One of these bankruptcy cases was substantially concluded in February 2008 upon
the sale of the franchisees assets to, and assumption of most of its franchise
agreements by, a successor franchisee; the other franchise operation is
continuing to operate under court supervision. Franchisees opened 88 stores and
closed 26 stores in fiscal 2008. Franchisees have contractual commitments to
open over 170 additional stores after fiscal 2008; however, the Company believes
franchisees also will close additional stores in the future, and the number of
such closures may be significant. Royalty revenues and most of KK Supply Chain
revenues are directly correlated to sales by franchise stores and, accordingly,
franchise store closures have an adverse effect on the Companys revenues,
results of operations and cash flows. Note 3 Receivables The components of receivables are as
follows: 72 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The changes in the allowances for
doubtful accounts are summarized as follows: Note 4 Inventories The components of inventories are as
follows: Note 5 Other Current
Assets Other current assets are composed of
the following: 73 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Note 6 Property and
Equipment Property and equipment consists of
the following: Machinery
and equipment includes assets leased under capital leases having a net book
value of approximately $594,000 and $630,000 at February 3, 2008 and January 28,
2007, respectively. Depreciation expense was $17.8 million, $20.3 million and
$27.9 million in fiscal 2008, 2007 and 2006, respectively. The Company
recorded significant impairment charges related to property and equipment in
fiscal 2008 as described in Note 13. Note 7 Goodwill and Other Intangible
Assets Goodwill and other intangible assets
consist of the following: During
fiscal 2008, the Company recorded impairment charges of $4.6 million and
$480,000 to reduce the carrying value of goodwill and reacquired franchise
rights, respectively, to their estimated fair values. The goodwill impairment
charge reflects reductions in the Companys forecasted sales and earnings in
certain of the reporting units comprising the Company Stores segment. Such
reductions reflect current operating results, including the effects of higher
materials and labor costs, as well as recent trends in operating results. The
fair values of those reporting units are estimated using the present value of
expected future cash flows. The Company records impairment charges for
reacquired franchise rights when such intangible assets are determined to be
impaired as a result of store closing decisions or other
developments. 74 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Note 8 Other Assets The components of other assets are
as follows: Note 9 Other Accrued
Liabilities The components of other accrued
liabilities are as follows: 75 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Note 10 Long Term Debt and Lease
Commitments Long-term debt and capital lease
obligations consist of the following: The
following table presents maturities of long-term debt and capital lease
obligations: 2007 Secured
Credit Facilities On February
16, 2007, the Company closed new secured credit facilities totaling $160 million
(the 2007 Secured Credit Facilities). The facilities then consisted of a $50
million revolving credit facility maturing in February 2013 (the 2007
Revolver) and a $110 million term loan maturing in February 2014 (the 2007
Term Loan). The 2007 Secured Credit Facilities are secured by a first lien on
substantially all of the assets of the Company and its domestic subsidiaries. At
closing, the Company borrowed the full $110 million available under the 2007
Term Loan, and used the proceeds to retire approximately $107 million of
indebtedness outstanding under the 2005 Secured Credit Facilities described
below (which were then terminated), to pay prepayment premiums under the 2005
Secured Credit Facilities and to pay fees and expenses associated with the 2007
Secured Credit Facilities. The Company recorded a pretax charge related to the
refinancing of approximately $9.6 million in the first quarter of fiscal 2008,
representing the approximately $4.1 million prepayment fee related to the 2005
Secured Credit Facilities and the write-off of approximately $5.5 million of
unamortized deferred financing costs related to that facility. The 2007
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 2007 Revolver. The commitments under the 2007 Revolver were reduced to
$30 million from $50 million in connection with the amendments to the 2007
Secured Credit Facilities executed in April 2008 (the April
Amendments). Interest on
borrowings under the 2007 Revolver and Term Loan is payable either at LIBOR or
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. As of February 3,
2008, the Applicable Margin for LIBOR-based loans was 3.50% and for Alternate
Base Rate-based loans was 2.50%. The April Amendments to the 2007 Secured Credit
Facilities more fully described 76 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) below increased the Applicable Margin for
LIBOR-based loans to 5.50% and for Alternate Base Rate-based loans to 4.50%. In
addition, those amendments provide that LIBOR-based loans shall be computed
based upon the greater of the relevant LIBOR rate or 3.25%. 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 2007 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 of 0.50% on the unused
portion of the 2007 Revolver lending commitment, which increased to 0.75%
simultaneously with the reduction in the revolver lending commitments pursuant
to the April Amendments. Borrowings
under the 2007 Revolver (and issuances of letters of credit) are subject to the
satisfaction of usual and customary conditions, including accuracy of
representations and warranties and the absence of defaults. The 2007
Term Loan is payable in quarterly installments of approximately $240,000 (after
adjustment for the effects of certain principal prepayments) and a final
installment equal to the remaining principal balance in February 2014. The 2007
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 2007
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
February 3, 2008, 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 3.25 to 1.0. As of February 3, 2008, the Companys consolidated
leverage ratio was approximately 3.03 to 1.0 and the Companys consolidated
interest coverage ratio was approximately 4.23 to 1.0. The April Amendments
provide that the consolidated leverage ratio shall not exceed 4.75 to 1.0 and
the consolidated interest coverage ratio shall not be less than 2.5 to 1.0 in
fiscal 2009. The maximum consolidated leverage ratio for periods after fiscal
2009 declines over time until it reaches 2.75 to 1.0 in fiscal 2013, and the
minimum consolidated interest coverage ratio increases over time until it
reaches 4.5 to 1.0 in fiscal 2011. Consolidated EBITDA is a non-GAAP measure
and is defined in the 2007 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
net interest expense, 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
12-month period and the sum of non-cash credits. In addition, the 2007 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 2007 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 2007 Revolver. In addition, the maximum
amount which may be borrowed under the 2007 Revolver is reduced by the amount of
outstanding letters of credit, of which approximately $20.3 million were
outstanding as of February 3, 2008. The maximum additional borrowing available
to the Company as of February 3, 2008 was approximately $9.7 million (computed
on a pro forma basis after giving effect to the April Amendments). 77 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The 2007
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 eliminate the
Companys exposure, with respect to such notional amount, to increases in three
month LIBOR beyond 5.40% through April 2010, and eliminate the Companys ability
to benefit from a reduction in three month LIBOR below 4.48% for the same
period. The Company is accounting for these derivatives as cash flow
hedges. 2005 Secured
Credit Facilities On April 1,
2005, the Company closed secured credit facilities totaling $225 million
(collectively, the 2005 Secured Credit Facilities). The facilities consisted
of a $75 million revolving credit facility (reduced by the Company to $25
million in November 2006) secured by a first lien on substantially all of the
assets of the Company and its domestic subsidiaries (the First Lien Revolver),
and a $150 million credit facility secured by a second lien on those assets (the
Second Lien Facility). The Second Lien Facility consisted of a $120 million
term loan (the Term Loan) and a $30 million revolving credit facility (the
Second Lien Revolver). At closing, the Company borrowed the full $120 million
available under the Term Loan, and used the proceeds to retire approximately $88
million of indebtedness outstanding under a bank credit facility (which was then
terminated) and to pay fees and expenses associated with the 2005 Secured Credit
Facilities. The 2005 Secured Credit Facilities were refinanced with the proceeds
of the 2007 Secured Credit Facilities described above. Interest on
borrowings under the First Lien Revolver was payable either at LIBOR or 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. The Applicable Margin for
LIBOR-based loans was 2.75% and for Alternate Base Rate- based loans was 1.75%
(3.25% and 2.25%, respectively, from December 12, 2005 through January 28,
2007). In addition, the Company was 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 First Lien Revolver, as well as a 0.25% fronting fee.
There also was a fee of 0.50% (0.75% from December 12, 2005 through January 28,
2007) on the unused portion of the First Lien Revolver lending
commitment. The Company
paid fees aggregating 5.975% (7.35% from December 12, 2005 through January 28,
2007) on the entire $30 million Second Lien Revolver commitment. In addition,
interest accrued on outstanding borrowings at either the Fed funds rate or
LIBOR, and the outstanding amount of letters of credit issued under the Second
Lien Revolver incurred a fronting fee of 0.25%. Interest on
the outstanding balance of the Term Loan accrued either at LIBOR or at the Fed
funds rate plus, in each case, the Applicable Margin. The Applicable Margin for
LIBOR-based loans was 5.875% and for Fed funds-based loans was 4.875% (7.25% and
6.25%, respectively, from December 12, 2005 through January 28,
2007). As required
by the 2005 Secured Credit Facilities, the Company entered into an interest rate
derivative contract having a notional principal amount of $75 million. The
derivative contract eliminated the Companys exposure, with respect to such
notional amount, to increases in three month LIBOR beyond 4.0% through April
2006, 4.50% from May 2006 through April 2007 and 5.0% from May 2007 through
March 2008. This derivative was accounted for as a cash flow hedge from its
inception in June 2005 through February 16, 2007. After that date, the
derivative contract could no longer be shown to be effective (as defined in
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities) in hedging interest rate risk due to a
change in the computation of interest payment periods on the derivative contract
relative to interest expense on the related indebtedness, and hedge accounting
was discontinued. As a consequence, 78 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) subsequent changes in the fair value of
the derivative contract after February 16, 2007 were reflected in earnings.
Simultaneously with entering into the new derivative contracts described above
related to the 2007 Secured Credit Facilities, the Company terminated the $75
million notional amount derivative contract. Lease
Obligations The Company
leases equipment and facilities under both capital and operating leases. The
approximate future minimum lease payments under non-cancelable leases as of
February 3, 2008 are set forth in the following table: Rent
expense, net of rental income, totaled $14.8 million in fiscal 2008, $17.7
million in fiscal 2007 and $23.5 million in fiscal 2006. Cash Payments of
Interest Interest
paid, exclusive of deferred financing costs, totaled $13.6 million in fiscal
2008, $17.6 million in fiscal 2007 and $13.4 million in fiscal 2006. Note 11 Other Long-Term
Obligations The components of other long-term
obligations are as follows: 79 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Note 12 Commitments and
Contingencies Legal Proceedings Except as disclosed below, the
Company is not a party to any material legal proceedings. Litigation
Settled Federal
Securities Class Actions and Settlement Thereof and Federal Court Shareholder
Derivative Actions and Partial Settlement Thereof On May 12,
2004, a purported securities class action was filed on behalf of persons who
purchased the Companys publicly traded securities between August 21, 2003 and
May 7, 2004 against the Company and certain of its former officers in the United
States District Court for the Middle District of North Carolina, alleging
violations of federal securities law in connection with various public
statements made by the Company and seeking damages in an unspecified amount.
Thereafter, 14 substantially identical purported class actions were filed in the
same court. All the actions ultimately were consolidated. The court appointed
lead plaintiffs in the consolidated action, who filed a second amended complaint
on May 23, 2005, alleging claims under federal securities law on behalf of
persons who purchased the Companys publicly-traded securities between March 8,
2001 and April 18, 2005. In addition
to the purported securities class action, three shareholder derivative actions
were filed in the United States District Court for the Middle District of North
Carolina against certain current and former directors of the Company, certain
former officers of the Company, including Scott Livengood (the Companys former
Chairman and Chief Executive Officer), as well as certain persons or entities
that sold franchises to the Company. The complaints in these actions alleged
that the defendants breached their fiduciary duties in connection with their
management of the Company and the Companys acquisitions of certain franchises.
The complaints sought damages, rescission of the franchise acquisitions,
disgorgement of the proceeds from these acquisitions and other unspecified
relief. In October
2004, the Companys Board of Directors elected Michael Sutton and Lizanne Thomas
to the Board and appointed them members and co-chairpersons of a Special
Committee to investigate the matters raised in connection with a formal
investigation of the Company by the Securities and Exchange Commission (the
SEC) described below, the allegations in the purported derivative lawsuits,
issues raised by the Companys independent auditors and other matters relevant
to the foregoing. On October
31, 2006, the Company and the Special Committee entered into a Stipulation and
Settlement Agreement (the Stipulation) with the lead plaintiffs in the
securities class action, the derivative plaintiffs and all defendants named in
the class action and derivative litigation, except for Mr. Livengood, providing
for the settlement of the securities class action and a partial settlement of
the derivative action. On February 14, 2007, the Court granted final approval of
the proposed partial settlement in the derivative action and entered final
judgment dismissing all claims with respect to all defendants, except for claims
that the Company may assert against Mr. Livengood. On February 15, 2007, the
court granted final approval of the proposed settlement in the securities class
action and entered final judgment dismissing all claims with respect to all
defendants. The final judgments were entered as contemplated by the terms of the
Stipulation. With respect
to the securities class action, the Stipulation provided for the certification
of a class consisting of all persons who purchased the Companys publicly-traded
securities between March 8, 2001 and April 18, 2005, inclusive. The settlement
class received total consideration of approximately $76.0 million, consisting of
a cash payment of approximately $35.0 million made by the Companys directors
and officers insurers, cash payments of $100,000 each made by John Tate (the
Companys former Chief Operating Officer) and Randy Casstevens (a former Chief
Financial Officer), a cash payment of $4 million made by the Companys
independent registered 80 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) public accounting firm and common stock and warrants
to purchase common stock issued by the Company having an estimated aggregate
value of approximately $36.9 million as of their issuance on March 2, 2007.
Claims against all defendants were dismissed with prejudice; however, claims
that the Company may have against Mr. Livengood that may be asserted by the
Company in the derivative action for contribution to the securities class action
settlement or otherwise under applicable law are expressly preserved. The
Stipulation contained no admission of fault or wrongdoing by the Company or the
other defendants. With respect to the derivative
litigation, the Stipulation provided for the settlement and dismissal with
prejudice of claims against all defendants except for claims against Mr.
Livengood. The Company, acting through its Special Committee, settled claims
against Mr. Tate and Mr. Casstevens for the following consideration: Messrs.
Tate and Casstevens each agreed to contribute $100,000 in cash to the settlement
of the securities class action; Mr. Tate agreed to cancel his interest in 6,000
shares of the Companys common stock; and Messrs. Tate and Casstevens agreed to
limit their claims for indemnity from the Company in connection with future
proceedings before the SEC or by the United States Attorney for the Southern
District of New York to specified amounts. The Company, acting through its
Special Committee, has been in negotiations with Mr. Livengood but has not
reached agreement to resolve the derivative claims against him. All other claims
against defendants named in the derivative actions were dismissed with prejudice
without paying any consideration. However, counsel for the derivative plaintiffs
have deferred their application for fees until conclusion of the derivative
actions against Mr. Livengood. See Other Contingencies and Commitments
below. On March 2,
2007, the Company issued 1,833,828 shares of its common stock and warrants to
purchase 4,296,523 shares of its common stock at a price of $12.21 per share in
connection with the Stipulation. The warrants expire on March 2,
2012. The Company
recorded a non-cash charge to earnings in fiscal 2006 of approximately $35.8
million, representing the estimated fair value, as of late October 2006, of the
common stock and warrants to be issued by the Company. In addition, the Company
recorded a related receivable from its insurers in the amount of approximately
$35.0 million, because the Company considered receipt of this amount to be
probable based on the insurance companies agreements to contribute this amount
to the settlement and the Companys assessment of the insurance companies
financial condition. Simultaneously, the Company recorded a liability in the
amount of $70.8 million representing the then estimated aggregate fair value of
the securities to be issued by the Company and the cash to be paid by the
insurers. In the fourth quarter of fiscal 2007, the Company recorded an
additional non-cash charge to earnings and an increase in the related liability
of approximately $16.0 million, representing the increase from October 2006 to
January 28, 2007 in the estimated fair value of the securities issued by the
Company in connection with the Stipulation. The provision for settlement costs
was adjusted downward by approximately $14.9 million in the first quarter of
fiscal 2008 to reflect the decrease in the fair value of the securities from
January 28, 2007 until their issuance on March 2, 2007. The fair value of the
common shares was determined based upon the market price of the Companys common
stock on March 2, 2007, and the fair value of the warrants to acquire common
shares was estimated as of that date as described in Note 16. 81 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) State Court Books and Records Action
On February
21, 2005, a lawsuit was filed against the Company in a North Carolina court
seeking an order requiring the Company to permit the plaintiff to inspect and
copy the books and records of the Company. On February 14, 2007, the federal
district court approved the partial settlement of the consolidated derivative
actions described above and entered an order dismissing those actions. On
February 14, 2007, the North Carolina court filed a copy of that order and, on
March 23, 2007, administratively dismissed the plaintiffs books and records
action. Pending Litigation and
Investigations The Company
is subject to other litigation and investigations, the outcome of which cannot
presently be determined. The Company cannot predict the likelihood of an
unfavorable outcome with respect to these other matters, or the amount or range
of potential loss with respect to, or the amount that might be paid in
connection with any settlement of, any of these other matters, and, accordingly,
no provision for loss with respect to any of the following matters has been
reflected in the consolidated financial statements. SEC Investigation On October
7, 2004, the staff of the SEC advised the Company that the SEC had entered a
formal order of investigation concerning the Company. The Company is cooperating
with the investigation. United States Attorney
Investigation On February
24, 2005, the United States Attorneys Office for the Southern District of New
York advised the Company that it would seek to conduct interviews of certain
current and former officers and employees of the Company. The Company is
cooperating with the investigation. FACTA litigation On October
3, 2007, a purported nationwide class action (Peter Jackson v. Krispy Kreme
Doughnut Corporation (Case No. CV07-06449 ABC (VBC)), United States District
Court, Central District of California) was filed against the Company and ten
fictitiously named defendants. Plaintiff asserts a single cause of action for
alleged willful violation of the federal Fair and Accurate Credit Transactions
Act (FACTA). Specifically, plaintiff alleges a violation concerning electronic
printing of certain credit card and debit card receipts that were not in
compliance with the applicable information truncation provisions of FACTA.
Plaintiff seeks statutory and punitive damages for these alleged violations, as
well as injunctive relief on behalf of a putative nationwide class. The Company
intends to defend vigorously against the claims asserted. 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 on 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.
TAG alleges that the Company acted improperly by failing to execute a written
contract between the companies and claims damages for breach of contract,
services rendered, unjust enrichment, violation of the North Carolina Unfair
Trade Practices Act and fraud in the inducement. TAG seeks approximately $1
million in actual damages as well as punitive and treble damages. The Company
intends to vigorously prosecute its claims against TAG and to vigorously defend
against the counterclaims, which the Company believes are without
merit. 82 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Other matters The Company
also is engaged in various legal proceedings arising in the normal course of
business. The Company maintains customary insurance policies (which are subject
to deductibles) against certain kinds of such claims and suits, including
insurance policies for workers compensation and personal injury. Other Commitments and Contingencies
The Company
has guaranteed certain leases and 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
Companys contingent liabilities related to these guarantees totaled
approximately $17.5 million and $22.6 million at February 3, 2008 and January
28, 2007, respectively, and are summarized in Note 18. The guaranteed amount for
debt was determined based upon the principal amount outstanding under the
related agreement and the guaranteed amount for leases was determined based upon
the gross amount of remaining lease payments. The percentage of the aggregate
franchisee obligation guaranteed by the Company generally approximates the
Companys percentage ownership in the franchisee. These guarantees require
payment from 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. At the time the
guarantees were issued, the Company determined the fair value of the guarantees
was immaterial and, accordingly, no amount was reflected for the liabilities in
the consolidated balance sheet. In the fourth
quarter of fiscal 2008, the Company recorded a provision of $3.0 million for
estimated payments under the Companys guarantees of certain debt and leases
related to a franchisee. During the quarter, the franchisee defaulted on certain
of the obligations guaranteed by the Company and, while there is no current
demand on the Company to perform under the guarantees, the Company believes it
is probable that demand will be made on the Company to perform under them. The
charge is comprised of $2.1 million representing 100% of the portion of
principal balance of the franchisees loans guaranteed by the Company, and
$900,000 representing the guaranteed portion of approximately one years total
payments on the guaranteed leases. The estimated aggregate maximum remaining
potential obligation on guaranteed leases over their remaining lives (which
range from 11 to 16 years) and for which no provision has been recorded is
approximately $8.8 million, assuming no sublease rentals or other loss
mitigation benefits and no reduction for rights of setoff or other defenses the
Company may have to the guarantees. During fiscal
2007, the Company recorded a provision of approximately $450,000 for estimated
payments under a Company guarantee of indebtedness of another franchisee. These
provisions are included in other non-operating income and expense in the
accompanying consolidated statement of operations. There is no liability
reflected for other guarantees as of February 3, 2008 because the Company did
not believe it was probable that the Company would be required to perform under
any other guarantees. However, there can be no assurance that the Company will
not be required to perform under those guarantees and, if circumstances change
from those prevailing at February 3, 2008, additional provisions for guarantee
payments could be required with respect to any of the guarantees, and such
provisions could be significant. The Company
is subject to indemnification obligations to its directors and officers pursuant
to indemnification provisions of North Carolina law, the Companys bylaws and
certain indemnification agreements. Several of the Companys former directors,
officers and employees are the subject of criminal, administrative and civil
investigations and the unresolved components of the shareholder derivative
litigation. The Company may have an obligation to indemnify these persons in
relation to these matters. Some of these indemnification obligations would be
covered by certain insurers under applicable directors and officers liability
policies. In connection with the settlement of the securities class action and
the partial settlement of the derivative litigation described above, however,
the Company agreed with these insurers to limit its claims for reimbursement for
legal fees and costs incurred in connection with those proceedings, and the
related criminal and administrative investigations, to a specified reserve fund
in the amount of $3.4 million (of which approximately $1.4 million remains as of
83 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) February 3, 2008). Two of the Companys
former officers have agreed to limit their claims for indemnity from the Company
in connection with future proceedings before the SEC or the United States
District Court for the Southern District of New York to a portion of the amount
deposited into the reserve fund. This portion is not available to the Company
for its claims for reimbursement of the legal fees and costs described above. If
the sums in this fund are not sufficient to provide for reimbursement to the
Company or if the Company incurs significant uninsured indemnity obligations,
such indemnity obligations could have a material adverse effect on the Companys
financial condition, results of operations and cash flows. In addition, counsel
for the plaintiffs in several settled shareholder derivative actions have
deferred their application for fees until conclusion of the derivative actions,
and there can be no assurance as to the amount the Company will be required to
pay to such counsel or that the remaining reserve fund at such time will be
sufficient to reimburse the Company for such amount. One of the
Companys lenders had issued letters of credit on behalf of the Company totaling
$20.3 million at February 3, 2008, the substantial majority of which secure the
Companys reimbursement obligations to insurers under the Companys
self-insurance arrangements. 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 product and bring greater
stability to the cost of ingredients, the Company routinely enters into forward
purchase contracts with suppliers under which the Company commits to purchasing
agreed-upon quantities of ingredients at agreed-upon prices at specified future
dates. Typically, the aggregate outstanding purchase commitment at any point in
time will range from one months to two years anticipated ingredients
purchases, depending on the ingredient. In addition, from time to time the
Company enters into contracts for the future delivery of equipment purchased for
resale and components of doughnut-making equipment manufactured by the Company.
As of February 3, 2008, the Company had approximately $48.9 million of
commitments under ingredient and other forward purchase contracts. While the
Company has multiple suppliers for most of its ingredients, the termination of
the Companys relationships with vendors with whom the Company has forward
purchase agreements, or those vendors inability to honor the purchase
commitments, could adversely affect the Companys results of operations and cash
flows. In addition
to entering into forward purchase contracts, 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 Companys 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
aggregate fair value of unassigned futures contracts as of February 3, 2008 was
an asset of approximately $267,000. 84 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Note 13 Impairment Charges and Lease
Termination Costs The components of impairment charges
and lease termination costs are as follows: The goodwill
impairment charges were recorded to reduce the carrying value of goodwill to its
estimated fair value, which the Company estimates using the present value of
expected future cash flows. Such charges reflect reductions in the Companys
forecasted sales and earnings in certain of the reporting units comprising the
Company Stores and KK Supply Chain segments, which caused a reduction in the
estimated fair value of those reporting units. Such reductions reflect current
operating results, including the effects of higher materials and labor costs, as
well as recent trends in operating results. The Company conducts its annual
goodwill impairment testing as of December 31. The Company
tests other 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 (including the impact of rising commodity costs) on current
results of operations, observed trends in operating results, and evidence of a
change in circumstances observed as a part of periodic reforecasts of future
operating results and as part of the Companys annual budgeting process. When
the Company concludes that the carrying value of other 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. Impairment charges related to Company Stores long-lived
assets were approximately $44.1 million, $9.4 million and $49.7 million in
fiscal 2008, 2007 and 2006, respectively. Such charges relate to underperforming
stores, including both stores closed or likely to be closed and stores
management believes will not generate sufficient future cash flows to enable the
Company to recover the carrying value of the stores assets, but which
management has not yet decided to close. The impaired store assets include
leasehold improvements, which are typically abandoned when the leased properties
revert to the lessor (although the Company may recover a portion of the cost of
the improvements if the Company is successful in assigning its leasehold
interests to another tenant), and doughnut-making and other equipment. The fair
value of equipment is based upon its estimated selling price to franchisees
opening new stores, after considering refurbishment and transportation costs.
For the
fiscal year ended February 3, 2008, the Company also recorded an impairment
charge of approximately $10.4 million (substantially all of which was recorded
in the second quarter) with respect to its KK Supply Chain manufacturing and
distribution facility in Illinois, based on managements revised expectations
85 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) about the use and ultimate disposition of
that facility. During the second quarter, the Company decided to divest the
facility and determined that the projected cash flows from operation and
ultimate sale of the facility were less than its carrying value; accordingly,
the Company recorded an impairment charge to reduce the carrying value of the
facility and related equipment to their estimated fair value. The Company sold
these assets for approximately $10.9 million cash (net of expenses) in the
fourth quarter of fiscal 2008, and recorded a credit to impairment charges of
approximately $600,000, representing the excess of the ultimate selling price
over the previously estimated disposition value of the facility. The Company
also recorded an impairment charge of approximately $1.5 million during fiscal
year ended February 3, 2008 to reduce the carrying value of its KK Supply Chain
coffee roasting assets to their estimated fair value upon disposition. The
Company sold these assets for approximately $1.9 million cash during the third
quarter of fiscal 2008. The Company
records impairment charges for reacquired franchise rights when such intangible
assets are determined to be impaired as a result of store closing decisions or
other developments. Lease
termination costs represent the net present value of remaining contractual lease
payments related to closed stores, after reduction by estimated sublease
rentals. The transactions reflected in the
accrual for lease termination costs are as follows: 86 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Note 14 Other Non-Operating Income
and Expense The components of other
non-operating income and expense are as follows: In the
fourth quarter of fiscal 2008, the Company recorded a provision of $3.0 million
for estimated payments under the Companys guarantees of certain debt and leases
related to a franchisee. During the quarter, the franchisee defaulted on certain
of the obligations guaranteed by the Company and, while there is no current
demand on the Company to perform under the guarantees, the Company believes it
is probable that the Company will be required to perform under some, and
potentially all, of them. The charge is comprised of $2.1 million representing
100% of the portion of principal balance of the franchisees loans guaranteed by
the Company, and $900,000 representing the guaranteed portion of approximately
one years total payments on the guaranteed leases. The estimated aggregate
maximum remaining potential obligation on guaranteed leases over their remaining
lives (which range from 11 to 16 years) and for which no provision has been
recorded is approximately $8.8 million, assuming no sublease rentals or other
loss mitigation benefits and no reduction for rights of setoff or other defenses
the Company may have to the guarantees. During fiscal 2007, the Company recorded
a provision of approximately $450,000 for estimated payments under a Company
guarantee of indebtedness of another franchisee. Note 15 Income Taxes The components of the provision for
income taxes (benefit) are as follows: 87 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The components of the loss before
income taxes are as follows: A
reconciliation of a tax provision computed at the statutory federal income tax
rate and the Companys provision for income taxes follows: Income tax
payments, net of refunds, were $682,000, $505,000 and $690,000 in fiscal 2008,
2007 and 2006, respectively. The components of deferred income
taxes are as follows: 88 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The tax effects of temporary
differences are as follows: Certain
amounts set forth in the preceding table as of January 28, 2007 differ from
amounts previously reported; however, the aggregate net deferred income tax
asset at that date is unchanged. The Company
has recorded a valuation allowance against deferred income tax assets of $177.0
million and $149.3 million at February 3, 2008 and January 28, 2007,
respectively, representing the amount of its deferred income tax assets in
excess of its deferred income tax liabilities. The valuation allowances were
recorded because management was unable to conclude, in light of the cumulative
loss realized by the Company for the three year period ended February 3, 2008,
that realization of the net deferred income tax asset was more likely than not.
The Company
has approximately $237 million of federal income tax loss carryforwards expiring
in fiscal 2024 through 2028. Of this amount, approximately $11 million is the
result of tax deductions related to the exercise of stock options by employees,
the tax benefits of which, if subsequently realized, will be recorded as an
addition to common stock. The Company also has state income tax loss
carryforwards expiring in fiscal 2010 through 2028. The Company
is subject to U.S. federal income tax, as well as income tax in multiple U.S.
state and local jurisdictions and a limited number of foreign jurisdictions. All
significant state, local and foreign income tax matters have been concluded
through fiscal 2004. The Company has concluded all U.S. federal income tax
matters for all years prior to fiscal 2002. 89 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The Company
currently is subject to examinations of its fiscal 2002 through 2004 income tax
returns by the Internal Revenue Service (IRS), and other tax examinations by
other tax authorities in various jurisdictions. The IRS has informed the Company
that it will seek to disallow permanently approximately $7.2 million of
deductions claimed in the income tax returns currently under examination. The
Company currently expects to agree with a portion of the adjustment proposed by
the IRS, but disagrees with the balance of the proposed adjustment. Because the
Company has net operating loss carryovers for federal income tax purposes, the
proposed adjustment is not expected to result in significant payment of
additional taxes with respect to the tax years under audit, but would, to the
extent sustained by the IRS, result in an increase in taxes payable by the
Company at such time, if any, as those net operating loss carryovers are
exhausted. The Company assesses the likelihood of adverse outcomes resulting
from these examinations in determining the provision for income
taxes. The Company
had $5.1 million of unrecognized tax benefits as of February 3, 2008. If
recognized, $2.2 million of the unrecognized tax benefits would be recorded as a
part of income tax expense and affect the Companys effective income tax
rate. The
following table presents a reconciliation of the beginning and ending amounts of
unrecognized tax benefits: It is
reasonably possible that the total amount of unrecognized tax benefits will
decrease in fiscal 2009 by up to approximately $3.9 million, of which
approximately $1.4 million would be recorded as part of income tax expense if
recognized. Decreases in the unrecognized tax benefits may result from the
completion of the IRS income tax audit, the pending liquidation of foreign
subsidiaries and the lapsing of statutes of limitations. The
Companys policy is to recognize interest and penalties related to income tax
issues as components of income tax expense. The Company had approximately
$670,000 of accrued interest and penalties as of February 3, 2008, and accrued
approximately $220,000 for such items for the year then ended. Note 16 Shareholders
Equity Common Shares and Warrants Issued in
Connection With Settlement of Litigation On March 2,
2007, the Company issued 1,833,828 shares of common stock and warrants to
acquire 4,296,523 shares of common stock at a price of $12.21 per share in
connection with the settlement of certain litigation as described in Note 12. As
of that date, the aggregate fair value of the common shares was approximately
$18.4 million and the aggregate fair value of the warrants was approximately
$18.5 million. The estimated fair value of the warrants was computed using the
Black-Scholes option pricing model with the following assumptions: an exercise
price of $12.21 per share; a market price of common stock of $10.01 per share;
an expected term of 5.0 years; a risk-free rate of 4.46%; a dividend yield of
zero; and expected volatility of 50%. The common
stock and warrants had a fair value as of January 28, 2007 of approximately
$51.8 million which, together with the approximately $35.0 million cash paid to
the settlement class by the Companys insurers, was reflected in the
consolidated balance sheet under the caption accrued litigation settlement.
The decrease in the estimated fair value of the common stock and warrants from
January 28, 2007 to their issuance on March 2, 90 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) 2007 of approximately $14.9 million was
credited to earnings in the first quarter of fiscal 2008, at which time the
aggregate fair value of the securities of approximately $36.9 million was
reclassified from liabilities to common stock. Warrant Issued in Exchange for
Services General and
administrative expenses for fiscal 2007 and 2006 include $3.9 million and $2.8
million, respectively, representing, in the aggregate, the estimated fair value
of a warrant to purchase 1.2 million shares of the Companys common stock issued
during fiscal 2006 to a corporate recovery and advisory firm engaged by the
Company to provide interim management services to the Company from late January
2005 through March 2006. The warrants exercise price is $7.75 per share, and it
expires on January 31, 2013. The warrants fair value was charged to earnings
during the period from January 18, 2005, the date on which the advisory firm was
engaged, to April 6, 2006, the date on which the warrant became exercisable and
non-forfeitable, in accordance with EITF Issue 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services. The substantial charge to earnings
related to the warrant in fiscal 2007 reflects an increase in its estimated fair
value as of April 6, 2006, the date on which the value of the warrant was fixed
for accounting purposes, compared to its estimated fair value at January 29,
2006. The estimated fair value of the warrant as of April 6, 2006 was computed
using the Black-Scholes option pricing model with the following assumptions: an
exercise price of $7.75 per share; a market price of common stock of $8.84 per
share; a term to maturity of 6.82 years; a risk-free rate of 4.91%; a dividend
yield of zero; and expected volatility of 55%. The aggregate $6.7 million
estimated fair value of the warrant as of April 6, 2006 was reclassified from
accrued liabilities to common stock as of that date. Share-Based Compensation for
Employees The
Companys shareholders approved the 2000 Stock Incentive Plan (the 2000 Plan),
under which incentive stock options, nonqualified stock options, stock
appreciation rights, performance units, restricted stock (or units) and common
shares may be awarded. In fiscal 2008, the Companys shareholders amended the
2000 plan to extend the term of the 2000 Plan by two years to June 30, 2012 and
to remove the 2000 Plans sublimit on the number of shares that may be issued in
connection with awards of stock appreciation rights, restricted stock, common
stock and performance unit awards. The maximum number of shares of common stock
with respect to which awards may be granted under the 2000 Plan is 9,996,000, of
which 3,566,500 remain available for grant after fiscal 2008. The 2000 Plan
provides that options may be granted with exercise prices not less than the
closing sale price of the Companys common stock on the date of
grant. Effective
January 30, 2006 (the first day of fiscal 2007), the Company adopted Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(FAS 123(R)), which requires the measurement and recognition of compensation
expense for share-based payment (SBP) awards, including stock options. Such
adoption included consideration of the provisions of Staff Accounting Bulletin
No. 107, which contains the views of the staff of the Commission relating to
adoption of FAS 123(R). Prior to fiscal 2007, the Company accounted for SBP
awards using the intrinsic value method prescribed by APB 25. The Company
adopted FAS 123(R) using the modified prospective method of adoption;
accordingly, financial statements for years prior to fiscal 2007 have not been
restated to reflect the fair value method of recognizing compensation cost
relating to stock options. Under the modified prospective method of adoption,
the aggregate fair value of stock options which were unvested at the end of
fiscal 2006 that is attributable to employee service after fiscal 2006 will be
charged to earnings over the remaining service period associated with the
options. In addition, the Company is recognizing compensation expense for stock
option awards made in fiscal 2007 and thereafter. The Company previously
recognized compensation expense for grants of restricted stock based upon the
fair value of the shares awarded, and this practice has continued after adoption
of FAS 123(R). Under FAS 123(R), the fair value of SBP awards with respect to
which employees render the requisite service necessary for the 91 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) award to vest is recognized over the
related vesting period. The fair value of SBP awards which vest in increments
and for which vesting is subject solely to service conditions is charged to
expense on a straight-line basis over the aggregate vesting period of each
award, which generally ranges from three to four years. The fair value of SBP
awards which vest in increments and for which vesting is subject to both market
conditions and service conditions is charged to expense over the estimated
vesting period of each increment of the award, each of which is treated as a
separate award for accounting purposes. Adoption of
FAS 123(R) had the effect of increasing compensation expense for fiscal 2007 by
approximately $5.0 million. Because the Company recorded no income tax benefit
with respect to its operating loss for fiscal 2007, the after tax effect of the
accounting change also was approximately $5.0 million, or $.08 per share. This
additional expense includes not only a portion of the fair value of stock
options granted during fiscal 2007, but also a portion of the fair value of
stock options granted in prior years. The
aggregate cost of SBP awards charged to earnings in fiscal 2008 and fiscal 2007
is set forth in the following table. The Company did not realize any excess tax
benefits from the exercise of stock options during either year. Had
compensation cost for the Companys stock option plans for fiscal 2006 been
determined based on the estimated fair value of the awards at the grant dates in
accordance with the provisions of Statement of Financial Accounting Standards
No. 123, Stock-Based Compensation (FAS 123), rather than using the intrinsic
value method of APB 25, the Companys earnings would have been affected as set
forth in the table below: 92 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The fair
value of stock options subject only to service conditions was estimated using
the Black-Scholes option pricing model. In addition to service conditions,
certain stock options granted in fiscal 2008 and 2007 also provide that the
price of the Companys common stock must increase by 20% and 40% after the grant
date, and remain at or above the appreciated price for at least ten consecutive
trading days, in order for the options to become vested and exercisable. The
fair value of those stock options was estimated using Monte Carlo simulation
techniques. Options granted generally have contractual terms of 10 years, the
maximum term permitted under the 2000 Plan. The weighted average assumptions
used in valuing stock options are set forth in the following table: The expected
life of stock options valued using the Black-Scholes option pricing model is
estimated by reference to historical experience, published data and any relevant
characteristics of the option. The expected life of stock options valued using
Monte Carlo simulation techniques is based upon the vesting dates forecasted by
the simulation and then assuming that options which vest are exercised at the
midpoint between the forecasted vesting date and their expiration. The risk-free
rate of interest is based on the yield of a zero-coupon U.S. Treasury bond on
the date the award is granted having a maturity approximately equal to the
expected term of the award. Expected volatility is based on a combination of the
historical and implied volatility of the Companys common shares and the shares
of peer companies. The Company uses historical data to estimate forfeitures of
awards prior to vesting. The number
of options granted during fiscal 2008, 2007 and 2006 and the aggregate and
weighed average fair value of such options were as follows: 93 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The
following table summarizes stock option transactions for fiscal 2008, 2007 and
2006. Option transactions include options granted under the 2000 Plan as well as
options granted under the Companys 1998 Stock Option Plan (the 1998 Plan)
pursuant to which grants may no longer be awarded. Additional information regarding
stock options outstanding as of February 3, 2008, is as follows: Options Outstanding
94 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) In addition
to stock options, the Company periodically has awarded restricted stock and
restricted stock units (which are settled in common stock) under the 2000 Plan.
The following table summarizes changes in unvested restricted stock awards for
fiscal 2008, 2007 and 2006: The total
fair value as of the grant date of shares vesting during fiscal 2008, 2007 and
2006 was $3,946,000, $597,000 and $3,000, respectively. As of
February 3, 2008, the total unrecognized compensation cost related to SBP awards
was approximately $9.0 million. The remaining service periods over which
compensation cost will be recognized for these awards range from approximately
three months to four years, with a weighted average remaining service period of
approximately 1.6 years. At February
3, 2008, there were approximately 11,147,800 shares of common stock reserved for
issuance pursuant to awards granted under the 2000 Plan and the 1998
Plan. Shareholder Rights
Plan Each share
of the Companys common stock has one preferred share purchase right. Each share
purchase right entitles the registered shareholder to purchase one one-hundredth
(1/100) of a share of Krispy Kreme Series A Participating Cumulative Preferred
Stock at a price of $96.00 per one one-hundredth of a Series A preferred share.
The share purchase rights are not exercisable until the earlier to occur of (1)
10 days following a public announcement that a person or group of affiliated or
associated persons referred to as an acquiring person has acquired
beneficial ownership of 15% or more of the Companys outstanding common stock or
(2) 10 business days following the commencement of, or announcement of an
intention to make a tender offer or exchange offer which would result in an
acquiring person beneficially owning 15% or more of the outstanding shares of
common stock. If the
Company is acquired in a merger or other business combination, or if 50% or more
of the Companys consolidated assets or earning power is sold after a person or
group has become an acquiring person, proper provision will be made so that each
holder of a share purchase right other than share purchase rights beneficially
owned by the acquiring person, which will thereafter be void will have the
right to receive, upon exercise of the share purchase right at the then current
exercise price, the number of shares of common stock of the acquiring company
which at the time of the transaction have a market value of two times the share
purchase right exercise 95 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) price. If any person or group becomes an
acquiring person, proper provision shall be made so that each holder of a share
purchase right other than share purchase rights beneficially owned by the
acquiring person, which will thereafter be void will have the right to receive
upon exercise, and without paying the exercise price, the number of shares of
Krispy Kreme common stock with a market value equal to the share purchase right
exercise price. Series A
preferred shares purchasable upon exercise of the share purchase rights will not
be redeemable. Each Series A preferred share will be entitled to a minimum
preferential dividend payment of $1 per share and will be entitled to an
aggregate dividend of 100 times the dividend declared per share of common stock.
In the event the Company liquidates, the holders of the Series A preferred
shares will be entitled to a minimum preferential liquidation payment of $1 per
share but will be entitled to an aggregate payment of 100 times the payment made
per share of common stock. Each Series A preferred share will have 100 votes,
voting together with the shares of common stock. Finally, in the event of any
merger, consolidation or other transaction in which shares of common stock are
exchanged, each Series A preferred share will be entitled to receive 100 times
the amount received per share of common stock. These rights are protected by
customary antidilution provisions. Before the
date the share purchase rights are exercisable, the share purchase rights may
not be detached or transferred separately from the common stock. The share
purchase rights will expire on January 18, 2010, unless that expiration date is
extended or unless the share purchase rights are redeemed or exchanged by the
Company. At any time an acquiring person acquires beneficial ownership of 15% or
more of the Companys outstanding common stock, the Board of Directors may
redeem the share purchase rights in whole, but not in part, at a price of $0.001
per share purchase right. Immediately upon any share purchase rights redemption,
the exercise rights terminate and the holders will only be entitled to receive
the redemption price. Note 17 Segment
Information The
Companys reportable segments are Company Stores, Franchise and KK Supply Chain.
The Company Stores segment is comprised of the operating activities 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 mix, equipment and other items to both
Company and franchisee-owned stores. The Franchise segment consists of the
Companys store franchise operations. Under the terms of the franchise
agreements, the 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 this segment include costs incurred to recruit new franchisees and
to open, monitor and aid in the performance of these stores and direct general
and administrative expenses. All
intercompany sales by the KK Supply Chain segment to the Company Stores segment
are at prices intended to reflect an arms-length transfer price and are
eliminated in consolidation. Operating income for the Company Stores segment
does not include any profit earned by the KK Supply Chain segment on sales of
doughnut mix, ingredients and supplies to the Company Stores segment; such
profit is included in KK Supply Chain operating income. The gross profit earned
by the KK Supply Chain segment on sales of equipment to the Company Stores
segment and eliminated in consolidation is not included in the KK Supply Chain
segment operating income shown below, and depreciation expense charged to
Company Stores operating income reflects the elimination of that intercompany
profit. The
following table presents the results of operations of the Companys operating
segments for fiscal 2008, 2007 and 2006. As described under Revisions in Note
1, in fiscal 2008 the Company revised its presentation of gains and losses on
disposals of property and equipment and foreign currency transaction gains and
losses related to inventory purchases to report such amounts as components of
income or loss from operations rather than as components of non-operating income
and expense. Certain amounts set forth in the table below for fiscal 2007 and
2006 differ from amounts previously reported as a result of such
revision. 96 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Segment
operating income is consolidated operating income before unallocated general and
administrative expenses, impairment charges and lease termination costs and
settlement of litigation. 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. Revenues for
fiscal 2008, 2007 and 2006 include approximately $48 million, $43 million and
$24 million, respectively, from customers outside the United States.
Approximately $4 million of the carrying value of property and equipment at
January 28, 2007 relates to the Companys operations in Canada. Note 18 Investments in
Franchisees As of
February 3, 2008, the Company has investments in seven franchisees. These
investments have been made in the form of capital contributions and, in certain
instances, loans evidenced by promissory notes. Notes receivable bear interest,
payable semi-annually, at rates ranging from 6.5% to 10.0% per annum, and have
maturity dates ranging from September 30, 2008 to the dissolution of the
franchisee. These investments and notes receivable are included in Investments
in Equity Method Franchisees in the consolidated balance sheet. Information
about the Companys ownership in the Equity Method Franchisees and the markets
served by those franchisees is set forth below: 97 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Information
about the financial position and results of operations of the Companys Equity
Method Franchisees is set forth below: 98 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) The
Companys financial exposures related to franchisees in which the Company has an
investment are summarized in the tables below. The consolidated balance sheet at
February 3, 2008 includes accruals for estimated payments under loan and lease
guarantees of approximately $3.4 million related to Krispy Kreme of South
Florida, LLC (KKSF) and Priz Doughnuts, LP (Priz). There is no liability
reflected for other guarantees of franchisee obligations because the Company did
not believe it was probable that the Company would be required to perform under
such other guarantees. Amounts
shown in the preceding tables for accounts and notes receivable are before
reduction for related allowances for doubtful accounts, which totaled
approximately $1.4 million and $2.9 million at February 3, 2008 and January 28,
2007, respectively (see Note 3). The aggregate loan and lease guarantees at
February 3, 2008 and January 28, 2007 shown in the preceding tables include
$11.5 million and $15.0 million, respectively, representing guarantees of lease
obligations; the balance of the guarantee amounts represents guarantees of
outstanding loans. The guaranteed amount for debt was determined based upon the
principal amount outstanding under the related agreement and the guaranteed
amount for leases was determined based upon the gross amount of remaining lease
payments. 99 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) In April
2008, the Company completed an agreement with A-OK, LLC and KK-TX-I, L.P. (which
have common ownership and are collectively referred to as the A-OK Parties)
pursuant to which, among other things, the Company conveyed to the owner of the
A-OK Parties the Companys equity interests in the A-OK Parties and compromised
and settled certain disputed and past due amounts owed by the A-OK Parties 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 A-OK
Parties indebtedness and lease obligations. During
fiscal 2008, the Company reevaluated its investment in Kremeworks Canada, LP
(Kremeworks Canada) and concluded that such investment was not recoverable;
accordingly, the Company recorded an impairment charge of $572,000 to reduce the
carrying value of the Companys investment in Kremeworks Canada to zero. This
charge is included in other non-operating income and expense, net in the
consolidated statement of operations. In August
2007, the Company acquired an additional 33.4% interest in Priz as part of a
plan to restructure its operations, which currently consist of two franchise
stores. In December
2006, the Company entered into an agreement with KKSF pursuant to which, among
other things, the Company agreed to permit KKSF to close certain of its stores
and granted KKSF forbearance with respect to certain of KKSFs financial
obligations to the Company, and KKSF agreed to use its best efforts to cause the
Company to be released from its obligations under its partial guarantees of
certain KKSF indebtedness and lease obligations. If KKSF obtained the Companys
release from the guarantees and otherwise complied with the terms of the
agreement, the Company agreed to convey to the majority owner of KKSF the
Companys equity interest in KKSF without further consideration. While KKSF
obtained the Companys release from approximately $2.9 million of potential
guarantee obligations since December 2006, as of February 3, 2008, KKSF was not
in compliance with all of the terms of the agreement and which, in any event,
has expired and not been extended. KKSF is seeking additional forbearance and/or
financial support from the Company, and is in default with respect to certain
credit agreements with its lenders, including agreements related to KKSF
indebtedness guaranteed, in part, by the Company. During the fourth quarter of
fiscal 2008, the Company recorded a provision of $3.0 million for estimated
payments related to guarantees of KKSF loans and leases, as more fully described
under Other Commitment and Contingencies in Note 12. The
following table summarizes the Companys obligations under the loan and lease
guarantees as of February 3, 2008 and the scheduled expiration of these
obligations in each of the next five fiscal years and thereafter. The amounts
shown as the scheduled expiration of the guarantees are based upon the scheduled
maturity of the underlying guaranteed obligation. 100 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Note 19 Related Party
Transactions All
franchisees are required to purchase doughnut mix and production equipment from
the Company. Revenues include $14.7 million, $22.9 million and $47.6 million in
fiscal 2008, 2007 and 2006, respectively, of sales to franchise stores owned, in
whole or in part, by emeritus directors and franchisees in which the Company has
an ownership interest. In August 2005, the Company eliminated the position of
emeritus director. Revenues also include royalties from these franchisees of
$2.9 million, $4.4 million and $8.6 million in fiscal 2008, 2007 and 2006,
respectively. Trade receivables from these franchisees are included in
receivables from related parties in Note 3. These transactions were conducted
pursuant to development and/or franchise agreements, the terms of which are
substantially the same as those with similar franchisees. The
Companys franchisee for the Middle East is an affiliate of a shareholder which
is the beneficial owner of approximately 14% of the companys common stock. The
Company had transactions in the normal course of business with this franchisee
(including sales of doughnut mix and equipment to the franchisee and royalties
payable to the Company by the franchisee based on its sales at Krispy Kreme
franchise stores) totaling approximately $8.1 million in fiscal 2008 and $1.5
million in fiscal 2007. Such transactions were conducted pursuant to development
and franchise agreements, the terms of which are substantially the same as those
currently offered to our other international franchisees. Note 20 Employee Benefit
Plans The Company
has a 401(k) savings plan (the 401(k) Plan) to which employees may contribute
up to 100% of their salary and bonus to the plan on a tax deferred basis,
subject to statutory limitations. The Company
also has a Nonqualified Deferred Compensation Plan (the 401(k) Mirror Plan)
designed to enable officers of the Company whose contributions to the 401(k)
Plan are limited by certain statutory limitations to have the same opportunity
to defer compensation as is available to other employees of the Company under
the qualified 401(k) savings plan. Participants may defer from 1% to 15% of
their base salary and from 1% to 100% of their bonus (reduced by their
contributions to the 401(k) Plan), subject to statutory limitations, into the
401(k) Mirror Plan and may direct the investment of the amounts they have
deferred. The investments, however, are not a legally separate fund of assets
and are included in other assets in the consolidated balance sheet. The
corresponding liability to participants is included in other long-term
obligations. The balance in the asset and corresponding liability account was
$368,000 and $255,000 at February 3, 2008 and January 28, 2007,
respectively. The Company
currently matches 50% of the first 6% of compensation contributed by each
employee to both the 401(k) Plan and the 401(k) Mirror Plan. Contributions
expense for these plans totaled $847,000 in fiscal 2008, $838,000 in fiscal 2007
and $851,000 in fiscal 2006. In February
1999, the Company established the Krispy Kreme Profit Sharing Stock Ownership
Plan (KSOP) pursuant to which the Company could contribute a discretionary
percentage of each employees compensation, subject to Internal Revenue Code
limits, to each eligible employees account under the plan. The Company made no
contribution to this plan in fiscal 2008, 2007 or 2006. In connection with the
settlement in fiscal 2007 of certain litigation involving the 401(k) Plan and
the KSOP, the Company agreed to merge the KSOP with and into the Companys
401(k) Plan, which occurred on June 1, 2007. KKDC
established a nonqualified mirror plan, comparable to the KSOP, in February
1999. Contributions to this nonqualified plan could be made by the Company with
respect to compensation earned by participants in excess of the maximum amount
of compensation that may be taken into account under the qualified plan. No
amounts were credited to employees under the nonqualified plan in fiscal 2008,
2007 or 2006. 101 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) In February
2002, the Company established the Krispy Kreme Doughnuts, Inc. Employee Stock
Purchase Plan (ESPP) to provide eligible employees of the Company an
opportunity to purchase Company common stock by deferring a portion of their
compensation. Deferred amounts are accumulated and, at the end of each quarter,
are used to purchase shares of common stock of the Company. The ESPP provides
that the shares can be acquired either from the Company or in the open market.
The Company recorded compensation expense related to the plan of $14,000 in
fiscal 2006 prior to halting purchases under the ESPP. As of February 3, 2008,
there were 2,000,000 common shares reserved for issuance under the
ESPP. Note 21 Selected Quarterly Financial
Data (Unaudited) The tables below present selected
quarterly financial data for fiscal 2008 and 2007. 102 KRISPY KREME DOUGHNUTS,
INC. NOTES TO FINANCIAL STATEMENTS
(Continued) Quarterly loss
per share amounts may not add to the total loss per share for the year due to
rounding. Note 22 Fair Value of Financial
Instruments
The carrying values and approximate fair values of certain financial
instruments were as follows: 103 None. Item 9A. CONTROLS AND
PROCEDURES. Evaluation of Disclosure Controls
and Procedures As of
February 3, 2008, the end of the period covered by this Annual Report on Form
10-K, management performed, under the supervision and with the participation of
our chief executive officer and chief financial officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated to management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosures. Based on this evaluation, our
chief executive officer and chief financial officer have concluded that, as of
February 3, 2008, our disclosure controls and procedures were
effective. Managements Report on Internal
Control over Financial Reporting Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act. Internal control over financial reporting is a process,
effected by an entitys board of directors, management and other personnel,
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external
purposes in accordance with GAAP. Internal control over financial reporting
includes those policies and procedures which pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with GAAP; provide reasonable assurance that
receipts and expenditures are being made only in accordance with managements
and/or the Board of Directors authorization; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our consolidated
financial statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect material errors in our financial statements. Also, projection
of any evaluation of the effectiveness of our internal control over financial
reporting to future periods is subject to the risk that controls may become
inadequate because of changes in conditions, because the degree of compliance
with our policies and procedures may deteriorate. Management
assessed the effectiveness of our internal control over financial reporting as
of February 3, 2008, using the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on our assessment, management has concluded
that we maintained effective internal control over financial reporting as of
February 3, 2008, based on the COSO criteria. The report
of PricewaterhouseCoopers LLP, an independent registered public accounting firm,
on our internal control over financial reporting appears on page 60 in this
Annual Report. Remediation of Material Weaknesses
in Internal Control over Financial Reporting Our
management report on internal control over financial reporting for the fiscal
year ended January 28, 2007 described material weaknesses in our internal
control over financial reporting. These material weaknesses continued to exist
as of the end of the first three quarters of fiscal 2008, during which time we
were engaged in the implementation and testing of remedial measures designed to
address these material weaknesses. In the 104 fourth quarter of fiscal 2008, we
completed testing of the design and operating effectiveness of enhanced controls
to demonstrate their operating effectiveness over a period of time sufficient to
support our conclusion that, as of February 3, 2008, we had remediated the
previously reported material weakness in our internal control over financial
reporting. During
fiscal 2008, we implemented the following changes in our internal control over
financial reporting to address previously reported material
weaknesses: Changes in Internal Control over
Financial Reporting Our
remediation of the material weaknesses described above during the quarter ended
February 3, 2008 has materially affected our internal control over financial
reporting. Item 9B. OTHER INFORMATION.
None. 105 PART III Except as
set forth below, the information required by this item is contained in our proxy
statement for our 2008 Annual Meeting of Shareholders to be held on June 17,
2008, to be filed pursuant to Section 14 of the Exchange Act, and is
incorporated herein by reference. NYSE and SEC
Certifications In
accordance with Section 303A.12(a) of the NYSE Listed Company Manual, the Chief
Executive Officer of the Company submits annual certifications to the NYSE
stating that he is not aware of any violations by the Company of the NYSE
corporate governance listing standards, qualifying the certification to the
extent necessary. The last such annual certification was submitted on June 22,
2007 and contained no qualifications. We have
filed certifications executed by our Chief Executive Officer and Chief Financial
Officer with the SEC pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act
as exhibits to this Annual Report on Form 10-K. Item 11. EXECUTIVE
COMPENSATION. The
information required by this item is contained in our proxy statement for our
2008 Annual Meeting of Shareholders to be held on June 17, 2008, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference. The
information required by this item is contained in our proxy statement for our
2008 Annual Meeting of Shareholders to be held on June 17, 2008, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference. The
information required by this item is contained in our proxy statement for our
2008 Annual Meeting of Shareholders to be held on June 17, 2008, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES The
information required by this item is contained in our proxy statement for our
2008 Annual Meeting of Shareholders to be held on June 17, 2008, to be filed
pursuant to Section 14 of the Exchange Act, and is incorporated herein by
reference. 106 PART IV Item 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES 107 108 * 109 SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT KRISPY KREME DOUGHNUTS,
INC. BALANCE SHEET 110 SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT KRISPY KREME DOUGHNUTS,
INC. STATEMENT OF
OPERATIONS 111 SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT KRISPY KREME DOUGHNUTS,
INC. STATEMENT OF CASH
FLOWS 112 SCHEDULE II VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES KRISPY KREME DOUGHNUTS,
INC. 113 SIGNATURES Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. Krispy Kreme Doughnuts,
Inc. Date: April 17, 2008 POWER OF ATTORNEY Each person
whose signature appears below hereby constitutes and appoints James H. Morgan
and Douglas R. Muir, or either of them, his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any or all amendments or supplements to this Annual Report
on Form 10-K and to file the same with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing necessary or appropriate to be done with this
Annual Report on Form 10-K and any amendments or supplements hereto, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on April 17, 2008. 114 115
Washington, D.C.
20549
______________
Form 10-K
(Mark
one)
þ
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year
ended February 3, 2008
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition
period from to
(Exact name of registrant as
specified in its charter)
North
Carolina
56-2169715
(State or other
jurisdiction of
(I.R.S. Employer
Identification No.)
incorporation or
organization)
370 Knollwood
Street,
27103
Winston-Salem,
North Carolina
(Zip
Code)
(Address of
principal executive offices)
Registrants telephone number, including area
code:
(336) 725-2981
Securities registered pursuant to Section 12(b) of the
Act:
Name
of
Each
Exchange
on
Which
Title of Each Class
Registered
Common Stock, No Par
Value
New York Stock
Exchange
Preferred Share
Purchase Rights
New York Stock
Exchange
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No þ
Portions of the
definitive proxy statement for the registrants 2008 Annual Meeting of
Shareholders to be held on June 17, 2008 are incorporated by reference
into Part III hereof.
Page
FORWARD-LOOKING STATEMENTS
1
PART
I
Item 1.
Business
3
Item
1A.
Risk
Factors
14
Item 1B.
Unresolved Staff Comments
21
Item
2.
Properties
21
Item 3.
Legal Proceedings
22
Item
4.
Submission of
Matters to a Vote of Security Holders
24
PART II
Item
5.
Market for
Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity
Securities
25
Item 6.
Selected Financial Data
27
Item
7.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
28
Item 7A.
Quantitative and Qualitative Disclosures about Market
Risk
57
Item
8.
Financial
Statements and Supplementary Data
59
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
104
Item
9A.
Controls and
Procedures
104
Item 9B.
Other Information
105
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance
106
Item
11.
Executive
Compensation
106
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder
Matters
106
Item
13.
Certain
Relationships and Related Transactions, and Director
Independence
106
Item 14.
Principal Accountant Fees and Services
106
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
107
SIGNATURES
114
Commission (the SEC) and the United States Attorneys
Office for the Southern District of New York;
These sales channels are
designed to generate incremental sales, increase market penetration and brand
awareness, increase consumer convenience and optimize utilization of our
stores production capacity. We accomplish off-premises sales through our
direct store delivery system, or DSD, through which we deliver
At
February 3,
At
January 28,
At
January 29,
2008
2007
2006
By Owner:
Company Stores
105
113
133
Franchise
Stores
344
282
269
Total
Systemwide
449
395
402
By Type:
Factory Stores
Company
97
108
128
Franchise
198
188
195
Total Factory Stores
295
296
323
Satellites
Company
8
5
5
Franchise
146
94
74
Total Satellites
154
99
79
Total
Systemwide
449
395
402
By Location:
Domestic Stores
Company
100
107
127
Franchise
145
165
207
Total Domestic Stores
245
272
334
International Stores:
Company
5
6
6
Franchise
199
117
62
Total International Stores
204
123
68
Total
Systemwide
449
395
402
Item
5.
High
Low
Year Ended January 28, 2007:
First
Quarter
$
9.57
$
5.30
Second Quarter
12.11
7.14
Third
Quarter
10.25
7.50
Fourth Quarter
13.93
9.01
Year Ended
February 3, 2008:
First Quarter
$
13.20
$
9.71
Second
Quarter
10.49
6.80
Third Quarter
7.33
2.91
Fourth
Quarter
4.19
2.23
January
January
January
January
January
February
31,
2003
30,
2004
28,
2005
27,
2006
26,
2007
1,
2008
Krispy Kreme
Doughnuts, Inc.
$100.00
$117.20
$
28.48
$ 17.53
$
42.35
$ 9.50
NYSE Composite
Index
100.00
134.57
144.43
166.29
188.02
190.56
S&P 500
Restaurants Index
100.00
161.60
211.89
248.69
291.57
307.75
____________________
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
Jan. 30,
Feb. 1,
2008
2007
2006
2005
2004
(In Thousands, except per share and number of stores
data)
STATEMENT OF OPERATIONS DATA:
Revenues
$
429,319
$
461,195
$
543,361
$
707,766
$
649,345
Operating expenses:
Direct operating expenses
380,014
389,379
474,591
598,281
493,650
General and administrative expenses
26,303
48,860
67,727
55,301
45,230
Depreciation and amortization expense
18,433
21,046
28,920
31,934
22,309
Impairment charges and lease termination costs
62,073
12,519
55,062
161,847
Settlement of litigation
(14,930
)
15,972
35,833
(525
)
Other operating (income) and expenses, net
13
1,916
(1,741
)
4,365
939
Operating income
(loss)
(42,587
)
(28,497
)
(117,031
)
(143,962
)
87,742
Interest income
1,422
1,627
1,110
775
906
Interest
expense
(9,796
)
(20,334
)
(20,211
)
(6,875
)
(4,509
)
Loss on extinguishment of debt
(9,622
)
Equity in
(losses) of equity method franchisees
(933
)
(842
)
(4,337
)
(1,622
)
(2,242
)
Minority interests in results of consolidated
franchises
4,181
6,249
(1,898
)
Other
non-operating income and (expense), net
(3,211
)
7,021
(248
)
(1,945
)
2,992
Income (loss) from continuing operations
before income taxes
(64,727
)
(41,025
)
(136,536
)
(147,380
)
82,991
Provision for
income taxes (benefit)
2,324
1,211
(776
)
9,674
33,146
Income (loss) from continuing operations
$
(67,051
)
$
(42,236
)
$
(135,760
)
$
(157,054
)
$
49,845
Income (loss)
from continuing operations
per common share
Basic
$
(1.05
)
$
(.68
)
$
(2.20
)
$
(2.55
)
$
.84
Diluted
$
(1.05
)
$
(.68
)
$
(2.20
)
$
(2.55
)
$
.80
BALANCE SHEET DATA (AT END OF YEAR):
Working capital
(deficit)(1)
$
32,862
$
(3,052
)
$
(6,894
)
$
1,728
$
78,821
Total assets
$
202,351
$
349,492
410,855
480,278
656,603
Long-term debt,
less current maturities
75,156
105,966
118,241
90,950
137,114
Total shareholders equity
56,624
78,962
108,671
240,943
436,409
Number of
factory stores at end of year (unaudited):
Company
97
108
128
175
141
Franchise
198
188
195
221
216
Systemwide
295
296
323
396
357
(1)
Reflects a liability, net of
amounts recoverable from insurance companies, of approximately $51.8
million and $35.8 million as of January 28, 2007 and January 29, 2006,
respectively, related to the settlement of certain litigation. This
liability was satisfied in March 2007 through the issuance of shares of
common stock and warrants to acquire shares of common stock as described
in Note 12 to the consolidated financial statements appearing elsewhere
herein.
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
Revenues
100.0
%
100.0
%
100.0
%
Operating
expenses:
Direct operating expenses
88.5
84.4
87.3
General and administrative expenses
6.1
10.6
12.5
Depreciation and amortization expense
4.3
4.6
5.3
Impairment charges and lease termination costs
14.5
2.7
10.1
Settlement of litigation
(3.5
)
3.5
6.6
Other operating (income) and expense, net
0.4
(0.3
)
Operating (loss)
(9.9
)
(6.2
)
(21.5
)
NUMBER OF FACTORY STORES
COMPANY
FRANCHISE
TOTAL
JANUARY 30, 2005
175
221
396
Opened
3
13
16
Closed
(46
)
(26
)
(72
)
Transferred
(3
)
3
Converted to satellites
(1
)
(16
)
(17
)
JANUARY 29,
2006
128
195
323
Opened
30
30
Closed
(8
)
(44
)
(52
)
Transferred
(11
)
11
Converted to
satellites
(1
)
(4
)
(5
)
JANUARY 28, 2007
108
188
296
Opened
1
32
33
Closed
(9
)
(18
)
(27
)
Transferred
Converted to satellites
(3
)
(4
)
(7
)
FEBRUARY 3,
2008
97
198
295
NUMBER OF SATELLITE
STORES
COMPANY
FRANCHISE
TOTAL
JANUARY 30, 2005
10
27
37
Opened
1
33
34
Closed
(5
)
(4
)
(9
)
Transferred
(2
)
2
Converted from factory stores
1
16
17
JANUARY 29,
2006
5
74
79
Opened
34
34
Closed
(2
)
(17
)
(19
)
Transferred
1
(1
)
Converted from
factory stores
1
4
5
JANUARY 28, 2007
5
94
99
Opened
56
56
Closed
(8
)
(8
)
Converted from
factory stores
3
4
7
FEBRUARY 3, 2008
8
146
154
Data on the
aggregate number of factory and satellite stores as of February 3, 2008
appear in the table below.
NUMBER OF STORES
COMPANY
FRANCHISE
TOTAL
FACTORY STORES:
Domestic
92
118
210
International
5
80
85
Total factory stores
97
198
295
SATELLITES:
Domestic:
Hot shops
5
15
20
Fresh shops
3
12
15
Kiosks
Total domestic
8
27
35
International:
Hot shops
28
28
Fresh shops
52
52
Kiosks
39
39
Total international
119
119
Total satellites
8
146
154
____________________
Fiscal Year
2008
2007
2006
(Dollars in thousands)
Average weekly sales per factory store (1):
Company
$
54.7
$
54.6
$
48.5
Systemwide
$
51.8
$
49.6
$
46.3
Factory store
operating weeks:
Company
5,448
5,905
8,112
Systemwide
14,936
15,742
19,136
Average weekly sales per store (1):
Company
$
53.0
$
52.9
$
47.7
Systemwide
$
37.2
$
39.5
$
41.4
Store operating
weeks:
Company
5,626
6,092
8,260
Systemwide
20,797
19,767
21,383
Year Ended
Feb. 3,
Jan. 28,
2008
2007
(Dollars in thousands)
REVENUES BY BUSINESS SEGMENT:
Company
Stores
$
304,444
$
326,199
Franchise
22,958
21,075
KK Supply
Chain:
Total revenues
203,283
219,991
Less intersegment sales elimination
(101,366
)
(106,070
)
External revenues
101,917
113,921
Total revenues
$
429,319
$
461,195
PERCENTAGE OF TOTAL REVENUES:
Company
Stores
70.9
%
70.7
%
Franchise
5.3
4.6
KK Supply
Chain
23.7
24.7
Total revenues
100.0
%
100.0
%
52
weeks
ended
Jan. 27,
2008
ON-PREMISES:
Change in same store sales
0.0
%
OFF-PREMISES:
Change in average weekly number of doors
(1.1
)%
Change in average weekly sales per
door
(6.4
)%
Year Ended
Feb. 3,
Jan. 28,
2008
2007
(Dollars in thousands)
Royalties
$
20,377
$
17,878
Development and
franchise fees
2,341
2,891
Other
240
306
Total revenues
$
22,958
$
21,075
Year Ended
Feb. 3,
Jan. 28,
2008
2007
(Dollars in thousands)
DIRECT OPERATING EXPENSES BY BUSINESS SEGMENT:
Company
Stores
$
299,806
$
307,635
Franchise
8,746
4,602
KK Supply
Chain:
Total direct operating expenses
172,761
183,305
Less intersegment elimination
(101,299
)
(106,163
)
KK Supply Chain direct operating expenses, less
intersegment eliminations
71,462
77,142
Total direct operating expenses
$
380,014
$
389,379
DIRECT OPERATING EXPENSES AS A PERCENTAGE OF SEGMENT
REVENUES:
Company Stores
98.5
%
94.3
%
Franchise
38.1
%
21.8
%
KK Supply Chain (before intersegment eliminations)
85.0
%
83.3
%
Total direct operating expenses
88.5
%
84.4
%
Year Ended
Jan. 28,
Jan. 29,
2007
2006
(Dollars in thousands)
REVENUES BY BUSINESS SEGMENT:
Company
Stores
$
326,199
$
398,450
Franchise
21,075
18,394
KK Supply
Chain:
Total revenues
219,991
253,367
Less intersegment sales
elimination
(106,070
)
(126,850
)
External revenues
113,921
126,517
Total revenues
$
461,195
$
543,361
PERCENTAGE OF TOTAL REVENUES:
Company
Stores
70.7
%
73.3
%
Franchise
4.6
3.4
KK Supply
Chain
24.7
23.3
Total revenues
100.0
%
100.0
%
Year Ended
Jan. 28,
Jan. 29,
2007
2006
(Dollars in thousands)
DIRECT OPERATING EXPENSES BY BUSINESS SEGMENT:
Company
Stores
$
307,635
$
378,715
Franchise
4,602
5,017
KK Supply
Chain:
Total direct operating expenses
183,305
217,709
Less intersegment elimination
(106,163
)
(126,850
)
KK Supply Chain direct operating expenses, less
intersegment eliminations
77,142
90,859
Total direct operating expenses
$
389,379
$
474,591
DIRECT OPERATING EXPENSES AS A PERCENTAGE OF SEGMENT
REVENUES:
Company
Stores
94.3
%
95.0
%
Franchise
21.8
%
27.3
%
KK Supply Chain
(before intersegment eliminations)
83.3
%
85.9
%
Total direct operating expenses
84.4
%
87.3
%
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Net cash provided by operating activities
$
9,712
$
22,108
$
1,865
Net cash
provided by (used for) investing activities
13,118
14,045
(11,688
)
Net cash provided by (used for) financing activities
(34,425
)
(15,477
)
138
Effect of
exchange rate changes on cash
88
(1
)
(10
)
Cash balances of subsidiaries at date of
deconsolidation
(1,413
)
(1,011
)
Net increase (decrease) in cash and cash
equivalents
$
(11,507
)
$
19,262
$
(10,706
)
____________________
Payments Due In
Less
More
Than
Than
Total
1
1-3
3-5
5
Amount
Year
Years
Years
Years
(In thousands)
Long-term debt
(excluding capital lease obligations),
including current maturities
$
76,119
$
963
$
1,926
$
1,926
$
71,304
Interest payment
obligations (1)(2)
47,565
7,806
15,594
16,481
7,684
Payment
obligations on interest rate hedge (3)
3,052
1,160
1,630
262
Capital lease
obligations
594
594
Operating lease
obligations
159,658
10,651
20,083
18,406
110,518
Purchase
obligations
48,885
34,974
13,911
Guarantee obligations
3,419
3,419
Other long-term
obligations, including current portion,
reflected on the Companys balance sheet:
Self-insurance claims
18,127
6,373
4,526
2,170
5,058
401(k) mirror plan liability
368
368
Total
$
357,787
$
65,940
$
57,670
$
39,245
$
194,932
(1)
Interest rates
utilized to estimate interest payments for variable rate debt are based
upon the forward LIBOR interest rate curve as of February 1, 2008 and have
been computed on a pro forma basis to give effect to the amendments to the
Companys secured credit facilities executed in April 2008.
(2)
Represents estimated
amounts payable without reduction for any amount due to the Company or
payable by the Company pursuant to an interest rate hedge agreement. See
Note 10 to the consolidated financial statements appearing elsewhere
herein.
(3)
Interest rates
utilized to estimate payments on the interest rate hedge are based upon
the forward LIBOR interest rate curve as of February 1,
2008
Aggregate
Weighted
Contract
Aggregate
Average
Contract
Amount
Fair
Contract Volume
or Strike Price
or Strike Price
Value
(Dollars in thousands, except average prices)
Wheat futures contracts
300,000 bu.
$10.04/bu.
$3,012
$267
Approximate
Approximate
Range
Approximate
Annual
Anticipated
Fiscal 2009
of Prices
Paid In
Hypothetical
Price
Effect Of
Hypothetical
Ingredient
Purchases
Fiscal 2008
Increase
Price Increase
(In
thousands)
(In
thousands)
Flour
79,000lbs.
$0.141 $0.239/lb.
$0.01
$790
Shortening
41,000lbs.
$0.367
$0.586/lb.
$0.01
410
Sugar
61,600lbs.
$0.295 $0.306/lb.
$0.01
616
Page
Index to Financial Statements
Report of
Independent Registered Public Accounting Firm
60
Consolidated balance sheet as of February 3, 2008 and January 28,
2007
61
Consolidated
statement of operations for each of the three years in the period
ended February 3, 2008
62
Consolidated statement of cash flows for each of the three years in
the period
ended February 3,
2008
63
Consolidated
statement of changes in shareholders equity for each of the three years
in the period
ended February 3, 2008
64
Notes to financial statements
65
Financial
statement schedules:
For each of the three years in the period ended February 3,
2008:
Schedule I
Condensed Financial Information of Registrant
110
Schedule II Valuation and Qualifying Accounts and Reserves
113
Greensboro,
North Carolina
April 17, 2008
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
ASSETS
CURRENT
ASSETS:
Cash and cash equivalents
$
24,735
$
36,242
Receivables
22,991
26,769
Accounts and notes receivable equity method franchisees
2,637
834
Inventories
19,987
21,006
Insurance recovery receivable
34,967
Deferred income
taxes
83
Other current assets
5,647
12,000
Total current assets
76,080
131,818
Property and equipment
90,996
168,654
Investments in
equity method franchisees
1,950
3,224
Goodwill and other intangible assets
23,856
28,934
Deferred income
taxes
20
Other assets
9,469
16,842
Total
assets
$
202,351
$
349,492
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT
LIABILITIES:
Current maturities of long-term debt
$
1,557
$
1,730
Accounts
payable
5,712
7,874
Accrued litigation settlement
86,772
Deferred income
taxes
20
Other accrued liabilities
35,949
38,474
Total current liabilities
43,218
134,870
Long-term debt, less current maturities
75,156
105,966
Deferred income
taxes
83
Other long-term obligations
27,270
29,694
Commitments and
contingencies
SHAREHOLDERS EQUITY:
Preferred stock,
no par value; 10,000 shares authorized; none issued and
outstanding
Common stock, no par value; 300,000 shares authorized; 65,370 and
62,670 shares
issued and outstanding
355,615
310,942
Accumulated
other comprehensive income
81
1,266
Accumulated deficit
(299,072
)
(233,246
)
Total shareholders equity
56,624
78,962
Total liabilities and shareholders equity
$
202,351
$
349,492
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands, except per share amounts)
Revenues
$
429,319
$
461,195
$
543,361
Operating
expenses:
Direct operating expenses (exclusive of depreciation and
amortization
shown
below)
380,014
389,379
474,591
General and administrative expenses
26,303
48,860
67,727
Depreciation and amortization expense
18,433
21,046
28,920
Impairment charges and lease termination
costs
62,073
12,519
55,062
Settlement of litigation
(14,930
)
15,972
35,833
Other operating (income) and expense, net
13
1,916
(1,741
)
Operating (loss)
(42,587
)
(28,497
)
(117,031
)
Interest
income
1,422
1,627
1,110
Interest expense
(9,796
)
(20,334
)
(20,211
)
Loss on
extinguishment of debt
(9,622
)
Equity in (losses) of equity method franchisees
(933
)
(842
)
(4,337
)
Minority
interests in results of consolidated franchisees
4,181
Other non-operating income and (expense), net
(3,211
)
7,021
(248
)
(Loss) before
income taxes
(64,727
)
(41,025
)
(136,536
)
Provision for income taxes (benefit)
2,324
1,211
(776
)
Net
(loss)
$
(67,051
)
$
(42,236
)
$
(135,760
)
(Loss) per common share:
Basic
$
(1.05
)
$
(.68
)
$
(2.20
)
Diluted
$
(1.05
)
$
(.68
)
$
(2.20
)
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net
(loss)
$
(67,051
)
$
(42,236
)
$
(135,760
)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization
18,433
21,046
28,920
Deferred income taxes
889
(12
)
(1,888
)
Impairment charges
61,041
10,762
53,734
Settlement of litigation
(14,930
)
15,972
35,833
Accrued rent expense
(663
)
1,029
374
(Gain) loss on disposal of property and equipment
64
1,786
(1,807
)
Gain on sale of interests in equity method
franchisees
(260
)
(7,308
)
Share-based compensation
7,599
9,849
6,862
Provision for doubtful accounts
1,786
3,390
6,033
Amortization of deferred financing costs
6,041
2,925
2,544
Minority interests in results of consolidated
franchisees
(4,181
)
Equity in losses of equity method franchisees
933
842
4,337
Cash distributions from equity method franchisees
453
Other
991
407
295
Change in assets
and liabilities:
Receivables
284
501
2,252
Inventories
1,058
2,558
4,123
Other current and non-current assets
2,105
6,850
(2,971
)
Accounts payable and accrued liabilities
(7,550
)
(9,054
)
435
Other long-term obligations
(1,058
)
2,801
2,277
Net
cash provided by operating activities
9,712
22,108
1,865
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of
property and equipment
(5,509
)
(4,005
)
(10,381
)
Proceeds from disposals of property and equipment
18,314
9,663
7,330
Acquisition of
franchisees and interests therein, net of cash acquired
428
Investments in and advances to franchise investees
(818
)
(12,219
)
Recovery of
investments in and advances to franchise investee
2,500
2,542
Sale of interests in equity method franchisee
300
9,591
Acquisition of
stores from franchisee
(2,900
)
Decrease in other assets
13
14
612
Net cash provided by (used for) investing
activities
13,118
14,045
(11,688
)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of
short-term debt
2,984
2,274
Repayment of short-term debt
(3,038
)
(2,220
)
Proceeds from
issuance of long-term debt
110,000
120,000
Repayment of long-term debt
(141,733
)
(14,936
)
(108,475
)
Net repayments
under revolving credit lines
(1,606
)
Deferred financing costs
(2,891
)
(427
)
(9,472
)
Proceeds from
exercise of stock options
292
154
Net change in book overdraft
(60
)
(8,420
)
Collection of
notes receivable secured by common stock
197
Cash received from minority interests
7,706
Other
(93
)
Net cash provided by (used for) financing
activities
(34,425
)
(15,477
)
138
Effect of
exchange rate changes on cash
88
(1
)
(10
)
Cash balances of subsidiaries at date of deconsolidation
(1,413
)
(1,011
)
Net increase
(decrease) in cash and cash equivalents
(11,507
)
19,262
(10,706
)
Cash and cash equivalents at beginning of year
36,242
16,980
27,686
Cash and cash
equivalents at end of year
$
24,735
$
36,242
$
16,980
Supplemental schedule of non-cash investing and financing
activities:
Assets acquired under capital leases
$
750
$
$
Accumulated
Other
Retained
Common
Comprehensive
Earnings
Shares
Common
Unearned
Notes
Income
(Accumulated
Outstanding
Stock
Compensation
Receivable
(Loss)
(Deficit)
Total
(In thousands)
BALANCE AT JANUARY 30, 2005
61,756
$
295,611
$ (17
)
$ (197
)
$ 796
$
(55,250
)
$
240,943
Comprehensive
income (loss):
Net
(loss) for the year ended
January 29, 2006
(135,760
)
(135,760
)
Foreign currency translation
adjustment, net of income tax
benefit of $168
(183
)
(183
)
Unrealized gain from cash flow hedge,
net of income taxes of $531
813
813
Total comprehensive (loss)
(135,130
)
Correction of errors in accounting for
stock-based compensation (Note 1)
2,508
2,508
Exercise of
stock options
86
154
154
Amortization of restricted shares
5
5
Cancellation of
restricted shares
(1
)
(18
)
12
(6
)
Collection of notes receivable secured by
common stock
197
197
BALANCE AT
JANUARY 29, 2006
61,841
298,255
1,426
(191,010
)
108,671
Comprehensive income (loss):
Net (loss) for the year ended
January 28, 2007
(42,236
)
(42,236
)
Foreign currency translation
adjustment, net of income tax
benefit of $58
(267
)
(267
)
Unrealized gain from cash flow hedge,
net of income taxes of $70
107
107
Total comprehensive (loss)
(42,396
)
Issuance of
common stock warrant
6,700
6,700
Share-based compensation
831
5,987
5,987
Cancellation of
restricted shares
(2
)
BALANCE AT JANUARY 28, 2007
62,670
310,942
1,266
(233,246
)
78,962
Effect of
adoption of FIN 48 (Note 1)
1,225
1,225
Comprehensive income (loss):
Net (loss) for the year ended
February 3, 2008
(67,051
)
(67,051
)
Foreign currency translation
adjustment, net of income taxes
of $117
357
357
Unrealized loss from cash flow
hedge, net of income tax
benefit of $1,006
(1,542
)
(1,542
)
Total comprehensive (loss)
(68,236
)
Exercise of
stock options
111
292
292
Issuance of common shares and warrants
(Notes 12 and 16)
1,834
36,875
36,875
Share-based
compensation
785
7,599
7,599
Cancellation of restricted shares
(30
)
(93
)
(93
)
BALANCE AT
FEBRUARY 3, 2008
65,370
$
355,615
$
$
$
81
$
(299,072
)
$
56,624
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Numerator: net (loss)
$
(67,051
)
$
(42,236
)
$
(135,760
)
Denominator:
Basic earnings per share weighted average shares
outstanding
63,805
61,871
61,807
Diluted earnings per share weighted average
shares
outstanding
63,805
61,871
61,807
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Accumulated other comprehensive income:
Unrealized gains (losses) on cash flow hedges, including
amounts related to
Equity Method Franchisees
$
(2,236
)
$
312
Cumulative foreign currency translation adjustments
2,371
1,897
135
2,209
Less: deferred income taxes
(54
)
(943
)
$
81
$
1,266
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Receivables:
Wholesale doughnut customers
$
12,769
$
15,091
Unaffiliated franchisees
14,607
13,927
Current portion of notes receivable
365
496
27,741
29,514
Less allowance for doubtful accounts:
Wholesale doughnut customers
(570
)
(682
)
Unaffiliated franchisees
(4,180
)
(2,063
)
(4,750
)
(2,745
)
$
22,991
$
26,769
Receivables from Equity Method Franchisees (Notes 1 and
18):
Trade
$
4,016
$
3,719
Current portion
of notes receivable
18
Less allowance for doubtful accounts
(1,379
)
(2,903
)
$
2,637
$
834
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Allowance for doubtful accounts related to trade
receivables:
Balance at beginning of year
$
2,745
$
13,656
$
11,379
Provision for doubtful accounts
2,150
1,836
3,978
Reserves associated with
acquired businesses
41
Effects of deconsolidation of subsidiaries
(115
)
(132
)
Chargeoffs
(145
)
(12,632
)
(1,610
)
Balance at end of year
$
4,750
$
2,745
$
13,656
Allowance for
doubtful accounts related to Equity Method
Franchisees:
Balance at beginning of year
$
2,903
$
3,160
$
1,105
Provision for doubtful accounts
(364
)
1,554
2,055
Chargeoffs
(1,160
)
(1,811
)
Balance at end of year
$
1,379
$
2,903
$
3,160
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Raw materials
$
6,055
$
6,998
Work in
progress
96
33
Finished goods
5,794
4,996
Purchased
merchandise
7,969
8,872
Manufacturing supplies
73
107
$
19,987
$
21,006
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Miscellaneous receivables
$
1,053
$
700
Current portion
of claims against insurance carriers related to
self-insurance
programs (Notes 1, 8, 9 and 11)
609
665
Assets held for sale
5,156
Receivables from
directors and officers insurance carriers
762
Prepaid expenses and other
3,985
4,717
$
5,647
$
12,000
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Land
$
19,058
$
19,161
Buildings
64,513
100,784
Leasehold improvements
9,918
18,848
Machinery and
equipment
62,327
123,285
Construction in progress
25
360
155,841
262,438
Less: accumulated depreciation
(64,845
)
(93,784
)
$
90,996
$
168,654
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Indefinite-lived intangible assets:
Goodwill (by segment):
Franchise
$
23,496
$
23,496
Company Stores
4,598
23,496
28,094
Reacquired franchise rights associated with Company
Stores
360
840
$
23,856
$
28,934
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Non-current portion of claims against insurance carriers related
to
self-insurance
programs (Notes 1, 5, 9 and 11)
$
3,838
$
4,276
Deferred
financing costs, net of accumulated amortization
2,369
5,519
Deposits
1,275
1,408
Computer
software, net of accumulated amortization
1,171
1,060
401(k) mirror plan assets (Notes 11 and 20)
368
255
Non-current
portion of notes receivable from unaffiliated franchisees
74
308
Fair value of interest rate hedge
729
Other
374
3,287
$
9,469
$
16,842
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Current portion of self-insurance claims, principally workers
compensation
(Notes 1, 5, 8 and 11)
$
4,996
$
5,885
Accrued
compensation
4,846
3,891
Accrued vacation pay
3,981
4,192
Accrued
guarantee obligations (Notes 12, 14 and 18)
3,419
450
Accrued taxes, other than income
3,036
3,336
Customer
deposits
2,881
2,742
Fair value of interest rate hedge
2,231
Accrued health care claims
1,377
1,290
Accrued professional fees
1,114
3,880
Accrued utilities
862
1,031
Current portion of deferred franchise fee revenue
601
944
Current portion of lease termination costs (Notes 11 and 13)
322
189
Accrued interest
67
4,222
Other
6,216
6,422
$
35,949
$
38,474
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
2007 Secured Credit Facilities
$
76,119
$
2005 Secured
Credit Facilities
107,066
Capital lease obligations
594
630
76,713
107,696
Less: current maturities
(1,557
)
(1,730
)
$
75,156
$
105,966
Fiscal Year
(In
thousands)
2009
$
1,557
2010
963
2011
963
2012
963
2013
963
Thereafter
71,304
$
76,713
Operating
Capital
Fiscal Year
Leases
Leases
(In thousands)
2009
$
10,651
$
654
2010
10,154
2011
9,929
2012
9,720
2013
8,686
Thereafter
110,518
$
159,658
654
Less:
portion representing interest and executory costs
(60
)
$
594
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Non-current portion of self-insurance claims, principally
workers
compensation (Notes 1, 5, 8 and 9)
$
11,754
$
11,389
Accrued rent
expense
6,935
7,534
Non-current portion of deferred franchise fee revenue
3,405
4,038
Non-current
portion of lease termination costs (Notes 9 and 13)
2,515
1,461
401(k) mirror plan liabilities (Notes 8 and 20)
368
255
Other
2,293
5,017
$
27,270
$
29,694
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Impairment charges:
Impairment of goodwill Company Stores
segment
$
4,598
$
874
$
3,511
Impairment of goodwill KK Supply Chain segment
213
Total goodwill impairment charges
4,598
1,087
3,511
Impairment of long-lived assets
55,963
9,418
49,663
Impairment of reacquired franchise rights
480
120
560
Other
137
Total impairment charges
61,041
10,762
53,734
Lease termination costs:
Provision for termination costs
2,683
2,113
2,860
Less
reversal of previously recorded deferred rent expense
(1,651
)
(356
)
(1,532
)
Net provision
1,032
1,757
1,328
$
62,073
$
12,519
$
55,062
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Balance at beginning of year
$
1,650
$
1,981
$
2,281
Provision for lease termination costs:
Provisions associated with store closings, net of estimated
sublease
rentals
1,961
122
2,682
Adjustments to previously recorded provisions resulting
from
settlements with lessors and adjustments of previous
estimates
526
1,824
77
Accretion of discount
196
167
101
Total provision
2,683
2,113
2,860
Proceeds from assignment of leases
966
Accruals related to deconsolidated
franchisees
(1,012
)
Payments on unexpired leases, including settlements with
lessors
(2,462
)
(2,444
)
(2,148
)
Total reductions
(1,496
)
(2,444
)
(3,160
)
Balance at end of
year
$
2,837
$
1,650
$
1,981
Accrued lease
termination costs are included in the consolidated
balance sheet as follows:
Other accrued liabilities
$
322
$
189
$
282
Other long-term obligations
2,515
1,461
1,699
$
2,837
$
1,650
$
1,981
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Foreign currency transaction gain (loss)
$
70
$
163
$
(248
)
Gain on disposal
of interests in Equity Method Franchisees
(Note 18)
260
7,308
Impairment charge related to investment in Equity
Method
Franchisee (Note 18)
(572
)
Provision for
guarantee payments
(2,969
)
(450
)
$
(3,211
)
$
7,021
$
(248
)
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Current
$
1,435
$
1,223
$
1,112
Deferred
889
(12
)
(1,888
)
$
2,324
$
1,211
$
(776
)
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Domestic
$
(58,491
)
$
(45,705
)
$
(130,411
)
Foreign
(6,236
)
4,680
(6,125
)
Total (loss) before income taxes
$
(64,727
)
$
(41,025
)
$
(136,536
)
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Income taxes at statutory federal rate
$
(22,654
)
$
(14,359
)
$
(47,788
)
State income
taxes
(3,718
)
(1,984
)
(3,988
)
Foreign (income) losses with no tax (cost) benefit
114
(2,216
)
291
Valuation
allowance provided on deferred income tax assets
27,642
19,420
50,284
Foreign withholding taxes
773
1,033
102
Other
167
(683
)
323
$
2,324
$
1,211
$
(776
)
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Net current assets (liabilities)
$
83
$
(20
)
Net noncurrent
assets (liabilities)
(83
)
20
Net
asset
$
$
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
Deferred income tax assets:
Goodwill and other intangible assets
$
29,830
$
33,056
Accrued litigation settlement
7,315
20,463
Allowance for doubtful accounts
2,668
2,298
Other current assets
2,180
1,900
Property and equipment
11,907
1,731
Other non-current assets
1,084
959
Insurance accruals
5,404
5,406
Deferred revenue
3,306
5,310
Other current liabilities
5,478
6,219
Other non-current liabilities
3,733
3,553
Share-based compensation
4,262
2,129
Federal net operating loss carryforwards
79,339
52,371
Federal tax credit carryforwards
3,678
2,883
Charitable contributions carryforward
3,889
3,717
State net operating loss and credit
carryforwards
12,176
7,526
Other
1,532
625
Gross deferred income tax assets
177,781
150,146
Valuation allowance on deferred income tax
assets
(176,964
)
(149,322
)
Deferred income tax assets, net of valuation
allowance
817
824
Deferred income tax liabilities:
Other
(817
)
(824
)
Gross deferred income tax liabilities
(817
)
(824
)
Net deferred income tax asset
$
$
(In thousands)
Unrecognized tax benefits recorded at adoption of FIN 48 effective
January 29, 2007
$
4,540
Increases for
positions related to the current year
238
Increases for positions taken in prior years
794
Settlements with
taxing authorities
(41
)
Lapsing of statutes of limitations
(401
)
Unrecognized tax
benefits at February 3, 2008
$
5,130
Year Ended
Feb. 3,
Jan. 29,
2008
2007
(In thousands)
Costs charged to earnings related to:
Stock options
$
2,561
$
4,978
Restricted stock and restricted stock units
5,038
1,009
Total costs
$
7,599
$
5,987
Costs included in:
Direct operating expenses
$
2,384
$
2,628
General and administrative expenses
5,215
3,359
Total costs
$
7,599
$
5,987
Year Ended
Jan. 29, 2006
(In thousands,
except
per share amounts)
Net (loss) as reported
$
(135,760
)
Deduct: SBP
awards determined under fair value method
(9,102
)
Pro forma net (loss)
$
(144,862
)
(Loss) per
share:
Reported (loss) per share Basic
$
(2.20
)
Pro forma (loss) per share Basic
$
(2.34
)
Reported (loss) per share Diluted
$
(2.20
)
Pro forma (loss) per share Diluted
$
(2.34
)
Year ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
Expected life of option
6.9 years
6.6 years
(1
)
Risk-free
interest rate
4.42
%
4.63
%
(1
)
Expected volatility of stock
50.0
%
51.8
%
(1
)
Expected
dividend yield
(1
)
(1)
Not applicable; no stock options
were granted in fiscal 2006.
Year ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
Weighted average fair value per share of options granted
$
2.95
$
4.88
(1
)
Total number of
options granted
784,200
1,400,000
Total fair value of all options granted
$
2,309,700
$
6,831,500
(1
)
(1)
Not applicable; no stock options
were granted in fiscal 2006.
Weighted
Weighted
Shares
Average
Average
Subject
Exercise
Aggregate
Remaining
to
Price
Intrinsic
Contractual
Option
Per Share
Value
Term
(Dollars in thousands,
except per share amounts)
Outstanding at January 30, 2005
7,448,500
$
18.89
Granted
Exercised
(85,700
)
$
1.79
$
459
Forfeited
(1,284,400
)
$
30.97
Outstanding at January 29, 2006
6,078,400
$
16.58
Granted
1,400,000
$
8.52
Exercised
Forfeited
(403,200
)
$
26.78
Outstanding at January 28, 2007
7,075,200
$
14.40
$
35,366
4.8 years
Granted
784,200
$
5.21
Exercised
(110,800
)
$
2.63
$
526
Forfeited
(1,352,800
)
$
13.76
Outstanding at February 3, 2008
6,395,800
$
13.61
$
3,796
3.6 years
Exercisable at
February 3, 2008
5,253,300
$
14.80
$
3,796
2.4
years
Weighted
Average
Options Exercisable
Remaining
Weighted
Weighted
Contractual
Average
Average
Range
of
Life
Exercise
Exercise
Exercise Prices
Shares
(Years)
Price
Shares
Price
$ 1.30 - $ 3.41
2,991,400
1.9
$
1.73
2,588,600
$
1.46
$ 5.25 - $ 9.71
544,000
8.0
$
9.19
64,000
$
5.25
$10.20 - $16.94
1,042,100
5.1
$
13.95
788,600
$
14.55
$28.11 - $28.58
624,000
4.3
$
28.34
624,000
$
28.34
$30.98 - $44.22
1,194,300
4.0
$
37.41
1,188,100
$
37.43
Weighted
Average
Unvested
Grant Date
Shares
Fair Value
Unvested at January 30, 2005
500
$
38.66
Granted
Vested
(100
)
$
34.11
Forfeited
(400
)
$
39.43
Unvested at January 29, 2006
Granted
834,000
$
8.52
Vested
(87,000
)
$
6.86
Forfeited
(3,000
)
$
9.71
Unvested at January 28, 2007
744,000
$
8.71
Granted
1,552,000
$
4.68
Vested
(795,500
)
$
4.96
Forfeited
(315,000
)
$
7.24
Unvested at February 3, 2008
1,185,500
$
6.33
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Revenues:
Company Stores
$
304,444
$
326,199
$
398,450
Franchise
22,958
21,075
18,394
KK Supply Chain:
Total revenues
203,283
219,991
253,367
Less intersegment sales elimination
(101,366
)
(106,070
)
(126,850
)
External KK Supply Chain revenues
101,917
113,921
126,517
Total revenues
$
429,319
$
461,195
$
543,361
Operating income (loss):
Company Stores
$
(6,292
)
$
1,721
$
(2,425
)
Franchise
14,317
16,354
13,805
KK Supply Chain
24,083
32,311
32,089
Unallocated general and administrative expenses
(27,552
)
(50,392
)
(69,605
)
Impairment charges and lease termination
costs
(62,073
)
(12,519
)
(55,062
)
Settlement of litigation
14,930
(15,972
)
(35,833
)
Total operating (loss)
$
(42,587
)
$
(28,497
)
$
(117,031
)
Depreciation and amortization expense:
Company Stores
$
11,558
$
15,979
$
23,416
Franchise
92
119
145
KK Supply Chain
5,586
3,469
3,504
Corporate administration
1,197
1,479
1,855
Total depreciation and amortization expense
$
18,433
$
21,046
$
28,920
____________________
Number of
Stores as
of
Feb. 3
Ownership%
Geographic Market
2008(1)
Company
Third Parties
A-OK, LLC
Arkansas, Oklahoma
5
30.3
%
69.7
%
KK-TX I,
L.P.
Texas (Amarillo,
Lubbock)
1
33.3
%
66.7
%
KremeWorks, LLC
Alaska, Hawaii, Oregon,
11
25.0
%
75.0
%
Washington
Kremeworks
Canada, LP
Western
Canada
1
24.5
%
75.5
%
Krispy Kreme of South Florida, LLC
Southern Florida
3
35.3
%
64.7
%
Krispy Kreme
Mexico, S. de R.L. de C.V.
Mexico
36
30.0
%
70.0
%
Priz Doughnuts, LP
Texas (El Paso), Mexico
2
66.7
%
33.3
%
(Ciudad Juarez)
(1)
Includes satellite
stores.
____________________
Summary Financial
Information(1)
Net
Total
Income
Total
Total
Equity
Revenues
(Loss)
Assets
Liabilities
(Deficit)
(In thousands)
A-OK, LLC
$
11,121
$
(626
)
$
6,568
$
8,808
$
(2,240
)
KK-TX I,
L.P.
2,268
(539
)
1,216
2,348
(1,132
)
KremeWorks, LLC
20,339
(2,121
)
23,507
17,978
5,529
Kremeworks
Canada, LP
1,511
(419
)
2,850
3,576
(726
)
Krispy Kreme of South Florida, LLC
13,196
53
9,026
13,036
(4,010
)
Krispy Kreme
Mexico, S. de R.L. de C.V.
14,238
(322
)
10,816
5,242
5,574
Priz Doughnuts, LP(2)
3,904
(1)
The revenues and net income
(loss) shown for each of these franchisees represents the amounts reported
by the franchisee for calendar 2007, and the amounts shown as total assets
and total liabilities represent the corresponding amounts reported by each
of the franchisees on or about December 31, 2007.
(2)
Information other than revenues
was not available for Priz Doughnuts, LP.
____________________
February 3, 2008
Investment
Loan and
and
Trade
Notes Receivable
Lease
Advances
Receivables
Current
Long-term
Guarantees
(In thousands)
A-OK, LLC
$
(523
)
$
2,591
$
$
$
2,319
KK-TX I,
L.P.
(484
)
203
810
Kremeworks, LLC
1,280
278
2,122
Kremeworks
Canada, LP
17
Krispy Kreme of South Florida, LLC
102
11,801
Krispy Kreme
Mexico, S. de R.L. de C.V.
1,677
756
Priz Doughnuts, LP
69
450
$
1,950
$
4,016
$
$
$
17,502
January 28, 2007
Investment
Loan and
and
Trade
Notes Receivable
Lease
Advances
Receivables
Current
Long-term
Guarantees
(In thousands)
A-OK, LLC
$
(333
)
$
1,563
$
$
$
2,554
KK-TX I,
L.P.
(305
)
206
1,330
Kremeworks, LLC
1,492
514
2,667
Kremeworks
Canada, LP
569
51
Krispy Kreme of South Florida, LLC(1)
18
15,600
Krispy Kreme
Mexico, S. de R.L. de C.V.
1,801
225
Priz Doughnuts, LP
1,142
18
450
$
3,224
$
3,719
$
18
$
$
22,601
(1)
Reflects a correction of the
previously reported guarantee amount of $10,231 reflected in the 2007 Form
10-K.
Total
Loan/
Guarantee
Lease
Amounts Expiring in Fiscal
Year
Percentages
Guarantees
2009
2010
2011
2012
2013
Thereafter
(In thousands)
A-OK, LLC
22.3%-33.3%
$
2,319
$
366
198
143
147
150
1,315
KK-TX I,
L.P.
30.0%-33.3%
810
147
128
92
69
52
322
Kremeworks, LLC
20.0%
2,122
1,506
616
Krispy Kreme of
South
Florida, LLC
35.0%-100.0%
11,801
2,969
822
822
822
822
5,544
Priz Doughnuts, LP
66.7%
450
450
$
17,502
$
5,438
$
1,764
$
1,057
$
1,038
$
1,024
$
7,181
Three Months
Ended
Apr. 29,
Jul. 29,
Oct. 28,
Feb. 3,
2007
2007
2007
2008
(In thousands, except per share data)
Revenues
$
110,918
$
104,098
$
103,355
$
110,948
Operating
expenses:
Direct operating expenses
96,995
95,333
90,911
96,775
General and administrative expenses
6,822
6,922
5,650
6,909
Depreciation and amortization expense
4,688
4,086
4,868
4,791
Impairment charges and lease termination
costs
12,663
22,109
(268
)
27,569
Settlement of litigation
(14,930
)
Other operating (income) and expense,
net
(285
)
16
196
86
Operating income (loss)
4,965
(24,368
)
1,998
(25,182
)
Interest
income
438
407
379
198
Interest expense
(2,520
)
(2,635
)
(2,274
)
(2,367
)
Loss on
extinguishment of debt.
(9,622
)
Equity in (losses) of equity method franchisees
(221
)
(258
)
(216
)
(238
)
Other
non-operating income and (expense), net
23
23
(309
)
(2,948
)
(Loss) before income taxes
(6,937
)
(26,831
)
(422
)
(30,537
)
Provision for
income taxes
461
209
376
1,278
Net (loss)
$
(7,398
)
$
(27,040
)
$
(798
)
$
(31,815
)
(Loss) per common share:
Basic
$
(.12
)
$
(.42
)
$
(.01
)
$
(.50
)
Diluted
$
(.12
)
$
(.42
)
$
(.01
)
$
(.50
)
Three Months Ended
Apr. 30,
Jul. 30,
Oct. 29,
Jan. 28,
2006
2006
2006
2007
(In thousands, except per share data)
Revenues
$
119,365
$
112,535
$
117,107
$
112,188
Operating
expenses:
Direct operating expenses
97,085
97,048
96,192
99,054
General and administrative expenses
16,607
12,154
12,457
7,642
Depreciation and amortization expense
5,478
5,459
5,177
4,932
Impairment charges and lease termination
costs
755
382
5,423
5,959
Settlement of litigation
15,972
Other operating (income) and expenses, net
(11
)
111
(105
)
1,921
Operating (loss)
(549
)
(2,619
)
(2,037
)
(23,292
)
Interest
income
284
424
460
459
Interest expense
(5,133
)
(5,036
)
(5,196
)
(4,969
)
Equity in income
(losses) of equity method franchisees
(494
)
(365
)
(65
)
82
Other non-operating income and (expense), net
122
3,097
68
3,734
(Loss) before
income taxes
(5,770
)
(4,499
)
(6,770
)
(23,986
)
Provision for income taxes
272
78
431
430
Net
(loss)
$
(6,042
)
$
(4,577
)
$
(7,201
)
$
(24,416
)
(Loss) per common share:
Basic
$
(.10
)
$
(.07
)
$
(.12
)
$
(.39
)
Diluted
$
(.10
)
$
(.07
)
$
(.12
)
$
(.39
)
Feb. 3, 2008
Jan. 28, 2007
Carrying
Fair
Carrying
Fair
value
value
value
value
(In thousands)
Assets
Cash and cash equivalents
$
24,735
$
24,735
$
36,242
$
36,242
Trade receivables
22,991
22,991
26,769
26,769
Commodity futures contracts
267
267
31
31
Interest rate derivative instruments
729
729
Liabilities:
Accounts payable
5,712
5,712
7,874
7,874
Interest rate derivative instruments
2,231
2,231
Long-term debt (including current
maturities)
76,713
72,500
107,696
107,696
Item
9.
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
1.
We designed and
implemented several key initiatives to strengthen our control environment.
These included:
2.
We designed and/or
implemented several key initiatives to strengthen our internal control
over financial closing and reporting including the following:
3.
We designed and
implemented effective controls to ensure that revenue was recognized in
the proper period for sales of equipment to franchisees in connection with
new store openings.
4.
We designed and
implemented effective controls over the application and monitoring of
accounting policies related to lease renewal options, rent escalations,
amortization periods for leasehold improvements and lease classification
principally affecting property and equipment, accrued rent, capital lease
obligations, rent expense and depreciation to ensure that such
transactions were completely and accurately accounted for in accordance
with GAAP.
5.
We designed and
implemented effective controls to ensure that retired assets were written
off in the appropriate period, that appropriate depreciable lives were
assigned to capital additions and assets were capitalized in accordance
with GAAP.
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
Item 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
Item 13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
(a)
Financial Statements and Schedules
1.
Financial Statements. See Item
8, Financial Statements and Supplementary Data.
2.
Financial Statement Schedules.
For each of the three years in the period ended February 3,
2008
Schedule I Condensed Financial
Information of Registrant
110
Schedule II Valuation and Qualifying
Accounts and Reserves
113
3.
Exhibits.
Exhibit
Description of
Number
Exhibits
3.1
Amended Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 of the Registrants Registration
Statement on Form S-8 (Commission File No. 333-97787), filed with the
Commission on August 7, 2002)
3.2
Amended and Restated Bylaws of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to the Registrants Current
Report on Form 8-K filed September 5, 2007)
4.1
Form of Certificate for Common Stock (incorporated by
reference to Exhibit 4.1 to the Registrants Amendment No. 4 to
Registration Statement on Form S-1 (Commission File No. 333-92909), filed
with the Commission on April 3, 2000)
4.2
Rights Agreement between the Company and Branch Banking and Trust
Company, as Rights Agent, dated as of January 18, 2000 (incorporated by
reference to Exhibit 4.2 to the Registrants Amendment No. 4 to
Registration Statement on Form S-1 (Commission File No. 333-92909), filed
with the Commission on April 3, 2000)
4.3
Warrant to Purchase Common Stock issued by Krispy Kreme
Doughnuts, Inc. in favor of Kroll Zolfo Cooper LLC, dated July 31, 2005
(incorporated by reference to Exhibit 4.1 to the Registrants Current
Report on Form 8-K filed October 26, 2005)
4.4
Warrant Agreement, dated as of March 2, 2007, between Krispy Kreme
Doughnuts, Inc. and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 4.1 to the Registrants Current
Report on Form 8-K filed March 8, 2007)
10.1
Form of Associates License Agreement (incorporated by
reference to Exhibit 10.2 to the Registrants Registration Statement on
Form S-1 (Commission File No. 333-92909), filed with the Commission on
December 16, 1999)
10.2
*
Form of Development Agreement
10.3
*
Form of Franchise Agreement
10.4
Form of International Franchise Agreement (incorporated by
reference to Exhibit 10.4 to the Registrants Annual Report on Form 10-K
for fiscal 2005)
10.5
Form of International Development Agreement
(incorporated by reference to Exhibit 10.5 to the Registrants Annual
Report on Form 10-K for fiscal 2005)
10.6
Trademark License Agreement, dated May 27, 1996, between HDN
Development Corporation and Krispy Kreme Doughnut Corporation
(incorporated by reference to Exhibit 10.22 to the Registrants Amendment
No. 1 to Registration Statement on Form S-1 (Commission File No.
333-92909), filed with the Commission on February 22, 2000)
10.7
1998 Stock Option Plan dated August 6, 1998 (incorporated by
reference to Exhibit 10.23 to the Registrants Amendment No. 1 to
Registration Statement on Form S-1(Commission File No. 333-92909), filed
with the Commission on February 22, 2000)**
Exhibit
Description of
Number
Exhibits
10.8
Employment Agreement, dated January 6, 2004, between the
Registrant and Michael C. Phalen (incorporated by reference to Exhibit
10.15 to the Registrants Annual Report on Form 10-K for fiscal
2004)**
10.9
Employment Agreement, dated as of April 23, 2007, among Krispy
Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Douglas R.
Muir (incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed April 27, 2007)**
10.10
Amendment, dated November 8, 2007, to Employment
Agreement, dated as of April 23, 2007, among Krispy Kreme Doughnuts, Inc.,
Krispy Kreme Doughnut Corporation and Douglas R. Muir (incorporated by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed November 13, 2007)**
10.11
Employment Agreement, dated as of March 6, 2006, among Krispy Kreme
Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Daryl G. Brewster
(incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed March 8, 2006)**
10.12
Amendment, dated March 30, 2007, to Employment
Agreement, dated as of March 6, 2006, among Krispy Kreme Doughnuts, Inc.,
Krispy Kreme Doughnut Corporation and Daryl G. Brewster (incorporated by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed April 2, 2007)**
10.13
Agreement and Release, dated as of January 6, 2008, among Krispy
Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Daryl G.
Brewster (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed January 7, 2008)**
10.14
Employment Agreement, dated as of February 27, 2008,
among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and
James H. Morgan (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed March 5,
2008)**
10.15
Employment Agreement, dated as of April 23, 2007, among Krispy
Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Sandra K.
Michel (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed April 27, 2007)**
10.16
Amendment, dated October 3, 2007, to Employment
Agreement, dated as of April 23, 2007, among Krispy Kreme Doughnuts, Inc.,
Krispy Kreme Doughnut Corporation and Sandra K. Michel (incorporated by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed October 4, 2007)**
10.17
Second Amendment, dated as of November 8, 2007, to Employment
Agreement, dated as of April 23, 2007, among Krispy Kreme Doughnuts, Inc.,
Krispy Kreme Doughnut Corporation and Sandra K. Michel (incorporated by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed November 13, 2007)**
10.18
*
Employment Agreement, dated as of November 7, 2007,
among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and
Kenneth J. Hudson**
10.19
*
Employment Agreement, dated as of November 7, 2007, among Krispy
Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Jeffrey B.
Welch **
10.20
2000 Stock Incentive Plan (incorporated by reference to Exhibit
10.1 to the Registrants Current Report on Form 8-K filed June 8,
2007)**
10.21
Krispy Kreme Doughnut Corporation Nonqualified Deferred
Compensation Plan, effective October 1, 2000 (incorporated by reference to
Exhibit 10.20 to the Registrants Annual Report on Form 10-K for fiscal
2005)**
10.22
Credit Agreement, dated as of February 16, 2007, by and among KKDC,
KKDI, the Subsidiary Guarantors party thereto, the Lenders party thereto
and Credit Suisse, Cayman Islands Branch, as administrative agent,
collateral agent, issuing lender and swingline lender (the Credit
Agreement) (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed February 23,
2007)
____________________
Exhibit
Description of
Number
Exhibits
10.23
Security Agreement, dated as of February 16, 2007, by
and among KKDC, KKDI, the Subsidiary Guarantors party thereto and Credit
Suisse, Cayman Islands Branch, as collateral agent (incorporated by
reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K
filed February 23, 2007)
10.24
Amendment No. 1, dated as of June 21, 2007, to the Credit Agreement
(incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed June 27, 2007)
10.25
Amendment No. 2, dated as of January 23, 2008, to the
Credit Agreement (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed January 25,
2008)
10.26
Amendment No. 3, dated as of April 9, 2008, to the Credit Agreement
(incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed April 15, 2008)
10.27
Form of Indemnification Agreement entered into between
Krispy Kreme Doughnuts, Inc. and Lizanne Thomas and Michael Sutton
(incorporated by reference to Exhibit 99.3 to the Registrants Current
Report on Form 8-K filed October 8, 2004)**
10.28
Form of Indemnification Agreement entered into between Krispy Kreme
Doughnuts, Inc. and members of the Registrants Board of Directors (other
than Lizanne Thomas and Michael Sutton) (incorporated by reference to
Exhibit 10.42 to the Registrants Annual Report on Form 10-K for fiscal
2005)**
10.29
Form of Indemnification Agreement entered into between
Krispy Kreme Doughnuts, Inc. and Officers of the Registrant (incorporated
by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K filed September 18, 2007)
10.30
*
Form of Nonqualified Stock Option Agreement**
10.31
Stipulation and Agreement of Class and Derivative
Settlement, dated as of October 30, 2006 (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K filed November
6, 2006)
10.32
*
Annual Incentive Plan**
10.33
*
Form of Restricted Stock Agreement**
10.34
*
Purchase
Agreement, dated December 21, 2007, entered into between Krispy Kreme
Doughnut Corporation and Harlan Bakeries, Inc.
21
*
List of Subsidiaries
23
*
Consent of PricewaterhouseCoopers LLP
24
*
Powers of Attorney of certain officers and directors of the Company
(included on the signature page of this Annual Report on Form
10-K)
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
Filed
herewith.
**
Identifies
management contracts and executive compensation plans or arrangements
required to be filed as exhibits pursuant to Item 15(b), Exhibits and
Financial Statement Schedules Exhibits, of this Annual Report on Form
10-K.
(PARENT COMPANY ONLY)
Feb. 3,
Jan. 28,
2008
2007
(In thousands)
ASSETS
Investment in and advances to subsidiaries
$
56,624
$
78,962
SHAREHOLDERS EQUITY
Preferred stock
$
$
Common
stock
355,615
310,942
Accumulated other comprehensive income
81
1,266
Accumulated
deficit
(299,072
)
(233,246
)
Total shareholders equity
$
56,624
$
78,962
(PARENT COMPANY ONLY)
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
Equity in (losses) of subsidiaries
$
(67,051
)
$
(42,236
)
$
(135,760
)
Miscellaneous
expenses
(Loss) before income taxes
(67,051
)
(42,236
)
(135,760
)
Provision for
income taxes (benefit)
Net (loss)
$
(67,051
)
$
(42,236
)
$
(135,760
)
(PARENT COMPANY ONLY)
Year Ended
Feb. 3,
Jan. 28,
Jan. 29,
2008
2007
2006
(In thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net
(loss)
$
(67,051
)
$
(42,236
)
$
(135,760
)
Equity in earnings of subsidiaries
67,051
42,236
135,760
Net cash used by
operating activities
CASH FLOW FROM INVESTING ACTIVITIES:
Investments in
subsidiaries
(292
)
(351
)
Net cash used for investing activities
(292
)
(351
)
CASH FLOW FROM
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
292
154
Collection of
notes receivable secured by common stock
197
Net cash provided by financing activities
292
351
Net increase in
cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash
equivalents at end of year
$
$
$
____________________
Additions
Balance at
Charged to
Charged
beginning
costs and
to
other
Balance at
Description
of year
expenses
accounts
Payments
end of year
(In thousands)
Accrual for self-insurance claims,
principally
workers compensation (current and
non-current portions)
Year ended January 28, 2007
$
13,250
$
8,223
(1)
$
(4,199
)
$
17,274
Accrual included in:
Other
accrued liabilities (Note 9)
$
4,378
$
5,885
Other
long-term obligations (Note 11)
8,872
11,389
$
13,250
$
17,274
Year ended February 3, 2008
$
17,274
$
3,381
$
(3,905
)
$
16,750
Accrual included in:
Other
accrued liabilities (Note 9)
$
5,885
$
4,996
Other
long-term obligations (Note 11)
11,389
11,754
$
17,274
$
16,750
(1)
Includes an increase
in the estimated total cost of open claims of $2,040. All of the increase
represents claim amounts covered by the Companys stop-loss coverages;
accordingly, there was a corresponding increase in amounts estimated to be
recoverable from the Companys insurance carriers related to such claims,
and the increase in total estimated claims was offset by a credit from
stop-loss insurance coverage, resulting in no net impact to
earnings.
By:
/s/ Douglas R. Muir
Name:
Douglas R.
Muir
Title:
Executive Vice
President and
Chief Financial
Officer
Signature
Title
/s/ James
H. Morgan
Chairman of the Board of Directors, President and
James
H. Morgan
Chief
Executive Officer (Principal Executive Officer)
/s/ Douglas R. Muir
Executive Vice President and Chief Financial Officer
Douglas R. Muir
(Principal Financial and Accounting Officer)
/s/ Charles A. Blixt
Director
Charles A. Blixt
/s/ Lynn
Crump-Caine
Director
Lynn
Crump-Caine
/s/ C.
Stephen Lynn
Director
C.
Stephen Lynn
/s/ Robert S. McCoy, Jr.
Director
Robert
S. McCoy, Jr.
Signature
Title
/s/ Andrew J. Schindler
Director
Andrew
J. Schindler
/s/ Michael H. Sutton
Director
Michael H. Sutton
/s/ Lizanne Thomas
Director
Lizanne Thomas
/s/ Togo D. West, Jr.
Director
Togo
D. West, Jr.
KRISPY KREME DOUGHNUT CORPORATION
DEVELOPMENT AGREEMENT
BASIC TERMS | |||||
A. | Effective Date | ||||
(Insert date Franchisee executes the | |||||
agreement): | |||||
B. | Franchisor: | Krispy Kreme Doughnut Corporation, a North Carolina | |||
Corporation | |||||
C. | Franchisee: | ||||
Franchisees Address: | |||||
Telephone: | Fax No.: | ||||
E-mail Address: | |||||
D. | Principal Owners: | ||||
E. | Managing Director: | ||||
F. | Development Area (See Exhibit A for | ||||
more detailed description): | |||||
G. | Development Schedule Totals (See | Cumulative Number of | End of Development Period | ||
Exhibit A for specific requirements): | Franchises | ||||
H. | Development Fee*: | ||||
I. | Initial Franchise Fee**: | Factory Store: $50,000 | Fresh Shop/Kiosk: $20,000 | ||
Hot Shop: $30,000 | Commissary Facility: $ 0 |
Franchisor: | |
(initials) | |
Franchisee: | |
(initials) |
____________________
* The
Development Fee is equal to 50% of the Initial Franchise Fees for all Stores to
be opened pursuant to the Development Schedule.
** Subject to a dollar-for-dollar credit equal to the amount of the Development Fee attributable to the particular Store; the Development Fee will be attributed only to the Stores for which it is paid and may not be used as a credit for any other Stores.
TABLE OF CONTENTS | |||
1. | BACKGROUND | 1 | |
2. | DEFINITIONS | 1 | |
3. | ACKNOWLEDGMENTS, REPRESENTATIONS, AND WARRANTIES | 5 | |
4. | TERM/ FEES /DEVELOPMENT SCHEDULE | 6 | |
5. | BUSINESS PLANS AND MANAGEMENT | 7 | |
6. | GRANT OF FRANCHISES | 7 | |
7. | FRANCHISORS RIGHTS AND LIMITATIONS/EXCLUSIVITY | 9 | |
8. | MARKS / COPYRIGHTS / CONFIDENTIAL INFORMATION | 10 | |
9. | TRANSFERS | 10 | |
10. | TERMINATION OF DEVELOPMENT RIGHTS | 13 | |
11. | EFFECT OF TERMINATION AND EXPIRATION | 14 | |
12. | RELATIONSHIP OF PARTIES/INDEMNIFICATION | 15 | |
13. | MISCELLANEOUS | 16 | |
14. | ACKNOWLEDGMENTS | 18 | |
EXHIBIT A | DEVELOPMENT AREA AND DEVELOPMENT SCHEDULE | ||
EXHIBIT A-1 | MAP OF DEVELOPMENT AREA | ||
EXHIBIT B | FRANCHISEE INFORMATION | ||
EXHIBIT C | FORM OF FRANCHISE AGREEMENT | ||
EXHIBIT D | FORM OF COMMISSARY FACILITY AGREEMENT | ||
EXHIBIT E | PRINCIPAL OWNERS PERSONAL GUARANTY | ||
EXHIBIT F | INVESTOR PERSONAL COVENANTS |
i
KRISPY KREME DOUGHNUT CORPORATION
DEVELOPMENT AGREEMENT
THIS DEVELOPMENT AGREEMENT (this Agreement) is made and entered into as of the Effective Date by and between Franchisor and Franchisee.
1. | BACKGROUND | |
1.1 | Franchisor has developed, as a result of considerable time, skill, effort, and money, a distinctive system for operating stores called Krispy Kreme Stores that offer and serve a variety of doughnuts, beverages, and other authorized products and services under the Marks. | |
1.2 | Franchisors Affiliate, HDN Development Corporation, owns the Marks and has granted Franchisor the right to sublicense the Marks to its franchisees for their use in operating Krispy Kreme Stores and Commissary Facilities. | |
1.3 | Franchisor grants franchises to own and operate Krispy Kreme Stores and Commissary Facilities to Persons who meet its qualifications and are willing to undertake the investment and effort to properly develop and operate them. | |
1.4 | Franchisee has submitted a Franchise Application to develop multiple Krispy Kreme Stores and Commissary Facilities in the Development Area, and Franchisor has accepted the application in reliance on all information Franchisee has provided in connection therewith. | |
1.5 | Pursuant to the terms of this Agreement, Franchisor grants Franchisee the right to develop Krispy Kreme Stores and Commissary Facilities within the Development Area. The operation of each Krispy Kreme Store and Commissary Facility will be governed by a separate Franchise Agreement and Commissary Facility Agreement, respectively. | |
2. | DEFINITIONS | |
2.1 | Capitalized terms used in this Agreement have the meanings given to them in this Section and in the Basic Terms. | |
Affiliate Any person that directly or indirectly owns or controls, that is directly or indirectly owned or controlled by, or that is under common ownership or control with the referenced person, including parents and subsidiaries. | ||
Basic Terms The terms of this Agreement set forth on the Krispy Kreme Doughnut Corporation Development Agreement Basic Terms section on the first page hereof. | ||
Commissary Facility A manufacturing facility for doughnuts and other Products that are supplied to Hot Shops and Fresh Shops/Kiosks. Commissary Facilities are not used for retail sales, but may distribute and sell to wholesale customers subject to Franchisors authorization pursuant to the Commissary Facility Agreement. | ||
Commissary Facility Agreement An agreement used by Franchisor to grant Franchisee the right to operate a Commissary Facility at a specified location. | ||
Competitive Business A business, other than a Krispy Kreme Store or Commissary Facility, that: (a) makes, sells, or distributes yeast-raised doughnuts, cake doughnuts, or any other types of doughnuts, miniature doughnuts, doughnut holes or any other bakery products in any distribution channel to any customer for consumption or resale, and such sales constitute ten percent (10%) or more of its total sales (or such sales from any single location constitute 10% or more of the total sales of that location) during any calendar quarter or calendar year; (b) sells coffee or coffee drinks in any distribution channel to any customer for consumption or resale, and such sales constitute twenty percent (20%) or more of its total sales (or such sales from any single location constitute 20% or more of the total sales of that location) during any calendar quarter or calendar year; (c) is the same as, or similar to, the Krispy Kreme Store |
1
concept as it evolves over time; or (d) grants franchises or licenses, or establishes joint ventures, for the development and/or operation of any business referred to in (a) through (c), above. Restrictions in this Agreement on having an Ownership Interest in a Competitive Business shall not apply to the ownership of shares of a class of securities listed on a stock exchange or traded on a public stock market that represents less than three percent (3%) of the number of shares of that class of securities issued and outstanding. Confidential Information Certain confidential information relating to the development and operation of Krispy Kreme Stores and Commissary Facilities, which includes: | |||
(a) | methods, techniques, equipment, specifications, standards, policies, procedures, information, concepts, and systems relating to and knowledge of and experience in the development, equipping, operation, outfitting, and franchising of Krispy Kreme Stores and Commissary Facilities, as well as expansion, growth and development plans, and prospects; | ||
(b) | marketing and advertising programs for Krispy Kreme Stores and Commissary Facilities; | ||
(c) | knowledge concerning the logic, structure, and operation of computer software programs that Franchisor authorizes for use in connection with the operation of Krispy Kreme Stores and Commissary Facilities, and all additions, modifications and enhancements, and all data generated from use of such programs; | ||
(d) | specifications and standards for, and sources of, buildings, equipment, furnishings, fixtures, signs, products, materials, supplies, and services utilized in the development and operation of Krispy Kreme Stores and Commissary Facilities; | ||
(e) | ingredients, formulas, mixes, recipes for and methods of preparation, cooking, serving, packaging, and delivery of the Products; | ||
(f) | information concerning sales, operating results, financial performance, consumer preferences, inventory requirements, materials and supplies, and other financial data of Krispy Kreme Stores and Commissary Facilities, and customer lists; | ||
(g) | current and concluded research, development and test programs for products, services and operations for use in Krispy Kreme Stores and Commissary Facilities; | ||
(h) | the contents of any System Standards Manuals, System Standards, and site selection criteria; and | ||
(i) | employee training, and staffing levels. | ||
Development Area The geographic area described in the Basic Terms and Exhibit A. Political boundaries described in the Basic Terms shall be considered fixed as of the Effective Date and shall not change for the purpose hereof, notwithstanding a political reorganization or change to such boundaries or regions. All street boundaries shall be deemed to end at the street center line unless otherwise specified above. Development Fee The non-refundable development fee that Franchisee agrees to pay Franchisor, as set forth in the Basic Terms. Development Rights The rights granted to Franchisee pursuant to this Agreement to develop Krispy Kreme Stores and Commissary Facilities within the Development Area. Development Schedule The cumulative number of Krispy Kreme Stores and Commissary Facilities that Franchisee agrees to have open and in operation by the corresponding date set forth in Exhibit A. Expansion Criteria Franchisors expansion criteria, which shall consist of Franchisee and its Affiliates being in compliance with all agreements with Franchisor or any of its Affiliates, including this Agreement and all Franchise Agreements and Commissary Facility Agreements. The Expansion Criteria include Franchisors assessment of compliance by Franchisee and its Affiliates with respect to factors such as monetary obligations, upgrading facilities and achieving satisfactory quality control levels with respects to products, services and cleanliness. |
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Factory Store A retail sales facility with the manufacturing capability to produce fresh doughnuts in accordance with System Standards. Additionally, Factory Stores may have some capacity to supply fresh doughnuts to Hot Shops and Fresh Shops/Kiosks. Franchise The right to operate a Krispy Kreme Store or Commissary Facility at a specific location within the Development Area pursuant to an effective Franchise Agreement or Commissary Facility Agreement, as applicable. Franchise Agreement An agreement used by Franchisor to grant the right to operate a Krispy Kreme Store at a specific location, the current form of which (including all exhibits, schedules, riders, addenda and other agreements used in connection therewith) is attached hereto as Exhibit C. Franchise Application The application submitted by Franchisee for the rights granted hereunder or for a Franchise, as applicable. Franchise Disclosure Document The franchise disclosure document required by applicable law. Franchisee As defined in the Basic Terms. Franchisor As defined in the Basic Terms. Fresh Shop/Kiosk A retail sales facility with limited manufacturing capabilities (e.g., icing and filling equipment), or no manufacturing capabilities, that receives doughnuts from a Factory Store or a Commissary Facility and finishes them as necessary to sell in accordance with System Standards. Good Standing The condition that Franchisee and its Affiliates: (a) are current with all payments due to Franchisor, its Affiliates and suppliers; (b) have met their obligations under the Development Schedule; and (c) are not in default of any of their obligations under this Agreement, any Franchise Agreement, any Commissary Facility Agreement or any other agreement between the parties hereto or any of their Affiliates. Hot Shop A retail sales facility with an impinger oven and limited manufacturing capabilities (e.g., icing and filling equipment) that receives doughnuts from a Factory Store or a Commissary Facility and finishes them as necessary to sell in accordance with System Standards. Immediate Family The spouse, parents, brothers, sisters and children, whether natural or adopted, of the referenced Person. Krispy Kreme Store(s) Stores which Franchisor or any of its Affiliates own, operate or franchise and which use the Marks and the Krispy Kreme System. Krispy Kreme Stores include Factory Stores, Hot Shops and Fresh Shops/Kiosks, but do not include Commissary Facilities. Managing Director The person designated as managing director of Franchisees business pursuant to Section 5.3. The initial Managing Director is identified in the Basic Terms. Marks The current and future trademarks, service marks, logos, designs, trade names, and other commercial symbols, together with all distinctive trade dress elements, or combinations thereof, used by Franchisor to identify the sources of goods and services offered and sold at Krispy Kreme Stores, including the trademark and service mark KRISPY KREME®. Owner Each Person (and permitted transferee of each such Person) holding: (a) a direct or indirect, legal or beneficial Ownership Interest or voting rights in Franchisee or any Affiliate of Franchisee that owns an Ownership Interest or voting rights in Franchisee; (b) a direct or indirect, legal or beneficial interest in this Agreement; or (c) any other legal or equitable interest, or the power to vest in himself or herself or itself any legal or equitable interest, in the revenue, profits, rights or assets of arising from any of the foregoing. Ownership Interest Any direct or indirect, legal or beneficial ownership interest of any type, including (a) in relation to a corporation, the ownership of shares in the corporation; (b) in relation to a partnership, the ownership of a general or limited partnership interest; (c) in relation to a limited liability company, the ownership of a membership interest; or (d) in relation to a trust, the ownership of a legal or beneficial interest of such trust. |
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Person Any individual, corporation, limited liability company, general or limited partnership, unincorporated association, cooperative or other legal or functional entity. | ||
Principal Owner An Owner with an Ownership Interest in Franchisee of ten percent (10%) or more. | ||
Restricted Person Franchisee, its Owners and Affiliates, and members of the Immediate Families of Franchisee (if a natural Person), and its Owners and Affiliates. | ||
System Those business formats, methods, procedures, signs, designs, layouts, equipment, and mixes designated by Franchisor from time to time for use in operating Krispy Kreme Stores and Commissary Facilities. | ||
System Standards The mandatory and suggested specifications, standards, operating procedures and rules that Franchisor prescribes from time to time for the operation of Krispy Kreme Stores and Commissary Facilities, including the standards, specifications and other requirements related to the purchase, preparation, marketing and sale of the Products; on-premises sales, Authorized Off-Premises Sales; customer service; the design, décor and appearance of Krispy Kreme Stores and Commissary Facilities; the maintenance and remodeling of Krispy Kreme Stores and Commissary Facilities and the equipment, fixtures and furnishings therein; the use and display of the Marks; the insurance coverage required to be carried for Krispy Kreme Stores and Commissary Facilities; the training of employees of Krispy Kreme Stores and Commissary Facilities; the days and hours of operation for Krispy Kreme Stores and Commissary Facilities; and the content, quality and use of advertising and promotional materials. | ||
Term The period of time starting on the Effective Date and ending on the expiration of the last date indicated on the Development Schedule (regardless whether all Krispy Kreme Stores and Commissary Facilities are open and operating at that time), unless terminated earlier in accordance with the provisions of this Agreement. | ||
Transfer or Transfer the Development Rights (or similar words) The direct or indirect sale, assignment, transfer, exchange, conversion, license, sublicense, lease, sublease, mortgage, pledge, collateral assignment, grant of a security, collateral or conditional interest or other encumbrance in or on, or other disposition, whether voluntary, involuntary, by operation of law or otherwise, of this Agreement, of any interest in or right under this Agreement, any form of legal or beneficial ownership interest in Franchisee, or any form of ownership interest or right to participate in or receive the benefits of the assets, revenues, income or profits of Franchisees business, or any one or more other acts or events not covered by the foregoing that Franchisor reasonably determines to be a form of direct or indirect transfer, including: (a) any transfer, redemption or issuance of a legal or beneficial ownership interest in the capital stock of, a membership interest in, or a partnership interest in, Franchisee or any interest convertible into or exchangeable for capital stock of, a membership interest in or a partnership interest in, Franchisee; (b) any merger or consolidation of Franchisee, whether or not Franchisee is the surviving entity, or any conversion of Franchisee from one form of legal entity into another form of legal entity, or any sale, exchange, encumbrance or other disposition of Franchisees assets; (c) any transfer in connection with or as a result of a divorce, dissolution of marriage or similar proceeding or a property settlement or legal separation agreement in the context of a divorce, dissolution or marriage or similar proceeding, an insolvency, bankruptcy or assignment for benefit of creditors, a judgment, a corporate, limited liability company or partnership dissolution or otherwise by operation of law; or (d) any transfer by gift, declaration of trust, transfer in trust, revocation of trust, trustee succession, trust termination, discretionary or mandatory trust distribution, occurrence of any event (e.g., death of a person) that affects or ripens the rights of contingent beneficiaries, exercise of a power of appointment, exercise of a withdrawal right, adjudication of Franchisee or any Principal Owner as legally disabled, or upon or after Franchisees death or the death of any of Franchisees Principal Owners by will, disclaimer or the laws of intestate succession or otherwise. | ||
2.2 | Other terms used in this Agreement are defined in the context in which they arise. |
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3. | ACKNOWLEDGMENTS, REPRESENTATIONS, AND WARRANTIES | |
3.1 | Franchisee acknowledges that Franchisee has read this Agreement and Franchisors Franchise Disclosure Document and understands and accepts the terms and conditions contained in this Agreement as being reasonably necessary to maintain Franchisors high standards of quality and service. Franchisee further acknowledges that the uniformity of those standards at Krispy Kreme Stores and Commissary Facilities is reasonably necessary to protect and preserve the goodwill of the Marks. Franchisee acknowledges that Franchisee has conducted an independent investigation of the business venture contemplated by this Agreement and recognizes that, like any other business, the nature of the business conducted by Krispy Kreme Stores and Commissary Facilities may evolve and change over time, that an investment in Krispy Kreme Stores and Commissary Facilities involves business risks, and that Franchisees business abilities and efforts are vital to the success of the venture. Any information Franchisee acquires from other franchisees relating to their sales, profits, or cash flows does not constitute information obtained from Franchisor, nor does Franchisor make any representation as to the accuracy of any such information or the likelihood of Franchisee achieving comparable results. Franchisee acknowledges that, in all of its dealings with Franchisor, Franchisors officers, directors, employees and agents act only in a representative, and not in an individual, capacity. All business dealings between Franchisee and such Persons in connection with this Agreement are solely between Franchisee and Franchisor. Franchisee further acknowledges that Franchisor has advised Franchisee to have this Agreement reviewed and explained to Franchisee by an attorney. | |
3.2 | Franchisee represents and warrants to Franchisor, as an inducement to Franchisors entry into this Agreement, that all statements Franchisee has made and all materials Franchisee has submitted to Franchisor in connection with Franchisees Franchise Application are accurate and complete and that Franchisee has made no misrepresentations or material omissions to obtain the rights granted hereunder. Franchisor has approved Franchisees Franchise Application in reliance on each of Franchisees representations to Franchisor. | |
3.3 | Franchisee represents and warrants to Franchisor that Franchisee has the authority to execute and deliver this Agreement and to perform Franchisees obligations hereunder. | |
3.4 | Franchisee represents and warrants to Franchisor that this Agreement has been duly executed and delivered by Franchisee and, assuming the due authorization, execution and delivery by Franchisor, constitutes a legal, valid and binding obligation of Franchisee, enforceable in accordance with its terms. | |
3.5 | Franchisee represents and warrants to Franchisor that Franchisees execution and delivery of this Agreement does not, and Franchisees performance of its obligations under this Agreement will not, with or without the giving of notice or the lapse of time or both, (a) conflict with or violate its organizational documents, if applicable, (b) conflict with or violate any law, statute, ordinance, rule, regulation, order, judgment or decree applicable to Franchisee, or (c) conflict with, result in any breach of, or constitute a default under, any contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Franchisee is a party or by which Franchisee is bound. | |
3.6 | If Franchisee is, or at any time becomes, a business corporation, partnership, limited liability company, or other legal entity, Franchisee and each of its Principal Owners represents, warrants and agrees that: (a) Franchisee is duly organized and validly existing under the laws of the state of its organization, and, if a foreign business corporation, partnership, limited liability company or other legal entity, Franchisee is duly qualified to transact business in the state in which the Development Area is located; (b) Franchisee has the authority to execute and deliver this Agreement and to perform its obligations hereunder; (c) true and complete copies of the articles of incorporation, articles of organization, operating agreement or principles, partnership agreement, bylaws, subscription agreements, buy-sell agreements, voting trust agreements, trust agreements and all other documents relating to Franchisees ownership, organization, capitalization, management and control (Organizational Documents) shall be promptly delivered to Franchisor for its approval, which approval shall not be unreasonably withheld; (d) any and all amendments, deletions and additions to Franchisees Organizational Documents shall be promptly delivered to Franchisor for its approval, which approval shall not be unreasonably withheld; (e) Franchisees activities are restricted |
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to those necessary solely for the development, ownership and operation of Krispy Kreme Stores and Commissary Facilities in accordance with this Agreement and in accordance with any other agreements entered into with Franchisor or any of its Affiliates; (f) the Organizational Documents recite that the issuance, transfer or pledge of any direct or indirect legal or beneficial ownership interest is restricted by the terms of this Agreement; (g) all certificates representing direct or indirect legal or beneficial ownership interests now or hereafter issued must bear a legend in conformity with applicable law reciting or referring to such restrictions; and (h) Franchisee will deliver to Franchisor a Secretary/Clerks/Trustees Certificate or other evidence satisfactory to Franchisor that the execution, delivery and performance of this Agreement and all other agreements and ancillary documents contemplated hereby or thereby have been duly authorized by all necessary action by the corporation, partnership, limited liability company or other legal entity, as applicable, and are within the legal powers of Franchisees trustee, if Franchisee is a trust. | ||
3.7 | Franchisee and each of its Principal Owners represent, warrant, and agree that Exhibit B is current, complete and accurate. Franchisee agrees that an updated Exhibit B will be furnished promptly to Franchisor, so that Exhibit B (as so revised and signed by Franchisee) is at all times current, complete and accurate. Each person who is or becomes a Principal Owner must execute an agreement in the form Franchisor prescribes, undertaking to guarantee and be bound jointly and severally by the terms of this Agreement, the current form of which is attached hereto as Exhibit E. Each person who is or becomes an Owner, whether or not a Principal Owner, must execute an agreement in the form Franchisor prescribes, undertaking to be bound by the confidentiality and non-competition covenants contained in this Agreement, the current form of which is attached hereto as Exhibit F. Each Owner must be an individual acting in his/her individual capacity, unless Franchisor waives this requirement. | |
3.8 | The provisions of Section 3 constitute continuing representations and warranties, and Franchisee and Franchisees Principal Owners shall notify Franchisor immediately in writing of the occurrence of any event or the development of any circumstance that might render any of the foregoing representations and warranties false, inaccurate, or misleading. | |
4. | TERM/ FEES /DEVELOPMENT SCHEDULE | |
4.1 | Franchisor grants Franchisee the right to develop (as long as Franchisee remains in Good Standing and meets the Expansion Criteria), and Franchisee accepts the obligation to develop, Krispy Kreme Stores and Commissary Facilities in the Development Area during the Term subject to and in compliance with the terms of this Agreement, including the Development Schedule. | |
4.2 | Franchisors obligation to grant Franchises to Franchisee to operate Krispy Kreme Stores and Commissary Facilities in the Development Area will expire upon the expiration of the Term. Franchisee has no right to renew or extend the rights granted under this Agreement. However, if Franchisee has been in Good Standing and has met the Expansion Criteria during the Term, Franchisor may, but is not obligated to, offer Franchisee further development rights on such terms and conditions as Franchisor deems appropriate. Upon expiration, Franchisor has the right to develop and operate, and to allow others to develop and operate, Krispy Kreme Stores and Commissary Facilities in the Development Area, unless further development rights are granted to Franchisee, as above provided. | |
4.3 | Franchisee agrees that during the Term, it will strictly and diligently perform its obligations hereunder and will continuously exert its best efforts to promote and enhance the development and operation of Krispy Kreme Stores and Commissary Facilities within the Development Area. Without limiting the foregoing obligations, Franchisee agrees to meet the Development Schedule. Time is of the essence in this Agreement. Franchisees failure to develop and operate Krispy Kreme Stores and Commissary Facilities in accordance with the Development Schedule is a material breach of this Agreement for which Franchisor has the right to exercise any and all rights and remedies conferred under this Agreement and applicable law, including the right to terminate this Agreement pursuant to Section 10 without prejudice to its recovery of damages. | |
4.4 | Notwithstanding anything to the contrary in this Agreement, Franchisee shall not be deemed to be in breach of this Agreement if its failure to meet the Development Schedule results solely from windstorms, rains, floods, earthquakes, mudslides, fires or other natural disasters. Any delay resulting from any of such |
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causes shall extend performance accordingly, in whole or in part, as may be reasonable, except that no such cause, alone or in combination with other causes, shall extend performance more than ninety (90) days without Franchisors prior written consent. | ||||
4.5 | Franchisee will pay to Franchisor the Development Fee as set forth in the Basic Terms. The Development Fee will be fully earned, non-refundable (except as otherwise provided in Section 10.2), and payable to Franchisor upon execution of this Agreement; provided however, the Development Fee may be creditable on a dollar-for-dollar basis against Initial Franchise Fees, if provided in the Basic Terms. | |||
4.6 | For each Franchise granted to Franchisee pursuant to this Agreement, the Initial Franchise Fee (defined in the Franchise Agreement) will be as set forth in the Basic Terms and will be subject to a credit in the amount of the portion of the Development Fee attributable to the Store. The Development Fee will be attributed only to the Stores for which it is paid and may not be used as a credit for any other Stores. For each Franchise granted to Franchisee pursuant to this Agreement, the Royalties (defined in the Franchise Agreement and the Commissary Facility Agreement) and other fees will be as set forth in the Franchise Agreement and the Commissary Facility Agreement. | |||
5. | BUSINESS PLANS AND MANAGEMENT | |||
5.1 | Prior to execution of this Agreement, and on an annual basis thereafter, Franchisee will submit for review and approval by Franchisor, a written business plan for the development and financing of Krispy Kreme Stores and Commissary Facilities in the Development Area in accordance with the Development Schedule. | |||
5.2 | Franchisee must secure and maintain in force in its name all required licenses, permits, and certificates relating to the conduct of its business pursuant to this Agreement. Franchisee will at all times remain in Good Standing. Franchisee shall comply with all applicable laws, including all federal, state and local laws, rules, regulations, ordinances, court orders and decrees. Franchisee shall refrain from any business practice that Franchisor determines in its sole discretion may be injurious to the business or reputation of Franchisor or Franchisee or the goodwill associated with the Marks. | |||
5.3 | At all times during the Term, Franchisee will designate a Managing Director of its business pursuant to this Agreement who shall complete Franchisors mandatory training program to Franchisors satisfaction. The initial Managing Director is identified in the Basic Terms. The Managing Director will use his or her full-time efforts to fulfill Franchisees obligations under this Agreement and under Franchise Agreements and any Commissary Facility Agreements, and will not directly or indirectly engage in any other business or activity that requires any significant management responsibility or time commitments, or that otherwise conflicts with Franchisees obligations under this Agreement. If the Managing Director is terminated in that role, or if the Managing Director does not carry out his or her responsibilities or otherwise perform in accordance with this Agreement, Franchisee will promptly designate a replacement, and each such replacement shall complete Franchisors mandatory training program to Franchisors satisfaction. | |||
6. | GRANT OF FRANCHISES | |||
6.1 | Franchisor will furnish Franchisee with its standard site selection criteria, and provide site selection assistance for Krispy Kreme Stores and Commissary Facilities, in accordance with System Standards. Franchisor also will provide such on-site evaluation of sites proposed pursuant hereto as Franchisor deems necessary or appropriate. | |||
6.2 | Subject to the terms and conditions of Section 4.1, Franchisor will grant Franchises for the cumulative number and type of Krispy Kreme Stores and Commissary Facilities set forth in the Development Schedule located within the Development Area in accordance with the following provisions: | |||
(a) | Franchisee must submit to Franchisor, in accordance with Franchisors procedures, a complete site information package (the Site Information Package), as Franchisor may require from time to time, for each site for a Krispy Kreme Store or Commissary Facility that Franchisee proposes to develop and operate and that Franchisee, in good faith, believes to conform to Franchisors then-current standard site selection criteria for Krispy Kreme Stores and Commissary Facilities; |
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(b) | Franchisor will accept or reject each site for which Franchisee submits a complete Site Information Package in accordance with Section 6.2(a) and, if Franchisor accepts the site, Franchisor will do so by delivering its standard site acceptance letter. The site acceptance letter, duly executed by Franchisor, is the exclusive means by which Franchisor accepts a proposed site, and no other direct or indirect representation, approval or acceptance, whether in writing or orally, by any of Franchisors officers, employees or agents, shall be effective or bind Franchisor. Franchisor will use all reasonable efforts to make a site acceptance decision and, if the site is accepted, deliver a site acceptance letter to Franchisee within thirty (30) days after Franchisor receives the complete Site Information Package and any other materials Franchisor has requested. | |||
In deciding whether to accept or reject a site Franchisee proposes, Franchisor may consider such factors as Franchisor, in its sole discretion, deems appropriate, including the general location and neighborhood, demographic information, traffic patterns, access, visibility, location of other retail food establishments (including other Krispy Kreme Stores and Commissary Facilities) and size, condition, configuration, appearance, and other physical characteristics of the site. | ||||
Neither Franchisors acceptance of a proposed site, nor any information communicated to Franchisee regarding Franchisors standard site selection criteria or the proposed site, constitutes a warranty or representation of any kind, express or implied, as to the suitability of the proposed site for a Krispy Kreme Store, a Commissary Facility or for any other purpose. Franchisors acceptance of a proposed site merely signifies that Franchisor is willing to grant a Franchise for a Krispy Kreme Store or Commissary Facility at that location in accordance with the terms of this Agreement. Franchisees decision to develop and operate a Krispy Kreme Store or Commissary Facility at any site is based solely on its own independent investigation of the suitability of the site for a Krispy Kreme Store or Commissary Facility, as applicable. | ||||
6.3 | In conjunction with its decision whether to accept or reject a proposed site, Franchisor may require that Franchisee and its Principal Owners furnish Franchisor with financial statements (historical and pro forma), statements of the sources and uses of capital funds, budgets and other information regarding Franchisee, its Principal Owners and each legal entity, if any, involved in the development, ownership and operation of any Krispy Kreme Store or Commissary Facility that Franchisee proposes, as well as any then-existing Krispy Kreme Stores or Commissary Facilities that Franchisee or its Affiliates own. All such information shall be verified by Franchisee and its Principal Owners as being complete and accurate in all respects, shall be submitted to Franchisor in accordance with its requirements and will be relied on by Franchisor in determining whether to grant a Franchise for the proposed Krispy Kreme Store or Commissary Facility. Franchisor may refuse to grant Franchisee a Franchise for a Krispy Kreme Store or Commissary Facility if Franchisee fails to demonstrate sufficient financial and management capabilities to properly develop and operate the proposed Krispy Kreme Store or Commissary Facility and the then-existing Krispy Kreme Stores and Commissary Facilities that Franchisee and its Affiliates own. Franchisor will evaluate such financial and management capabilities in accordance with the then-current standards Franchisor uses to establish Krispy Kreme Stores or Commissary Facilities in other comparable market areas. | |||
6.4 | If Franchisor accepts a proposed site pursuant to Section 6.2, and Franchisee demonstrates the requisite financial and management capabilities (if requested by Franchisor) pursuant to Section 6.3, then Franchisor agrees to offer Franchisee a Franchise to operate a Krispy Kreme Store or Commissary Facility at the proposed site by delivering to Franchisee the Franchise Agreement or Commissary Facility Agreement for the state in which the Krispy Kreme Store or Commissary Facility is to be located. The Franchise Agreement or Commissary Facility Agreement must be executed by Franchisee and its Owners (as applicable) and returned to Franchisor no later than fourteen (14) days after Franchisor delivers them to Franchisee. If Franchisor does not receive the fully executed Franchise Agreement or Commissary Facility Agreement and payment of the Initial Franchise Fee as required hereunder, Franchisor may revoke its offer to grant Franchisee a Franchise to operate a Krispy Kreme Store or Commissary Facility at the proposed site and may revoke its acceptance of the proposed site. |
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7. | FRANCHISORS RIGHTS AND LIMITATIONS/EXCLUSIVITY | |||
7.1 | Provided that Franchisee is in Good Standing, neither Franchisor nor its Affiliates will, during the Term, own or operate, or grant Franchises for the ownership or operation of, Krispy Kreme Stores or Commissary Facilities located in the Development Area, except for: (a) Franchises granted pursuant to this Agreement; (b) any Krispy Kreme Stores and Commissary Facilities open (or under commitment to open) as of the date hereof; (c) any food service establishment using any part or all of the System and/or Marks at special locations within the Development Area, such as college campuses, hospitals, public transportation facilities (e.g. airport facilities or highway rest stops), government (e.g. military bases) or institutional locations, supermarkets, convenience stores or grocery stores, and department stores, as well as mobile units located temporarily at special events, such as sports or entertainment events; and (d) food service establishments that Franchisor purchases (or as to which Franchisor purchases the rights as franchisor) that are part of another franchise system or chain, regardless whether such food services establishments are converted to operate using any of the Marks and/or any or all of the System or whether such food service establishments operate under other trademarks, service marks, or trade dress and/or use other operating systems. | |||
7.2 | Franchisor and its Affiliates (and their respective successors and assigns, by purchase, merger, consolidation or otherwise) retain all rights not expressly granted to Franchisee in Section 7.1, including those with respect to Krispy Kreme Stores, Commissary Facilities, the Marks, and the sale of Products. Franchisee waives, to the fullest extent permitted under applicable law, all claims, demands or causes of action arising from or related to any of such activities by Franchisor, its Affiliates, or their respective successors and assigns. | |||
7.3 | Except as provided in Section 7.1, no exclusive territory or protection is expressly or impliedly granted to Franchisee under this Agreement, and Franchisor reserves the right to operate and to grant others the right to operate Krispy Kreme Stores and Commissary Facilities at any location on such terms and conditions as it deems appropriate. | |||
7.4 | Franchisor reserves the right to acquire, develop, and operate, or be acquired by, any company, including a company operating one or more food service businesses (including food service businesses selling doughnuts or coffee). | |||
7.5 | Franchisor reserves the right to license, sample, sell, or market by any means whatsoever (including the Internet) the Products and any goods or services identified by the Marks. Such goods and services may be licensed, sampled, sold, or marketed in any and all locations and venues (including within the Development Area), and through any method or channel of distribution Franchisor deems appropriate in its sole discretion (including wholesale distribution of Products to supermarkets, grocery stores, convenience stores, and other retail outlets located within or outside the Development Area). | |||
7.6 | Franchisee acknowledges and agrees that Franchisor would be unable to (a) protect the Confidential Information against unauthorized use or disclosure; (b) preserve the prestige, integrity, and goodwill of the Products, Marks, and System; or (c) encourage the free exchange of ideas and information among Krispy Kreme Stores and Commissary Facilities if franchisees and owners of Krispy Kreme Stores or Commissary Facilities or their owners were permitted to engage in or benefit from certain competitive activities. Franchisee also acknowledges that Franchisor has granted the franchise rights to Franchisee in consideration of and reliance on Franchisees agreement that Franchisee and its Owners will deal exclusively with Franchisor. Therefore, except as expressly authorized by this Agreement or another written agreement with Franchisor, Franchisee agrees that during the Term, without Franchisors prior written consent, neither Franchisee nor any Restricted Person will: | |||
(i) | have any Ownership Interest in a Competitive Business; | |||
(ii) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business; | |||
(iii) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business, where such services (A) are substantially similar to those provided to Franchisor or Franchisors Affiliates by Franchisee or the respective Restricted Person or (B) create a relationship |
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between Franchisee or the Restricted Person and such Competitive Business in which Franchisee or the Restricted Person could be reasonably expected to materially benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any Confidential Information to such Competitive Business; | ||||
(iv) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Franchisee to hire any such Person, then Franchisee agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | |||
(v) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility, as the case may be. | |||
8. | MARKS / COPYRIGHTS / CONFIDENTIAL INFORMATION | |||
8.1 | Notwithstanding any provision to the contrary contained herein, it is understood and agreed that this Agreement does not grant Franchisee any right to use the Marks. Further, it is understood and agreed that this Agreement does not grant Franchisee, and Franchisee does not have, any right to any copyrighted work or patent which Franchisor now owns or may hereinafter own. Rights to the Marks, copyrighted works and/ or patents are granted only under the Franchise Agreements to be executed by Franchisor and Franchisee. | |||
8.2 | Franchisor will disclose parts of its Confidential Information to Franchisee solely for its use in connection with this Agreement. The Confidential Information is proprietary and includes Franchisors trade secrets. During the Term and thereafter: (a) Franchisee and its Owners may not use the Confidential Information in any other business or capacity (Franchisee acknowledges such use is an unfair method of competition); (b) Franchisee and its Owners must maintain the confidentiality of the Confidential Information; (c) Franchisee and its Owners may not make unauthorized copies of any portion of the Confidential Information disclosed in written, electronic or other form; and (d) Franchisee and its Owners must implement all reasonable procedures Franchisor prescribes from time to time to prevent unauthorized use or disclosure of the Confidential Information, including the use of nondisclosure agreements with Franchisees Owners, officers, directors, Managing Director, managers, and assistant managers, and Franchisee and its Owners must deliver such agreements to Franchisor. | |||
Without limiting the foregoing, Franchisee, and each of its Owners, as applicable, each (a) acknowledges possibly gaining access to Franchisors material non-public information and that of Franchisors parent company, Krispy Kreme Doughnuts, Inc. (KKDI), and that the securities laws prohibit trading in KKDI securities while in possession of such information, and (b) agrees to refrain from trading in KKDI securities in violation of such laws. | ||||
At the end of the Term, Franchisee and its Owners must deliver to Franchisor all such Confidential Information, except for such information as Franchisee is permitted to retain pursuant to Franchise Agreements then in effect. Franchisees restrictions on disclosure and use of Confidential Information do not apply to information or techniques which are or become generally known in the restaurant industry (other than through Franchisees own disclosure), provided Franchisee obtains Franchisors prior written consent to such disclosure or use. | ||||
9. | TRANSFERS | |||
9.1 | This Agreement is fully transferable by Franchisor (without any obligation to provide notice to Franchisee or obtain Franchisees consent) and will inure to the benefit of any assignee or other legal successor to Franchisors interests. Franchisee agrees that Franchisor will have the right, from time to time, to delegate the performance of any portion of or all of its obligations and duties under this Agreement to designees, whether the same are Franchisors agents or independent contractors with which Franchisor has contracted to provide these services. |
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9.2 | Franchisees rights and duties under this Agreement are personal to Franchisee, or if Franchisee is a business corporation, partnership, limited liability company or any other legal entity, its Owners. Accordingly, neither Franchisee nor any of its Owners may Transfer the Development Rights without Franchisors prior approval and without complying with the terms and conditions of Section 9. Any such Transfer without such approval or compliance constitutes a breach of this Agreement, and is void and of no force or effect. Notwithstanding the foregoing, Franchisee may not under any circumstances directly or indirectly subfranchise or sublicense any of its rights hereunder. | |||
9.3 | If Franchisor has not exercised its right of first refusal under Section 9.5, Franchisor will not unreasonably withhold its approval of a Transfer of the Development Rights that meets all of the reasonable restrictions, requirements and conditions Franchisor imposes on the Transfer, the transferor(s) and/or the transferee(s) from time to time, which shall in any event include the following: | |||
(a) | Franchisee must be in Good Standing; | |||
(b) | the proposed transferee and its owners (if the proposed transferee is a corporation, partnership, limited liability company or other legal entity) must provide Franchisor on a timely basis all information Franchisor requests, and must be individuals acting in their individual capacities who are of good character and reputation, who must have sufficient business experience, aptitude and financial resources to develop Franchises pursuant to this Agreement, and who must otherwise meet Franchisors then-current standards for approval; | |||
(c) | the proposed transferee may not be an entity, or be affiliated with an entity, that is required to comply with the reporting and information requirements of the Securities Exchange Act of 1934, as amended; | |||
(d) | the transferee and its owners must agree to be bound by all of the provisions of this Agreement for the remainder of the Term; | |||
(e) | the transferee must acquire, in a concurrent transaction, all of the rights and obligations of Franchisee and its Affiliates under all agreements between Franchisee or its Affiliates and Franchisor or its Affiliates, including all Franchise Agreements and Commissary Facility Agreements executed by Franchisee or its Affiliates pursuant to this Agreement or pursuant to any other development or similar agreement with Franchisor; | |||
(f) | Franchisee or the transferee must pay Franchisor a transfer fee in an amount equal to Five Thousand Dollars ($5,000.00), plus Five Thousand Dollars ($5,000.00) for each Franchise for which a Franchise Agreement or Commissary Facility Agreement has been executed pursuant hereto (as required under the terms of such agreements), plus any transfer fee required by any other agreement between Franchisee or its Affiliates and Franchisor or its Affiliates; | |||
(g) | Franchisee and its Owners and Affiliates must, except to the extent limited or prohibited by applicable law, execute a general release, in form and substance satisfactory to Franchisor, of any and all claims against Franchisor, its Affiliates and shareholders, members, managers, officers, directors, employees, agents, successors and assigns; | |||
(h) | Franchisee must provide Franchisor with all information requested by Franchisor in connection with the Transfer, and Franchisor must not have disapproved the material terms and conditions of such Transfer (including the price and terms of payment and the amount to be financed by the transferee in connection with such Transfer) on the basis that they are so burdensome as to be likely, in Franchisors reasonable judgment, to adversely affect the transferees operation of Krispy Kreme Stores and Commissary Facilities or its compliance with this Agreement, all Franchise Agreements and Commissary Facility Agreements being transferred, and any other agreements to be executed by the transferee; | |||
(i) | if Franchisee (or any of its Owners or Affiliates) finances any part of the sale price of the transferred interest, Franchisee and/or its Owners or Affiliates must agree that all obligations of the transferee, and security interests reserved by any of them in the assets transferred, will be subordinate to |
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the transferees obligations to pay all amounts due Franchisor and its Affiliates and to otherwise comply with this Agreement, all Franchise Agreements and Commissary Facility Agreements being transferred, and any other agreements to be executed by the transferee; | ||||
(j) | Franchisee and its Owners must execute noncompetition and non-solicitation covenants, in form and substance satisfactory to Franchisor, substantially similar to those contained in Section 11.2 hereof; and | |||
(k) | Franchisee and its Owners and Affiliates must execute such other documents and do such other things as Franchisor reasonably requires to protect its rights under this Agreement and all Franchise Agreements, Commissary Facility Agreements and other agreements being transferred. | |||
9.4 | Franchisors approval of a Transfer of the Development Rights does not constitute: (a) a representation as to the fairness of the terms of any agreement or arrangement between Franchisee or its Owners and the transferee or as to the prospects for success by the transferee; or (b) a release of Franchisee and its Owners, a waiver of any claims against Franchisee or its Owners or a waiver of Franchisors right to demand the transferees compliance with this Agreement or any other agreements being transferred. Any approval shall apply only to the specific Transfer of the Development Rights being proposed and shall not constitute Franchisors approval of, or have any bearing on, any other proposed Transfer of the Development Rights. | |||
9.5 | If Franchisee or any of its Owners desires to Transfer the Development Rights (other than by gift or bequest), Franchisee or such Owner(s) must obtain a bona fide, executed written offer from a responsible and fully disclosed purchaser (which must contain a confidentiality covenant by Franchisee and the prospective buyer to which Franchisor shall be an intended third party beneficiary) and must deliver immediately to Franchisor a complete and accurate copy of such offer. If the offeror proposes to buy any other property or rights from Franchisee or any of its Owners or Affiliates (other than rights under any Development Agreement, Franchise Agreement, or Commissary Facility Agreement for Krispy Kreme Stores) as part of the bona fide offer, the proposal for such property or rights must be set forth in a separate, contemporaneous offer that is fully disclosed to Franchisor, and the price and terms of purchase offered to Franchisee or its Owners for the Transfer of the Development Rights must reflect the bona fide price offered therefor and not reflect any value for any other property or rights. | |||
9.6 | Franchisor has the option, exercisable by notice delivered to Franchisee or its Owners within thirty (30) days from the date of delivery of a complete and accurate copy of such offer to Franchisor, to purchase such interest for the price and on the terms and conditions contained in such offer, provided that: (a) Franchisor may substitute cash for any form of payment proposed in such offer; (b) Franchisors credit shall be deemed at least equal to the credit of any proposed purchaser; (c) Franchisor shall have not less than ninety (90) days from the option exercise date to consummate the transaction; and (d) Franchisor shall not be required to pay deposits (such as earnest money) or to escrow funds prior to closing. Franchisor has the right to investigate and analyze the business, assets and liabilities and all other matters Franchisor deems necessary or desirable in order to make an informed investment decision with respect to the fairness of the terms of the right of first refusal. Franchisor may conduct such investigation and analysis in any manner Franchisor deems reasonably appropriate, and Franchisee and its Owners must cooperate fully with Franchisor in connection therewith. | |||
9.7 | If Franchisor exercises its option to purchase, Franchisor is entitled to purchase such interest subject to all representations and warranties, closing documents, releases, non-competition covenants and indemnities as Franchisor reasonably may require, provided if Franchisor exercises its option as a result of a written offer reflected in a fully negotiated definitive agreement with the proposed purchaser, Franchisor will not be entitled to any additional representations, warranties, closing documents, or indemnities that will have a materially adverse effect on Franchisees rights and obligations under the definitive agreement. | |||
If Franchisor does not exercise its option to purchase, Franchisee or its Owners may complete the sale to such offeror pursuant to and on the exact terms of such offer, subject to Franchisors approval of the Transfer as provided in Sections 9.2 and 9.3, provided that if the sale to such offeror is not completed within ninety (90) days after delivery of such offer to Franchisor, or if there is a change in the terms of the offer, Franchisee must promptly notify Franchisor and Franchisor shall have an additional option to |
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purchase (on the terms of the revised offer, if any, and otherwise as set forth herein) during the thirty (30) day period following Franchisees notification of the expiration of the ninety (90) day period or the material change to the terms of the offer. | ||||
9.8 | Neither Franchisee nor any of its Owners or Affiliates may issue or sell, or offer to issue or sell, any of Franchisees securities or any securities of any of its Affiliates, regardless of whether such sale or offer would be required to be registered pursuant to the provisions of the Securities Act of 1933, as amended, or the securities laws of any other jurisdiction and regardless of the means by which such sale is conducted, directly or indirectly, or by operation of law (including by merger, consolidation, reorganization or otherwise) without obtaining Franchisors prior consent and complying with all of its requirements and restrictions concerning use of information about Franchisor and its Affiliates. Neither Franchisee nor any of its Owners or Affiliates may issue or sell Franchisees securities or the securities of any of its Affiliates if: (a) such securities would be required to be registered pursuant to the Securities Act of 1933, as amended, or such securities would be owned by more than 35 persons; or (b) after such issuance or sale, Franchisee or such Affiliate would be required to comply with the reporting and information requirements of the Securities Exchange Act of 1934, as amended. Any memorandum or other communications circulated in connection with any solicitation of offers to purchase that would require Franchisors consent to Transfer the Development Rights (through whatever form of transaction, whether through direct or indirect sale of assets or securities, by operation of law or otherwise) shall be subject to approval by Franchisor. | |||
10. | TERMINATION OF DEVELOPMENT RIGHTS | |||
10.1 | Franchisee is in material breach of this Agreement, and this Agreement will automatically terminate without notice, at Franchisors discretion, if: (a) Franchisee becomes insolvent by reason of its inability to pay its debts as they mature; (b) Franchisee is adjudicated bankrupt or insolvent; (c) Franchisee files a petition in bankruptcy, reorganization or similar proceeding under the bankruptcy laws of the United States or has such a petition filed against Franchisee, which is not discharged within thirty (30) days; (d) a receiver or other custodian, permanent or temporary, is appointed for Franchisees business, assets or property; (e) Franchisee requests the appointment of a receiver or makes a general assignment for the benefit of creditors; (f) a final judgment against Franchisee in the amount of Fifty Thousand Dollars ($50,000.00) or more remains unsatisfied of record for sixty (60) days or longer; (g) Franchisees bank accounts, property or accounts receivable are attached; (h) execution is levied against Franchisees business or property; (i) suit is filed to foreclose any lien or mortgage against any of Franchisees assets and such suit is not dismissed within thirty (30) days; or (j) Franchisee voluntarily dissolves or liquidates or has a petition filed for corporate or partnership dissolution and such petition is not dismissed within thirty (30) days; or (k) Franchisees assets, property or interest are blocked under any law, ordinance or regulation relating to terrorist activities or if Franchisee is otherwise in violation of any such law, ordinance or regulation. | |||
10.2 | In addition to Franchisors right to terminate pursuant to other provisions of this Agreement or under applicable law, Franchisor may terminate this Agreement, effective upon delivery of notice of termination to Franchisee, if Franchisee or any of its Principal Owners or Affiliates: | |||
(a) | fails to meet any part of the Development Schedule; | |||
(b) | makes an unauthorized Transfer of the Development Rights; | |||
(c) | makes any material misstatement or omission in any Franchise Application or in any other information, report, or summary provided to Franchisor at any time; | |||
(d) | is convicted of, or plead no contest to, a felony or other crime or offense that Franchisor believes, in its sole judgment, may adversely affect the System or the goodwill associated with the Marks; | |||
(e) | makes any unauthorized use or disclosure of the Confidential Information; | |||
(f) | fails to comply with any other provision of this Agreement and does not correct such failure within thirty (30) days after written notice of such failure to comply is delivered to Franchisee; |
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(g) | is in breach of any Franchise Agreement or Commissary Facility Agreement such that Franchisor has the right to terminate such agreement, whether or not Franchisor elects to exercise its right to do so; | |||
(h) | is in breach of any other agreement between Franchisee or any of its Affiliates and Franchisor or any of its Affiliates such that Franchisor has a right to terminate such agreement, whether or not Franchisor elects to exercise its right to do so; or | |||
(i) | if Franchisor determines that any applicable federal or state statute, regulation, rule or law, which is enacted, promulgated or amended after the date hereof, may have a material adverse effect on its rights, remedies or discretion in franchising Krispy Kreme Stores or Commissary Facilities. | |||
Franchisor has no obligation whatsoever to refund any portion of the Development Fee upon any termination, except that Franchisor will refund a pro rata portion of the Development Fee in the event of a termination solely pursuant to Section 10.2(i). | ||||
11. | EFFECT OF TERMINATION AND EXPIRATION | |||
11.1 | All obligations under this Agreement, which expressly or by their nature survive the expiration or termination of this Agreement, shall continue in full force and effect until they are satisfied in full or by their nature expire. | |||
11.2 | Upon termination or expiration of this Agreement, neither Franchisee nor any Restricted Person will, for a period of two (2) years, starting on the effective date of termination or expiration: | |||
(a) | have any Ownership Interest in a Competitive Business operating within the Development Area or within a radius of ten (10) miles of any Krispy Kreme Store or Commissary Facility in operation or under construction on the effective date of termination or expiration; | |||
(b) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business operating within the Development Area or within a radius of ten (10) miles of any Krispy Kreme Store or Commissary Facility in operation or under construction on the effective date of termination or expiration; | |||
(c) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business operating within the Development Area or within a radius of ten (10) miles of any Krispy Kreme Store or Commissary Facility in operation or under construction on the effective date of termination or expiration, where such services: (i) are substantially similar to those provided to Franchisee; or (ii) create a relationship between Franchisee or the Restricted Person and such Competitive Business in which Franchisee or the Restricted Person could be reasonably expected to materially benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any Confidential Information to such Competitive Business; | |||
(d) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Franchisee to hire any such Person, then Franchisee agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | |||
(e) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility, as the case may be. | |||
Franchisee and each of its Owners expressly acknowledges the possession of skills and abilities of a general nature and other opportunities for exploiting such skills in other ways, so that enforcement of the covenants contained in this Section 11.2 will not deprive any of them their personal goodwill or ability to earn a living. If Franchisee or any of its Owners fails or refuses to abide by any of the foregoing covenants and Franchisor obtains enforcement in a judicial or arbitration proceeding, the obligations under |
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the breached covenant will be tolled during the period(s) of time that the covenant is breached and/or Franchisor seeks to enforce it and will continue in effect for a period of time ending two (2) years after the date of the order enforcing the covenant. | ||
11.3 | Franchisors exercise of any of its rights under Section 11 will be in addition to and not in limitation of any other rights and remedies it may have in the event of any breach or default by Franchisee. | |
12. | RELATIONSHIP OF PARTIES/INDEMNIFICATION | |
12.1 | Neither this Agreement nor the dealings of the parties pursuant to this Agreement shall create any fiduciary relationship or any other relationship of trust or confidence between the parties. Franchisor and Franchisee, as between themselves, are and shall be independent contractors. | |
12.2 | Franchisee understands and agrees that Franchisor may operate and change the Krispy Kreme System and its business in any manner that is not expressly and specifically prohibited by this Agreement. Whenever Franchisor has expressly reserved in this Agreement or is deemed to have a right and/or discretion to take or withhold an action, or to grant or decline to grant Franchisee a right to take or withhold an action, except as otherwise expressly and specifically provided in this Agreement, Franchisor may make its decision or exercise its right and/or discretion on the basis of its judgment of what is in its best interests, including its judgment of what is in the best interests of its franchise network, at the time its decision is made or its right or discretion is exercised, without regard to whether: (a) other reasonable alternative decisions or actions could have been made by Franchisor; (b) Franchisors decision or action promotes its financial or other individual interest; (c) Franchisors decision or action applies differently to Franchisee and one or more other franchisees or its company-owed operations; or (d) Franchisors decision or the exercise of its right or discretion is adverse to Franchisees interests. In the absence of an applicable statute, Franchisor will have no liability to Franchisee for any such decision or action. The parties intend that the exercise of Franchisors right or discretion will not be subject to limitation or review. If applicable law implies a covenant of good faith and fair dealing in this Agreement, the parties agree that such covenant shall not imply any rights or obligations that are inconsistent with a fair construction of the terms of this Agreement and that this Agreement grants Franchisor the right to make decisions, take actions and/or refrain from taking actions not inconsistent with Franchisees rights and obligations hereunder. | |
12.3 | Nothing contained in this Agreement, or arising from the conduct of the parties hereunder, is intended to make either party a general or special agent, joint venturer, partner or employee of the other for any purpose whatsoever. Franchisee must conspicuously identify itself in all dealings with customers, lessors, contractors, suppliers, public officials, employees and others as the owner of development rights granted hereunder and must place such other notices of independent ownership on such forms, business cards, stationery, advertising and other materials as we may require from time to time. | |
12.4 | Franchisee may not make any express or implied agreements, warranties, guarantees or representations or incur any debt in Franchisors name or on its behalf or represent that the relationship of the parties hereto is anything other than that of independent contractors. Franchisor will not be obligated by or have any liability under any agreements made by Franchisee with any third party or for any representations made by Franchisee to any third party. Franchisor will not be obligated for any damages to any person or property arising directly or indirectly out of the operation of Franchisees business hereunder. | |
12.5 | Franchisee agrees to indemnify Franchisor, its Affiliates and their respective directors, officers, employees, shareholders, members, managers, agents, successors and assigns (collectively Indemnified Parties), and to hold the Indemnified Parties harmless to the fullest extent permitted by law, from any and all losses and expenses (as defined below) incurred in connection with any litigation or other form of adjudicatory procedure, claim, demand, investigation, formal or informal inquiry (regardless of whether it is reduced to judgment) or any settlement thereof which arises directly or indirectly from, or as a result of, a claim of a third party against any one or more of the Indemnified Parties in connection with (a) Franchisees failure to perform or breach of any covenant, agreement, term or provision of this Agreement; (b) Franchisees breach of any representation or warranty contained in this Agreement; (c) Franchisees development, ownership, operation and/or closing of Krispy Kreme Stores or Commissary Facilities; and |
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(d) any allegedly unauthorized service or act rendered or performed in connection with this Agreement (collectively Event), and regardless of whether it resulted from any strict or vicarious liability imposed by law on the Indemnified Parties. The foregoing indemnity shall apply even if it is determined that the Indemnified Parties negligence caused such loss, liability or expense, in whole or in part, provided, however, that this indemnity will not apply to any liability arising from a breach of this Agreement by Franchisor or with respect to any Indemnified Party whose gross negligence or willful acts caused such liability (except to the extent that joint liability is involved, in which event the indemnification provided herein will extend to any finding of comparative or contributory negligence attributable to Franchisee). The term losses and expenses includes compensatory, exemplary and punitive damages; fines and penalties; attorneys fees; experts fees; court costs; costs associated with investigating and defending against claims; settlement amounts; judgments; compensation for damages to Franchisors reputation and goodwill; and all other costs associated with any of the foregoing losses and expenses. Franchisor agrees to give Franchisee reasonable notice of any Event of which Franchisor becomes aware for which indemnification may be required, and Franchisor may elect (but is not obligated) to direct the defense thereof, provided that the selection of counsel shall be subject to Franchisees consent, which consent shall not be unreasonably withheld or delayed. Franchisor may, in its reasonable discretion, take such actions as Franchisor deems necessary and appropriate to investigate, defend or settle any event or take other remedial or corrective actions with respect thereto as may be necessary for the protection of the Indemnified Parties or Krispy Kreme Stores and/or Commissary Facilities generally, provided however, that any settlement shall be subject to Franchisees consent, which consent shall not be unreasonably withheld or delayed. Further, notwithstanding the foregoing, if the insurer on a policy or policies obtained in compliance with any Franchise Agreement agrees to undertake the defense of an Event (an Insured Event), Franchisor agrees not to exercise its right to select counsel to defend the Event if such would cause Franchisees insurer to deny coverage. Franchisor reserves the right to retain counsel to represent Franchisor with respect to an Insured Event at its sole cost and expense. This Section 12.5 shall continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement. | ||
13. | MISCELLANEOUS | |
13.1 | This Agreement and all issues arising from or relating to this Agreement shall be governed by and construed under the laws of the State of North Carolina, provided the foregoing shall not constitute a waiver of Franchisees rights under any applicable franchise law of another state. Otherwise, in the event of any conflict of law, North Carolina law will prevail, without regard to the application of North Carolina conflict of law principles, except that any North Carolina law regulating the sale of franchises or business opportunities or governing the relationship of a franchisor and its franchisees will not apply unless its jurisdictional requirements are met independently without reference to this section. | |
13.2 | Franchisee and each of its Owners agree that the U.S. District Court for the Middle District of North Carolina, or if such court lacks jurisdiction, the Superior Court (or its successor) for Forsyth County, North Carolina, shall be the venue and exclusive forum in which to adjudicate any case or controversy arising from or relating to this Agreement and any guarantees or covenants by Franchisees Owners. In the event a case or controversy is to be heard by the Superior Court (or its successor) for Forsyth County, North Carolina, any party may request that the matter be assigned to the North Carolina Business Court. Franchisee and each of its Owners irrevocably submits to the jurisdiction of such courts and waives any objections to either the jurisdiction of or venue in such courts. Franchisee and each of its Owners irrevocably waives, to the fullest extent they may lawfully do so, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding and agrees that service of process for purposes of any such suit, action or proceeding need not be personally served or served within the State of North Carolina but may be served with the same effect as if they were served within the State of North Carolina, by certified mail or any other means permitted by law, addressed to Franchisee and its Owners (as applicable) at the address set forth herein. Nothing contained herein shall affect Franchisors rights to bring a suit, action or proceeding in any other appropriate jurisdiction, including any suit, action or proceeding brought by Franchisor to enforce any judgment against Franchisee or any of its Owners entered by a State or Federal Court. |
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13.3 | Franchisor may obtain at any time in any court of competent jurisdiction any injunctive relief, including temporary restraining orders and preliminary injunctions, against conduct or threatened conduct for which no adequate remedy at law may be available or which may cause Franchisor irreparable harm. Franchisor may have such injunctive relief, without bond, but upon due notice, in addition to such further and other relief as may be available at equity or law, and Franchisees sole remedy in the event of the entry of such injunction, shall be the dissolution of such injunction, if warranted, upon hearing duly had (all claims for damages by reason of the wrongful issuance of any such injunction being expressly waived hereby). Franchisee and each of its Owners acknowledges that any violation of Sections 7.6, 8.2, 9.3(j) or 11.2 would result in irreparable injury to Franchisor for which no adequate remedy at law may be available. Accordingly, Franchisee and each of its Owners consents to the issuance of an injunction at Franchisors request (without posting a bond or other security) prohibiting any conduct in violation of any of those sections and agrees that the existence of any claims Franchisee or any of its Owners may have against Franchisor, whether or not arising herefrom, shall not constitute a defense to the enforcement of any of those Sections. | |
13.4 | If Franchisor claims in any judicial proceeding that Franchisee owes Franchisor or any of its Affiliates money or that Franchisee has otherwise breached this Agreement and Franchisor prevails on such claims, then Franchisor shall be awarded its costs and expenses incurred in connection with such proceedings, including reasonable attorneys fees. | |
13.5 | Except with respect to any of Franchisees obligations herein regarding the Confidential Information, the Marks, and any other intellectual property rights of Franchisor, Franchisor and Franchisee and its Owners each waive, to the fullest extent permitted by law, any right to or claim for any punitive or exemplary damages against the other. Franchisee and each of its Owners waive, to the fullest extent permitted by applicable law, the right to recover consequential damages for any claim directly or indirectly arising from or relating to this Agreement. FURTHERMORE, THE PARTIES AGREE THAT ANY LEGAL ACTION IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED TO THE COURT SITTING WITHOUT A JURY, AND ALL PARTIES WAIVE ANY RIGHT TO HAVE ANY ACTION TRIED BY JURY. | |
13.6 | Every part of this Agreement shall be considered severable. If for any reason any part of this Agreement is held to be invalid, that determination shall not impair the other parts of this Agreement. If any covenant herein which restricts competitive activity is deemed unenforceable by virtue of its scope in terms of geographical area, type of business activity prohibited and/or length of time, but could be rendered enforceable by reducing any part or all of it, Franchisee and Franchisor agree that it will be enforced to the fullest extent permissible under applicable law. If any applicable law requires a greater prior notice of the termination of or refusal to enter into a successor franchise than is required hereunder, a different standard of good cause, or the taking of some other action not required hereunder, the prior notice, good cause standard and/or other action required by such law shall be substituted for the comparable provisions hereof. If any provision of this Agreement or any specification, standard or operating procedure prescribed by Franchisor is invalid or unenforceable under applicable law, Franchisor has the right, in its sole discretion, to modify such invalid or unenforceable provision, specification, standard or operating procedure to the extent required to make it valid and enforceable. | |
13.7 | Franchisor and Franchisee may, by written instrument signed by the waiving party unilaterally, waive or reduce any obligation of the other under this Agreement. Any waiver granted by Franchisor shall be without prejudice to any other rights Franchisor may have, will be subject to continuing review by Franchisor and may be revoked, in its sole discretion, at any time and for any reason, effective upon delivery to Franchisee of 10 days prior notice. Franchisee and Franchisor shall not be deemed to have waived any right reserved by this Agreement by virtue of any custom or practice of the parties at variance with it; any failure, refusal or neglect by Franchisee or Franchisor to exercise any right under this Agreement or to insist upon exact compliance by the other with its obligations hereunder; any waiver, forbearance, delay, failure or omission by Franchisor to exercise any right, whether of the same, similar or different nature, with respect to other Krispy Kreme Stores; or the acceptance by Franchisor of any payments due from Franchisee after any breach of this Agreement. |
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13.8 | The rights of Franchisor and Franchisee hereunder are cumulative and no exercise or enforcement by Franchisor or Franchisee of any right or remedy hereunder shall preclude the exercise or enforcement by Franchisor or Franchisee of any other right or remedy hereunder which Franchisor or Franchisee is entitled to enforce by law. | |||
13.9 | The language of this Agreement shall be construed according to its fair meaning and not strictly against any party. The Basic Terms, introduction, personal guarantees and covenants, exhibits, schedules and riders (if any) to this Agreement are a part of this Agreement, which constitutes the entire agreement of the parties with respect to the subject matter hereof. Except as otherwise expressly provided herein, there are no other oral or written agreements, understandings, representations or statements relating to the subject matter of this Agreement, other than the Franchise Disclosure Document, that either party may or does rely on or that will have any force or effect. Nothing in this Agreement shall be deemed to confer any rights or remedies on any person or legal entity not a party hereto. This Agreement shall not be modified except by written agreement signed by both parties. | |||
13.10 | The headings of sections are for convenience only and do not limit or construe their contents. The word including shall be construed to include the words without limitation. The term Franchisee is applicable to one or more persons, a corporation, limited liability company or a partnership and its owners, as the case may be. If two or more persons are at any time Franchisee hereunder, whether as partners, joint venturers or otherwise, their obligations and liabilities to Franchisor shall be joint and several. | |||
13.11 | References to a controlling interest in an entity shall mean more than fifty percent (50%) of the equity and voting control of such entity. | |||
13.12 | This Agreement is binding on the parties hereto and their respective executors, administrators, heirs, assigns and successors in interest. This Agreement may be executed in multiple copies, each of which shall be deemed an original. Time is of the essence in this Agreement. | |||
13.13 | Whenever this Agreement requires the approval or consent of either party, the other party shall make written request therefor, and such approval or consent shall be obtained in writing; provided however, unless specified otherwise in this Agreement, such party may withhold approval or consent for any reason or for no reason at all. Furthermore, unless specified otherwise in this Agreement, no such approval or consent shall be deemed to constitute a warranty or representation of any kind, express or implied, and the approving or consenting party shall have no responsibility, liability or obligation arising therefrom. | |||
13.14 | All notices, requests and reports permitted or required to be delivered by this Agreement shall be deemed delivered: (a) at the time delivered by hand to the recipient party (or to an officer, director or partner of the recipient party); (b) one (1) business day after being placed in the hands of a commercial courier service for guaranteed overnight delivery; or (c) five (5) business days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the party to be notified at its most current principal business address of which the notifying party has been notified in writing. All payments and reports required by this Agreement shall be sent to Franchisor at the address identified in this Agreement unless and until a different address has been designated by written notice. No restrictive endorsement on any check or in any letter or other communication accompanying any payment shall bind Franchisor, and its acceptance of any such payment shall not constitute an accord and satisfaction. | |||
14. | ACKNOWLEDGMENTS | |||
14.1 | By initialing below, Franchisee hereby specifically acknowledges the following: | |||
(a) | Domicile. Franchisee acknowledges that Franchisee is not a domiciliary or a resident of any state, other than the state where the Development Area is predominantly located or, if different, the state listed in the Basic Terms as Franchisees address. | |||
Initials ________/________ |
18
(b) | Receipt of Franchise Disclosure Document. Franchisee acknowledges having received Franchisors Franchise Disclosure Document at least fourteen (14) calendar days before signing a binding agreement or before making any payment to Franchisor or any of its Affiliates relating to this Agreement. Franchisee has read and understands Franchisors Franchise Disclosure Document. | |||
Initials ________/________ | ||||
(c) | No Inconsistent Representations. Franchisee acknowledges that no representations have been made to Franchisee which are inconsistent with information presented in Franchisors Franchise Disclosure Document, and Franchisee has not relied on any representations inconsistent with or not contained in Franchisors Franchise Disclosure Document. | |||
Initials ________/________ | ||||
(d) | Business Risks; Independent Investigation. Franchisee recognizes that the nature of Krispy Kreme Stores and Commissary Facilities may change over time, that an investment in a Krispy Kreme Store or Commissary Facility involves business risks and that the success of the investment is largely dependent on Franchisees own business abilities, efforts and financial resources. Franchisee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that the food service industry is highly competitive. | |||
Initials ________/________ | ||||
(e) | Independent Counsel. Franchisee acknowledges having had the opportunity to seek independent counsel concerning the execution of this Agreement. | |||
Initials ________/________ | ||||
(f) | No Guarantee or Assurance. Franchisee has not received from Franchisor or its representatives or relied on any statement, representation, guaranty or assurance, express or implied, as to the revenues, profits or success of the business venture contemplated by this Agreement, nor has Franchisee received from Franchisor or its representatives any information from which Franchisee may easily ascertain a specific level or range of actual or potential sales, income, gross or net profits from franchised or non-franchised Krispy Kreme Stores or Commissary Facilities. | |||
Initials ________/________ |
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement in multiple originals as of the Effective Date set forth in the Basic Terms.
KRISPY KREME DOUGHNUT CORPORATION | [FRANCHISEE] | |||
By: | By: | |||
Name: | Name: | |||
Title: | Title: |
19
EXHIBIT A
TO THE DEVELOPMENT AGREEMENT
BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
_____________________________
DATED____________,__________
DEVELOPMENT AREA
The Development Area is the geographic
area described as
follows and shown on the map attached as Exhibit
A-1:
DEVELOPMENT SCHEDULE
Franchisee agrees to have open and operating in the Development Area the cumulative numbers of Krispy Kreme Stores (of the types set forth below), and Commissary Facilities as of each of the following dates:
Fresh | Commissary | |||||||
Factory Stores | Hot Shops | Shops/Kiosks | Facilities | Date | ||||
The last date of the table above shall be the expiration date of this Agreement.
For purposes hereof, no Krispy Kreme Store or Commissary Facility that is open and operating as of the date of this Agreement shall be counted for purposes of the Development Schedule. In addition, a Krispy Kreme Store or Commissary Facility that is permanently closed after having been opened, other than as a result of noncompliance by Franchisee with the terms of the applicable Franchise Agreement or Commissary Facility Agreement, shall be deemed open for a period of six (6) months after the last day it was open for business, provided that: (a) during such period of time, Franchisee continuously and diligently takes such actions as may be required to develop and open a substitute Krispy Kreme Store or Commissary Facility within the Development Area pursuant to a new Franchise Agreement or Commissary Facility Agreement, therefor and (b) by the end of such period Franchisee has the substitute Krispy Kreme Store or Commissary Facility, as applicable, open and operating in compliance with the Franchise Agreement or Commissary Facility therefor.
A-1
EXHIBIT A-1
TO THE DEVELOPMENT AGREEMENT
BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
_____________________________
DATED____________,__________
MAP OF DEVELOPMENT AREA
A-1-1
EXHIBIT B
TO THE DEVELOPMENT AGREEMENT
BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
_____________________________
DATED____________,__________
FRANCHISEE INFORMATION
1. Form of Entity of Franchisee.
(a) Corporation or Limited Liability Company. Franchisee was organized on ___________, _______ under the laws of the State of __________. Its Federal Identification Number is ________________. It has not conducted business under any name other than its corporate or company name. The following is a list of all of Franchisees directors and officers or managing members as of _______________, _______.
Name of Each Director/Officer/Managing Member | Position(s) Held | |
(b) Partnership. Franchisee is a [general] [limited] partnership formed on ___________, _______under the laws of the State of __________. Its Federal Identification Number is ______________________. It has not conducted business under any name other than its partnership name. The following is a list of all of Franchisees general partners as of _______________, _______.
Name of Each General Partner | |
B-1
2. | Owners. Franchisee and each of its Owners represents and warrants that the following is a complete and accurate list of all Owners of Franchisee, including the full name and mailing address of each Owner, and fully describes the nature and extent of each Owners interest in Franchisee. Franchisee and each Owner as to his/her ownership interest, represents and warrants that each Owner is the sole and exclusive legal and beneficial owner of his/her ownership interest in Franchisee, free and clear of all liens, restrictions, agreements and encumbrances of any kind or nature, other than those required or permitted by this Agreement. |
Owners Name and Mailing Address | Percentage and Nature of | |
Ownership Interest | ||
Submitted by Franchisee
Accepted by
Franchisor and
made a part of the Development
Agreement as of_______________, _______.
KRISPY KREME DOUGHNUT | ||||
CORPORATION, | (Name of corporation, limited liability | |||
a North Carolina corporation | company or partnership) | |||
By: | By: | |||
Print Name: | Print Name: | |||
Title: | Title: | |||
By: | ||||
Print Name: | ||||
Title: | ||||
Owners: | ||||
(Signature) | ||||
(Print Name) | ||||
(Signature) | ||||
(Print Name) |
B-2
EXHIBIT C
TO THE DEVELOPMENT AGREEMENT
BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
_____________________________
DATED____________,__________
FORM OF FRANCHISE AGREEMENT
(Please see Exhibit 10.3 to the
Companys Annual Report on Form 10-K for fiscal 2008)
C-1
EXHIBIT D
TO THE DEVELOPMENT AGREEMENT
BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
_____________________________
DATED____________,__________
FORM OF COMMISSARY FACILITY AGREEMENT
D-1
KRISPY KREME DOUGHNUT
CORPORATION
COMMISSARY FACILITY AGREEMENT
BASIC TERMS
FOR USE ONLY TOGETHER WITH A HOT
SHOP OR
FRESH SHOP/KIOSK AGREEMENT
A. | Effective Date | |||
(Insert date Franchisee | ||||
executes the agreement): | ||||
B. | Franchisor: | Krispy Kreme Doughnut Corporation, a North Carolina corporation | ||
C. | Facility Number: | |||
D. | Facility Address: | |||
E. | Franchisee: | |||
Franchisees Address: | ||||
Telephone: | Fax No.: | |||
E-mail Address: | ||||
F. | Principal Owners: | |||
G. | Managing Director: | |||
H. | General Manager: | |||
I. | Term: | The time period commencing on the Effective Date and expiring 15 | ||
years after the Effective Date |
Franchisor: | ||
(initials) | ||
Franchisee: | ||
(initials) |
D-2
TABLE OF CONTENTS
Page | |||
1. | BACKGROUND | 5 | |
2. | DEFINITIONS | 5 | |
3. | ACKNOWLEDGMENTS, REPRESENTATIONS, AND WARRANTIES | 9 | |
4. | GRANT OF FRANCHISE | 11 | |
5. | FRANCHISORS RESERVATION OF RIGHTS | 12 | |
6. | SITE SELECTION | 12 | |
7. | LEASE OR PURCHASE OF SITE | 13 | |
8. | FACILITY DEVELOPMENT | 13 | |
9. | BUILDING, EQUIPMENT, FIXTURES, FURNISHINGS, SIGNS AND SUPPLIES | 14 | |
10. | COMPUTER SYSTEM | 15 | |
11. | FACILITY OPENING | 16 | |
12. | CAPITAL IMPROVEMENTS | 16 | |
13. | ROYALTIES | 17 | |
14. | TRAINING AND GUIDANCE | 17 | |
15. | SYSTEM STANDARDS | 18 | |
16. | MARKS | 19 | |
17. | CONFIDENTIAL INFORMATION | 20 | |
18. | PATENTS AND INVENTIONS | 21 | |
19. | WORKS OF AUTHORSHIP AND COPYRIGHTS | 22 | |
20. | EXCLUSIVE RELATIONSHIP | 23 | |
21. | COMPLIANCE WITH LAW | 23 | |
22. | MARKETING AND ADVERTISING | 24 |
D-3
TABLE OF CONTENTS
(continued)
Page | ||||
23. | ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS | 25 | ||
24. | TRANSFER | 26 | ||
25. | SUCCESSOR FRANCHISE | 29 | ||
26. | TERMINATION OF FRANCHISE | 30 | ||
27. | EFFECT OF TERMINATION OR EXPIRATION | 31 | ||
28. | RELATIONSHIP OF PARTIES/INDEMNIFICATION | 34 | ||
29. | MISCELLANEOUS | 37 | ||
30. | ACKNOWLEDGMENTS | 39 |
EXHIBIT A | FRANCHISEE INFORMATION | |||||
EXHIBIT B | PRINCIPAL OWNERS PERSONAL GUARANTY | |||||
EXHIBIT C | INVESTOR PERSONAL COVENANTS | |||||
EXHIBIT D | AUTHORIZATION FOR ACH DEBITS OR CREDITS | |||||
EXHIBIT E | AUTHORIZED OFF-PREMISES SALES |
D-4
KRISPY KREME DOUGHNUT
CORPORATION
COMMISSARY FACILITY
AGREEMENT
THIS COMMISSARY FACILITY AGREEMENT (this Agreement) is made and entered into as of the Effective Date by and between Franchisor and Franchisee.
1. | BACKGROUND |
1.1 | Franchisor has developed, as a result of considerable time, skill, effort, and money, a distinctive system for operating stores called Krispy Kreme Stores that offer and serve a variety of doughnuts, beverages, and other authorized products and services under the Marks. |
1.2 | Franchisors Affiliate, HDN Development Corporation, owns the Marks and has granted Franchisor the right to sublicense the Marks to its franchisees for their use in producing the Products. |
1.3 | Franchisor grants franchises to own and operate Krispy Kreme Stores and Commissary Facilities to Persons who meet its qualifications and are willing to undertake the investment and effort to properly develop and operate them. |
1.4 | Franchisee has submitted a Franchise Application to own and operate a Commissary Facility at the Site, and Franchisor has accepted the application in reliance on all information Franchisee has provided in connection therewith. |
2. | DEFINITIONS |
2.1 | Capitalized terms used in this Agreement have the meanings given to them in this Section and in the Basic Terms. |
Account Franchisees bank account as to which Franchisee has provided Franchisor with all appropriate account information and from which Franchisee has authorized Franchisor to withdraw funds by electronic funds transfers. | |
Affiliate Any person that directly or indirectly owns or controls, that is directly or indirectly owned or controlled by, or that is under common ownership or control with the referenced person, including parents and subsidiaries. | |
Authorized Off-Premises Sales Sales to wholesale customers pursuant to an express authorization by Franchisor, the current form of which is attached as Exhibit E. | |
Basic Terms The terms of this Agreement set forth on the Krispy Kreme Doughnut Corporation Commissary Facility Agreement Basic Terms section on the first page hereof. | |
Brand Fund As defined in Section 22. | |
Commissary Facility A manufacturing facility for doughnuts and other Products that are supplied to Hot Shops and Fresh Shops/Kiosks. Commissary Facilities are not used for retail sales, but may distribute and sell to wholesale customers, subject to Franchisors authorization pursuant to the Commissary Facility Agreement. | |
Commissary Facility Agreement An agreement, such as this Agreement, used by Franchisor to grant the right to operate a Commissary Facility at a specific location. | |
Competitive Business A business, other than a Krispy Kreme Store or Commissary Facility, that: (a) makes, sells or distributes yeast-raised doughnuts, cake doughnuts, or any other types of doughnuts, miniature doughnuts, doughnut holes or any other bakery products in any distribution channel to any customer for consumption or resale, and such sales constitute ten percent (10%) or more of its total sales (or such sales from any single location constitute 10% or more of the total sales of that location) during any calendar quarter or calendar year; (b) sells coffee or coffee drinks in any distribution channel to any customer for consumption or resale, and such sales constitute twenty percent (20%) or more of its total sales (or such sales from any single location constitute 20% or more of the total sales of that location) |
D-5
during any calendar quarter or
calendar year; (c) is the same as, or similar to, the Krispy Kreme Store
concept as it evolves over time; or (d) grants franchises or licenses, or
establishes joint ventures, for the development and/or operation of any
business referred to in (a) through (c), above. Restrictions in this
Agreement on having an Ownership Interest in a Competitive Business shall
not apply to the ownership of shares of a class of securities listed on a
stock exchange or traded on a public stock market that represents less
than three percent (3%) of the number of shares of that class of
securities issued and outstanding. | |||
(a) | methods, techniques, equipment, specifications, standards, policies, procedures, information, concepts, and systems relating to and knowledge of and experience in the development, equipping, operation, outfitting, and franchising of Krispy Kreme Stores and Commissary Facilities, as well as expansion, growth and development plans, and prospects; | ||
(b) | marketing and advertising programs for Krispy Kreme Stores and Commissary Facilities; | ||
(c) | knowledge concerning the logic, structure, and operation of computer software programs that Franchisor authorizes for use in connection with the operation of Krispy Kreme Stores and Commissary Facilities, and all additions, modifications and enhancements, and all data generated from use of such programs; | ||
(d) | specifications and standards for, and sources of, buildings, equipment, furnishings, fixtures, signs, products, materials, supplies, and services utilized in the development and operation of Krispy Kreme Stores and Commissary Facilities; | ||
(e) | ingredients, formulas, mixes, recipes for and methods of preparation, cooking, serving, packaging, and delivery of the Products; | ||
(f) | information concerning sales, operating results, financial performance, consumer preferences, inventory requirements, materials and supplies, and other financial data of Krispy Kreme Stores and Commissary Facilities, and customer lists; | ||
(g) | current and concluded research, development and test programs for products, services and operations for use in Krispy Kreme Stores and Commissary Facilities; | ||
(h) | the contents of any System Standards Manuals, System Standards, and site selection criteria; and | ||
(i) | employee training, and staffing levels. | ||
Development Agreement If
applicable, the Krispy Kreme Doughnut Corporation Development Agreement
pursuant to which Franchisor has granted Franchisee the right to develop
Krispy Kreme Stores and Commissary Facilities in the Development Area and
pursuant to which this Agreement has been
executed. |
D-6
Franchise The rights granted
and the obligations imposed pursuant to this Agreement that relate to the
development and operation of the Commissary Facility at the
Site. |
D-7
which Franchisee is required by law
to remit to a taxing authority, (ii) customer refunds, (iii) credits for
product returns and (iv) sales or delivery of products to Krispy Kreme
Stores or Commissary Facilities (regardless whether owned by Franchisee),
and (b) shall not be reduced by any charge or other provision for
uncollectible accounts. Neither the inclusion of any type of revenue in
the definition of Net Sales nor Franchisors demand or receipt of
Royalties or Brand Fund contributions on such revenues shall constitute a
waiver or approval of any unauthorized sales by Franchisee hereunder, and
Franchisor reserves all rights and remedies with respect
thereto. |
D-8
the Marks; the insurance coverage required to be carried for the FACILITY; the training of FACILITY employees; the days and hours of FACILITY operation; and the content, quality and use of advertising and promotional materials. | |
System Standards Manuals The documents and other media that contain the System Standards. | |
Term As defined in the Basic Terms. | |
Transfer or Transfer the Franchise (or similar words) The direct or indirect sale, assignment, transfer, exchange, conversion, license, sublicense, lease, sublease, mortgage, pledge, collateral assignment, grant of a security, collateral or conditional interest or other encumbrance in or on, or other disposition, whether voluntary, involuntary, by operation of law or otherwise, of this Agreement, of any interest in or right under this Agreement, any form of legal or beneficial ownership interest in Franchisee, or any form of ownership interest or right to participate in or receive the benefits of the assets, revenues, income or profits of Franchisees business, or any one or more other acts or events not covered by the foregoing that Franchisor reasonably determines to be a form of direct or indirect transfer, including: (a) any transfer, redemption or issuance of a legal or beneficial ownership interest in the capital stock of, a membership interest in, or a partnership interest in, Franchisee or any interest convertible into or exchangeable for capital stock of, a membership interest in or a partnership interest in, Franchisee; (b) any merger or consolidation of Franchisee, whether or not Franchisee is the surviving entity, or any conversion of Franchisee from one form of legal entity into another form of legal entity, or any sale, exchange, encumbrance or other disposition of Franchisees assets; (c) any transfer in connection with or as a result of a divorce, dissolution of marriage or similar proceeding or a property settlement or legal separation agreement in the context of a divorce, dissolution or marriage or similar proceeding, an insolvency, bankruptcy or assignment for benefit of creditors, a judgment, a corporate, limited liability company or partnership dissolution or otherwise by operation of law; or (d) any transfer by gift, declaration of trust, transfer in trust, revocation of trust, trustee succession, trust termination, discretionary or mandatory trust distribution, occurrence of any event (e.g., death of a person) that affects or ripens the rights of contingent beneficiaries, exercise of a power of appointment, exercise of a withdrawal right, adjudication of Franchisee or any Principal Owner as legally disabled, or upon or after Franchisees death or the death of any of Franchisees Principal Owners by will, disclaimer or the laws of intestate succession or otherwise. | |
Week Any consecutive seven (7) calendar day period that Franchisor may designate from time to time, currently consisting of each seven (7) calendar day period ending at 11:59 PM on each Sunday. | |
2.2 | Other terms used in this Agreement are defined in the context in which they arise. |
3. | ACKNOWLEDGMENTS, REPRESENTATIONS, AND WARRANTIES |
3.1 | Franchisee acknowledges that Franchisee has read this Agreement and Franchisors Franchise Disclosure Document and understands and accepts the terms and conditions contained in this Agreement as being reasonably necessary to maintain Franchisors high standards of quality and service. Franchisee further acknowledges that the uniformity of those standards at each Krispy Kreme Store is reasonably necessary to protect and preserve the goodwill of the Marks. Franchisee acknowledges that Franchisee has conducted an independent investigation of the business venture contemplated by this Agreement and recognizes that, like any other business, the nature of the business conducted by a Commissary Facility may evolve and change over time, that an investment in a Commissary Facility involves business risks, and that Franchisees business abilities and efforts are vital to the success of the venture. Any information Franchisee acquires from other Krispy Kreme Store or Commissary Facility franchisees relating to their sales, profits, or cash flows does not constitute information obtained from Franchisor, nor does Franchisor make any representation as to the accuracy of any such information or the likelihood of Franchisee achieving comparable results. Franchisee acknowledges that, in all of its dealings with Franchisor, Franchisors officers, directors, employees and agents act only in a representative, and not in an individual, capacity. All business dealings between Franchisee and such Persons in connection with |
D-9
this Agreement are solely between Franchisee and Franchisor. Franchisee further acknowledges that Franchisor has advised Franchisee to have this Agreement reviewed and explained to Franchisee by an attorney. | ||
3.2 | Franchisee represents and warrants to Franchisor, as an inducement to Franchisors entry into this Agreement, that all statements Franchisee has made and all materials Franchisee has submitted to Franchisor in connection with Franchisees Franchise Application for and purchase of the Franchise are accurate and complete and that Franchisee has made no misrepresentations or material omissions to obtain the Franchise. Franchisor has approved Franchisees Franchise Application for a franchise for a Commissary Facility in reliance on each of Franchisees representations to Franchisor. | |
3.3 | Franchisee represents and warrants to Franchisor that Franchisee has the authority to execute and deliver this Agreement and to perform Franchisees obligations hereunder. | |
3.4 | Franchisee represents and warrants to Franchisor that this Agreement has been duly executed and delivered by Franchisee and, assuming the due authorization, execution and delivery by Franchisor, constitutes a legal, valid and binding obligation of Franchisee, enforceable in accordance with its terms. | |
3.5 | Franchisee represents and warrants to Franchisor that Franchisees execution and delivery of this Agreement does not, and Franchisees performance of its obligations under this Agreement will not, with or without the giving of notice or the lapse of time or both, (a) conflict with or violate its organizational documents, if applicable, (b) conflict with or violate any law, statute, ordinance, rule, regulation, order, judgment or decree applicable to Franchisee, or (c) conflict with, result in any breach of, or constitute a default under, any contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Franchisee is a party or by which Franchisee is bound. | |
3.6 | Franchisee represents and warrants to Franchisor that: (a) Franchisee owns fee simple title to the real property and improvements which comprise the FACILITY; or (b) if Franchisee holds a leasehold interest in the FACILITY, Franchisee has or will have a binding and effective lease with a lease term (plus renewal options) extending at least to the end of the Term and otherwise conforming to Franchisors requirements in accordance with Section 7. | |
3.7 | If Franchisee is, or at any time becomes, a business corporation, partnership, limited liability company or other legal entity, Franchisee and each of its Principal Owners represent, warrant and agree that: (a) Franchisee is duly organized and validly existing under the laws of the state of its organization, and, if a foreign business corporation, partnership, limited liability company or other legal entity, Franchisee is duly qualified to transact business in the state in which the FACILITY is located; (b) Franchisee has the authority to execute and deliver this Agreement and to perform its obligations hereunder; (c) true and complete copies of the articles of incorporation, articles of organization, operating agreement or principles, partnership agreement, bylaws, subscription agreements, buy-sell agreements, voting trust agreements, trust agreements and all other documents relating to Franchisees ownership, organization, capitalization, management and control (Organizational Documents) shall be promptly delivered to Franchisor for its approval, which approval shall not be unreasonably withheld; (d) any and all amendments, deletions and additions to Franchisees Organizational Documents shall be promptly delivered to Franchisor for its approval, which approval shall not be unreasonably withheld; (e) Franchisees activities are restricted to those necessary solely for the development, ownership and operation of Krispy Kreme Stores and Commissary Facilities in accordance with this Agreement and in accordance with any other agreements entered into with Franchisor or any of its Affiliates; (f) the Organizational Documents recite that the issuance, transfer or pledge of any direct or indirect legal or beneficial ownership interest is restricted by the terms of this Agreement; (g) all certificates representing direct or indirect legal or beneficial ownership interests now or hereafter issued must bear a legend in conformity with applicable law reciting or referring to such restrictions; and (h) Franchisee will deliver to Franchisor a Secretary/Clerks/Trustees Certificate or other evidence satisfactory to Franchisor that the execution, delivery and performance of this Agreement and all other agreements and ancillary documents |
D-10
contemplated hereby or thereby have been duly authorized by all necessary action by the corporation, partnership, limited liability company or other legal entity, as applicable, and are within the legal powers of Franchisees trustee, if Franchisee is a trust. | |
3.8 | Franchisee and each of its Principal Owners represent, warrant, and agree that Exhibit A is current, complete and accurate. Franchisee agrees that an updated Exhibit A will be furnished promptly to Franchisor, so that Exhibit A (as so revised and signed by Franchisee) is at all times current, complete and accurate. Each person who is or becomes a Principal Owner must execute an agreement in the form Franchisor prescribes, undertaking to guarantee and be bound jointly and severally by the terms of this Agreement, the current form of which is attached hereto as Exhibit B. Each person who is or becomes an Owner, whether or not a Principal Owner, must execute an agreement in the form Franchisor prescribes, undertaking to be bound by the confidentiality and non-competition covenants contained in this Agreement, the current form of which is attached hereto as Exhibit C. Each Owner must be an individual acting in his/her individual capacity, unless Franchisor waives this requirement. |
3.9 | The provisions of Section 3 constitute continuing representations and warranties, and Franchisee and Franchisees Principal Owners shall notify Franchisor immediately in writing of the occurrence of any event or the development of any circumstance that might render any of the foregoing representations and warranties false, inaccurate, or misleading. |
4. | GRANT OF FRANCHISE |
4.1 | Subject to the terms of and on the conditions contained in this Agreement, Franchisor hereby grants to Franchisee the right to operate the FACIILTY during the Term and to use the Marks and the System in the performance of Franchisees obligations under this Agreement. Franchisee shall use the FACILITY to manufacture certain authorized Products (a) to be distributed to, and offered for sale at, Krispy Kreme Stores that are categorized as Hot Shops, Fresh Shops or Kiosks and established and operated pursuant to Franchise Agreements entered into between Franchisor and Franchisee and (b) to be sold as Authorized Off-Premises Sales. |
4.2 | Franchisee will faithfully, honestly, and diligently perform Franchisees obligations under this Agreement. Franchisee will continuously exert its best efforts to promote and enhance the operation of the FACILITY and to maximize the sale of Products. |
4.3 | Franchisee may not operate the FACILITY from any location other than the Site without Franchisors prior written consent. If Franchisor consents to the relocation of the FACILITY, Franchisor has the right to charge Franchisee for its expenses in connection with the relocation. |
4.4 | Franchisee agrees that the FACILITY will be under direct, on-premises management by a trained Managing Director or General Manager or one of Franchisees other managers, all of whom must have completed training to Franchisors satisfaction. |
4.5 | Franchisee agrees that the FACILITY will not be closed for five (5) or more consecutive days without Franchisors prior written consent. |
4.6 | Franchisee expressly acknowledges and agrees that (a) the FACILITY may only produce the Products that Franchisor authorizes from time to time and shall not produce or store any other food products whatsoever; (b) the FACILITY shall only produce authorized Products for distribution to Franchisees Krispy Kreme Stores that do not have production capabilities for such Products (such as Hot Shops, Fresh Shops and Kiosks) for sale at such stores; and (c) except for Authorized Off-Premises Sales, the FACILITY shall not sell or distribute any Products to any other Persons or locations, including any other Krispy Kreme Stores owned by other franchisees or any sales for Fundraising purposes. |
4.7 | Either party shall have the right at any time to terminate this Agreement without cause, effective ninety (90) days after notice thereof to the other, provided Franchisee no longer operates any Krispy Kreme Stores that are categorized as Hot Shops, Fresh Shops or Kiosks. |
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5. | FRANCHISORS RESERVATION OF RIGHTS |
5.1 | Franchisor and its Affiliates (and their respective successors and assigns, by purchase, merger, consolidation or otherwise) retain all rights not expressly granted to Franchisee in this Agreement, including those with respect to Krispy Kreme Stores and Commissary Facilities, the Marks, and the sale of Products, including all rights Franchisor expressly reserves in this Section 5. Franchisee waives, to the fullest extent permitted under applicable law, all claims, demands or causes of action arising from or related to any of such activities by Franchisor or any of its Affiliates. |
5.2 | No exclusive territory, protection, or other right in the contiguous space, area, or market of the FACILITY is expressly or impliedly granted to Franchisee under this Agreement, and Franchisor reserves the right to operate and to grant others the right to operate Krispy Kreme Stores or Commissary Facilities at any location on such terms and conditions as it deems appropriate. Franchisee acknowledges and agrees that such Krispy Kreme Stores or Commissary Facility may be in direct competition with the FACILITY, without regard to any adverse effect on the FACILITY and without any obligation or liability to Franchisee. |
5.3 | Franchisor reserves the right to acquire, develop, and operate, or be acquired by, any company, including a company operating one or more food service businesses (including food service businesses selling doughnuts or coffee). |
5.4 | Franchisor reserves the right to license, sample, sell, or market by any means whatsoever (including the Internet) the Products and any goods or services identified by the Marks. Such goods and services may be licensed, sampled, sold, or marketed in any and all locations and venues, and through any method or channel of distribution Franchisor deems appropriate in its sole discretion (including wholesale distribution of Products to supermarkets, grocery stores, convenience stores, and other retail outlets). Such sales may be in direct competition with the FACILITY, without regard to any adverse effect on the FACILITY and without any obligation or liability to Franchisee. |
6. | SITE SELECTION |
6.1 | Franchisee acknowledges that, prior to signing this Agreement, Franchisee (with or without Franchisor assistance) located, and Franchisor approved, the Site. Franchisee acknowledges and agrees that Franchisors recommendation or approval of the Site, and any information regarding the Site communicated to Franchisee, do not constitute any acknowledgement, warranty or representation of any kind, express or implied, including any warranty or representation as to the potential access, visibility or profitability of a Commissary Facility at that Site, or for any other purpose. Franchisors approval of the Site merely signifies that Franchisor is willing to grant a Franchise for a Commissary Facility at that location. Application of criteria that have appeared effective with respect to other sites may not accurately reflect the potential for all sites, and, after Franchisors approval of a site, demographic and/ or other factors included in or excluded from Franchisors criteria could change, thereby altering the potential of a site. The uncertainty and instability of such criteria are beyond Franchisors control, and Franchisor will not be responsible for the failure of a site Franchisor has recommended or approved to meet expectations as to potential revenue or operational criteria. Neither Franchisors approval of the Site nor any assistance Franchisor may give Franchisee in identifying the Site, constitutes a warranty or representation of any kind, express or implied, as to the suitability of the proposed Site for a Commissary Facility or for any other purpose. Franchisees decision to develop and operate the FACILITY at the Site is based solely on Franchisees own independent investigation of the suitability of the Site for a Commissary Facility. |
6.2 | Franchisee must also cause to be prepared, and submit for approval by Franchisor, a site plan and basic plans and specifications for the FACILITY, including requirements for dimensions, exterior design, materials, interior layout, equipment, fixtures, furniture, signs and decorating. Franchisors exercise of its right to approve the Site layout, to approve any plans, to inspect the construction or conversion of the FACILITY shall be solely for the purpose of assuring compliance with the System Standards and shall not be construed as any express or implied representation or warranty that the FACILITY complies with any |
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applicable laws, codes or regulations (including the Americans with Disabilities Act (ADA) or any other federal, state, or local law or ordinance regulating standards for the access to, use of, or modification of buildings for and by persons whose disabilities are protected by law) or that the construction thereof is sound or free from defects. Franchisors criteria for approval or disapproval do not encompass technical, architectural or engineering considerations. Franchisor shall have no liability or obligation with respect to the construction or conversion of the FACILITY. | ||
7. | LEASE OR PURCHASE OF SITE | |
7.1 | Franchisee must lease, sublease or purchase the Site within one-hundred and eighty (180) days after the date of Franchisors site acceptance letter. Franchisor has the right to approve the terms of any lease, sublease or purchase contract for the Site, and Franchisee agrees to deliver a copy to Franchisor for Franchisors approval before Franchisee signs it. Franchisee agrees that any lease or sublease for the Site must, in form and substance satisfactory to Franchisor, (a) provide for notice to Franchisor of Franchisees default under the lease or sublease and an opportunity for Franchisor to cure such default; (b) require the lessor or sublessor to disclose to Franchisor, on its request, sales and other information furnished by Franchisee; (c) give Franchisor the right on any termination or expiration (without renewal) of this Agreement to assume the lease or sublease without the lessors or sublessors consent; (d) give Franchisor the right to enter the FACILITY to remove signs and other tangible property that embodies any of the Marks or that contains or embodies patents owned by Franchisor or any of its Affiliates, and provide that the lessor and/or sublessor relinquishes to Franchisor, on any termination or expiration (without renewal) of this Agreement, any lien or other ownership interest, whether by operation of law or otherwise, in and to any tangible property, including any outdoor sign, that embodies any of the Marks; and (e) require that the lessor and/or sublessor acknowledges that Franchisor has no liability or obligation whatsoever under the lease or sublease until and unless Franchisor assumes the lease or sublease on termination or expiration of this Agreement. | |
Franchisee may not execute a lease, sublease or purchase contract pertaining to the Site for the FACILITY or any modification thereof without Franchisors approval. Franchisors approval of the lease, sublease or purchase contract does not constitute a warranty or representation of any kind, express or implied, as to its fairness or suitability or as to Franchisees ability to comply with its terms. Franchisor does not, by virtue of approving the lease, sublease or purchase contract, assume any liability or responsibility to Franchisee or to any third parties. Franchisee must deliver a copy of the fully signed lease, sublease or purchase contract to Franchisor within five (5) days after its execution. | ||
8. | FACILITY DEVELOPMENT | |
8.1 | Franchisee is responsible for developing the FACILITY. Franchisee is obligated to have prepared all required construction plans and specifications to suit the shape and dimensions of the Site and to insure that such plans and specifications comply with all applicable state, federal, and local laws, codes, ordinances, regulations (including building codes, permit requirements, and regulations and the ADA or similar rules governing accommodations for persons with disabilities). Franchisee is obligated to submit construction plans and specifications to Franchisor for approval before construction of the FACILITY is commenced and, at Franchisors request, to submit all revised plans and specifications during the course of such construction with as built plans to be provided upon completion. Franchisor may be willing to assist Franchisee in developing the FACILITY by recommending engineers and architects and otherwise furnishing information to assist Franchisee in developing the FACILITY in accordance with Franchisors specifications. | |
8.2 | Franchisee agrees, at its own expense, to do the following with respect to developing the FACILITY at the Site: | |
(a) | secure all financing required to develop and operate the FACILITY; | |
(b) | obtain all building, utility, sign, health, sanitation, business and other permits and licenses required to construct and operate the FACILITY; |
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(c) | construct all required improvements to the Site and decorate the FACILITY in compliance with plans and specifications and designs Franchisor has approved; | |
(d) | purchase or lease and install all required equipment, fixtures, furnishings, and signs required for the FACILITY; and | |
(e) | purchase an opening inventory of authorized and approved materials and supplies, certain of which items must be purchased from Franchisor, its Affiliates, or suppliers designated by Franchisor, all as described in the System Standards Manuals. | |
8.3 | Franchisee acknowledges that Franchisor is not responsible for, and shall have no liability for, the architecture, design, engineering, or construction of the FACILITY, for the FACILITYs compliance with any federal, state, or local law (including the ADA and any other federal, state or local law or ordinance regulating standards for access to, use of the, or modification of buildings for and by persons who are protected by law by virtue of such disability or whose disabilities are otherwise recognized by law), for any errors, omissions or discrepancies of any nature in any drawings or specifications with respect to the FACILITY, or for any other matter relating to the development, use or operation of the FACILITY, even if Franchisor assists in the development of the FACILITY. | |
9. | BUILDING, EQUIPMENT, FIXTURES, FURNISHINGS, SIGNS AND SUPPLIES | |
9.1 | Franchisee acknowledges that the Products, Marks, and System have established significant prestige and goodwill and are well-recognized in the mind of the public and the trade. In order to preserve such prestige and goodwill, Franchisee understands and agrees that it is necessary and appropriate for Franchisor to closely control the supply chain for all equipment (including production equipment and fixtures, cash register, POS system and computer), fixtures, furnishings, signs, delivery vehicles, raw materials (including doughnut mixes and coffee beans), supplies, and any other items used or useful in developing or operating the FACILITY or producing, marketing, or selling the Products or other goods Franchisor requires Franchisee to sell. | |
9.2 | Franchisee agrees to use in developing and operating the FACILITY (and producing, marketing, and selling the Products and other goods Franchisor requires Franchisee to sell) only the equipment, fixtures, furnishings, signs, delivery vehicles, raw materials, supplies, cash register, POS system, and computers and other items that Franchisor has approved from time to time for Franchisee to use in conjunction with the FACILITY as meeting its specifications and standards for quality, design, appearance, function and performance in accordance with the System Standards. Any deviation from Franchisors mandatory specifications and standards as prescribed by the System Standards must receive prior written approval from Franchisor. Approval of any item for use by Franchisor, its Affiliates, or other developers or franchisees will not be construed as approval of such item for Franchisees use. | |
9.3 | Notwithstanding Section 9.2, Franchisor may require Franchisee to purchase any or all of the equipment, fixtures, furnishings, signs, delivery vehicles, raw materials, supplies, and other items for the FACILITY directly from Franchisor or its Affiliates or other suppliers it may designate from time to time. Franchisee agrees to purchase all such items from Franchisor, its Affiliates or designated suppliers, as Franchisor may require. Franchisee acknowledges and agrees that Franchisor, its Affiliates and designated suppliers have the right to profit from the sale of such items and that Franchisor does not act as agent, representative or in any other intermediary or fiduciary capacity for Franchisee in Franchisors relationship with any designated suppliers. Franchisee acknowledges and agrees that (a) Franchisor and/ or its Affiliates may receive payments, fees, commission or reimbursements from designated suppliers and third parties in respect to such purchases, (b) Franchisor and/or its Affiliates may have investments in designated suppliers, and (c) Franchisor and/or its Affiliates may profit from Franchisees purchases from designated suppliers. Franchisor, its Affiliates and designated suppliers shall not be liable for any delay in the delivery of ingredients as a result of any Force Majeure. Franchisor, its Affiliates and designated suppliers may establish policies and procedures from time to time for the allocation and distribution of items among Krispy Kreme Stores and Commissary Facilities. |
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9.4 | All equipment (including production equipment), fixtures, furnishings, raw materials (including doughnut mixes and coffee beans) that Franchisee purchases from Franchisor, its Affiliates or designated suppliers shall be at such prices and on such purchase terms (including credit, such as COD, and shipping) and conditions as Franchisor, its Affiliates or designated suppliers may determine from time to time. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY PURCHASE ORDER ISSUED BY FRANCHISOR OR ITS AFFILIATES OR DESIGNATED SUPPLIERS, NEITHER FRANCHISOR, ANY OF ITS AFFILIATES NOR ANY DESIGNATED SUPPLIER MAKES ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE OR OTHERWISE WITH RESPECT ANY ITEMS FRANCHISEE IS REQUIRED TO PURCHASE FROM ANY OF THEM. NEITHER FRANCHISOR, ANY OF ITS AFFILIATES NOR ANY DESIGNATED SUPPLIER WILL HAVE ANY LIABILITY FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH ANY SUCH ITEMS, INCLUDING FRANCHISEES PURCHASE, USE OR RESALE OF ANY SUCH ITEMS. |
9.5 | In the event Franchisor does not require Franchisee to purchase a particular item from Franchisor, its Affiliates, or a designated supplier, Franchisee may purchase such item from a supplier Franchisor has approved. If Franchisee proposes to purchase any such item from any supplier who is not then approved by Franchisor, Franchisee and the proposed supplier must submit to Franchisor all information that Franchisor may request in order to determine whether to approve the supplier. Franchisor will have the unconditional right to approve or disapprove any proposed supplier, and Franchisor may approve a supplier conditionally. Within one thirty (30) days after Franchisor receives all requested information, Franchisor will communicate to Franchisee in writing Franchisors decision to approve or disapprove Franchisees proposed supplier. Franchisor will evaluate proposed suppliers on their ability to comply with applicable standards, specifications and procedures, and Franchisor will only approve those proposed suppliers that meet Franchisors high standards. Franchisor may disapprove any supplier who Franchisor previously approved, and Franchisee may not, after receipt of notice of disapproval, reorder from any supplier Franchisor has disapproved. Franchisor may prescribe procedures for the submission of requests for approval and impose obligations on approved suppliers, which will be incorporated in a written license agreement with the supplier. Franchisor may obtain from Franchisee and/or such approved suppliers reimbursement of Franchisors reasonable costs and expenses incurred in connection with the approval process of the suppliers compliance with Franchisors requirements. Franchisee acknowledges and agrees that Franchisor does not act as agent, representative or in any other intermediary or fiduciary capacity for Franchisee in Franchisors relationship with approved suppliers. Franchisor may impose limits on the number of approved suppliers. Franchisor has the right to monitor the quality of services provided by approved suppliers in a manner Franchisor deems appropriate and may terminate any approved supplier that does not meet Franchisors quality standards and specifications, as may be in effect from time to time. |
9.6 | Franchisee agrees to place or display at the Sites (interior and exterior) only such signs, emblems, lettering, logos, and display materials that Franchisor approves from time to time. |
10. | COMPUTER SYSTEM |
10.1 | Franchisee agrees to use in the development and operation of the FACILITY the POS, cash register/ computer terminals and operating software (Computer System) that Franchisor specifies from time to time. Franchisee agrees to install and use at the FACILITY the Computer System that Franchisor specifies from time to time and to transmit to Franchisor (and otherwise permit Franchisor to collect) in the form and at frequencies it specifies from time to time, electronic information from the Computer System. Franchisee also agrees to identify Product categories and other items in the Computer System in a form that Franchisor specifies. Franchisee agrees to install and maintain at the FACILITY a DSL or cable modem, or similar means of networking, and dedicated line that Franchisor may use to access sales information and other data on the Computer System. Franchisee is responsible for maintaining a secure network environment consistent with this Agreement and all applicable legal requirements. |
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10.2 | Franchisee acknowledges that Franchisor has developed specifications for certain components of the Computer System and may modify such specifications and the components of the Computer System from time to time. As part of the Computer System, Franchisor may require Franchisee to obtain specified computer hardware and/or software, including a license to use proprietary software developed by Franchisor or others. Franchisors modification of such specifications for the components of the Computer System may require Franchisee to incur costs to purchase, lease and/or license new or modified computer hardware and/or software and to obtain service and support for the Computer System during the term of this Agreement. Franchisee acknowledges that Franchisor cannot estimate the future costs of the Computer System (or additions or modifications thereto) and that the cost to Franchisee of obtaining the Computer System (including software licenses) (or additions or modification thereto) may not be fully amortizable over the remaining term of this Agreement. Within sixty (60) days after Franchisee receives notice from Franchisor, Franchisee agrees to obtain the components of the Computer System that Franchisor designates and requires. | |
10.3 | Franchisee further acknowledges and agrees that Franchisor has the right to charge a reasonable systems fee for software or systems, modifications and enhancements specifically made for Franchisor that are licensed to Franchisee and other maintenance and support services that Franchisor or its Affiliates furnish to Franchisee related to the Computer System. | |
11. | FACILITY OPENING | |
11.1 | Franchisee agrees not to open the FACILITY for business until: | |
(a) | Franchisor approves the FACILITY and site plan as developed in accordance with Franchisors specifications and System Standards; | |
(b) | All required training has been completed to Franchisors satisfaction; | |
(c) | Franchisee is in compliance with all Franchise Agreements, Development Agreements, and Commissary Facility Agreements, including the payment of all amounts then due to Franchisor; | |
(d) | Franchisor has been furnished with copies of all insurance policies required by this Agreement, or such other evidence of insurance coverage and payment of premiums as Franchisor requests or accepts; and | |
(e) | Other items which Franchisor may reasonably require have been furnished to Franchisor. | |
11.2 | Franchisee must properly staff the FACILITY prior to opening. Franchisor will supply at no charge an operating team that will assist Franchisee for a minimum of seven (7) days in the opening of the FACILITY. However, if Franchisee is developing several Krispy Kreme Stores or Commissary Facilities pursuant to a Development Agreement, this team will be made available at no charge for the first Krispy Kreme Store or Commissary Facility, one-half of a team will be made available at no charge for the second Krispy Kreme Store or Commissary Facility, a field consultant will be made available at no charge for the third Krispy Kreme Store or Commissary Facility and a field consultant may or may not be made available at no charge for any subsequent Krispy Kreme Stores or Commissary Facilities, at Franchisors sole discretion. No charge means Franchisor will be responsible for the teams travel, room and board, and salaries, but Franchisee will be responsible for all other charges or expenses. | |
12. | CAPITAL IMPROVEMENTS | |
12.1 | In addition to the requirements of Section 10 pertaining to the Computer System, Franchisor may, from time to time, require Franchisee to make certain capital improvements with respect to developing or operating the FACILITY, including: (a) the acquisition of new equipment (whether for the Products or other goods Franchisor requires Franchisee to sell or otherwise), fixtures, furnishings, signs, delivery vehicles, or other fixed assets; (b) periodic remodeling; and (c) replacement of obsolete or worn-out improvements, equipment, fixtures, furnishings, signs, delivery vehicles, or other fixed assets (Capital Improvements). Franchisee agrees to make such Capital Improvements as Franchisor may specify from time to time in Franchisors sole discretion. Franchisee agrees not to make any modifications to any |
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required Capital Improvements without Franchisors prior written approval. Franchisee further agrees that all intellectual property rights to any such Capital Improvements, if applicable, will be the exclusive property of Franchisor or its Affiliates. | |
13. | ROYALTIES |
13.1 | [THIS SECTION HAS BEEN INTENTIONALLY DELETED] |
13.2 | On or before the Payment Day each Week, Franchisee will pay Franchisor an amount equal to the following percentage of Net Sales (Royalties) for the preceding Week: three and one-half percent (3½%) of Net Sales incurred during 2008; two and one-half percent (2½%) of Net Sales incurred during 2009; and one percent (1%) of Net Sales incurred during 2010 and thereafter. On or before the Reporting Day each Week, Franchisee will report to Franchisor, in the form it may require from time to time, the true and correct Net Sales of the FACILITY for the preceding Week. |
13.3 | Franchisee agrees to give Franchisor authorization, in the form that Franchisor designates from time to time (the current from is attached as Exhibit D), for direct debits from, or credits to, the Account. Franchisee shall not close the Account (or allow the Account to be closed) without first opening and notifying Franchisor of an alternate Account, nor shall Franchisee terminate any direct debit authorization from the Account without a replacement authorization approved by Franchisor. Franchisee hereby authorizes Franchisor to initiate debit entries and/or credit entries to the Account for payments of Royalties and other amounts payable under this Agreement, including purchases for production equipment, fixtures, furnishings, doughnut mixes and other ingredients, packaging and all supplies purchased from Franchisor and any interest charges due thereon. Franchisee agrees to make the funds available in the Account for withdrawal no later than the due date for payment. The amount actually transferred from the Account to pay Royalties will be based on the FACILITYs Net Sales reported to Franchisor or determined by Franchisor from the records contained in the cash register/computer terminals of the FACILITY. If Franchisee has not reported Net Sales of the FACILITY to Franchisor for any reporting period as required above, Franchisee hereby authorizes Franchisor to debit the Account in an estimated amount based on prior reports of Net Sales. |
13.4 | If at any time Franchisor determines that Franchisee has under-reported the Net Sales of the FACILITY, or underpaid Royalties or any other amounts due to Franchisor under this Agreement, Franchisee hereby authorizes Franchisor to initiate immediately a debit to the Account in the appropriate amount, including interest as provided for in this Agreement. Any overpayment will be credited to the Account through a credit effective as of the first reporting date after Franchisor and Franchisee determine that such credit is due. |
13.5 | All amounts that Franchisee owes Franchisor will bear interest after their due date at the rate of one and one-half percent (1.5%) per month or the highest contract rate of interest permitted by law, whichever is less. Franchisee acknowledges that this Section does not constitute Franchisors agreement to accept any payments after they are due or Franchisors commitment to extend credit to, or otherwise finance Franchisees operation of, the FACILITY. Franchisees failure to pay all amounts when due constitutes a material breach and grounds for termination of this Agreement, as provided in Section 26 hereof, notwithstanding the provisions of this Section 13.5. |
13.6 | Notwithstanding any designation Franchisee might make, Franchisor has sole discretion to apply any of Franchisees payments to any of its past due indebtedness to Franchisor in any sequence. Franchisee acknowledges and agrees that Franchisee has no right to set off any amounts that Franchisee claims Franchisor owes Franchisee against Royalties, Brand Fund contributions, payments for purchases, or any other amounts Franchisee owes Franchisor under this Agreement or otherwise. |
14. | TRAINING AND GUIDANCE |
14.1 | Before the FACILITY begins operating, Franchisor will furnish training on the operation of a Commissary Facility as follows. Franchisor will furnish a training program for up to two (2) FACILITY managers furnished at Franchisors designated training facility and/or at an operating Commissary |
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Facility, at Franchisors discretion. The FACILITY managers are required to complete training to Franchisors satisfaction. Although Franchisor will furnish training to these managers of the FACILITY at no additional fee or other charge, Franchisee will be responsible for the managers wages, salaries, travel, room and board, and living expenses during training. Franchisee agrees to replace a manager immediately if Franchisor determines that he or she is not qualified to serve in this capacity at the FACILITY. Franchisor will furnish the same training program to one (1) additional manager of the FACILITY per year that Franchisee hires after the FACILITY is open, without fee or other charge, subject to the schedules for the training program in effect from time to time. Franchisee will be responsible for the managers wages, salaries, travel, room and board, and living expenses during training. | |
14.2 | Franchisor may require managers of the FACILITY to attend and successfully complete periodic or additional training programs, and Franchisor may also offer optional training programs. Except as provided in Section 14.1, Franchisor has the right to charge reasonable fees for providing any such initial, periodic or additional training programs. Franchisee will be responsible for the managers wages, salaries, travel, room and board, and living expenses during incurred by Franchisee and Franchisees personnel in attending any training programs. Franchisee shall immediately replace any managers who fail to successfully complete any training program. |
14.3 | Franchisor will furnish Franchisee periodic guidance with respect to the System, including improvements and changes to the System. Such guidance, at Franchisors discretion, will be furnished in the form of the System Standards Manuals, bulletins and other written materials, consultations by telephone or in person at Franchisors offices or at the FACILITY, or by any other means of communications. At Franchisees request, Franchisor may provide special assistance for which Franchisee will be required to pay the fees and charges Franchisor may establish from time to time. If Franchisee requests or Franchisor requires additional or special training for Franchisees employees, all of the expenses that Franchisor incurs in connection with such training, including per diem charges and travel and living expenses for Franchisors personnel, will be Franchisees responsibility. |
15. | SYSTEM STANDARDS |
15.1 | Franchisor will loan Franchisee one (1) copy of its System Standards Manuals solely for use in operating the FACILITY during the Term. The System Standards Manuals at all times will remain Franchisors property, and they are protected by copyright. Franchisee will keep its copy of the System Standards Manuals current and in a secure location at the FACILITY and shall return them to Franchisor immediately upon request, upon termination, or expiration of this Agreement or upon any Transfer. If any copies of the System Standards Manuals in Franchisees possession are lost, destroyed or significantly damaged, Franchisee will obtain a replacement copy at Franchisors then applicable charge. Franchisee may not at any time copy, duplicate, record, or otherwise reproduce any part of the System Standards Manuals or allow any unauthorized persons access to any System Standards Manuals, including those that are made available electronically, nor may Franchisee post all or any part of the System Standards Manuals on any limited access intranet sites without Franchisors approval. Franchisee may not distribute any part of the System Standards Manuals and may not disclose any part of the System Standards Manuals to any person, other than its employees who have a need to know the contents of the System Standards Manuals in order to perform their jobs. |
15.2 | During the Term, Franchisee will comply with all of the System Standards and other requirements contained in System Standards Manuals, in addition to all applicable laws, regulations, rules, by-laws, orders and ordinances in connection with its operation of the FACILITY. In the event of a dispute relating to the contents of the System Standards Manuals, the master copy of the System Standards Manuals maintained by Franchisor at its principal office is controlling. Franchisor may at any time and from time to time change the System Standards Manuals to reflect changes in System Standards. |
15.3 | To determine whether Franchisee is in compliance with this Agreement and all System Standards, Franchisor and/or Franchisors agents have the right at any time during regular business hours, and without prior notice to Franchisee, to: (a) inspect the FACILITY; (b) observe, photograph and videotape |
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the operations of the FACILITY; (c) remove samples of any Products, materials or supplies for testing and analysis; (d) interview personnel of the FACILITY; (e) interview customers of the FACILITY and to require Franchisee to present to Franchisee customers any evaluation forms periodically prescribed by Franchisor and to participate in and/or request its customers to participate in any surveys performed by or on behalf of Franchisor; and (f) inspect and copy any books, records and documents relating to the operation of the FACILITY. | |
16. | MARKS |
16.1 | Franchisee acknowledges that HDN Development Corporation is the Owner of the Marks and that Franchisor has the right to sublicense the use of the Marks. Franchisee further acknowledges that Franchisees right to use the Marks is derived solely from this Agreement and is limited to the performance of Franchisees responsibilities and obligations hereunder in accordance with the terms hereof. Franchisee acknowledges that its unauthorized use of any of the Marks will constitute a material breach of this Agreement, warranting immediate termination of this Agreement by Franchisor at Franchisors election. Franchisee acknowledges and agrees that its usage of the Marks and any goodwill established thereby shall inure solely to the benefit of the Owner of the Marks and that this Agreement does not confer any goodwill or other interests in any of the Marks upon Franchisee or Franchisees Owners (other than the rights specifically granted by this Agreement). All provisions of this Agreement applicable to the Marks apply to any additional trademarks, service marks, logos, trade dress and commercial symbols Franchisor authorizes Franchisee to use. Franchisee may not at any time during or after the Term contest, or assist any other person in contesting, the validity or ownership of any of the Marks. |
16.2 | Franchisee shall use the Marks as the sole brand and other source identifier of the FACILITY, provided Franchisee shall identify itself as the independent owner and operator of the FACILITY in the manner Franchisor prescribes. Franchisee shall use the Marks only as Franchisor prescribes or allows in writing, whether in connection with the sale of Products and the operation of the FACILITY, or otherwise. |
16.3 | Franchisee and Franchisees Owners, affiliates and agents may not: (a) challenge the validity of any of the Marks or any registration or application for registration therefore, or attempt to claim ownership of or to register anywhere any of the Marks or any derivation or colorable imitation thereof; (b) attempt to claim ownership of or to register anywhere any trademark, service mark, trade name, or trade dress confusingly similar to any of the Marks; (c) use any of the Marks or any other trademark or trade dress confusingly similar thereto in any manner that would jeopardize or Franchisors rights in the Marks; or (d) do any act that would invalidate registration for any of the Marks. Franchisee may not use any of the Marks as part of any corporate or legal business name or with any prefix, suffix or other modifying words, terms, designs or symbols (other than logos licensed to Franchisee hereunder), or in any modified form, nor may Franchisee use any of the Marks in connection with the performance or sale of any unauthorized products or services or in any other manner Franchisor has not expressly authorized in writing. Franchisee agrees to display the Marks prominently in the manner Franchisor prescribes, including at the FACILITY, on packaging and serving materials that Franchisor designates and in connection with forms and advertising and marketing materials. Franchisee agrees to give such notices of trademark and service mark registrations and such other trademark and service mark notices as Franchisor specifies and to obtain any fictitious or assumed name registrations required under applicable law. |
16.4 | Franchisee agrees to notify Franchisor immediately of any apparent infringement of, or challenge to, any of the Marks, or of any claim by any Person of any rights in any of the Marks, and Franchisee agrees not to communicate with any Person other than Franchisor, Franchisors attorneys and Franchisees attorneys in connection with any such apparent infringement, challenge or claim. Franchisor has sole discretion to take such action as Franchisor deems appropriate and the right to control exclusively any litigation, U.S. Patent and Trademark Office proceeding or any other proceeding arising out of any such apparent infringement, challenge or claim or otherwise relating to any of the Marks, including the exclusive right to utilize counsel of Franchisors choice to prosecute or defend any such litigation or proceeding. Any award recovered in any such action or proceeding shall belong exclusively to Franchisor, or, as |
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appropriate, Franchisors Affiliates. Franchisee agrees to sign any and all instruments and documents, render such assistance and do such acts and things as, in the opinion of Franchisor and/or Franchisors attorneys, may be necessary or advisable to protect and maintain Franchisors interests in any litigation or U.S. Patent and Trademark Office proceeding or other proceeding or otherwise to protect and maintain Franchisors interests in the Marks. | |
16.5 | Franchisee may not register, or attempt to register, any of the Marks as part of any Internet domain name or URL, and may neither display nor use any of the Marks or other of Franchisors or its Affiliates intellectual property in connection with, or associate the System with (through a link or otherwise) any website advertising, address or listing on the World Wide Web or any other portion of the Internet without Franchisors prior written consent. |
16.6 | Franchisee may not use any of the Marks to incur any obligation or indebtedness on behalf of Franchisor or its Affiliates. |
16.7 | Franchisee hereby assigns to Franchisor all tangible media of expression derived from any of the Marks, and agrees to execute such further assignments as Franchisor may request. Franchisee shall take all actions and sign all documents necessary to give effect to the purpose and intent of this Section 16. Franchisee irrevocably appoints Franchisor as the true and lawful attorney-in-fact for Franchisee and authorizes Franchisor to take such actions and to execute, acknowledge and deliver all such documents as may from time to time be necessary to convey to Franchisor all rights granted by this Agreement. |
16.8 | Franchisor may, in its sole discretion, modify or discontinue the use of any of the Marks and/or to use one or more additional or substitute trademarks or service marks. Franchisee agrees to comply with Franchisors directions with regard to such modification, discontinuance, addition, or substitution of use of any Mark. Franchisor will not be obligated to reimburse Franchisee for any expense or loss of revenue related thereto. |
16.9 | Franchisee acknowledges that the Marks have established prestige and goodwill and are well recognized in the mind of the public and the trade, and that it is of great importance to Franchisor that the high standards and reputation symbolized by the Marks be maintained in the manufacture, marketing, and sale of the various Products and other authorized goods bearing and services utilizing the Marks. Accordingly, all items of Products manufactured, marketed, or sold, and services rendered, by Franchisee pursuant to this Agreement shall be of high quality as determined by Franchisor in its sole discretion. They shall be suitable for the exploitation of the Marks to the best advantage and the protection and enhancement of the Marks and the goodwill associated therewith. Franchisor shall have the right to, and shall, exercise quality control over Franchisees use of the Marks to the degree reasonably necessary to maintain the validity thereof and to protect the goodwill associated therewith, including but not limited to the right to inspect and monitor Franchisees use of the Marks in any manner and time prescribed by Franchisor. |
17. | CONFIDENTIAL INFORMATION |
17.1 | Franchisor will disclose to Franchisee such parts of the Confidential Information as Franchisor deems necessary or advisable from time to time for the performance of Franchisees obligations under this Agreement. Franchisee acknowledges and agrees that Franchisee and its Owners and Affiliates will not acquire any interest in or right to use the Confidential Information, other than the right to use it in the performance of Franchisees obligations under this Agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition with Franchisor and with other developers and Franchisees of Krispy Kreme Stores. Franchisee agrees to disclose the Confidential Information to Franchisees Owners and to Franchisees employees only to the extent reasonably necessary for the performance of Franchisee obligations under this Agreement. Franchisees Owners must execute the form of Investor Personal Covenants Regarding Confidentiality, Non-Competition and Non-Solicitation attached hereto as Exhibit C. |
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17.2 | Franchisee acknowledges and agrees that the Confidential Information is confidential, is Franchisors proprietary and valuable asset, includes trade secrets owned by Franchisor and Franchisor Affiliates and is disclosed to Franchisee solely on the condition that Franchisee, Franchisees Owners and employees who have access to the Confidential Information agree, and Franchisee agrees that, during and after the Term, Franchisee, Franchisees Owners, Franchisees Affiliates and Franchisees employees: | |
(a) | will not use Confidential Information in any other business or capacity; | |
(b) | will maintain the absolute confidentiality of Confidential Information during and after the Term; | |
(c) | will not make unauthorized copies of any portion of Confidential Information whether through electronic media, writings, or other tangible or intangible means of expression; and | |
(d) | will adopt and implement all reasonable procedures that Franchisor prescribes from time to time to prevent unauthorized use or disclosure of Confidential Information, including restrictions on disclosure thereof to FACILITY personnel and others. | |
Without limiting the foregoing, Franchisee, and each of its Owners, as applicable, each (i) acknowledge the possibility that they may gain access to Franchisors material non-public information and/or that of Franchisors parent company, Krispy Kreme Doughnuts, Inc. (KKDI), and that the securities laws prohibit trading in KKDI securities while in possession of such information, and (ii) agree to refrain from trading in KKDI securities in violation of such laws. | ||
17.3 | Notwithstanding anything to the contrary contained in this Agreement and provided Franchisee has obtained Franchisors prior written consent, the restrictions on Franchisee disclosure and use of the Confidential Information will not apply to the following: | |
(a) | information, methods, procedures, techniques and knowledge which are or become generally known in the food service business, other than through disclosure (whether deliberate or inadvertent) by Franchisee, Franchisees Owners, agents, or employees; and | |
(b) | the disclosure of the Confidential Information in judicial, arbitration or administrative proceedings to the extent that Franchisee is legally compelled to disclose such information, provided Franchisee has notified Franchisor prior to such disclosure and has used Franchisees best efforts to obtain, and has afforded Franchisor sufficient opportunity to seek an appropriate protective order and obtain, assurances satisfactory to Franchisor of confidential treatment for the information required to be so disclosed. | |
18. | PATENTS AND INVENTIONS | |
18.1 | Franchisor and/or its Affiliates have obtained certain patent protection and may seek additional patent protections for other aspects of the System, the Products, and/or other technology related to the development and operation of Krispy Kreme Stores and Commissary Facilities and the production, marketing, and sale of the Products, or otherwise, including all improvements thereto. Nothing in this Agreement shall be construed as transferring ownership of any patents or patent applications from Franchisor or its Affiliates to Franchisee. Nothing in this Agreement shall be construed as transferring the right to sublicense any patents or patent applications from Franchisor or its Affiliates to Franchisee. | |
18.2 | Franchisee agrees to promptly disclose to Franchisor and/or its Affiliates, and Franchisee agrees not to disclose to any other Person or permit any other Person to use (absent Franchisors prior written consent), any and all inventions (which term inventions includes any invention, idea, concept, method, technique, material, design, discovery, know-how, development, improvement, product, process, or innovation), including all improvements thereto, which are developed by Franchisee, Franchisees Owners, or Franchisees Affiliates, whether or not constituting protectable intellectual property, which are in any way related to the System, the Products, the development or operation of Krispy Kreme Stores or Commissary Facilities, or the production, marketing, or sale of the Products. |
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18.3 | Franchisee hereby agrees to assign, and does assign, to Franchisor and/or the Affiliates Franchisor designates all right, title, and interest in any invention, patent application, or patent conceived of or reduced to practice which is in any way related to the System, the Products, the development or operation of Krispy Kreme Stores or Commissary Facilities, or the production, marketing, or sale of the Products. Franchisor will have no obligation to make payments to Franchisee or any other Person with respect to any such assignments. Franchisee agrees that all such inventions, patent applications, and patents referenced above shall belong to Franchisor and/or Franchisors Affiliates, and that all right, title, and interest therein shall be the sole and exclusive property of Franchisor and/or Franchisors Affiliates, except that Franchisee shall be entitled to use all such inventions without charge by Franchisor in connection with this Agreement for the Term. |
18.4 | Franchisee agrees to assist Franchisor and/or Franchisors Affiliates in the evaluation and documentation of any such inventions, patent applications, and patents referred to above. Franchisee also agrees to assist Franchisor and/or Franchisors Affiliates in the documentation of such assignment in any way necessary to transfer such interest to Franchisor and/or Franchisors Affiliates. Franchisee also agrees to assist Franchisor and/or Franchisors Affiliates in obtaining and maintaining such interest, including signing any declaration, patent application, assignment of rights, power of attorney, or other documents in such form and substance as Franchisor may require related to such invention or interest. Franchisee further agrees to assist Franchisor and/or Franchisors Affiliates in the protection and enforcement of any such interest, including testifying in any court action brought to enforce, protect, or defend such interest or invention. |
19. | WORKS OF AUTHORSHIP AND COPYRIGHTS |
19.1 | Franchisee agrees that all works (defined herein as including works of authorship, works in any tangible medium, writings, documents, and computer programs) authored, made, or produced by Franchisee, Franchisees Owners, or Franchisees Affiliates that are in any way related to the System, the Products, the development or operation of Krispy Kreme Stores or Commissary Facilities, or the production, marketing, or sale of the Products, whether or not such works are copyrightable, are works-made-for-hire and that Franchisee will not have, under this Agreement or otherwise, any right, title, or interest of any kind or nature in and to such works, and that all rights therein are the sole and exclusive property of Franchisor and/or its Affiliates. |
19.2 | If any portion of any work described above is not considered a work-made-for-hire for Franchisor or its Affiliates, Franchisee hereby agrees to assign, and does assign, to Franchisor and/or the Affiliates Franchisor designates, all right, title, and interest in any work authored, made, or produced by Franchisee or its Owners or Affiliates (whether alone or in conjunction with one or more other persons) in the course of involvement with Franchisor under this Agreement or otherwise relating to the System, the Products, the Marks, the development or operation of Krispy Kreme Stores or Commissary Facilities, or the production, marketing, or sale of the Products. Franchisor will have no obligation to make payments to Franchisee or any other Person with respect to any such assignment. Franchisee agrees that all such works referenced above shall belong to Franchisor and/or its Affiliates, and that all right, title, and interest therein, including any copyrights, shall be the sole and exclusive property of Franchisor and/or its Affiliates, except that Franchisee shall be entitled to use all such works at the FACILITY (if authorized by Franchisor) without charge by Franchisor. |
19.3 | Franchisee agrees to assist Franchisor in the evaluation, documentation, and registration of any such work described above. Franchisee also agrees to assist Franchisor in the documentation of such assignment in any way necessary to transfer such interest to Franchisor or its Affiliates. Franchisee also agrees to assist Franchisor in obtaining and maintaining such interest, including signing any assignment of rights, copyright application, power of attorney, or other document in such form and substance as Franchisor may require related to such work or interest. Franchisee further agrees to assist Franchisor in the protection and enforcement of any such interest, including testifying in any court action brought to enforce, protect, or defend such work. |
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20. | EXCLUSIVE RELATIONSHIP | |
20.1 | Franchisee acknowledges and agrees that Franchisor would be unable to (a) protect the Confidential Information against unauthorized use or disclosure; (b) preserve the prestige, integrity, and goodwill of the Products, Marks, and System; or (c) encourage the free exchange of ideas and information among Krispy Kreme Stores and Commissary Facilities if franchisees and owners of Krispy Kreme Stores and Commissary Facilities or their owners were permitted to engage in or benefit from certain competitive activities. Franchisee also acknowledges that Franchisor has granted the franchise rights to Franchisee in consideration of and reliance on Franchisees agreement that Franchisee and its Owners will deal exclusively with Franchisor. Therefore, except as expressly authorized by this Agreement or another written agreement with Franchisor, Franchisee agrees that during the term of this Agreement, without Franchisors prior written consent, neither Franchisee, nor any other Restricted Person will: | |
(i) | have any Ownership Interest in a Competitive Business; | |
(ii) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business; | |
(iii) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business, where such services (A) are substantially similar to those provided to Franchisor or Franchisor Affiliates by Franchisee or the respective Restricted Person; or (B) create a relationship between Franchisee or the Restricted Person and such Competitive Business in which Franchisee or the Restricted Person could be reasonably expected to benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any material Confidential Information to such Competitive Business; | |
(iv) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility, or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Franchisee to hire any such Person, then Franchisee agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | |
(v) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility as the case may be. | |
20.2 | At all times during the Term, Franchisee will designate a Managing Director of its business pursuant to this Agreement who shall complete Franchisors mandatory training program to Franchisors satisfaction. The initial Managing Director is identified in the Basic Terms. The Managing Director will use his or her full-time efforts to fulfill Franchisees obligations under this Agreement and under Franchise Agreements and any other Commissary Facility Agreements, and will not directly or indirectly engage in any other business or activity that requires any significant management responsibility or time commitments, or that otherwise conflicts with Franchisees obligations under this Agreement. If the Managing Director is terminated in that role, or if the Managing Director does not carry out his or her responsibilities or otherwise perform in accordance with this Agreement, Franchisee will promptly designate a replacement, and each such replacement shall complete Franchisors mandatory training program to Franchisors satisfaction. | |
21. | COMPLIANCE WITH LAW | |
21.1 | In operating the FACILITY, Franchisee agrees to comply with all laws, including, but not limited to, all federal, state, and local laws, rules, regulations, ordinances, court orders, and decrees. Franchisee agrees that its failure to comply with these laws is a material breach and grounds for termination of this Agreement. |
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21.2 | Franchisee and Franchisees Principal Owners represent and warrant to Franchisor that neither Franchisee nor any Principal Owner is identified, either by name or an alias, pseudonym or nickname, on the lists of Specially Designated Nationals or Blocked Persons maintained by the U.S. Treasury Departments Office of Foreign Assets Control. Further, Franchisee and Franchisees Principal Owners represent and warrant that neither has violated and agree that neither will violate any law (in effect now or which may become effective in the future) prohibiting corrupt business practices, money laundering or the aid or support of persons or entities who conspire to commit acts of terror against any person or government, including acts prohibited by the U.S. Patriot Act, U.S. Executive Order 13244, or similar law. |
22. | MARKETING AND ADVERTISING |
22.1 | Franchisor has established a fund (the Brand Fund) for the creation, production and/or implementation of advertising, promotional, marketing, and public relations programs and materials Franchisor deems appropriate. Franchisee agrees to contribute to the Brand Fund amounts (as determined by Franchisor from time to time) not more than one percent (1%) of the Net Sales of the FACILITY, payable by electronic funds transfer in the same manner as the Royalties. Krispy Kreme Stores and Commissary Facilities located in the U.S. and owned or operated by Franchisor shall contribute to the Brand Fund at least on the same basis. |
22.2 | Franchisor will direct all programs funded by the Brand Fund. Periodically, Franchisor may give Franchisee, at no cost, samples of advertising, marketing, and promotional formats and materials produced and funded by the Brand Fund. Franchisee may purchase additional copies of these materials at cost. |
22.3 | The Brand Fund will be accounted for separately from Franchisors other funds and will not be used to defray any of its general operating expenses, except for reasonable salaries, administrative costs and overhead Franchisor may incur in activities related to the administration of the Brand Fund and its programs, including conducting market research, preparing advertising and marketing materials and collecting and accounting for contributions to the Brand Fund. Franchisor may spend in any fiscal year an amount greater or less than the aggregate contributions of all Krispy Kreme Stores and Commissary Facilities to the Brand Fund in that year, and the Brand Fund may borrow from Franchisor or other lenders to cover deficits in the Brand Fund or cause the Brand Fund to invest any surplus for future use by the Brand Fund. |
22.4 | Franchisor will prepare annually a statement of monies collected and costs incurred by the Brand Fund and furnish Franchisee a copy upon Franchisees written request. Except as otherwise expressly provided in this Section 22, Franchisor assumes no direct or indirect liability or obligation with respect to the maintenance, direction or administration of the Brand Fund. Franchisor does not act as trustee or in any other fiduciary capacity with respect to the Brand Fund. |
22.5 | Franchisor may operate the Brand Fund through a separate entity whenever it deems appropriate. The successor entity will have all of the rights and duties specified in Sections 22.1 through 22.8. |
22.6 | Franchisor cannot ensure that Brand Fund expenditures in or affecting any geographic area are proportionate or equivalent to Brand Fund contributions by contributors operating in that geographic area or that any contributor benefits directly or in proportion to its Brand Fund contribution. |
22.7 | Franchisor has the right, but no obligation, to use collection agents and institute legal proceedings to collect Brand Fund contributions at the Brand Funds expense. Franchisor may also forgive, waive, settle and compromise any and all claims for contributions to the Brand Fund. Except as expressly provided in Sections 22.1 through 22.8, Franchisor assumes no direct or indirect liability or obligation to Franchisee for collecting amounts due to, maintaining, directing or administering the Brand Fund. |
22.8 | Franchisor may at any time defer or reduce the Brand Fund contributions of one or more franchisees and, upon thirty (30) days prior written notice to Franchisee, reduce or suspend Brand Fund contributions and operations for one or more periods of any length and terminate (and, if terminated, reinstate) the Brand |
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Fund. If Franchisor terminates the Brand Fund, it will distribute all unspent monies to its franchisees, and to Franchisor and its Affiliates, in proportion to their, and Franchisors, respective Brand Fund contributions during the preceding twelve (12) month period. | |
22.9 | Franchisee will not execute or conduct any advertising or promotional activity in relation to the FACILITY or the System without Franchisors prior written approval. Franchisee must submit annual marketing plans to Franchisor in a form Franchisor specifies. Such annual marketing plans require Franchisor approval. |
22.10 | [THIS SECTION HAS BEEN INTENTIONALLY DELETED] |
22.11 | [THIS SECTION HAS BEEN INTENTIONALLY DELETED] |
22.12 | Before Franchisee uses any advertising, promotional or marketing materials that Franchisor has not prepared or previously approved, Franchisee must send samples of all such materials to Franchisor for approval. If Franchisee does not receive Franchisors written approval within thirty (30) days after Franchisor receives the materials, they are deemed approved. Franchisee may not use any advertising, promotional, or marketing materials that Franchisor has disapproved. |
22.13 | Franchisee agrees that any advertising, promotion and marketing it conducts will be completely clear and factual and not misleading and conform to the highest standards of ethical marketing and the promotion policies and System Standards that Franchisor prescribes from time to time. |
22.14 | At Franchisors option, Franchisor may establish one or more websites to advertise, market, and promote Krispy Kreme Stores, the Products, and/or the Krispy Kreme franchise system (each a System Website). If Franchisor establishes a System Website, Franchisor may require Franchisee to participate in such System Website by including information relating to the FACILITY. Franchisor will control website traffic and registration of additional domain names. |
22.15 | Franchisee may not develop, maintain, or authorize any other website that mentions or describes Franchisee or the FACILITY or that displays any of the Marks without obtaining written approval from Franchisor. |
22.16 | [THIS SECTION HAS BEEN INTENTIONALLY DELETED] |
23. | ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS |
23.1 | Franchisee will, at Franchisees expense, retain all records relating to the development and operation of the FACILITY. All such records shall be kept at the premises of the FACILITY, unless Franchisor otherwise approves. Franchisee will furnish to Franchisor via the medium Franchisor prescribes from time to time, in a form consistent with its then-current accounting practices and procedures: (a) by each Reporting Day, reports of the FACILITYs sales, distribution of Products (including number of units and Stores to which distributed), cost of goods sold, labor expense and number of transactions for the preceding Week; (b) within thirty (30) days after the end of each month, an operating income statement of Franchisee, the FACILITY, or both for such month and fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied; (c) within forty-five (45) days after the end of each fiscal quarter, a balance sheet and income statement of Franchisee, the FACILITY, or both for such quarter and fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied; (d) within one hundred twenty days (120) days after the end of Franchisees fiscal year, a balance sheet and an income statement for the FACILITY and/or Franchisee for such fiscal year (reflecting all year-end adjustments), and a statement of cash flow of the FACILITY, prepared in accordance with generally accepted accounting principles consistently applied; and (e) upon request by Franchisor, such other data, reports, information and supporting records as Franchisor may from time to time prescribe. |
23.2 | Franchisee agrees to maintain and to furnish to Franchisor, upon request, complete copies of all withholding, income, sales, value added, use and service tax returns filed by Franchisee reflecting activities of the FACILITY. |
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23.3 | Franchisor has the right to (a) disclose data derived from all reports; (b) require Franchisee to have audited financial statements prepared on an annual basis; and (c) to access all cash registers/computer terminals and Franchisees Computer System and retrieve all information relating to the FACILITY, as often as it deems appropriate. Franchisee will take such action as may be necessary to provide such access to Franchisor. Furthermore, Franchisee will immediately report to Franchisor any events or developments which may have a significant or material adverse impact on the operation of the FACILITY, Franchisees performance under this Agreement, or the goodwill associated with the Marks and Krispy Kreme Stores. Franchisee will sign and verify as correct and complete each report and financial statement submitted by Franchisee in the manner prescribed by Franchisor. |
23.4 | Each year, Franchisor requires that Franchisee submit an annual business plan for Franchisors review. Further, Franchisor has the right to audit at any time during regular business hours, and without prior notice to Franchisee, to inspect and audit, or cause to be inspected and audited, the business, financial and tax records of the FACILITY and Franchisee. Franchisee will fully cooperate and cause its employees and agents to fully cooperate with Franchisors representatives and independent accountants hired by Franchisor to conduct any such inspection or audit. Franchisors right to audit includes the right to access the Computer System. In the event any such inspection or audit reveals an understatement of the Net Sales of the FACILITY, Franchisee will pay to Franchisor, within fifteen (15) days after receipt of the inspection or audit report, the Royalty payments and Brand Fund contributions due on the amount of such understatement, plus interest (at the rate and on the terms provided in this Agreement) from the date originally due until the date of payment. Further, in the event such inspection or audit is made necessary by Franchisees failure to furnish timely any reports or supporting records required to be submitted under this Agreement or if an understatement of Net Sales for the period of any audit is determined by any such audit or inspection to be greater than two percent (2%), Franchisee will reimburse Franchisor for the cost of such inspection or audit, including legal fees, accountants fees and the travel expenses, room and board, per diem charges, and other associated expenses for Franchisors employees. The foregoing remedies are in addition to all other remedies and rights contained in this Agreement or under applicable law. |
24. | TRANSFER |
24.1 | This Agreement is fully transferable by Franchisor (without any obligation to provide notice to Franchisee or obtain Franchisees consent) and will inure to the benefit of any assignee or other legal successor to Franchisors interests. Franchisee agrees that Franchisor will have the right, from time to time, to delegate the performance of any portion of or all of its obligations and duties under this Agreement or otherwise in connection with the System to designees, whether the same are Franchisors agents or independent contractors with which Franchisor has contracted to provide such services or perform such duties. |
24.2 | Franchisees rights and duties under this Agreement are personal to Franchisee, or if Franchisee is a business corporation, partnership, limited liability company or any other legal entity, its Owners. Accordingly, neither Franchisee nor any of its Owners may Transfer the Franchise without Franchisors prior approval and without complying with the terms and conditions of Section 24. Any Transfer without such approval or compliance constitutes a breach of this Agreement, and is void and of no force or effect. Notwithstanding the foregoing, Franchisee may not under any circumstances directly or indirectly subfranchise or sublicense any of its rights hereunder. |
24.3 | If Franchisor has not exercised its right of first refusal under Section 24.5, Franchisor will not unreasonably withhold its approval of a Transfer of the Franchise that meets all of the reasonable restrictions, requirements and conditions Franchisor imposes on the Transfer, the transferor(s) and/or the transferee(s) from time to time, which shall in any event include, the following: |
(a) | Franchisee must be in Good Standing; | |
(b) | the proposed transferee and its owners (if the proposed transferee is a corporation, partnership, limited liability company or other legal entity) must provide Franchisor on a timely basis all information Franchisor requests, and must be individuals acting in their individual capacities |
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who are of good character and reputation, who must have sufficient business experience, aptitude and financial resources to operate the FACILITY pursuant to this Agreement and to develop Krispy Kreme Stores and Commissary Facilities pursuant to the Development Agreement, if applicable, and who must otherwise meet Franchisors then-current standards for approval; | ||
(c) | the proposed transferee may not be an entity, or be affiliated with an entity, that is required to comply with the reporting and information requirements of the Securities Exchange Act of 1934, as amended; | |
(d) | the transferee (and its owners) must agree to be bound by all of the provisions of this Agreement for the remainder of the Term or, at Franchisors option, execute Franchisors then current Commissary Facility Agreement and related documents used in the state where the FACILITY is located (which may provide for different royalties, advertising contributions, duration and other rights and obligations than those provided in this Agreement); | |
(e) | the transferee must acquire, in a concurrent transaction, all of the rights and obligations of Franchisee and its Affiliates under all agreements between Franchisee or its Affiliates and Franchisor or its Affiliates, including any Development Agreement and all Franchise Agreements and Commissary Facility Agreements executed by Franchisee or its Affiliates pursuant to the Development Agreement or pursuant to any other development or similar agreement with Franchisor; | |
(f) | Franchisee or the transferee must pay Franchisor a transfer fee in an amount equal to Five Thousand Dollars ($5,000.00); | |
(g) | Franchisee and its Owners and Affiliates must, except to the extent limited or prohibited by applicable law, execute a general release, in form and substance satisfactory to Franchisor, of any and all claims against Franchisor, its Affiliates and shareholders, members, managers, officers, directors, employees, agents, successors and assigns; | |
(h) | Franchisee must provide Franchisor with all information requested by Franchisor in connection with the Transfer, and Franchisor must not have disapproved the material terms and conditions of such Transfer (including the price and terms of payment and the amount to be financed by the transferee in connection with such Transfer) on the basis that they are so burdensome as to be likely, in Franchisors reasonable judgment, to adversely affect the transferees operation of the FACILITY or its compliance with this Agreement, all Franchise Agreements, Commissary Facility Agreements, and Development Agreements being transferred and any other agreements to be executed by the transferee; | |
(i) | If Franchisee (or any of its Owners or Affiliates) finances any part of the sales price of the transferred interest, Franchisee and/or its Owners or Affiliates must agree that all obligations of the transferee, and security interests reserved by any of them in the assets transferred, will be subordinate to the transferees obligations to pay all amounts due Franchisor and its Affiliates and to otherwise comply with this Agreement, all Franchise Agreements, Commissary Facility Agreements, and Development Agreements being transferred and any other agreements to be executed by the transferee; | |
(j) | Franchisee and its Owners must execute non-competition and non-solicitation covenants, in form and substance satisfactory to Franchisor, substantially similar to those contained in Section 27.3; and | |
(k) | Franchisee and its Owners and Affiliates must execute such other documents and do such other things as Franchisor reasonably requires to protect its rights under this Agreement and all Development Agreements, Franchise Agreements, Commissary Facility Agreements and other agreements being transferred. |
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24.4 | Franchisors approval of a Transfer of the Franchise does not constitute: (a) a representation as to the fairness of the terms of any agreement or arrangement between Franchisee or its Owners and the transferee or as to the prospects for success by the transferee; or (b) a release of Franchisee and its Owners, a waiver of any claims against Franchisee or its Owners or a waiver of Franchisors right to demand the transferees compliance with this Agreement or any other agreements being transferred. Any approval shall apply only to the specific Transfer of the Franchise being proposed and shall not constitute Franchisors approval of, or have any bearing on, any other proposed Transfer of the Franchise. |
24.5 | If Franchisee or any of its Owners desires to Transfer the Franchise (other than by gift or bequest), Franchisee or such Owners must obtain a bona fide, executed written offer from a responsible and fully disclosed purchaser (which must contain a confidentiality covenant by Franchisee and the prospective buyer to which Franchisor shall be an intended third party beneficiary) and must deliver immediately to Franchisor a complete and accurate copy of such offer. If the offeror proposes to buy any other property or rights from Franchisee or any of its Owners or Affiliates (other than rights under any Development Agreements, Franchise Agreements or Commissary Facility Agreements) as part of the bona fide offer, the proposal for such property or rights must be set forth in a separate, contemporaneous offer that is fully disclosed to Franchisor, and the price and terms of purchase offered to Franchisee or its Owners for the Transfer of the Franchise must reflect the bona fide price offered therefor and not reflect any value for any other property or rights. |
24.6 | Franchisor has the option, exercisable by notice delivered to Franchisee or its Owners within thirty (30) days from the date of delivery of a complete and accurate copy of such offer to Franchisor, to purchase such interest for the price and on the terms and conditions contained in such offer, provided that: (a) Franchisor may substitute cash for any form of payment proposed in such offer; (b) Franchisors credit shall be deemed equal to the credit of any proposed purchaser; (c) Franchisor shall have not less than ninety (90) days from the option exercise date to consummate the transaction; and (d) Franchisor shall not be required to pay deposits (such as earnest money) or to escrow funds prior to closing. Franchisor has the right to investigate and analyze the business, assets and liabilities and all other matters Franchisor deems necessary or desirable in order to make an informed investment decision with respect to the fairness of the terms of the right of first refusal. Franchisor may conduct such investigation and analysis in any manner Franchisor deems reasonably appropriate, and Franchisee and its Owners must cooperate fully with Franchisor in connection therewith. |
24.7 | If Franchisor exercises its option to purchase, Franchisor is entitled to purchase such interest subject to all representations and warranties, closing documents, releases, non-competition covenants and indemnities as Franchisor reasonably may require, provided if Franchisor exercises its option as a result of a written offer reflected in a fully negotiated definitive agreement with the proposed purchaser, Franchisor will not be entitled to any additional representations, warranties, closing documents or indemnities that will have a materially adverse effect on Franchisees rights and obligations under the definitive agreement. |
If Franchisor does not exercise its option to purchase, Franchisee or its Owners may complete the sale to such offeror pursuant to and on the exact terms of such offer, subject to Franchisors approval of the Transfer as provided in Sections 24.2 and 24.3, provided that if the sale to such offeror is not completed within ninety (90) days after delivery of such offer to Franchisor, or if there is a change in the terms of the offer, Franchisee must promptly notify Franchisor and Franchisor shall have an additional option to purchase (on the terms of the revised offer, if any, and otherwise as set forth herein) during the thirty (30)-day period following Franchisees notification of the expiration of the ninety (90)-day period or the change to the terms of the offer. | |
24.8 | Neither Franchisee nor any of its Owners or Affiliate may issue or sell, or offer to issue or sell, any of Franchisees securities or any securities of any of its Affiliates, regardless of whether such sale or offer would be required to be registered pursuant to the provisions of the Securities Act of 1933, as amended, or the securities laws of any other jurisdiction and regardless of the means by which such sale is conducted, directly or indirectly, or by operation of law (including by merger, consolidation, reorganization or otherwise) without obtaining Franchisors prior consent and complying with all of its requirements |
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and restrictions concerning use of information about Franchisor and its Affiliates. Neither Franchisee nor any of its Owners or Affiliates may issue or sell Franchisees securities or the securities of any of its Affiliates if: (1) such securities would be required to be registered pursuant to the Securities Act of 1933, as amended, or such securities would be owned by more than 35 persons; or (2) after such issuance or sale, Franchisee or such Affiliate would be required to comply with the reporting and information requirements of the Securities Exchange Act of 1934, as amended. Any memorandum or other communications circulated in connection with any solicitation of offers to purchase that would require Franchisors consent to Transfer the Franchise (through whatever form of transaction, whether through direct or indirect sale of assets or securities, by operation of law or otherwise) shall be subject to approval by Franchisor. | ||
25. | SUCCESSOR FRANCHISE | |
25.1 | Upon expiration of the Term, Franchisor will grant Franchisee a successor franchise on Franchisors then-current terms if Franchisee and each of its Owners and Affiliates are in full compliance with the provisions of this Agreement and any other agreements with Franchisor or any of its Affiliates, and provided that the following conditions are met: | |
(a) | Franchisee needs to continue to operate the Facility to support its Hot Shops, Fresh Shops and / or Kiosks, maintains possession of the Site and agrees to upgrade the FACILITY to Franchisors then-current standards for Commissary Facilities; | |
(b) | If Franchisee is unable to maintain possession of the Site, or if in Franchisors judgment the FACILITY should be relocated, and Franchisee secures a substitute site approved by Franchisor, Franchisee develops such site in compliance with Franchisors then-current standards for Commissary Facilities, and continues to operate the FACILITY at the Site until operations are transferred to the substitute site; | |
(c) | Franchisee gives Franchisor written notice of its election to acquire a successor franchise at least six (6) months but not more than twelve (12) months prior to the expiration of the term of the Franchise; | |
(d) | Franchisee and its Owners and Affiliates are then in compliance with all of the terms and conditions of this Agreement and all other agreements between such parties and Franchisor and its Affiliates, and have been in substantial compliance with all such agreements throughout their respective terms; | |
(e) | Franchisee and its Owners will execute the terms and conditions of the agreements Franchisor then customarily uses in connection with the grant of successor franchises for Commissary Facilities in the state where the FACILITY is located; and | |
(f) | Franchisee and its Owners and Affiliates will execute and deliver general releases, in form and substance satisfactory to Franchisor, of any and all claims against Franchisor and its Affiliates, shareholders, officers, directors, employees, agents, successors, and assigns. | |
25.2 | Once Franchisor receives notice from Franchisee in accordance with Section 25.1(c) above, Franchisor will give Franchisee notice, within ninety (90) days after Franchisors receipt of Franchisees notice and any supporting information requested by Franchisor, of Franchisors decision: (a) to grant Franchisee a successor franchise; (b) to grant Franchisee a successor franchise on the condition that deficiencies of the FACILITY, and/or in its operation of the FACILITY, or such other matters as Franchisor may indicate are deficient in its sole discretion are corrected; or (c) not to grant Franchisee a successor franchise. If Franchisors notice states that Franchisee must cure certain deficiencies of the FACILITY, its operation or otherwise as a condition to the grant of a successor franchise, Franchisee will have thirty (30) days from the receipt of such notice to cure such deficiencies. If Franchisee does not cure such deficiencies, Franchisor will give Franchisee written notice of a decision not to grant a successor franchise, based upon Franchisee failure to cure such deficiencies, within thirty (30) days after the expiration of the cure period, |
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provided, however, that Franchisor will not be required to give Franchisee such notice if Franchisor decides not to grant Franchisee a successor franchise due to Franchisees breach of this Agreement during the cure period or the thirty (30) day period thereafter. | |
26. | TERMINATION OF FRANCHISE |
26.1 | Franchisee is in material breach of this Agreement, and this Agreement will automatically terminate without notice, at Franchisors discretion, if: (a) Franchisee becomes insolvent by reason of its inability to pay its debts as they mature; (b) Franchisee is adjudicated bankrupt or insolvent; (c) Franchisee files a petition in bankruptcy, reorganization or similar proceeding under the bankruptcy laws of the United States or has such a petition filed against Franchisee, which is not discharged within thirty (30) days; (d) a receiver or other custodian, permanent or temporary, is appointed for Franchisees business, assets or property; (e) Franchisee requests the appointment of a receiver or makes a general assignment for the benefit of creditors; (f) a final judgment against Franchisee in the amount of Fifty Thousand Dollars ($50,000.00) or more remains unsatisfied of record for sixty (60) days or longer; (g) Franchisees bank accounts, property or accounts receivable are attached; (h) execution is levied against Franchisees business or property; (i) suit is filed to foreclose any lien or mortgage against any of Franchisees assets and such suit is not dismissed within thirty (30) days; (j) Franchisee voluntarily dissolves or liquidates or has a petition filed for corporate or partnership dissolution and such petition is not dismissed within thirty (30) days; or (k) Franchisees assets, property or interest are blocked under any law, ordinance or regulation relating to terrorist activities or if Franchisee is otherwise in violation of any such law, ordinance or regulation. |
26.2 | In addition to Franchisors right to terminate pursuant to other provisions of this Agreement and under applicable law, Franchisor has the right to terminate this Agreement, effective upon delivery of notice of termination to Franchisee, if Franchisee or any of its Principal Owners or Affiliates: |
(a) | opens the FACILITY in violation of Section 11.1; | |
(b) | abandons or fails actively to operate the FACILITY for five (5) consecutive days, unless a closing of the FACILITY has been approved by Franchisor; | |
(c) | makes any material misstatement or omission in the Franchise Application or in any other information, report, or summary provided to Franchisor at any time; | |
(d) | suffers cancellation or termination of the lease or sublease for the FACILITY; | |
(e) | is convicted of, or pleads no contest to, a felony or other crime or offense that Franchisor believes, in its sole judgment, may adversely affect the System or the goodwill associated with the Marks; | |
(f) | makes an unauthorized Transfer of the Franchise; | |
(g) | makes any unauthorized use or disclosure of any Confidential Information or uses, duplicates or discloses any portion of the System Standards Manuals in violation of this Agreement; | |
(h) | fails or refuses to comply with any mandatory specification, standard, or operating procedure prescribed by Franchisor relating to the cleanliness or sanitation of the FACILITY or violates any applicable health, safety or sanitation law, ordinance or regulation that Franchisor in its sole judgment believes may pose harm to the public or to its reputation, and does not correct such failure, refusal or violation within 24 hours after written notice thereof is delivered to Franchisee; | |
(i) | fails to report accurately Net Sales, to establish, maintain and/or have sufficient funds available in the Account as required by Section 13.3 or fails to make payment of any amounts due Franchisor or any of its Affiliates, and does not correct such failure within ten (10) days after written notice of such failure is delivered to Franchisee; |
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(j) | fails to make a timely payment of any amount due to a supplier unaffiliated with Franchisor (other than payments which are subject to bona fide dispute), and does not correct such failure within thirty (30) days after Franchisor delivers to Franchisee notice of such failure to comply; | |
(k) | fails to comply with any other provision of this Agreement or any other mandatory specification, standard or operating procedure or other obligation prescribed in the System Standards Manuals and does not correct such failure within thirty (30) days after notice of such failure to comply is delivered to Franchisee; or | |
(l) | fails on three (3) or more separate occasions within any period of twelve (12) consecutive months to submit when due reports or other data, information or supporting records or to pay when due Royalties, Brand Fund contributions or other payments due Franchisor, any of its Affiliates or any unaffiliated suppliers or otherwise fails to comply with this Agreement or any mandatory specification, standard or operating procedure or other obligation prescribed in the System Standards Manuals, whether or not such failure is corrected after notice is delivered to Franchisee. | |
26.3 | Franchisor has the option, but not the obligation, to cure any of Franchisees default under Section 26.2. If Franchisor chooses to exercise such option, then within five (5) days of the date Franchisor sends Franchisee notice of Franchisors expenses incurred in curing Franchisees default, Franchisee shall reimburse Franchisor for all such expenses. | |
27. | EFFECT OF TERMINATION OR EXPIRATION | |
27.1 | Within ten (10) days after the effective date of termination or expiration (without renewal) of this Agreement, Franchisee must pay Franchisor and its Affiliates all Royalties, Brand Fund contributions, amounts owed for purchases from Franchisor or its Affiliates, interest due on any of the foregoing and all other amounts owed to Franchisor or its Affiliates which are then unpaid. | |
27.2 | Upon the termination or expiration (without renewal) of this Agreement, Franchisee will: | |
(a) | not directly or indirectly at any time or in any manner use any Mark; any colorable imitation of any Mark or any other indicia of a Krispy Kreme Store or Commissary Facility; | |
(b) | take such action as may be required to cancel all fictitious or assumed name registrations relating to Franchisees use of any Mark; | |
(c) | notify the telephone company and all telephone directory publishers of the termination or expiration of Franchisees right to use any telephone number and any regular, classified or other telephone directory listings associated with any Mark and to authorize transfer of the number to Franchisor or at its direction; | |
(d) | if Franchisor does not exercise its option to purchase the FACILITY pursuant to Section 27.5, promptly remove from the Site, and discontinue using for any purpose, all signs, fixtures, furniture, decor items, advertising materials, forms and other materials and supplies which display any of the Marks or any distinctive features, images, or designs associated with Krispy Kreme Stores or Commissary Facilities, at Franchisees expense, make such alterations as may be necessary to distinguish the Site so clearly from its former appearance as a Commissary Facility as to prevent any possibility of confusion by the public; | |
(e) | immediately cease to use all Confidential Information and return to Franchisor all copies of the System Standards Manuals and any other confidential materials which have been loaned to Franchisee; | |
(f) | immediately discontinue any mode of communications on the Internet directly or indirectly relating to the FACILITY, including any websites or web pages, and immediately take all steps required by Franchisor to transfer to Franchisor any domain name associated with the FACILITY |
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(such as executing a registrant name change agreement with the applicable registrar). Franchisee irrevocably appoints an authorized officer of Franchisor as Franchisees duly authorized agent and attorney-in-fact to execute all instruments and take all steps to transfer such domain names; | ||
(g) | immediately discontinue the use of any proprietary software; and | |
(h) | within thirty (30) days after the effective date of termination or expiration, furnish evidence satisfactory to Franchisor of Franchisees compliance with the foregoing obligations. | |
27.3 | Upon termination or expiration (without renewal) of this Agreement, neither Franchisee nor any Restricted Person will, for a period of two (2) years commencing on the effective date of such termination or expiration or the date on which Franchisee ceases to conduct its activities under this Agreement, whichever is later: | |
(a) | have any Ownership Interest in a Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility then open or under construction; | |
(b) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility open or under construction on the effective date of termination or expiration; | |
(c) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility then open or under construction, where such services: (i) are substantially similar to those provided to Franchisor or Franchisor Affiliates by Franchisee or the respective Restricted Person; or (ii) create a relationship between Franchisee or the Restricted Person and such Competitive Business in which Franchisee or the Restricted Person could be reasonably expected to benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any Confidential Information to such Competitive Business; | |
(d) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility, or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Franchisee to hire any such Person, then Franchisee agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | |
(e) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility as the case may be. | |
Franchisee and each of its Owners expressly acknowledges the possession of skills and abilities of a general nature and other opportunities for exploiting such skills in other ways, so that enforcement of the covenants contained in Section 27.3 will not deprive any of them their personal goodwill or ability to earn a living. If Franchisee or any of its Owners fails or refuses to abide by any of the foregoing covenants and Franchisor obtains enforcement in a judicial or arbitration proceeding, the obligations under the breached covenant will be tolled during the period(s) of time that the covenant is breached and/or Franchisor seeks to enforce it and will continue in effect for a period of time ending two (2) years after the date of the order enforcing the covenant. | ||
27.4 | Upon termination or expiration (without renewal) of this Agreement, Franchisor shall have the right, exercisable by giving notice thereof within thirty (30) days after the date of such termination or expiration, to purchase (and, if necessary, take possession of and remove from the Site) any and all equipment used or useable at the FACILITY (including all equipment that contains or embodies patents |
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owned by Franchisor or any of its Affiliates) at its net book value, determined in accordance with generally accepted accounting principles, consistently applied. This right is separate and apart from Franchisors rights under Section 27.5. | |
27.5 | Upon termination or expiration (without renewal) of this Agreement, Franchisor shall have the right, exercisable by giving notice thereof (Appraisal Notice) within thirty (30) days after the date of such termination or expiration, to require that a determination be made of the Fair Market Value (as defined below) of any or all of the assets of the FACILITY which Franchisee owns, including inventory of non-perishable products, materials, supplies, furniture, equipment, signs, and any and all leasehold improvements, fixtures, building and land, but excluding any cash and short-term investments and any items not meeting Franchisors specifications for Commissary Facilities (the Purchased Assets). Notwithstanding the foregoing, if Franchisee notifies Franchisor not less than one hundred eighty (180) days nor more than two hundred seventy (270) days prior to the expiration of this Agreement that Franchisee does not desire to enter into a successor franchise agreement on expiration, then Franchisor agrees, if Franchisor desires to exercise its right to purchase, to give Franchisee the Appraisal Notice at least one hundred twenty (120) days prior to the date of expiration of this Agreement. |
27.6 | Upon delivery of the Appraisal Notice, Franchisee may not sell or remove any of the assets of the FACILITY from the Premises (other than in the ordinary course of business) and must give Franchisor, its designated agents and the Appraisers (as defined below) full access to the FACILITY and all of Franchisees books and records at any times during customary business hours in order to conduct inventories and determine the purchase price for the Purchased Assets. |
27.7 | The Fair Market Value shall be defined as the amount at which an arms length purchaser would be willing to pay for the Purchased Assets, assuming that the Purchased Assets would be used for the operation of a Commissary Facility under a valid franchise agreement reflecting the then-current (or if Franchisor is not offering franchises at that time, then the most recent) standard terms upon which Franchisor offers franchises for Commissary Facilities. Under no circumstances will any value be attributed to any goodwill associated with the Marks or any value attributed to the System (all of which Franchisee acknowledges to be owned by Franchisor and its Affiliates). In the first instance, Fair Market Value shall be determined by consultation between Franchisor and Franchisee. If Franchisee and Franchisor are unable to agree on the Fair Market Value of the Purchased Assets within fifteen (15) days after the Appraisal Notice, then Fair Market Value will be determined by calculating the mean average of three (3) separate appraisals done by three (3) independent appraisers (Appraisers). Franchisor and Franchisee shall each designate one (1) Appraiser within thirty (30) days of the Appraisal Notice and the two (2) Appraisers so designated will select a third (3rd) Appraiser within ten (10) days thereafter. If the two designated Appraisers are unable to select a third (3rd) Appraiser within such ten (10) days, then the third (3rd) Appraiser shall be selected, on demand of either party, by the director of the Regional Office of the American Arbitration Association located nearest to Winston-Salem, North Carolina. |
27.8 | Each Appraiser will make his or her determination and submit a written report (Appraisal Report) to Franchisee and Franchisor as soon as practicable, but in no event more than thirty (30) days after his or her appointment. Each party may submit in writing to the Appraisers its judgment of Fair Market Value (together with its reasons therefor and with copies to each other); however, the Appraisers shall not be limited to these submissions and may make such independent investigations as they reasonably determine to be necessary. The Appraisers fees and costs shall be borne equally by the parties. |
27.9 | Franchisor has the option, exercisable by delivering notice thereof within thirty (30) days after submission of the last Appraisal Report (or the date that an agreement is reached, if the parties agree to the Fair Market Value), to agree to purchase the Purchased Assets at the Fair Market Value, as so determined. Franchisor shall have the unrestricted right to assign this option to purchase separate and apart from the remainder of this Agreement. |
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27.10 | If Franchisor exercises its option to purchase, the purchase price for the Purchased Assets will be paid in cash at the closing, which will occur at the place, time and date Franchisor designates, but not later than sixty (60) days after the exercise of Franchisors option to purchase the Purchased Assets. At the closing, Franchisor will be entitled to all representations, warranties, covenants, title insurance policies and other closing documents and post-closing indemnifications and hold-backs as Franchisor reasonably requires, including: (a) instruments transferring good and marketable title to the Purchased Assets, free and clear of all liens, encumbrances, and liabilities, to Franchisor or its designee, with all sales and other transfer taxes paid by Franchisee; (b) an assignment of all leases of assets used in the operation of the FACILITY, including land, building and/or equipment (or if an assignment is prohibited, a sublease to Franchisor or its designee for the full remaining term and on the same terms and conditions as Franchisees lease, including renewal and/or purchase options), provided, however, that if any of Franchisees Owners or Affiliates directly or indirectly owns the land, building and/or equipment of the FACILITY, Franchisee will, at Franchisors option, cause such Owner or Affiliate to grant to Franchisor a lease at reasonable and customary rental rates and other terms prevailing in the community where the FACILITY is located; and (c) a general release by Franchisee and its Owners and Affiliates in form and substance satisfactory to Franchisor. |
27.11 | If Franchisee cannot deliver clear title to all of the Purchased Assets, or if there are other unresolved issues, the closing of the sale may, at Franchisors option, be accomplished through an escrow on such terms and conditions as Franchisor deems appropriate, including the making of payments, to be deducted from the purchase price, directly to third parties in order to obtain clear title to all of the Purchased Assets. Further, Franchisee and Franchisor shall comply with any applicable Bulk Sales provisions of the Uniform Commercial Code as enacted in the state where the FACILITY is located and all applicable state and local sales and income tax notification and/or escrow procedures. Franchisor has the right to set off against and reduce the purchase price by any and all amounts owed by Franchisee or any of its Owners or Affiliates to Franchisor or any of its Affiliates. |
27.12 | Upon delivery of the Appraisal Notice and pending (a) determination of Fair Market Value, (b) Franchisors option period, and (c) the closing of the purchase, Franchisor may authorize continued temporary operations of the FACILITY pursuant to the terms of this Agreement, subject to the supervision and control of one or more of Franchisors appointed managers. |
27.13 | Franchisors exercise of any of its rights under Section 27 will be in addition to and not in limitation of any other rights and remedies it may have in the event of any breach or default by Franchisee. |
27.14 | All the obligations of Franchisee and its Owners and Affiliates under this Agreement, which expressly or by their nature survive or are intended to survive the termination or expiration of this Agreement, will continue in full force and effect subsequent to and notwithstanding the termination or expiration until they are satisfied in full or by their nature expire. |
28. | RELATIONSHIP OF PARTIES/INDEMNIFICATION |
28.1 | Neither this Agreement nor the dealings of the parties pursuant to this Agreement shall create any fiduciary relationship or any other relationship of trust or confidence between the parties hereto. Franchisor and Franchisee, as between themselves, are and shall be independent contractors. |
28.2 | Franchisee understands and agrees that Franchisor may operate and change the System and its business in any manner that is not expressly and specifically prohibited by this Agreement. Whenever Franchisor has expressly reserved in this Agreement or is deemed to have a right and/or discretion to take or withhold an action, or to grant or decline to grant Franchisee a right to take or withhold an action, except as otherwise expressly and specifically provided in this Agreement, Franchisor may make its decision or exercise its right and/or discretion on the basis of its judgment of what is in its best interests, including its judgment of what is in the best interests of its franchise network, at the time its decision is made or its right or discretion is exercised, without regard to whether: (a) other reasonable alternative decisions or actions could have been made by Franchisor; (b) Franchisors decision or action promotes its financial or other individual interest; (c) Franchisors decision or action applies differently to Franchisee and one |
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or more other franchisees or its company-owed operations; or (d) Franchisors decision or the exercise of its right or discretion is adverse to Franchisees interests. In the absence of an applicable statute, Franchisor will have no liability to Franchisee for any such decision or action. The parties intend that the exercise of Franchisors right or discretion will not be subject to limitation or review. If applicable law implies a covenant of good faith and fair dealing in this Agreement, the parties agree that such covenant shall not imply any rights or obligations that are inconsistent with a fair construction of the terms of this Agreement and that this Agreement grants Franchisor the right to make decisions, take actions and/or refrain from taking actions not inconsistent with Franchisees rights and obligations hereunder. Nothing contained in this Agreement, nor arising from the conduct of the parties hereunder, is intended to make either party a general or special agent, joint venturer, partner or employee of the other for any purpose whatsoever. Franchisee must conspicuously identify itself in all dealings with customers, lessors, contractors, suppliers, public officials, employees and others as the owner of the rights granted hereunder and must place such other notices of independent ownership on such forms, business cards, stationery, advertising and other materials as we may require from time to time. Franchisee is solely responsible for all employment decisions with respect to its personnel, including hiring, firing, compensation, training, supervision and discipline, and regardless whether Franchisee receives advise from Franchisor on any of these subjects. | |
28.3 | Franchisee may not make any express or implied agreements, warranties, guarantees or representations or incur any debt in Franchisors name or on its behalf or represent that the relationship of the parties hereto is anything other than that of independent contractors. Franchisor will not be obligated by or have any liability under any agreements made by Franchisee with any third party or for any representations made by Franchisee to any third party. Franchisor will not be obligated for any damages to any person or property arising directly or indirectly out of the operation of Franchisees business hereunder. |
28.4 | Franchisor will have no liability for any sales, use, service, occupation, excise, gross receipts, income, property or other taxes, whether levied upon Franchisee or the FACILITY, in connection with the business Franchisee conducts (except for taxes Franchisor is required by law to collect from Franchisee with respect to purchases from Franchisor). Payment of all such taxes is Franchisees responsibility. |
28.5 | Franchisor agrees to indemnify Franchisee against, and to reimburse Franchisee for, all damages for which Franchisee is held liable as a result of a claim that Franchisees authorized use of any Mark or of any of Franchisors other intellectual property rights pursuant to and in full compliance with this Agreement infringes on the rights of another person and, except as provided herein, for all costs Franchisee reasonably incurs in defending any such claim brought against Franchisee, provided that Franchisee has timely notified Franchisor of such claim and provided further that Franchisee and Franchisees Principal Owners and Affiliates are in full compliance with this Agreement and with all other agreements entered into with Franchisor or any of its Affiliates. HDN Development Corporation or its agent or assignee, at its sole discretion, is entitled to prosecute, defend and/or settle any such proceeding arising out of Franchisees use of any Mark or other intellectual property right pursuant to this Agreement and, if HDN Development Corporation or its agent or assignee undertakes to prosecute, defend and/or settle any such matter, Franchisor, HDN Development Corporation or its agent or assignee, has no obligation to indemnify or reimburse Franchisee for any fees or disbursements of any legal counsel retained by Franchisee. |
28.6 | Franchisee agrees to indemnify Franchisor, its Affiliates and their respective directors, officers, employees, shareholders, members, managers, agents, successors and assigns (collectively Indemnified Parties), and to hold the Indemnified Parties harmless to the fullest extent permitted by law, from any and all losses and expenses (as defined below) incurred in connection with any litigation or other form of adjudicatory procedure, claim, demand, investigation, or formal or informal inquiry (regardless of whether it is reduced to judgment) or any settlement thereof which arises directly or indirectly from, or as a result of, a claim of a third party against any one or more of the Indemnified Parties, including those in connection with (a) Franchisees failure to perform or breach of any covenant, agreement, term or provision of this Agreement, (b) Franchisees breach of any representation or warranty contained in this Agreement, (c) |
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Franchisees marketing, promotion, advertisement or sale of any of the products and services offered by the FACILITY, including unfair or fraudulent advertising claims (whether in print advertising, electronic media or otherwise), and product liability claims, (d) Franchisees development, ownership, operation and/or closing of the FACILITY, (e) Franchisees failure to pay any amounts owed to a supplier, (f) claims by Franchisees employees (including workers or unemployment compensation), (g) personal injury claims, (h) Franchisees failure to comply with any law, and (i) any allegedly unauthorized service or act, rendered or performed in connection with this Agreement, (collectively Event) and regardless of whether it resulted from any strict or vicarious liability imposed by law on the Indemnified Parties. The foregoing indemnity shall apply even if it is determined that the Indemnified Parties negligence caused such loss, liability or expense, in whole or in part, provided, however, that this indemnity will not apply to any liability arising from a breach of this Agreement by Franchisor or with respect to any Indemnified Party whose gross negligence or willful acts caused such liability (except to the extent that joint liability is involved, in which event the indemnification provided herein will extend to any finding of comparative or contributory negligence attributable to Franchisee). The term losses and expenses includes compensatory, exemplary, and punitive damages; fines and penalties; attorneys fees; experts fees; court costs; costs associated with investigating and defending against claims; settlement amounts; judgments; compensation for damages to our reputation and goodwill; and all other costs associated with any of the foregoing losses and expenses. Franchisor agrees to give Franchisee reasonable notice of any event of which Franchisor becomes aware for which indemnification may be required, and Franchisor may elect (but is not obligated) to direct the defense thereof, provided that the selection of counsel shall be subject to Franchisees consent, which consent shall not be unreasonably withheld or delayed. Franchisor may, in its reasonable discretion, take such actions as Franchisor deems necessary and appropriate to investigate, defend, or settle any Event or take other remedial or corrective actions with respect thereto as may be necessary for the protection of the Indemnified Parties or Krispy Kreme Stores generally, provided however, that any settlement (to the extent payment is made by Franchisee) shall be subject to Franchisees consent, which consent shall not be unreasonably withheld or delayed. Further, notwithstanding the foregoing, if the insurer on a policy or policies obtained in compliance with this Agreement agrees to undertake the defense of an Event (an Insured Event), Franchisor agrees not to exercise its right to select counsel to defend the Event if such would cause Franchisees insurer to deny coverage. Franchisor reserves the right to retain counsel to represent Franchisor with respect to an Insured Event at Franchisors sole cost and expense. | |
28.7 | In furtherance of the indemnity contained in Section 28.6, during the Term, Franchisee agrees to maintain commercial general liability insurance, product liability coverage, automobile liability insurance, workers compensation insurance, employers liability insurance and any other insurance policies as Franchisor may require from time to time, insuring Franchisee and the Indemnified Parties against the matters described in Section 28.6, including claims for bodily and personal injury, death and property damage, among other things, caused by or occurring in conjunction with the conduct of business by Franchisee pursuant to this Agreement, under one or more policies of insurance acceptable to Franchisor and containing minimum liability coverage Franchisor prescribes from time to time. Each such insurance policy will name Franchisor as an additional insured and will provide for thirty (30) days prior written notice to Franchisor of any material modification, cancellation, or expiration of such policy. Each such insurance policy will give Franchisor notice of default under the policy and the opportunity to cure such default on Franchisees behalf. Simultaneous with the execution of this Agreement, Franchisee will provide Franchisor with evidence of such insurance; thereafter, Franchisee will furnish to Franchisor annually and upon the replacement or material modification of any insurance policy providing the coverage required under this Agreement, a copy of the certificate of insurance or other evidence requested by Franchisor that such insurance coverage is continuously in force without interruption. The maintenance of sufficient insurance coverage (both as to the type and limits of coverage) for the FACILITY is Franchisees sole responsibility. |
28.8 | The terms of Section 28 will survive the termination or expiration of this Agreement. |
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29. | MISCELLANEOUS |
29.1 | This Agreement and all issues arising from or relating to this Agreement shall be governed by and construed under the laws of the State of North Carolina, provided the foregoing shall not constitute a waiver of Franchisees rights under any applicable franchise law of another state. Otherwise, in the event of any conflict of law, North Carolina law will prevail, without regard to the application of North Carolina conflict of law principles, except that any North Carolina law regulating the sale of franchises or business opportunities or governing the relationship of a franchisor and its franchisees will not apply unless its jurisdictional requirements are met independently without reference to this section. |
29.2 | Franchisee and each of its Owners agree that the U.S. District Court for the Middle District of North Carolina, or if such court lacks jurisdiction, the Superior Court (or its successor) for Forsyth County North Carolina, shall be the venue and exclusive forum in which to adjudicate any case or controversy arising from or relating to this Agreement, or any Development Agreement, Franchise Agreement or any other Commissary Facility Agreement, including any guarantees or covenants by Franchisees Owners. In the event a case or controversy is to be heard by the Superior Court (or its successor) for Forsyth County North Carolina, any party may request that the matter be assigned to the North Carolina Business Court. Franchisee and each of its Owners irrevocably submit to the jurisdiction of such courts and waive any objections to either the jurisdiction of or venue in such courts. Franchisee and each of its Owners irrevocably waive, to the fullest extent they may lawfully do so, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding and agree that service of process for purposes of any such suit, action or proceeding need not be personally served or served within the State of North Carolina but may be served with the same effect as if they were served within the State of North Carolina, by certified mail or any other means permitted by law, addressed to Franchisee and its Owners (as applicable) at the address set forth herein. Nothing contained herein shall affect Franchisors rights to bring a suit, action or proceeding in any other appropriate jurisdiction, including any suit, action or proceeding brought by Franchisor to enforce any judgment against Franchisee or any of its Owners entered by a State or Federal Court. |
29.3 | Franchisor may obtain at any time in any court of competent jurisdiction any injunctive relief, including temporary restraining orders and preliminary injunctions, against conduct or threatened conduct for which no adequate remedy at law may be available or which may cause Franchisor irreparable harm. Franchisor may have such injunctive relief, without bond, but upon due notice, in addition to such further and other relief as may be available at equity or in law, and Franchisees sole remedy in the event of the entry of such injunction, shall be the dissolution of such injunction, if warranted, upon hearing duly had (all claims for damages by reason of the wrongful issuance of any such injunction being expressly waived hereby). Franchisee and each of its Owners acknowledges that any violation of Sections 16, 17.3, 18, 19, 20, 24.3(j) or 27.3 would result in irreparable injury to Franchisor for which no adequate remedy at law may be available. Accordingly, Franchisee and each of its Owners consent to the issuance of an injunction at Franchisors request (without posting a bond or other security) prohibiting any conduct in violation of any of those sections and agree that the existence of any claims Franchisee or any of its Owners may have against Franchisor, whether or not arising herefrom, shall not constitute a defense to the enforcement of any of those Sections. |
29.4 | If Franchisor claims in any judicial proceeding that Franchisee owes Franchisor or any of its Affiliates money or that Franchisee has otherwise breached this Agreement and Franchisor prevails on such claims, then Franchisor shall be awarded its costs and expenses incurred in connection with such proceedings, including reasonable attorneys fees. |
29.5 | Except with respect to any of Franchisees obligations herein regarding the Confidential Information, the Marks, and any other intellectual property rights of Franchisor, Franchisor and Franchisee (and its Owners) each waives, to the fullest extent permitted by law, any right to or claim for any punitive or exemplary damages against the other. Franchisee and each of its Owners waives, to the fullest extent permitted by applicable law, the right to recover consequential damages for any claim directly or indirectly arising from or relating to this Agreement. FURTHERMORE, THE PARTIES AGREE |
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THAT ANY LEGAL ACTION IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED TO THE COURT SITTING WITHOUT A JURY, AND ALL PARTIES WAIVE ANY RIGHT TO HAVE ANY ACTION TRIED BY JURY. | |
29.6 | Every part of this Agreement shall be considered severable. If for any reason any part of this Agreement is held to be invalid, that determination shall not impair the other parts of this Agreement. If any covenant herein which restricts competitive activity is deemed unenforceable by virtue of its scope in terms of geographical area, type of business activity prohibited and/or length of time, but could be rendered enforceable by reducing any part or all of it, Franchisee and Franchisor agree that it will be so modified as to remain enforceable to the fullest extent permissible under applicable law. If any applicable law requires a greater prior notice of the termination of or refusal to enter into a successor franchise than is required hereunder, a different standard of good cause, or the taking of some other action not required hereunder, the prior notice, good cause standard and/or other action required by such law shall be substituted for the comparable provisions hereof. If any provision of this Agreement or any specification, standard or operating procedure prescribed by Franchisor is invalid or unenforceable under applicable law, Franchisor has the right, in its sole discretion, to modify such invalid or unenforceable provision, specification, standard or operating procedure to the extent required to make it valid and enforceable. |
29.7 | Franchisor and Franchisee may by written instrument signed by the waiving party unilaterally waive or reduce any obligation of the other under this Agreement. Any waiver granted by Franchisor shall be without prejudice to any other rights Franchisor may have, will be subject to continuing review by Franchisor and may be revoked, in its sole discretion, at any time and for any reason, effective upon delivery to Franchisee of 10 days prior notice. Franchisee and Franchisor shall not be deemed to have waived any right reserved by this Agreement by virtue of any custom or practice of the parties at variance with it; any failure, refusal or neglect by Franchisee or Franchisor to exercise any right under this Agreement or to insist upon exact compliance by the other with its obligations hereunder; any waiver, forbearance, delay, failure or omission by Franchisor to exercise any right, whether of the same, similar or different nature, with respect to other Commissary Facilities; or the acceptance by Franchisor of any payments due from Franchisee after any breach of this Agreement. |
29.8 | The rights of Franchisor and Franchisee hereunder are cumulative and no exercise or enforcement by Franchisor or Franchisee of any right or remedy hereunder shall preclude the exercise or enforcement by Franchisor or Franchisee of any other right or remedy hereunder which Franchisor or Franchisee is entitled to enforce by law. |
29.9 | The language of this Agreement shall be construed according to its fair meaning and not more strictly against any one party than the other. The Basic Terms, introduction, personal guarantees and covenants, exhibits, schedules and riders (if any) to this Agreement are a part of this Agreement, which constitutes the entire agreement of the parties with respect to the subject matter hereof. Except as otherwise expressly provided herein, there are no other oral or written agreements, understandings, representations or statements relating to the subject matter of this Agreement, other than the Franchise Disclosure Document, that either party may or does rely on or that will have any force or effect. Nothing in this Agreement shall be deemed to confer any rights or remedies on any person or legal entity not a party hereto. This Agreement shall not be modified except by written agreement signed by both parties. |
29.10 | The headings of sections are for convenience only and do not limit or construe their contents. The word including shall be construed to include the words without limitation. The term Franchisee is applicable to one or more persons, a corporation, limited liability company or a partnership and its owners, as the case may be. If two or more persons are at any time Franchisee hereunder, whether as partners, joint venturers or otherwise, their obligations and liabilities to Franchisor shall be joint and several. |
29.11 | References to a controlling interest in an entity shall mean more than fifty percent (50%) of the equity and voting control of such entity. |
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29.12 | This Agreement is binding on the parties hereto and their respective executors, administrators, heirs, assigns and successors in interest. This Agreement may be executed in multiple copies, each of which shall be deemed an original. Time is of the essence in this Agreement. | |
29.13 | Whenever this Agreement requires the approval or consent of either party, the other party shall make written request therefor, and such approval or consent shall be obtained in writing; provided however, unless specified otherwise in this Agreement, such party may withhold approval or consent for any reason or for no reason at all. Furthermore, unless specified otherwise in this Agreement, no such approval or consent shall be deemed to constitute a warranty or representation of any kind, express or implied, and the approving or consenting party shall have no responsibility, liability or obligation arising therefrom. | |
29.14 | All notices, requests and reports permitted or required to be delivered by this Agreement shall be deemed delivered: (a) at the time delivered by hand to the recipient party (or to an officer, director or partner of the recipient party); (b) one (1) business day after being placed in the hands of a commercial courier service for guaranteed overnight delivery; or (c) five (5) business days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the party to be notified at its most current principal business address of which the notifying party has been notified in writing. All payments and reports required by this Agreement shall be sent to Franchisor at the address identified in this Agreement unless and until a different address has been designated by written notice. No restrictive endorsement on any check or in any letter or other communication accompanying any payment shall bind Franchisor, and its acceptance of any such payment shall not constitute an accord and satisfaction. | |
30. | ACKNOWLEDGMENTS | |
30.1 | By initialing below, Franchisee hereby specifically acknowledges the following: | |
(a) | Domicile. Franchisee acknowledges that Franchisee is not a domiciliary or a resident of any state, other than the state where the FACILITY is located or, if different, the state listed in the Basic Terms as Franchisees address. | |
Initials ________/________ | ||
(b) | Receipt of Franchise Disclosure Document. Franchisee acknowledges having received Franchisors Franchise Disclosure Document at least fourteen (14) calendar days before signing a binding agreement or before making any payment to Franchisor or any of its Affiliates relating to this Agreement. Franchisee has read and understands Franchisors Franchise Disclosure Document. | |
Initials ________/________ | ||
(c) | No Inconsistent Representations. Franchisee acknowledges that no representations have been made to Franchisee which are inconsistent with information presented in Franchisors Franchise Disclosure Document, and Franchisee has not relied on any representations inconsistent with or not contained in Franchisors Franchise Disclosure Document. | |
Initials ________/________ | ||
(d) | Business Risks; Independent Investigation. Franchisee recognizes that the nature of Krispy Kreme Stores and Commissary Facilities may change over time, that an investment in a Krispy Kreme Store or Commissary Facility involves business risks and that the success of the investment is largely dependent on Franchisees own business abilities, efforts and financial resources. Franchisee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that the food service industry is highly competitive. | |
Initials ________/________ |
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(e) | Independent Counsel. Franchisee acknowledges having had the opportunity to seek independent counsel concerning the execution of this Agreement and the operation of the Franchise. | |
Initials ________/________ | ||
(f) | No Guarantee or Assurance. Franchisee has not received from Franchisor or its representatives or relied on any statement, representation, guaranty or assurance, express or implied, as to the revenues, profits or success of the business venture contemplated by this Agreement, nor has Franchisee received from Franchisor or its representatives any information from which Franchisee may easily ascertain a specific level or range of actual or potential sales, income, gross or net profits from franchised or non-franchised Krispy Kreme Stores or Commissary Facilities. | |
Initials ________/________ |
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the Effective Date.
KRISPY KREME DOUGHNUT | [FRANCHISEE] | |||
CORPORATION | ||||
By: | By: |
Title: | Title: |
Dated: | Dated: |
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EXHIBIT E
TO THE DEVELOPMENT AGREEMENT
BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
_____________________________
DATED____________,__________
PRINCIPAL OWNERS PERSONAL GUARANTY
OF FRANCHISEES OBLIGATIONS
(Guaranty)
In consideration of, and as an inducement to, the execution of the Krispy Kreme Doughnut Corporation Development Agreement dated as of __________,__________ (the Agreement) by and between KRISPY KREME DOUGHNUT CORPORATION (Franchisor), and _____________ (Franchisee), each of the undersigned Principal Owners of a ten percent (10%) or greater interest in Franchisee hereby personally and unconditionally: (a) guarantees to Franchisor and its successors and assigns, for the term of the Agreement and thereafter as provided in the Agreement, that Franchisee shall punctually pay and perform each and every undertaking, agreement and covenant set forth in the Agreement (and any amendments) and that each and every representation of Franchisee made in connection with the Agreement (and any amendments) are true, correct and complete in all respects at and as of the time given; and (b) agrees personally to be bound by each and every provision in the Agreement (and any amendments).
Each of the undersigned waives: (a) acceptance and notice of acceptance by Franchisor of the foregoing undertakings; (b) notice of demand for payment of any indebtedness or nonperformance of any obligations hereby guaranteed; (c) protest and notice of default to any party with respect to the indebtedness or nonperformance of any obligations hereby guaranteed; (d) any right that the undersigned may have to require that an action be brought against Franchisee or any other person as a condition of liability; (e) notice of any amendment to the Agreement; (f) any and all other notices and legal or equitable defenses to which that the undersigned may be entitled; and (g) the provisions of N.C. General Statutes § 26.7 et seq.
Each of the undersigned consents and agrees that: (a) that the undersigneds direct and immediate liability under this guaranty shall be joint and several; (b) that the undersigned shall render any payment or performance required under the Agreement upon demand if Franchisee fails or refuses to do so punctually; (c) such liability shall not be contingent or conditioned upon pursuit by Franchisor of any remedies against Franchisee or any other person; and (d) such liability shall not be diminished, relieved or otherwise affected by any extension of time, credit or other indulgence which Franchisor may from time to time grant to Franchisee or to any other person including the acceptance of any partial payment or performance or the compromise or release of any claims, none of which shall in any way modify or amend this Guaranty, which shall be continuing and irrevocable until satisfied in full.
Each of the undersigned agrees that the U.S. District Court for the Middle District of North Carolina, or if such court lacks jurisdiction, the Superior Court (or its successor) for Forsyth County, North Carolina, shall be the venue and exclusive forum in which to adjudicate any case or controversy arising from or relating to this Guaranty. In the event a case or controversy is to be heard by the Superior Court (or its successor) for Forsyth County, North Carolina, any party may request that the matter be assigned to the North Carolina Business Court. Each of the undersigned irrevocably submits to the jurisdiction of such courts and waives any objections to either the jurisdiction of or venue in such courts. Each of the undersigned irrevocably waives, to the fullest extent he/she may lawfully do so, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding and agrees that service of process for purposes of any such suit, action or proceeding need not be personally served or served within the State of North Carolina but may be served with the same effect as if the undersigned were served within the State of North Carolina, by certified mail or any other means permitted by law addressed to the
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undersigned at the address set forth herein. Nothing contained herein shall affect Franchisors rights to bring a suit, action or proceeding in any other appropriate jurisdiction, including any suit, action or proceeding brought by Franchisor to enforce any judgment against the undersigned entered by a State or Federal Court.
Each of the undersigned waives all rights to payments and claims for reimbursement or subrogation which any of the undersigned may have against Franchisee arising as a result of the undersigneds execution of and performance under this Guaranty.
[This space intentionally left blank.]
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IN WITNESS WHEREOF, each of the undersigned has hereunto affixed his/her signature as of the _____ day of __________,__________.
PERCENTAGE OF OWNERSHIP | GUARANTOR(S) | |
INTERESTS IN FRANCHISEE | ||
(Signature) | ||
(Print Name) | ||
(Address) | ||
(Signature) | ||
(Print Name) | ||
(Address) | ||
(Signature) | ||
(Print Name) | ||
(Address) | ||
(Signature) | ||
(Print Name) | ||
(Address) | ||
Subscribed and sworn to before me
this
____ day of ________, _______.
____________________________
Notary Public
My Commission
expires:_________
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EXHIBIT F
TO THE DEVELOPMENT AGREEMENT
BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
_____________________________
DATED____________,__________
INVESTOR PERSONAL COVENANTS REGARDING
CONFIDENTIALITY, NON-COMPETITION AND NON-SOLICITATION
In conjunction with your investment in __________ (Franchisee) a ______________, the undersigned _________________ (Owner), acknowledges and agrees as follows:
1. Franchisee owns and operates, or is developing, Krispy Kreme Stores pursuant to a development agreement dated ____________________, _________ (Development Agreement) with Krispy Kreme Doughnut Corporation (Franchisor), which Development Agreement requires persons with legal or beneficial ownership interests in Franchisee under certain circumstances to be personally bound by the confidentiality and noncompetition covenants contained in the Development Agreement. All capitalized terms contained herein shall have the same meaning set forth in the Development Agreement.
2. Owner owns or intends to own a ______________ percent (__ %) legal or beneficial ownership interest in Franchisee and acknowledges and agrees that the execution of this Agreement is a condition to such ownership interest and that Owner has received good and valuable consideration for executing this Agreement. Franchisor may enforce this Agreement directly against Owner.
3. Owner may gain access to information comprising Franchisors Confidential Information as a result of investing in Franchisee. The Confidential Information is proprietary and includes Franchisors trade secrets. Owner hereby agrees that while Owner has a legal or beneficial ownership interest in Franchisee and thereafter, Owner: (a) will not use the Confidential Information in any other business or capacity; (b) will maintain the confidentiality of the Confidential Information; and (c) will not make unauthorized copies of any portion of the Confidential Information, whether through electronic media, writings, or other tangible or intangible means of expression. Without limiting the foregoing, Owner (i) acknowledges that he/she may have access to Franchisors material non-public information and that of its parent, Krispy Kreme Doughnut Inc. (KKDI), and that the securities laws prohibit trading in KKDI securities while in possession of such information, and (ii) agrees to refrain from trading in KKDI securities in violation of such laws. If Owner ceases to have an interest in Franchisee, Owner must deliver to Franchisor any such Confidential Information in his/her possession or control.
4. Notwithstanding anything to the contrary contained herein and provided Owner has obtained Franchisors prior written consent, the restrictions on Owners disclosure and use of the Confidential Information will not apply to the following:
(a) | information, methods, procedures, techniques and knowledge which are or become generally known in the food service business, other than through disclosure (whether deliberate or inadvertent) by Franchisee, Franchisees Owners, agents, or employees; and | ||
(b) | the disclosure of the Confidential Information in judicial, arbitration or administrative proceedings to the extent that Owner is legally compelled to disclose such information, provided Owner has notified Franchisor prior to such disclosure and has used its best efforts to obtain, and has afforded Franchisor sufficient opportunity to seek an appropriate protective order and obtain, assurances satisfactory to Franchisor of confidential treatment for the information required to be so disclosed. |
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5. Owner acknowledges and agrees that Franchisor would be unable to (a) protect the Confidential Information against unauthorized use or disclosure; (b) preserve the prestige, integrity, and goodwill of the Products, Marks, and System; or (c) encourage the free exchange of ideas and information among Krispy Kreme Stores and Commissary Facilities if franchisees and owners of Krispy Kreme Stores and Commissary Facilities or their owners were permitted to engage in or benefit from certain competitive activities. Therefore, except as expressly authorized by another written agreement with Franchisor, Owner agrees that during the term of the Development Agreement or during such time as Owner has an Ownership Interest in Franchisee (whichever is shorter), without Franchisors prior written consent, Owner shall not directly or indirectly (including through a Restricted Person):
(i) | have any Ownership Interest in a Competitive Business; | ||
(ii) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business; | ||
(iii) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business, where such services could be reasonably expected to benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any Confidential Information to such Competitive Business; | ||
(iv) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility, or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Owner to hire any such Person, then Owner agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | ||
(v) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility as the case may be. |
6. Upon termination of the Development Agreement or Owners Ownership Interest in Franchisee (whichever first occurs), Owner shall not directly or indirectly (including through a Restricted Person) for a period of two (2) years commencing on the effective date of such termination:
(a) | have any Ownership Interest in a Competitive Business within the Development Area or within a radius of ten (10) miles of any Krispy Kreme Store or Commissary Facility then open or under construction; | ||
(b) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business within the Development Area or within a radius of ten (10) miles of any Krispy Kreme Store or Commissary Facility then open or under construction; | ||
(c) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business within the Development Area or within a radius of ten (10) miles of any Krispy Kreme Store or Commissary Facility then open or under construction, where such services could be reasonably expected to benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any Confidential Information to such Competitive Business; | ||
(d) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility, or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Owner to hire any such Person, then Owner agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | ||
(e) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility as the case may be. |
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7. Owner expressly acknowledges the possession of skills and abilities of a general nature and the opportunity to exploit such skills in other ways, so that enforcement of the covenants contained in Sections 5 and 6 of these covenants will not deprive him/her of his/her personal goodwill or ability to earn a living. If any covenant herein which restricts competitive activity is deemed unenforceable by virtue of its scope or in terms of geographic area, type of business activity prohibited and/or length of time, but could be rendered enforceable by reducing any part or all of it, Owner agrees that it will be enforced to the fullest extent permissible under applicable law and public policy. Franchisor may obtain in any court of competent jurisdiction any injunctive relief, including temporary restraining orders and preliminary injunctions, against conduct or threatened conduct for which no adequate remedy at law may be available or which may cause it irreparable harm. Owner acknowledges that any violation of Sections 4, 5, or 6 of these covenants would result in irreparable injury for which no adequate remedy at law may be available. If Franchisor files a claim to enforce this Agreement and prevails in such proceeding, Owner agrees to reimburse Franchisor for all its costs and expenses, including reasonable attorneys fees.
8. Owner agrees that the U.S. District Court for the Middle District of North Carolina, or if such court lacks jurisdiction, the Superior Court (or its successor) for Forsyth County, North Carolina, shall be the venue and exclusive forum in which to adjudicate any case or controversy arising from or relating to these covenants. In the event a case or controversy is to be heard by the Superior Court (or its successor) for Forsyth County, North Carolina, any party may request that the matter be assigned to the North Carolina Business Court. Owner irrevocably submits to the jurisdiction of such courts and waives any objections to either the jurisdiction of or venue in such courts. Owner irrevocably waives, to the fullest extent he or she may lawfully do so, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding and agrees that service of process for purposes of any such suit, action or proceeding need not be personally served or served within the State of North Carolina but may be served with the same effect as if he or she were served within the State of North Carolina, by certified mail or any other means permitted by law, addressed to Owner at the address set forth herein. Nothing contained herein shall affect Franchisors rights to bring a suit, action or proceeding in any other appropriate jurisdiction, including any suit, action or proceeding brought by Franchisor to enforce any judgment against Owner entered by a State or Federal Court.
9. If Franchisor claims in any judicial proceeding that Owner has breached any of the covenants contained herein, and Franchisor prevails on such claims, then Franchisor shall be awarded its costs and expenses incurred in connection with such proceedings, including reasonable attorneys fees.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Agreement on the ___ day of _________, ______.
OWNER | |
(Signature) | |
(Print Name) | |
(Address) |
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KRISPY KREME DOUGHNUT
CORPORATION
FRANCHISE AGREEMENT
BASIC TERMS
A. | Effective Date | ||||
(Insert date Franchisee | |||||
executes the agreement): | |||||
B. | Franchisor: | Krispy Kreme Doughnut Corporation, a North Carolina corporation | |||
C. | Store Number: | ||||
D. | Store Address: | ||||
E. | Store Type & Initial | _____________ | Factory Store | $50,000 | |
Franchise Fee: | _____________ | Hot Shop | $30,000 | ||
_____________ | Fresh Shop/Kiosk | $20,000 | |||
F. | Franchisee: | ||||
Franchisees Address: | |||||
Telephone: | Fax No.: | ||||
E-mail Address: | |||||
G. | Principal Owners: | ||||
H. | Managing Director: | ||||
I. | General Manager: | ||||
J. | Term: | The time period commencing on the Effective Date and expiring 15 years after the Effective Date. |
Franchisor: | |
(initials) | |
Franchisee: | |
(initials) |
TABLE OF CONTENTS
Page | |||
1. | BACKGROUND | 1 | |
2. | DEFINITIONS | 1 | |
3. | ACKNOWLEDGMENTS, REPRESENTATIONS, AND WARRANTIES | 5 | |
4. | GRANT OF FRANCHISE | 7 | |
5. | FRANCHISORS RESERVATION OF RIGHTS | 7 | |
6. | SITE SELECTION | 8 | |
7. | LEASE OR PURCHASE OF SITE | 9 | |
8. | STORE DEVELOPMENT | 9 | |
9. | BUILDING, EQUIPMENT, FIXTURES, FURNISHINGS, SIGNS AND SUPPLIES | 10 | |
10. | COMPUTER SYSTEM | 11 | |
11. | STORE OPENING | 12 | |
12. | CAPITAL IMPROVEMENTS | 12 | |
13. | INITIAL FRANCHISE FEE AND ROYALTIES | 13 | |
14. | TRAINING AND GUIDANCE | 14 | |
15. | SYSTEM STANDARDS | 14 | |
16. | MARKS | 15 | |
17. | CONFIDENTIAL INFORMATION | 16 | |
18. | PATENTS AND INVENTIONS | 17 | |
19. | WORKS OF AUTHORSHIP AND COPYRIGHTS | 18 | |
20. | EXCLUSIVE RELATIONSHIP | 19 | |
21. | COMPLIANCE WITH LAW | 19 | |
22. | MARKETING AND ADVERTISING | 20 | |
23. | ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS | 22 | |
24. | TRANSFER | 22 | |
25. | SUCCESSOR FRANCHISE | 25 | |
26. | TERMINATION OF FRANCHISE | 26 | |
27. | EFFECT OF TERMINATION OR EXPIRATION | 27 | |
28. | RELATIONSHIP OF PARTIES/INDEMNIFICATION | 30 | |
29. | MISCELLANEOUS | 32 | |
30. | ACKNOWLEDGMENTS | 35 |
EXHIBIT A | FRANCHISEE INFORMATION | |
EXHIBIT B | PRINCIPAL OWNERS PERSONAL GUARANTY | |
EXHIBIT C | INVESTOR PERSONAL COVENANTS | |
EXHIBIT D | AUTHORIZATION FOR ACH DEBITS OR CREDITS | |
EXHIBIT E | AUTHORIZED OFF-PREMISES SALES |
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KRISPY KREME DOUGHNUT
CORPORATION
FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT (this Agreement) is made and entered into as of the Effective Date by and between Franchisor and Franchisee.
1. | BACKGROUND | |
1.1 | Franchisor has developed, as a result of considerable time, skill, effort, and money, a distinctive system for operating stores called Krispy Kreme Stores that offer and serve a variety of doughnuts, beverages, and other authorized products and services under the Marks. | |
1.2 | Franchisors Affiliate, HDN Development Corporation, owns the Marks and has granted Franchisor the right to sublicense the Marks to its franchisees for their use in operating Krispy Kreme Stores and Commissary Facilities. | |
1.3 | Franchisor grants Franchises to own and operate Krispy Kreme Stores and Commissary Facilites to Persons who meet its qualifications and are willing to undertake the investment and effort to properly develop and operate them. | |
1.4 | Franchisee has submitted a Franchise Application to own and operate a Krispy Kreme Store at the Site, and Franchisor has accepted the application in reliance on all information Franchisee has provided in connection therewith. | |
2. | DEFINITIONS | |
2.1 | Capitalized terms used in this Agreement have the meanings given to them in this Section and in the Basic Terms. | |
Account Franchisees bank account as to which Franchisee has provided Franchisor with all appropriate account information and from which Franchisee has authorized Franchisor to withdraw funds by electronic funds transfers. | ||
Affiliate Any person that directly or indirectly owns or controls, that is directly or indirectly owned or controlled by, or that is under common ownership or control with the referenced person, including parents and subsidiaries. | ||
Authorized Off-Premises Sales Sales to wholesale customers pursuant to an express authorization by Franchisor, the current form of which is attached as Exhibit E. | ||
Basic Terms The terms of this Agreement set forth on the Krispy Kreme Doughnut Corporation Franchise Agreement Basic Terms section on the first page hereof. | ||
Brand Fund As defined in Section 22. | ||
Commissary Facility A manufacturing facility for doughnuts and other Products that are supplied to Hot Shops and Fresh Shops/Kiosks. Commissary Facilities are not used for retail sales, but may distribute and sell to wholesale customers, subject to Franchisors authorization pursuant to the Commissary Facility Agreement. | ||
Commissary Facility Agreement An agreement used by Franchisor to grant the right to operate a Commissary Facility at a specific location. | ||
Competitive Business A business, other than a Krispy Kreme Store or Commissary Facility, that: (a) makes, sells or distributes yeast-raised doughnuts, cake doughnuts, or any other types of doughnuts, miniature doughnuts, doughnut holes or any other bakery products in any distribution channel to any customer for consumption or resale, and such sales constitute ten percent (10%) or more of its total sales (or such sales from any single location constitute 10% or more of the total sales of that location) during any calendar quarter or calendar year; (b) sells coffee or coffee drinks in any distribution channel to any |
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customer for consumption or resale, and such sales constitute twenty percent (20%) or more of its total sales (or such sales from any single location constitute 20% or more of the total sales of that location) during any calendar quarter or calendar year; (c) is the same as, or similar to, the Krispy Kreme Store concept as it evolves over time; or (d) grants franchises or licenses, or establishes joint ventures, for the development and/or operation of any business referred to in (a) through (c), above. Restrictions in this Agreement on having an Ownership Interest in a Competitive Business shall not apply to the ownership of shares of a class of securities listed on a stock exchange or traded on a public stock market that represents less than three percent (3%) of the number of shares of that class of securities issued and outstanding. Confidential Information Certain confidential information relating to the development and operation of Krispy Kreme Stores and Commissary Facilities, which includes: | ||||
(a) | methods, techniques, equipment, specifications, standards, policies, procedures, information, concepts, and systems relating to and knowledge of and experience in the development, equipping, operation, outfitting and franchising of Krispy Kreme Stores and Commissary Facilities, as well as expansion, growth and development plans, and prospects; | |||
(b) | marketing and advertising programs for Krispy Kreme Stores and Commissary Facilities; | |||
(c) | knowledge concerning the logic, structure and operation of computer software programs which Franchisor authorizes for use in connection with the operation of Krispy Kreme Stores and Commissary Facilities, and all additions, modifications and enhancements, and all data generated from use of such programs; | |||
(d) | specifications and standards for, and sources of, buildings, equipment, furnishings, fixtures, signs, products, materials, supplies, and services utilized in the development and operation of Krispy Kreme Stores and Commissary Facilities; | |||
(e) | ingredients, formulas, mixes, recipes for and methods of preparation, cooking, serving, packaging, and delivery of the Products; | |||
(f) | information concerning sales, operating results, financial performance, consumer preferences, inventory requirements, materials and supplies, and other financial data of Krispy Kreme Stores and Commissary Facilities, and customer lists; | |||
(g) | current and concluded research, development and test programs for products, services and operations for use in Krispy Kreme Stores and Commissary Facilities; | |||
(h) | the contents of any System Standards Manuals, System Standards, and site selection criteria; and | |||
(i) | employee training, and staffing levels. | |||
Development Agreement If applicable, the Krispy Kreme Doughnut Corporation Development Agreement pursuant to which Franchisor has granted Franchisee the right to develop Krispy Kreme Stores and Commissary Facilities in the Development Area and pursuant to which this Agreement has been executed. Development Area If applicable, the geographic area in which Franchisee has the right to develop Krispy Kreme Stores and Commissary Facilities, as set forth in the Development Agreement. Factory Store A retail sales facility with the manufacturing capability to produce fresh doughnuts in accordance with System Standards. Additionally, Factory Stores may have some capacity to supply fresh doughnuts to Hot Shops and Fresh Shops/Kiosks. Force Majeure Any of the following events or circumstances: (a) fire, earthquake, storm, hurricane, tornado, flood or other act of God; (b) war, act of terrorism, insurrection, rebellion, riots or other civil unrest; (c) epidemics, quarantine restrictions or other public health restrictions or advisories; and (d) other similar events beyond the reasonable control of the party. |
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Franchise The rights granted and the obligations imposed pursuant to this Agreement that relate to the development and operation of the Krispy Kreme Store at the Site. Franchise Agreement An agreement, such as this Agreement, used by Franchisor to grant franchises for the operation of Krispy Kreme Stores at specific locations (including all exhibits, riders, guarantees and other agreements used in connection therewith). Franchise Application The application submitted by Franchisee for the Franchise. Franchise Disclosure Document The franchise disclosure document required by applicable law. Franchisee As defined in the Basic Terms. Franchisor As defined in the Basic Terms. Fresh Shop/Kiosk A retail sales facility with limited manufacturing capabilities (e.g. icing and filling equipment), or no manufacturing capabilities, that receives doughnuts from a Factory Store or a Commissary Facility and finishes them as necessary to sell in accordance with System Standards. Fundraising Sales of doughnuts, redemption cards, or coupons to charitable, educational, and other nonprofit organizations restricted to those located within the STOREs local market area (as Franchisor may determine from time to time) for resale (or giving) to consumers. General Manager The general manager of the STORE. The initial general manager is identified in the Basic Terms. Good Standing The condition that Franchisee and its Affiliates: (a) are current with all payments due to Franchisor, its Affiliates and suppliers; and (b) are not in default of any of their obligations under this Agreement, any Development Agreement (including any Development Schedule), any Franchise Agreement, any Commissary Facility Agreement or any other agreement between the parties hereto or any of their Affiliates. Hot Shop A retail sales facility with an impinger oven and limited manufacturing capabilities (e.g., icing and filling equipment) that receives doughnuts from a Factory Store or a Commissary Facility and finishes them as necessary to sell in accordance with System Standards. Immediate Family The spouse, parents, brothers, sisters and children, whether natural or adopted, of the referenced Person. Initial Franchise Fee As defined in Section 13.1 Krispy Kreme Store(s) Stores which Franchisor or any of its Affiliates own, operate or franchise and which use the Marks and the System. Krispy Kreme Stores include Factory Stores, Hot Shops and Fresh Shops/Kiosks, but do not include Commissary Facilities. Managing Director The person designated as managing director of Franchisees business pursuant to Section 20.2. The initial Managing Director is identified in the Basic Terms. Marks The current and future trademarks, service marks, logos, designs, trade names, and other commercial symbols, together with all distinctive trade dress elements, or combinations thereof, used by Franchisor to identify the sources of goods and services offered and sold at Krispy Kreme Stores, including the trademark and service mark KRISPY KREME®. Net Sales All the STOREs revenue from food, beverages, and other products and merchandise of any type whatsoever sold, whether or not produced at the STORE or acquired from a third party, including Products purchased from other Krispy Kreme franchises (regardless whether owned by Franchisee) and services rendered at or away from the STORE (whether or not such sales are authorized by Franchisor) or from any use of the Marks, recorded using the accrual basis of accounting and otherwise in accordance with accounting principles generally accepted in the United States. Without limiting the foregoing, and for |
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the avoidance of doubt, Net Sales (a) includes all amounts Franchisee receives or has the right to receive from the conveyance of products and services, whether such sales are made for cash or cash equivalents (including credit, debit and gift cards) or on credit terms, but excludes (i) sales and similar taxes collected or which Franchisee has the right to collect from customers and which Franchisee is required by law to remit to a taxing authority, (ii) customer refunds, (iii) credits for product returns and (iv) sales or delivery of products to other Krispy Kreme Stores or Commissary Facilities (regardless whether owned by Franchisee), and (b) shall not be reduced by any charge or other provision for uncollectible accounts. Neither the inclusion of any type of revenue in the definition of Net Sales nor Franchisors demand or receipt of Royalties or Brand Fund contributions on such revenues shall constitute waiver or approval of any unauthorized sales by Franchisee hereunder, and Franchisor reserves all rights and remedies with respect thereto. On-Premises Sales Sales conducted on-premises to retail customers visiting the STORE. Owner Each Person (and permitted transferee of each such Person) holding: (a) a direct or indirect, legal or beneficial Ownership Interest or voting rights in Franchisee or any Affiliate of Franchisee that owns an Ownership Interest or voting rights in Franchisee; (b) a direct or indirect, legal or beneficial interest in this Agreement; (c) a direct or indirect, legal or beneficial interest in the STORE; or (d) any other legal or equitable interest, or the power to vest in himself or herself or itself any legal or equitable interest, in the revenue, profits, rights or assets arising from any of the foregoing. Ownership Interest Any direct or indirect, legal or beneficial ownership interest of any type, including (a) in relation to a corporation, the ownership of shares in the corporation; (b) in relation to a partnership, the ownership of a general or limited partnership interest; (c) in relation to a limited liability company, the ownership of a membership interest; or (d) in relation to a trust, the ownership of a legal or beneficial interest of such trust. Payment Day The day of the Week on which Royalties are due, which day currently is Friday, but may be changed at Franchisors sole discretion. Person Any individual, corporation, limited liability company, general or limited partnership, unincorporated association, cooperative or other legal or functional entity. Principal Owner An Owner with an Ownership Interest in Franchisee of ten percent (10%) or more. Products The current and future products that Franchisor authorizes to be offered and sold at Krispy Kreme Stores, including (a) fresh doughnuts (including, yeast-raised doughnuts, cake doughnuts, miniature doughnuts, and doughnut holes, which doughnuts have various types and flavors of fillings, glazes, or other coatings); (b) hot or cold fresh-brewed coffee beverages suitable for immediate consumption; (c) hot or cold espresso drinks suitable for immediate consumption; (d) frozen beverages suitable for immediate consumption; and (e) such other products and beverages as we may determine from time to time. Reporting Day The day of the Week by which Franchisee is required to report Net Sales to Franchisor, which day currently is Tuesday, but may be changed at Franchisors sole discretion. Restricted Person Franchisee, its Owners and Affiliates, and members of the Immediate Families of Franchisee (if a natural Person), and its Owners and Affiliates. Royalties As set forth in Section 13. Site The location of the STORE with the street address identified in the Basic Terms. STORE The Krispy Kreme Store of the type identified in the Basic Terms that Franchisor authorizes Franchisee to operate at the Site pursuant to this Agreement. The term includes all of the assets of the STORE, including its revenue and income. System Those business formats, methods, procedures, signs, designs, layouts, equipment, and mixes designated by Franchisor from time to time for use in operating Krispy Kreme Stores and Commissary Facilities. |
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System Standards The mandatory and suggested specifications, standards, operating procedures and rules that Franchisor prescribes from time to time for the operation of Krispy Kreme Stores and Commissary Facilities, including the standards, specifications and other requirements related to the purchase, preparation, marketing and sale of the Products; On-Premises Sales, Authorized Off-Premises Sales; customer service; the design, décor and appearance of the STORE; the maintenance and remodeling of the STORE and the equipment, fixtures and furnishings therein; the use and display of the Marks; the insurance coverage required to be carried for the STORE; the training of STORE employees; the days and hours of STORE operation; and the content, quality and use of advertising and promotional materials. | ||
System Standards Manuals The documents and other media that contain the System Standards. | ||
Term As defined in the Basic Terms. | ||
Transfer or Transfer the Franchise (or similar words) The direct or indirect sale, assignment, transfer, exchange, conversion, license, sublicense, lease, sublease, mortgage, pledge, collateral assignment, grant of a security, collateral or conditional interest or other encumbrance in or on, or other disposition, whether voluntary, involuntary, by operation of law or otherwise, of this Agreement, of any interest in or right under this Agreement, any form of legal or beneficial ownership interest in Franchisee, or any form of ownership interest or right to participate in or receive the benefits of the assets, revenues, income or profits of Franchisees business, or any one or more other acts or events not covered by the foregoing that Franchisor reasonably determines to be a form of direct or indirect transfer, including: (a) any transfer, redemption or issuance of a legal or beneficial ownership interest in the capital stock of, a membership interest in, or a partnership interest in, Franchisee or any interest convertible into or exchangeable for capital stock of, a membership interest in or a partnership interest in, Franchisee; (b) any merger or consolidation of Franchisee, whether or not Franchisee is the surviving entity, or any conversion of Franchisee from one form of legal entity into another form of legal entity, or any sale, exchange, encumbrance or other disposition of Franchisees assets; (c) any transfer in connection with or as a result of a divorce, dissolution of marriage or similar proceeding or a property settlement or legal separation agreement in the context of a divorce, dissolution or marriage or similar proceeding, an insolvency, bankruptcy or assignment for benefit of creditors, a judgment, a corporate, limited liability company or partnership dissolution or otherwise by operation of law; or (d) any transfer by gift, declaration of trust, transfer in trust, revocation of trust, trustee succession, trust termination, discretionary or mandatory trust distribution, occurrence of any event (e.g., death of a person) that affects or ripens the rights of contingent beneficiaries, exercise of a power of appointment, exercise of a withdrawal right, adjudication of Franchisee or any Principal Owner as legally disabled, or upon or after Franchisees death or the death of any of Franchisees Principal Owners by will, disclaimer or the laws of intestate succession or otherwise. | ||
Week Any consecutive seven (7) calendar day period that Franchisor may designate from time to time, currently consisting of each seven (7) calendar day period ending at 11:59 PM on each Sunday. | ||
2.2 | Other terms used in this Agreement are defined in the context in which they arise. | |
3. | ACKNOWLEDGMENTS, REPRESENTATIONS, AND WARRANTIES | |
3.1 | Franchisee acknowledges that Franchisee has read this Agreement and Franchisors Franchise Disclosure Document and understands and accepts the terms and conditions contained in this Agreement as being reasonably necessary to maintain Franchisors high standards of quality and service. Franchisee further acknowledges that the uniformity of those standards at each Krispy Kreme Store is reasonably necessary to protect and preserve the goodwill of the Marks. Franchisee acknowledges that Franchisee has conducted an independent investigation of the business venture contemplated by this Agreement and recognizes that, like any other business, the nature of the business conducted by a Krispy Kreme Store may evolve and change over time, that an investment in a Krispy Kreme Store involves business risks, and that Franchisees business abilities and efforts are vital to the success of the venture. Any information Franchisee acquires from other Krispy Kreme Store franchisees relating to their sales, profits, or cash flows does not constitute information obtained from Franchisor, nor does Franchisor make any representation as |
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to the accuracy of any such information or the likelihood of Franchisee achieving comparable results. Franchisee acknowledges that, in all of its dealings with Franchisor, Franchisors officers, directors, employees and agents act only in a representative, and not in an individual, capacity. All business dealings between Franchisee and such Persons in connection with this Agreement are solely between Franchisee and Franchisor. Franchisee further acknowledges that Franchisor has advised Franchisee to have this Agreement reviewed and explained to Franchisee by an attorney. | ||
3.2 | Franchisee represents and warrants to Franchisor, as an inducement to Franchisors entry into this Agreement, that all statements Franchisee has made and all materials Franchisee has submitted to Franchisor in connection with Franchisees Franchise Application for and purchase of the Franchise are accurate and complete and that Franchisee has made no misrepresentations or material omissions to obtain the Franchise. Franchisor has approved Franchisees Franchise Application for a franchise for a Krispy Kreme Store in reliance on each of Franchisees representations to Franchisor. | |
3.3 | Franchisee represents and warrants to Franchisor that Franchisee has the authority to execute and deliver this Agreement and to perform Franchisees obligations hereunder. | |
3.4 | Franchisee represents and warrants to Franchisor that this Agreement has been duly executed and delivered by Franchisee and, assuming the due authorization, execution and delivery by Franchisor, constitutes a legal, valid and binding obligation of Franchisee, enforceable in accordance with its terms. | |
3.5 | Franchisee represents and warrants to Franchisor that Franchisees execution and delivery of this Agreement does not, and Franchisees performance of its obligations under this Agreement will not, with or without the giving of notice or the lapse of time or both, (a) conflict with or violate its organizational documents, if applicable, (b) conflict with or violate any law, statute, ordinance, rule, regulation, order, judgment or decree applicable to Franchisee, or (c) conflict with, result in any breach of, or constitute a default under, any contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Franchisee is a party or by which Franchisee is bound. | |
3.6 | Franchisee represents and warrants to Franchisor that: (a) Franchisee owns fee simple title to the real property and improvements which comprise the STORE; or (b) if Franchisee holds a leasehold interest in the STORE, Franchisee has or will have a binding and effective lease with a lease term (plus renewal options) extending at least to the end of the Term and otherwise conforming to Franchisors requirements in accordance with Section 7. | |
3.7 | If Franchisee is, or at any time becomes, a business corporation, partnership, limited liability company or other legal entity, Franchisee and each of its Principal Owners represent, warrant and agree that: (a) Franchisee is duly organized and validly existing under the laws of the state of its organization, and, if a foreign business corporation, partnership, limited liability company or other legal entity, Franchisee is duly qualified to transact business in the state in which the STORE is located; (b) Franchisee has the authority to execute and deliver this Agreement and to perform its obligations hereunder; (c) true and complete copies of the articles of incorporation, articles of organization, operating agreement or principles, partnership agreement, bylaws, subscription agreements, buy-sell agreements, voting trust agreements, trust agreements and all other documents relating to Franchisees ownership, organization, capitalization, management and control (Organizational Documents) shall be promptly delivered to Franchisor for its approval, which approval shall not be unreasonably withheld; (d) any and all amendments, deletions and additions to Franchisees Organizational Documents shall be promptly delivered to Franchisor for its approval, which approval shall not be unreasonably withheld; (e) Franchisees activities are restricted to those necessary solely for the development, ownership and operation of Krispy Kreme Stores and Commissary Facilities in accordance with this Agreement and in accordance with any other agreements entered into with Franchisor or any of its Affiliates; (f) the Organizational Documents recite that the issuance, transfer or pledge of any direct or indirect legal or beneficial ownership interest is restricted by the terms of this Agreement; (g) all certificates representing direct or indirect legal or beneficial ownership interests now or hereafter issued must bear a legend in conformity with applicable law reciting or referring to such restrictions; and (h) Franchisee will deliver to Franchisor a Secretary/Clerks/Trustees Certificate |
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or other evidence satisfactory to Franchisor that the execution, delivery and performance of this Agreement and all other agreements and ancillary documents contemplated hereby or thereby have been duly authorized by all necessary action by the corporation, partnership, limited liability company or other legal entity, as applicable, and are within the legal powers of Franchisees trustee, if Franchisee is a trust. | ||
3.8 | Franchisee and each of its Principal Owners represent, warrant, and agree that Exhibit A is current, complete and accurate. Franchisee agrees that an updated Exhibit A will be furnished promptly to Franchisor, so that Exhibit A (as so revised and signed by Franchisee) is at all times current, complete and accurate. Each person who is or becomes a Principal Owner must execute an agreement in the form Franchisor prescribes, undertaking to guarantee and be bound jointly and severally by the terms of this Agreement, the current form of which is attached hereto as Exhibit B. Each person who is or becomes an Owner, whether or not a Principal Owner, must execute an agreement in the form Franchisor prescribes, undertaking to be bound by the confidentiality and non-competition covenants contained in this Agreement, the current form of which is attached hereto as Exhibit C. Each Owner must be an individual acting in his/her individual capacity, unless Franchisor waives this requirement. | |
3.9 | The provisions of Section 3 constitute continuing representations and warranties, and Franchisee and Franchisees Principal Owners shall notify Franchisor immediately in writing of the occurrence of any event or the development of any circumstance that might render any of the foregoing representations and warranties false, inaccurate or misleading. | |
4. | GRANT OF FRANCHISE | |
4.1 | Subject to the terms of and on the conditions contained in this Agreement, Franchisor hereby grants to Franchisee the right to operate the STORE during the Term and to use the Marks and the System in the performance of Franchisees obligations under this Agreement. | |
4.2 | Franchisee will faithfully, honestly, and diligently perform Franchisees obligations under this Agreement. Franchisee will continuously exert its best efforts to promote and enhance the operation of the STORE and to maximize the sale of Products. | |
4.3 | Franchisee may not operate the STORE from any location other than the Site without Franchisors prior written consent. If Franchisor consents to the relocation of the STORE, Franchisor has the right to charge Franchisee for its expenses in connection with the relocation. | |
4.4 | Franchisee agrees that the STORE will be under direct, on-premises management by a trained Managing Director or General Manager or one of Franchisees other managers, all of whom must have completed training to Franchisors satisfaction. | |
4.5 | Franchisee agrees that the STORE will not be closed for five (5) or more consecutive days without Franchisors prior written consent. | |
4.6 | In addition to selling the Products, Franchisee agrees to offer and sell such other goods and services as Franchisor may require from time to time in Franchisors sole discretion. Franchisee will not, however, sell anything at, from or in connection with the STORE, other than the Products and other goods or services Franchisor authorizes Franchisee to offer or sell. | |
4.7 | Franchisee may engage only in On-Premises Sales at and from the STORE and Authorized Off-Premises Sales, and shall not engage in any other types of sales or distribution of Products. | |
5. | FRANCHISORS RESERVATION OF RIGHTS | |
5.1 | Franchisor and its Affiliates (and their respective successors and assigns, by purchase, merger, consolidation or otherwise) retain all rights not expressly granted to Franchisee in this Agreement, including those with respect to Krispy Kreme Stores and Commissary Facilities, the Marks, and the sale of Products, including all rights Franchisor expressly reserves in this Section 5. Franchisee waives, to the fullest extent permitted under applicable law, all claims, demands or causes of action arising from or related to any of such activities by Franchisor or any of its Affiliates. |
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5.2 | No exclusive territory, protection, or other right in the contiguous space, area, or market of the STORE is expressly or impliedly granted to Franchisee under this Agreement, and Franchisor reserves the right to operate and to grant others the right to operate Krispy Kreme Stores at any location on such terms and conditions as it deems appropriate. Franchisee acknowledges and agrees that such Krispy Kreme Stores and Commissary Facilities may be in direct competition with the STORE, without regard to any adverse effect on the STORE and without any obligation or liability to Franchisee. | |
5.3 | Franchisor reserves the right to acquire, develop, and operate, or be acquired by, any company, including a company operating one or more food service businesses (including food service businesses selling doughnuts or coffee). | |
5.4 | Franchisor reserves the right to license, sample, sell, or market by any means whatsoever (including the Internet) the Products and any goods or services identified by the Marks. Such goods and services may be licensed, sampled, sold, or marketed in any and all locations and venues, and through any method or channel of distribution Franchisor deems appropriate in its sole discretion (including wholesale distribution of Products to supermarkets, grocery stores, convenience stores, and other retail outlets). Such sales may be in direct competition with the STORE, without regard to any adverse effect on the STORE and without any obligation or liability to Franchisee. | |
6. | SITE SELECTION | |
6.1 | Franchisee acknowledges that, prior to signing this Agreement, Franchisee (with or without Franchisor assistance) located, and Franchisor approved, the Site. Franchisee acknowledges and agrees that Franchisors recommendation or approval of the Site, and any information regarding the Site communicated to Franchisee, do not constitute any acknowledgement, warranty or representation of any kind, express or implied, including any warranty or representation as to the potential access, visibility or profitability of a Krispy Kreme Store at that Site, or for any other purpose. Franchisors approval of the Site merely signifies that Franchisor is willing to grant a Franchise for a Krispy Kreme Store at that location. Application of criteria that have appeared effective with respect to other sites may not accurately reflect the potential for all sites, and, after Franchisors approval of a site, demographic and/or other factors included in or excluded from Franchisors criteria could change, thereby altering the potential of a site. The uncertainty and instability of such criteria are beyond Franchisors control, and Franchisor will not be responsible for the failure of a site Franchisor has recommended or approved to meet expectations as to potential revenue or operational criteria. Neither Franchisors approval of the Site nor any assistance Franchisor may give Franchisee in identifying the Site, constitutes a warranty or representation of any kind, express or implied, as to the suitability of the proposed Site for a Krispy Kreme Store or for any other purpose. Franchisees decision to develop and operate the STORE at the Site is based solely on Franchisees own independent investigation of the suitability of the Site for a Krispy Kreme Store. | |
6.2 | Franchisee must also cause to be prepared, and submit for approval by Franchisor, a site plan and any modifications to Franchisors basic plans and specifications for the STORE, including requirements for dimensions, exterior design, materials, interior layout, equipment, fixtures, furniture, signs and decorating. Franchisee understands that Franchisee may modify Franchisors basic plans and specifications only to the extent required to comply with applicable ordinances, building codes and permit requirements and only with Franchisors prior written approval. Franchisors exercise of its right to approve the Site layout, to approve any plans, to inspect the construction or conversion of the STORE shall be solely for the purpose of assuring compliance with the System Standards and shall not be construed as any express or implied representation or warranty that the STORE complies with any applicable laws, codes or regulations (including the Americans with Disabilities Act (ADA) or any other federal, state, or local law or ordinance regulating standards for the access to, use of, or modification of buildings for and by persons whose disabilities are protected by law) or that the construction thereof is sound or free from defects. Franchisors criteria for approval or disapproval do not encompass technical, architectural or engineering considerations. Franchisor shall have no liability or obligation with respect to the construction or conversion of the STORE. |
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7. | LEASE OR PURCHASE OF SITE | |||
7.1 | Franchisee must lease, sublease or purchase the Site within one-hundred and eighty (180) days after the date of Franchisors site acceptance letter. Franchisor has the right to approve the terms of any lease, sublease or purchase contract for the Site, and Franchisee agrees to deliver a copy to Franchisor for Franchisors approval before Franchisee signs it. Franchisee agrees that any lease or sublease for the Site must, in form and substance satisfactory to Franchisor, (a) provide for notice to Franchisor of Franchisees default under the lease or sublease and an opportunity for Franchisor to cure such default; (b) require the lessor or sublessor to disclose to Franchisor, on its request, sales and other information furnished by Franchisee; (c) give Franchisor the right on any termination or expiration (without renewal) of this Agreement to assume the lease or sublease without the lessors or sublessors consent; (d) give Franchisor the right to enter the STORE to remove signs and other tangible property that embodies any of the Marks or that contains or embodies patents owned by Franchisor or any of its Affiliates, and provide that the lessor and/or sublessor relinquishes to Franchisor, on any termination or expiration (without renewal) of this Agreement, any lien or other ownership interest, whether by operation of law or otherwise, in and to any tangible property, including any outdoor sign, that embodies any of the Marks; and (e) require that the lessor and/or sublessor acknowledges that Franchisor has no liability or obligation whatsoever under the lease or sublease until and unless Franchisor assumes the lease or sublease on termination or expiration of this Agreement. | |||
Franchisee may not execute a lease, sublease or purchase contract pertaining to the Site for the STORE or any modification thereof without Franchisors approval. Franchisors approval of the lease, sublease or purchase contract does not constitute a warranty or representation of any kind, express or implied, as to its fairness or suitability or as to Franchisees ability to comply with its terms. Franchisor does not, by virtue of approving the lease, sublease or purchase contract, assume any liability or responsibility to Franchisee or to any third parties. Franchisee must deliver a copy of the fully signed lease, sublease or purchase contract to Franchisor within five (5) days after its execution. | ||||
8. | STORE DEVELOPMENT | |||
8.1 | Franchisee is responsible for developing the STORE. In the System Standards Manuals, Franchisor will furnish Franchisee with mandatory and suggested specifications and layouts for a Krispy Kreme Store, including requirements for dimensions, design, image, interior layout, decor, equipment, fixtures, furnishings, construction materials, and signs. Franchisee acknowledges that the System Standards Manuals do not contain the requirements of any federal, state, or local law, code, ordinance or regulation (including building codes, permit requirements, and regulations and the ADA or similar rules governing accommodations for persons with disabilities). Franchisee is obligated to have prepared all required construction plans and specifications to suit the shape and dimensions of the Site and to insure that such plans and specifications comply with all applicable state, federal, and local laws, codes, ordinances, regulations (including building codes, permit requirements, and regulations and the ADA or similar rules governing accommodations for persons with disabilities). Franchisee is obligated to submit construction plans and specifications to Franchisor for approval before construction of the STORE is commenced and, at Franchisors request, to submit all revised plans and specifications during the course of such construction with as built plans to be provided upon completion. Franchisor may be willing to assist Franchisee in developing the STORE by recommending engineers and architects and otherwise furnishing information to assist Franchisee in developing the STORE in accordance with Franchisors specifications. | |||
8.2 | Franchisee agrees, at its own expense, to do the following with respect to developing the STORE at the Site: | |||
(a) | secure all financing required to develop and operate the STORE; | |||
(b) | obtain all building, utility, sign, health, sanitation, business and other permits and licenses required to construct and operate the STORE; | |||
(c) | construct all required improvements to the Site and decorate the STORE in compliance with plans and specifications and designs Franchisor has approved; |
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(d) | purchase or lease and install all required equipment, fixtures, furnishings, and signs required for the STORE; and | |||
(e) | purchase an opening inventory of authorized and approved materials and supplies, certain of which items must be purchased from Franchisor, its Affiliates, or suppliers designated by Franchisor, all as described in the System Standards Manuals. | |||
8.3 | Franchisee acknowledges that Franchisor is not responsible for, and shall have no liability for, the architecture, design, engineering, or construction of the STORE, for the STOREs compliance with any federal, state, or local law (including the ADA and any other federal, state or local law or ordinance regulating standards for access to, use of the, or modification of buildings for and by persons who are protected by law by virtue of such disability or whose disabilities are otherwise recognized by law), for any errors, omissions or discrepancies of any nature in any drawings or specifications with respect to the STORE, or for any other matter relating to the development, use or operation of the STORE, even if Franchisor assists in the development of the STORE. | |||
9. | BUILDING, EQUIPMENT, FIXTURES, FURNISHINGS, SIGNS AND SUPPLIES | |||
9.1 | Franchisee acknowledges that the Products, Marks, and System have established significant prestige and goodwill and are well-recognized in the mind of the public and the trade. In order to preserve such prestige and goodwill, Franchisee understands and agrees that it is necessary and appropriate for Franchisor to closely control the supply chain for all equipment (including production equipment and fixtures, cash register, POS system and computer), fixtures, furnishings, signs, delivery vehicles, raw materials (including doughnut mixes and coffee beans), supplies, and any other items used or useful in developing or operating the STORE or producing, marketing, or selling the Products or other goods Franchisor requires Franchisee to sell. | |||
9.2 | Franchisee agrees to use in developing and operating the STORE (and producing, marketing, and selling the Products and other goods Franchisor requires Franchisee to sell) only the equipment, fixtures, furnishings, signs, delivery vehicles, raw materials, supplies, cash register, POS system, and computers and other items that Franchisor has approved from time to time for Franchisee to use in conjunction with the STORE as meeting its specifications and standards for quality, design, appearance, function and performance in accordance with the System Standards. Any deviation from Franchisors mandatory specifications and standards as prescribed by the System Standards must receive prior written approval from Franchisor. Approval of any item for use by Franchisor, its Affiliates, or other developers or franchisees will not be construed as approval of such item for Franchisees use. | |||
9.3 | Notwithstanding Section 9.2, Franchisor may require Franchisee to purchase any or all of the equipment, fixtures, furnishings, signs, delivery vehicles, raw materials, supplies, and other items for the STORE directly from Franchisor or its Affiliates or other suppliers it may designate from time to time. Franchisee agrees to purchase all such items from Franchisor, its Affiliates or designated suppliers, as Franchisor may require. Franchisee acknowledges and agrees that Franchisor, its Affiliates and designated suppliers have the right to profit from the sale of such items and that Franchisor does not act as agent, representative or in any other intermediary or fiduciary capacity for Franchisee in Franchisors relationship with any designated suppliers. Franchisee acknowledges and agrees that (a) Franchisor and/or its Affiliates may receive payments, fees, commission or reimbursements from designated suppliers and third parties in respect to such purchases, (b) Franchisor and/or its Affiliates may have investments in designated suppliers, and (c) Franchisor and/or its Affiliates may profit from Franchisees purchases from designated suppliers. Franchisor, its Affiliates and designated suppliers shall not be liable for any delay in the delivery of ingredients as a result of any Force Majeure. Franchisor, its Affiliates and designated suppliers may establish policies and procedures from time to time for the allocation and distribution of items among Krispy Kreme Stores and Commissary Facilities. |
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9.4 | All equipment (including production equipment), fixtures, furnishings, raw materials (including doughnut mixes and coffee beans) that Franchisee purchases from Franchisor, its Affiliates or designated suppliers shall be at such prices and on such purchase terms (including credit, such as COD, and shipping) and conditions as Franchisor, its Affiliates or designated suppliers may determine from time to time. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY PURCHASE ORDER ISSUED BY FRANCHISOR OR ITS AFFILIATES OR DESIGNATED SUPPLIERS, NEITHER FRANCHISOR, ANY OF ITS AFFILIATES NOR ANY DESIGNATED SUPPLIER MAKES ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE OR OTHERWISE WITH RESPECT ANY ITEMS FRANCHISEE IS REQUIRED TO PURCHASE FROM ANY OF THEM. NEITHER FRANCHISOR, ANY OF ITS AFFILIATES NOR ANY DESIGNATED SUPPLIER WILL HAVE ANY LIABILITY FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH ANY SUCH ITEMS, INCLUDING FRANCHISEES PURCHASE, USE OR RESALE OF ANY SUCH ITEMS. | |
9.5 | In the event Franchisor does not require Franchisee to purchase a particular item from Franchisor, its Affiliates, or a designated supplier, Franchisee may purchase such item from a supplier Franchisor has approved. If Franchisee proposes to purchase any such item from any supplier who is not then approved by Franchisor, Franchisee and the proposed supplier must submit to Franchisor all information that Franchisor may request in order to determine whether to approve the supplier. Franchisor will have the unconditional right to approve or disapprove any proposed supplier, and Franchisor may approve a supplier conditionally. Within thirty (30) days after Franchisor receives all requested information, Franchisor will communicate to Franchisee in writing Franchisors decision to approve or disapprove Franchisees proposed supplier. Franchisor will evaluate proposed suppliers on their ability to comply with applicable standards, specifications and procedures, and Franchisor will only approve those proposed suppliers that meet Franchisors high standards. Franchisor may disapprove any supplier who Franchisor previously approved, and Franchisee may not, after receipt of notice of disapproval, reorder from any supplier Franchisor has disapproved. Franchisor may prescribe procedures for the submission of requests for approval and impose obligations on approved suppliers, which will be incorporated in a written license agreement with the supplier. Franchisor may obtain from Franchisee and/or such approved suppliers reimbursement of Franchisors reasonable costs and expenses incurred in connection with the approval process of the suppliers compliance with Franchisors requirements. Franchisee acknowledges and agrees that Franchisor does not act as agent, representative or in any other intermediary or fiduciary capacity for Franchisee in Franchisors relationship with approved suppliers. Franchisor may impose limits on the number of approved suppliers. Franchisor has the right to monitor the quality of services provided by approved suppliers in a manner Franchisor deems appropriate and may terminate any approved supplier that does not meet Franchisors quality standards and specifications, as may be in effect from time to time. | |
9.6 | Franchisee agrees to place or display at the Sites (interior and exterior) only such signs, emblems, lettering, logos, and display materials that Franchisor approves from time to time. | |
10. | COMPUTER SYSTEM | |
10.1 | Franchisee agrees to use in the development and operation of the STORE the POS, cash register/computer terminals and operating software (Computer System) that Franchisor specifies from time to time. Franchisee agrees to install and use at the STORE the Computer System that Franchisor specifies from time to time and to transmit to Franchisor (and otherwise permit Franchisor to collect) in the form and at frequencies it specifies from time to time, electronic information from the Computer System. Franchisee also agrees to identify Product categories and other items in the Computer System in a form that Franchisor specifies. Franchisee agrees to install and maintain at the STORE a DSL or cable modem, or similar means of networking, and dedicated line that Franchisor may use to access sales information and other data on the Computer System. Franchisee is responsible for maintaining a secure network environment consistent with this Agreement and all applicable legal requirements. |
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10.2 | Franchisee acknowledges that Franchisor has developed specifications for certain components of the Computer System and may modify such specifications and the components of the Computer System from time to time. As part of the Computer System, Franchisor may require Franchisee to obtain specified computer hardware and/or software, including a license to use proprietary software developed by Franchisor or others. Franchisors modification of such specifications for the components of the Computer System may require Franchisee to incur costs to purchase, lease and/or license new or modified computer hardware and/or software and to obtain service and support for the Computer System during the term of this Agreement. Franchisee acknowledges that Franchisor cannot estimate the future costs of the Computer System (or additions or modifications thereto) and that the cost to Franchisee of obtaining the Computer System (including software licenses) (or additions or modification thereto) may not be fully amortizable over the remaining term of this Agreement. Within sixty (60) days after Franchisee receives notice from Franchisor, Franchisee agrees to obtain the components of the Computer System that Franchisor designates and requires. | |||
10.3 | Franchisee further acknowledges and agrees that Franchisor has the right to charge a reasonable systems fee for software or systems, modifications and enhancements specifically made for Franchisor that are licensed to Franchisee and other maintenance and support services that Franchisor or its Affiliates furnish to Franchisee related to the Computer System. | |||
11. | STORE OPENING | |||
11.1 | Franchisee agrees not to open the STORE for business until: | |||
(a) | Franchisor approves the STORE and site plan as developed in accordance with Franchisors specifications and System Standards; | |||
(b) | All required training has been completed to Franchisors satisfaction; | |||
(c) | Franchisee is in compliance with all Franchise Agreements, Development Agreements, and Commissary Facility Agreements, including the payment of the Initial Franchise Fee and all other amounts then due to Franchisor; | |||
(d) | Franchisor has been furnished with copies of all insurance policies required by this Agreement, or such other evidence of insurance coverage and payment of premiums as Franchisor requests or accepts; and | |||
(e) | Other items which Franchisor may reasonably require have been furnished to Franchisor. | |||
11.2 | Franchisee must properly staff the STORE prior to opening. Franchisor will supply at no charge an opening team that will assist Franchisee for a minimum of seven (7) days in the opening of the STORE. However, if Franchisee is developing several Krispy Kreme Stores or Commissary Facilities pursuant to a Development Agreement, this team will be made available at no charge for the first Krispy Kreme Store or Commissary Facility, one-half of a team will be made available at no charge for the second Krispy Kreme Store or Commissary Facility, a field consultant will be made available at no charge for the third Krispy Kreme Store or Commissary Facility and a field consultant may or may not be made available at no charge for any subsequent Krispy Kreme Stores or Commissary Facilities, at Franchisors sole discretion. No charge means Franchisor will be responsible for the teams travel, room and board, and salaries, but Franchisee will be responsible for all other charges or expenses. | |||
12. | CAPITAL IMPROVEMENTS | |||
12.1 | In addition to the requirements of Section 10 pertaining to the Computer System, Franchisor may, from time to time, require Franchisee to make certain capital improvements with respect to developing or operating the STORE, including: (a) the acquisition of new equipment (whether for the Products or other goods Franchisor requires Franchisee to sell or otherwise), fixtures, furnishings, signs, delivery vehicles, or other fixed assets; (b) periodic remodeling; and (c) replacement of obsolete or worn-out improvements, equipment, fixtures, furnishings, signs, delivery vehicles, or other fixed assets (Capital Improvements). |
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Franchisee agrees to make such Capital Improvements as Franchisor may specify from time to time in Franchisors sole discretion. Franchisee agrees not to make any modifications to any required Capital Improvements without Franchisors prior written approval. Franchisee further agrees that all intellectual property rights to any such Capital Improvements, if applicable, will be the exclusive property of Franchisor or its Affiliates. | ||
13. | INITIAL FRANCHISE FEE AND ROYALTIES | |
13.1 | Concurrently with the signing of this Agreement, Franchisee agrees to pay Franchisor a nonrecurring initial franchise fee in the amount specified in the Basic Terms (Initial Franchise Fee). The Initial Franchise Fee is fully-earned, non-refundable, and payable to Franchisor on the Effective Date. | |
13.2 | On or before the Payment Day each Week, Franchisee will pay Franchisor an amount equal to four and one-half percent (4.5%) of Net Sales (Royalties) for the preceding Week, provided however, Royalties on Authorized Off-Premises Sales shall be the following percentages of Net Sales: three and one half (3 ½ %) of Net Sales incurred during 2008; two and one-half percent (2 ½%) of Net Sales incurred during 2009; and one percent (1%) of Net Sales incurred during 2010 and thereafter. On or before the Reporting Day each Week, Franchisee will report to Franchisor, in the form it may require from time to time, the true and correct Net Sales of the STORE for the preceding Week. | |
13.3 | Franchisee agrees to give Franchisor authorization, in the form that Franchisor designates from time to time (the current from is attached as Exhibit D), for direct debits from, or credits to, the Account. Franchisee shall not close the Account (or allow the Account to be closed) without first opening and notifying Franchisor of an alternate Account, nor shall Franchisee terminate any direct debit authorization from the Account without a replacement authorization approved by Franchisor. Franchisee hereby authorizes Franchisor to initiate debit entries and/or credit entries to the Account for payments of Royalties and other amounts payable under this Agreement, including purchases for production equipment, fixtures, furnishings, doughnut mixes and other ingredients, packaging and all supplies purchased from Franchisor and any interest charges due thereon. Franchisee agrees to make the funds available in the Account for withdrawal no later than the due date for payment. The amount actually transferred from the Account to pay Royalties will be based on the STOREs Net Sales reported to Franchisor or determined by Franchisor from the records contained in the cash register/computer terminals of the STORE. If Franchisee has not reported Net Sales of the STORE to Franchisor for any reporting period as required above, Franchisee hereby authorizes Franchisor to debit the Account in an estimated amount based on prior reports of Net Sales. | |
13.4 | If at any time Franchisor determines that Franchisee has under-reported the Net Sales of the STORE, or underpaid Royalties or any other amounts due to Franchisor under this Agreement, Franchisee hereby authorizes Franchisor to initiate immediately a debit to the Account in the appropriate amount, including interest as provided for in this Agreement. Any overpayment will be credited to the Account through a credit effective as of the first reporting date after Franchisor and Franchisee determine that such credit is due. | |
13.5 | All amounts that Franchisee owes Franchisor will bear interest after their due date at the rate of one and one-half percent (1.5%) per month or the highest contract rate of interest permitted by law, whichever is less. Franchisee acknowledges that this Section does not constitute Franchisors agreement to accept any payments after they are due or Franchisors commitment to extend credit to, or otherwise finance Franchisees operation of, the STORE. Franchisees failure to pay all amounts when due constitutes a material breach and grounds for termination of this Agreement, as provided in Section 26 hereof, notwithstanding the provisions of this Section 13.5. | |
13.6 | Notwithstanding any designation Franchisee might make, Franchisor has sole discretion to apply any of Franchisees payments to any of its past due indebtedness to Franchisor in any sequence. Franchisee acknowledges and agrees that Franchisee has no right to set off any amounts that Franchisee claims Franchisor owes Franchisee against Royalties, Brand Fund contributions, payments for purchases, or any other amounts Franchisee owes Franchisor under this Agreement or otherwise. |
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14. | TRAINING AND GUIDANCE | |
14.1 | Before the STORE begins operating, Franchisor will furnish training on the operation of a Krispy Kreme Store as follows. Franchisor will furnish a training program for up to two (2) STORE managers furnished at Franchisors designated training facility and/or at an operating Krispy Kreme Store, at Franchisors discretion. The STORE managers are required to complete training to Franchisors satisfaction. Although Franchisor will furnish training to these managers of the STORE at no additional fee or other charge, Franchisee will be responsible for the managers wages, salaries, travel, room and board, and living expenses during training. Franchisee agrees to replace a manager immediately if Franchisor determines that he or she is not qualified to serve in this capacity at the STORE. Franchisor will furnish the same training program to one (1) additional manager of the STORE per year that Franchisee hires after the STORE is open, without fee or other charge, subject to the schedules for the training program in effect from time to time. Franchisee will be responsible for the managers wages, salaries, travel, room and board, and living expenses during training. | |
14.2 | Franchisor may require managers of the STORE to attend and successfully complete periodic or additional training programs, and Franchisor may also offer optional training programs. Except as provided in Section 14.1, Franchisor has the right to charge reasonable fees for providing any such initial, periodic or additional training programs. Franchisee will be responsible for the managers wages, salaries, travel, room and board, and living expenses incurred by Franchisee and Franchisees personnel in attending any training programs. Franchisee shall immediately replace any managers who fail to successfully complete any training program. | |
14.3 | Franchisor will furnish Franchisee periodic guidance with respect to the System, including improvements and changes to the System. Such guidance, at Franchisors discretion, will be furnished in the form of the System Standards Manuals, bulletins and other written materials, consultations by telephone or in person at Franchisors offices or at the STORE, or by any other means of communications. At Franchisees request, Franchisor may provide special assistance for which Franchisee will be required to pay the fees and charges Franchisor may establish from time to time. If Franchisee requests or Franchisor requires additional or special training for Franchisees employees, all of the expenses that Franchisor incurs in connection with such training, including per diem charges and travel and living expenses for Franchisors personnel, will be Franchisees responsibility. | |
15. | SYSTEM STANDARDS | |
15.1 | Franchisor will loan Franchisee one (1) copy of its System Standards Manuals solely for use in operating the STORE during the Term. The System Standards Manuals at all times will remain Franchisors property, and they are protected by copyright. Franchisee will keep its copy of the System Standards Manuals current and in a secure location at the STORE and shall return them to Franchisor immediately upon request, upon termination, or expiration of this Agreement or upon any Transfer. If any copies of the System Standards Manuals in Franchisees possession are lost, destroyed or significantly damaged, Franchisee will obtain a replacement copy at Franchisors then applicable charge. Franchisee may not at any time copy, duplicate, record, or otherwise reproduce any part of the System Standards Manuals or allow any unauthorized persons access to any System Standards Manuals, including those that are made available electronically, nor may Franchisee post all or any part of the System Standards Manuals on any limited access intranet sites without Franchisors approval. Franchisee may not distribute any part of the System Standards Manuals and may not disclose any part of the System Standards Manuals to any person, other than its employees who have a need to know the contents of the System Standards Manuals in order to perform their jobs. | |
15.2 | During the Term, Franchisee will comply with all of the System Standards and other requirements contained in System Standards Manuals, in addition to all applicable laws, regulations, rules, by-laws, orders and ordinances in connection with its operation of the STORE. In the event of a dispute relating to the contents of the System Standards Manuals, the master copy of the System Standards Manuals maintained by Franchisor at its principal office is controlling. Franchisor may at any time and from time to time change the System Standards Manuals to reflect changes in System Standards. |
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15.3 | To determine whether Franchisee is in compliance with this Agreement and all System Standards, Franchisor and/or Franchisors agents have the right at any time during regular business hours, and without prior notice to Franchisee, to: (a) inspect the STORE; (b) observe, photograph and videotape the operations of the STORE; (c) remove samples of any Products, materials or supplies for testing and analysis; (d) interview personnel of the STORE; (e) interview customers of the STORE and to require Franchisee to present to Franchisee customers any evaluation forms periodically prescribed by Franchisor and to participate in and/or request its customers to participate in any surveys performed by or on behalf of Franchisor; and (f) inspect and copy any books, records and documents relating to the operation of the STORE. | |
16. | MARKS | |
16.1 | Franchisee acknowledges that HDN Development Corporation is the Owner of the Marks and that Franchisor has the right to sublicense the use of the Marks. Franchisee further acknowledges that Franchisees right to use the Marks is derived solely from this Agreement and is limited to the performance of Franchisees responsibilities and obligations hereunder in accordance with the terms hereof. Franchisee acknowledges that its unauthorized use of any of the Marks will constitute a material breach of this Agreement, warranting immediate termination of this Agreement by Franchisor at Franchisors election. Franchisee acknowledges and agrees that its usage of the Marks and any goodwill established thereby shall inure solely to the benefit of the Owner of the Marks and that this Agreement does not confer any goodwill or other interests in any of the Marks upon Franchisee or Franchisees Owners (other than the rights specifically granted by this Agreement). All provisions of this Agreement applicable to the Marks apply to any additional trademarks, service marks, logos, trade dress and commercial symbols Franchisor authorizes Franchisee to use. Franchisee may not at any time during or after the Term contest, or assist any other person in contesting, the validity or ownership of any of the Marks. | |
16.2 | Franchisee shall use the Marks as the sole brand and other source identifier of the STORE, provided Franchisee shall identify itself as the independent owner and operator of the STORE in the manner Franchisor prescribes. Franchisee shall use the Marks only as Franchisor prescribes or allows in writing, whether in connection with the sale of Products and the operation of the STORE, or otherwise. | |
16.3 | Franchisee and Franchisees Owners, affiliates and agents may not: (a) challenge the validity of any of the Marks or any registration or application for registration therefore, or attempt to claim ownership of or to register anywhere any of the Marks or any derivation or colorable imitation thereof; (b) attempt to claim ownership of or to register anywhere any trademark, service mark, trade name, or trade dress confusingly similar to any of the Marks; (c) use any of the Marks or any other trademark or trade dress confusingly similar thereto in any manner that would jeopardize Franchisors rights in the Marks; or (d) do any act that would invalidate registration for any of the Marks. Franchisee may not use any of the Marks as part of any corporate or legal business name or with any prefix, suffix or other modifying words, terms, designs or symbols (other than logos licensed to Franchisee hereunder), or in any modified form, nor may Franchisee use any of the Marks in connection with the performance or sale of any unauthorized products or services or in any other manner Franchisor has not expressly authorized in writing. Franchisee agrees to display the Marks prominently in the manner Franchisor prescribes, including at the STORE, on packaging and serving materials that Franchisor designates and in connection with forms and advertising and marketing materials. Franchisee agrees to give such notices of trademark and service mark registrations and such other trademark and service mark notices as Franchisor specifies and to obtain any fictitious or assumed name registrations required under applicable law. | |
16.4 | Franchisee agrees to notify Franchisor immediately of any apparent infringement of, or challenge to, any of the Marks, or of any claim by any Person of any rights in any of the Marks, and Franchisee agrees not to communicate with any Person other than Franchisor, Franchisors attorneys and Franchisees attorneys in connection with any such apparent infringement, challenge or claim. Franchisor has sole discretion to take such action as Franchisor deems appropriate and the right to control exclusively any litigation, U.S. Patent and Trademark Office proceeding or any other proceeding arising out of any such apparent infringement, |
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challenge or claim or otherwise relating to any of the Marks, including the exclusive right to utilize counsel of Franchisors choice to prosecute or defend any such litigation or proceeding. Any award recovered in any such action or proceeding shall belong exclusively to Franchisor, or, as appropriate, Franchisors Affiliates. Franchisee agrees to sign any and all instruments and documents, render such assistance and do such acts and things as, in the opinion of Franchisor and/or Franchisors attorneys, may be necessary or advisable to protect and maintain Franchisors interests in any litigation or U.S. Patent and Trademark Office proceeding or other proceeding or otherwise to protect and maintain Franchisors interests in the Marks. | ||
16.5 | Franchisee may not register, or attempt to register, any of the Marks as part of any Internet domain name or URL, and may neither display nor use any of the Marks or other of Franchisors or its Affiliates intellectual property in connection with, or associate the System with (through a link or otherwise) any website advertising, address or listing on the World Wide Web or any other portion of the Internet without Franchisors prior written consent. | |
16.6 | Franchisee may not use any of the Marks to incur any obligation or indebtedness on behalf of Franchisor or its Affiliates. | |
16.7 | Franchisee hereby assigns to Franchisor all tangible media of expression derived from any of the Marks, and agrees to execute such further assignments as Franchisor may request. Franchisee shall take all actions and sign all documents necessary to give effect to the purpose and intent of this Section 16. Franchisee irrevocably appoints Franchisor as the true and lawful attorney-in-fact for Franchisee and authorizes Franchisor to take such actions and to execute, acknowledge and deliver all such documents as may from time to time be necessary to convey to Franchisor all rights granted by this Agreement. | |
16.8 | Franchisor may, in its sole discretion, modify or discontinue the use of any of the Marks and/or to use one or more additional or substitute trademarks or service marks. Franchisee agrees to comply with Franchisors directions with regard to such modification, discontinuance, addition, or substitution of use of any Mark. Franchisor will not be obligated to reimburse Franchisee for any expense or loss of revenue related thereto. | |
16.9 | Franchisee acknowledges that the Marks have established prestige and goodwill and are well recognized in the mind of the public and the trade, and that it is of great importance to Franchisor that the high standards and reputation symbolized by the Marks be maintained in the manufacture, marketing, and sale of the various Products and other authorized goods bearing and services utilizing the Marks. Accordingly, all items of Products manufactured, marketed, or sold, and services rendered, by Franchisee pursuant to this Agreement shall be of high quality as determined by Franchisor in its sole discretion. They shall be suitable for the exploitation of the Marks to the best advantage and the protection and enhancement of the Marks and the goodwill associated therewith. Franchisor shall have the right to, and shall, exercise quality control over Franchisees use of the Marks to the degree reasonably necessary to maintain the validity thereof and to protect the goodwill associated therewith, including but not limited to the right to inspect and monitor Franchisees use of the Marks in any manner and time prescribed by Franchisor. | |
17. | CONFIDENTIAL INFORMATION | |
17.1 | Franchisor will disclose to Franchisee such parts of the Confidential Information as Franchisor deems necessary or advisable from time to time for the performance of Franchisees obligations under this Agreement. Franchisee acknowledges and agrees that Franchisee and its Owners and Affiliates will not acquire any interest in or right to use the Confidential Information, other than the right to use it in the performance of Franchisees obligations under this Agreement, and that the use or duplication of the Confidential Information in any other business would constitute an unfair method of competition with Franchisor and with other developers and Franchisees of Krispy Kreme Stores. Franchisee agrees to disclose the Confidential Information to Franchisees Owners and to Franchisees employees only to the extent reasonably necessary for the performance of Franchisee obligations under this Agreement. Franchisees Owners must execute the form of Investor Personal Covenants Regarding Confidentiality, Non-Competition and Non-Solicitation attached hereto as Exhibit C. |
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17.2 | Franchisee acknowledges and agrees that the Confidential Information is confidential, is Franchisors proprietary and valuable asset, includes trade secrets owned by Franchisor and Franchisor Affiliates and is disclosed to Franchisee solely on the condition that Franchisee, Franchisees Owners and employees who have access to the Confidential Information agree, and Franchisee agrees that, during and after the Term, Franchisee, Franchisees Owners, Franchisees Affiliates and Franchisees employees: | |||
(a) | will not use Confidential Information in any other business or capacity; | |||
(b) | will maintain the absolute confidentiality of Confidential Information during and after the Term; | |||
(c) | will not make unauthorized copies of any portion of Confidential Information whether through electronic media, writings, or other tangible or intangible means of expression; and | |||
(d) | will adopt and implement all reasonable procedures that Franchisor prescribes from time to time to prevent unauthorized use or disclosure of Confidential Information, including restrictions on disclosure thereof to STORE personnel and others. | |||
Without limiting the foregoing, Franchisee, and each of its Owners, as applicable, each (i) acknowledge the possibility that they may gain access to Franchisors material non-public information and/or that of Franchisors parent company, Krispy Kreme Doughnuts, Inc. (KKDI), and that the securities laws prohibit trading in KKDI securities while in possession of such information, and (ii) agree to refrain from trading in KKDI securities in violation of such laws. | ||||
17.3 | Notwithstanding anything to the contrary contained in this Agreement and provided Franchisee has obtained Franchisors prior written consent, the restrictions on Franchisee disclosure and use of the Confidential Information will not apply to the following: | |||
(a) | information, methods, procedures, techniques and knowledge which are or become generally known in the food service business, other than through disclosure (whether deliberate or inadvertent) by Franchisee, Franchisees Owners, agents, or employees; and | |||
(b) | the disclosure of the Confidential Information in judicial, arbitration or administrative proceedings to the extent that Franchisee is legally compelled to disclose such information, provided Franchisee has notified Franchisor prior to such disclosure and has used Franchisees best efforts to obtain, and has afforded Franchisor sufficient opportunity to seek an appropriate protective order and obtain, assurances satisfactory to Franchisor of confidential treatment for the information required to be so disclosed. | |||
18. | PATENTS AND INVENTIONS | |||
18.1 | Franchisor and/or its Affiliates have obtained certain patent protection and may seek additional patent protections for other aspects of the System, the Products, and/or other technology related to the development and operation of Krispy Kreme Stores and Commissary Facilities and the production, marketing, and sale of the Products, or otherwise, including all improvements thereto. Nothing in this Agreement shall be construed as transferring ownership of any patents or patent applications from Franchisor or its Affiliates to Franchisee. Nothing in this Agreement shall be construed as transferring the right to sublicense any patents or patent applications from Franchisor or its Affiliates to Franchisee. | |||
18.2 | Franchisee agrees to promptly disclose to Franchisor and/or its Affiliates, and Franchisee agrees not to disclose to any other Person or permit any other Person to use (absent Franchisors prior written consent), any and all inventions (which term inventions includes any invention, idea, concept, method, technique, material, design, discovery, know-how, development, improvement, product, process, or innovation), including all improvements thereto, which are developed by Franchisee, Franchisees Owners, or Franchisees Affiliates, whether or not constituting protectable intellectual property, which are in any way related to the System, the Products, the development or operation of Krispy Kreme Stores or Commissary Facilities, or the production, marketing, or sale of the Products. |
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18.3 | Franchisee hereby agrees to assign, and does assign, to Franchisor and/or the Affiliates Franchisor designates all right, title, and interest in any invention, patent application, or patent conceived of or reduced to practice which is in any way related to the System, the Products, the development or operation of Krispy Kreme Stores or Commissary Facilities, or the production, marketing, or sale of the Products. Franchisor will have no obligation to make payments to Franchisee or any other Person with respect to any such assignments. Franchisee agrees that all such inventions, patent applications, and patents referenced above shall belong to Franchisor and/or Franchisors Affiliates, and that all right, title, and interest therein shall be the sole and exclusive property of Franchisor and/or Franchisors Affiliates, except that Franchisee shall be entitled to use all such inventions without charge by Franchisor in connection with this Agreement for the Term. | |
18.4 | Franchisee agrees to assist Franchisor and/or Franchisors Affiliates in the evaluation and documentation of any such inventions, patent applications, and patents referred to above. Franchisee also agrees to assist Franchisor and/or Franchisors Affiliates in the documentation of such assignment in any way necessary to transfer such interest to Franchisor and/or Franchisors Affiliates. Franchisee also agrees to assist Franchisor and/or Franchisors Affiliates in obtaining and maintaining such interest, including signing any declaration, patent application, assignment of rights, power of attorney, or other documents in such form and substance as Franchisor may require related to such invention or interest. Franchisee further agrees to assist Franchisor and/or Franchisors Affiliates in the protection and enforcement of any such interest, including testifying in any court action brought to enforce, protect, or defend such interest or invention. | |
19. | WORKS OF AUTHORSHIP AND COPYRIGHTS | |
19.1 | Franchisee agrees that all works (defined herein as including works of authorship, works in any tangible medium, writings, documents, and computer programs) authored, made, or produced by Franchisee, Franchisees Owners, or Franchisees Affiliates that are in any way related to the System, the Products, the development or operation of Krispy Kreme Stores or Commissary Facilities, or the production, marketing, or sale of the Products, whether or not such works are copyrightable, are works-made-for-hire and that Franchisee will not have, under this Agreement or otherwise, any right, title, or interest of any kind or nature in and to such works, and that all rights therein are the sole and exclusive property of Franchisor and/or its Affiliates. | |
19.2 | If any portion of any work described above is not considered a work-made-for-hire for Franchisor or its Affiliates, Franchisee hereby agrees to assign, and does assign, to Franchisor and/or the Affiliates Franchisor designates, all right, title, and interest in any work authored, made, or produced by Franchisee or its Owners or Affiliates (whether alone or in conjunction with one or more other persons) in the course of involvement with Franchisor under this Agreement or otherwise relating to the System, the Products, the Marks, the development or operation of Krispy Kreme Stores or Commissary Facilities, or the production, marketing, or sale of the Products. Franchisor will have no obligation to make payments to Franchisee or any other Person with respect to any such assignment. Franchisee agrees that all such works referenced above shall belong to Franchisor and/or its Affiliates, and that all right, title, and interest therein, including any copyrights, shall be the sole and exclusive property of Franchisor and/or its Affiliates, except that Franchisee shall be entitled to use all such works at the STORE (if authorized by Franchisor) without charge by Franchisor. | |
19.3 | Franchisee agrees to assist Franchisor in the evaluation, documentation, and registration of any such work described above. Franchisee also agrees to assist Franchisor in the documentation of such assignment in any way necessary to transfer such interest to Franchisor or its Affiliates. Franchisee also agrees to assist Franchisor in obtaining and maintaining such interest, including signing any assignment of rights, copyright application, power of attorney, or other document in such form and substance as Franchisor may require related to such work or interest. Franchisee further agrees to assist Franchisor in the protection and enforcement of any such interest, including testifying in any court action brought to enforce, protect, or defend such work. |
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20. | EXCLUSIVE RELATIONSHIP | |||
20.1 | Franchisee acknowledges and agrees that Franchisor would be unable to (a) protect the Confidential Information against unauthorized use or disclosure; (b) preserve the prestige, integrity, and goodwill of the Products, Marks, and System; or (c) encourage the free exchange of ideas and information among Krispy Kreme Stores and Commissary Facilities if franchisees and owners of Krispy Kreme Stores and Commissary Facilities or their owners were permitted to engage in or benefit from certain competitive activities. Franchisee also acknowledges that Franchisor has granted the franchise rights to Franchisee in consideration of and reliance on Franchisees agreement that Franchisee and its Owners will deal exclusively with Franchisor. Therefore, except as expressly authorized by this Agreement or another written agreement with Franchisor, Franchisee agrees that during the term of this Agreement, without Franchisors prior written consent, neither Franchisee, nor any other Restricted Person will: | |||
(i) | have any Ownership Interest in a Competitive Business; | |||
(ii) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business; | |||
(iii) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business, where such services (A) are substantially similar to those provided to Franchisor or Franchisor Affiliates by Franchisee or the respective Restricted Person; or (B) create a relationship between Franchisee or the Restricted Person and such Competitive Business in which Franchisee or the Restricted Person could be reasonably expected to benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any material Confidential Information to such Competitive Business; | |||
(iv) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility, or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Franchisee to hire any such Person, then Franchisee agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | |||
(v) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility as the case may be. | |||
20.2 | At all times during the Term, Franchisee will designate a Managing Director of its business pursuant to this Agreement who shall complete Franchisors mandatory training program to Franchisors satisfaction. The initial Managing Director is identified in the Basic Terms. The Managing Director will use his or her full-time efforts to fulfill Franchisees obligations under this Agreement and under other Franchise Agreements and any Commissary Facility Agreements, and will not directly or indirectly engage in any other business or activity that requires any significant management responsibility or time commitments, or that otherwise conflicts with Franchisees obligations under this Agreement. If the Managing Director is terminated in that role, or if the Managing Director does not carry out his or her responsibilities or otherwise perform in accordance with this Agreement, Franchisee will promptly designate a replacement, and each such replacement shall complete Franchisors mandatory training program to Franchisors satisfaction. | |||
21. | COMPLIANCE WITH LAW | |||
21.1 | In operating the STORE, Franchisee agrees to comply with all laws, including, but not limited to, all federal, state, and local laws, rules, regulations, ordinances, court orders, and decrees. Franchisee agrees that its failure to comply with these laws is a material breach and grounds for termination of this Agreement. |
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21.2 | Franchisee and Franchisees Principal Owners represent and warrant to Franchisor that neither Franchisee nor any Principal Owner is identified, either by name or an alias, pseudonym or nickname, on the lists of Specially Designated Nationals or Blocked Persons maintained by the U.S. Treasury Departments Office of Foreign Assets Control. Further, Franchisee and Franchisees Principal Owners represent and warrant that neither has violated and agree that neither will violate any law (in effect now or which may become effective in the future) prohibiting corrupt business practices, money laundering or the aid or support of persons or entities who conspire to commit acts of terror against any person or government, including acts prohibited by the U.S. Patriot Act, U.S. Executive Order 13244, or similar law. | |
22. | MARKETING AND ADVERTISING | |
22.1 | Franchisor has established a fund (the Brand Fund) for the creation, production and/or implementation of advertising, promotional, marketing, and public relations programs and materials Franchisor deems appropriate. Franchisee agrees to contribute to the Brand Fund amounts (as determined by Franchisor from time to time) not more than one percent (1%) of the Net Sales of the STORE, payable by electronic funds transfer in the same manner as the Royalties. Krispy Kreme Stores and Commissary Facilities located in the U.S. and owned or operated by Franchisor shall contribute to the Brand Fund at least on the same basis. | |
22.2 | Franchisor will direct all programs funded by the Brand Fund. Periodically, Franchisor may give Franchisee, at no cost, samples of advertising, marketing, and promotional formats and materials produced and funded by the Brand Fund. Franchisee may purchase additional copies of these materials at cost. | |
22.3 | The Brand Fund will be accounted for separately from Franchisors other funds and will not be used to defray any of its general operating expenses, except for reasonable salaries, administrative costs and overhead Franchisor may incur in activities related to the administration of the Brand Fund and its programs, including conducting market research, preparing advertising and marketing materials and collecting and accounting for contributions to the Brand Fund. Franchisor may spend in any fiscal year an amount greater or less than the aggregate contributions of all Krispy Kreme Stores and Commissary Facilities to the Brand Fund in that year, and the Brand Fund may borrow from Franchisor or other lenders to cover deficits in the Brand Fund or cause the Brand Fund to invest any surplus for future use by the Brand Fund. | |
22.4 | Franchisor will prepare annually a statement of monies collected and costs incurred by the Brand Fund and furnish Franchisee a copy upon Franchisees written request. Except as otherwise expressly provided in this Section 22, Franchisor assumes no direct or indirect liability or obligation with respect to the maintenance, direction or administration of the Brand Fund. Franchisor does not act as trustee or in any other fiduciary capacity with respect to the Brand Fund. | |
22.5 | Franchisor may operate the Brand Fund through a separate entity whenever it deems appropriate. The successor entity will have all of the rights and duties specified in Sections 22.1 through 22.8. | |
22.6 | Franchisor cannot ensure that Brand Fund expenditures in or affecting any geographic area are proportionate or equivalent to Brand Fund contributions by contributors operating in that geographic area or that any contributor benefits directly or in proportion to its Brand Fund contribution. | |
22.7 | Franchisor has the right, but no obligation, to use collection agents and institute legal proceedings to collect Brand Fund contributions at the Brand Funds expense. Franchisor may also forgive, waive, settle and compromise any and all claims for contributions to the Brand Fund. Except as expressly provided in Sections 22.1 through 22.8, Franchisor assumes no direct or indirect liability or obligation to Franchisee for collecting amounts due to, maintaining, directing or administering the Brand Fund. | |
22.8 | Franchisor may at any time defer or reduce the Brand Fund contributions of one or more franchisees and, upon thirty (30) days prior written notice to Franchisee, reduce or suspend Brand Fund contributions and operations for one or more periods of any length and terminate (and, if terminated, reinstate) the Brand Fund. If Franchisor terminates the Brand Fund, it will distribute all unspent monies to its franchisees, and to Franchisor and its Affiliates, in proportion to their, and Franchisors, respective Brand Fund contributions during the preceding twelve (12) month period. |
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22.9 | Franchisee will not execute or conduct any advertising or promotional activity in relation to the STORE or the System without Franchisors prior written approval. Franchisee must submit annual marketing plans to Franchisor in a form Franchisor specifies. Such annual marketing plans require Franchisor approval. | |
22.10 | Franchisee will be responsible for conducting, with Franchisors guidance, a grand opening marketing program (the Grand Opening Marketing Program) during the period commencing thirty (30) days before and ending ninety (90) days after the opening of the STORE. The Grand Opening Marketing Program will utilize public relations and advertising, media, and promotional materials that Franchisor has developed or approved. Amounts so spent on the Grand Opening Marketing Program, up to one percent (1%) of the STOREs Net Sales, will be credited against Franchisees requirement to spend three percent (3%) of the STOREs Net Sales, as set forth in Section 22.11, for the first year. | |
22.11 | During each twelve (12) month period of the Term, Franchisee agrees to spend for advertising and promotion of the STORE not less than three percent (3%) of the STOREs Net Sales and to submit plans for such programs for Franchisors approval or disapproval in accordance with schedules prescribed by Franchisor. For these purposes, advertising expenditures include amounts spent for advertising media, such as television, radio, newspaper, billboards, posters, direct mail, yellow pages, collateral promotional and novelty items, advertising on public vehicles, such as cabs and buses, and, if not provided by Franchisor, the cost of producing approved materials necessary to participate in these media. Advertising expenditures do not include Brand Fund contributions or amounts spent for items which Franchisor, in its reasonable judgment, deems inappropriate for meeting the minimum advertising requirement, including permanent on-premises signs and menu boards, lighting, menus, premiums, discounts, free offers, charitable contributions, fundraising activities, and employee incentive programs. Franchisor will have the right to review Franchisees books and records from time to time to determine Franchisees expenditures for local advertising and promotion. | |
22.12 | Before Franchisee uses any advertising, promotional or marketing materials that Franchisor has not prepared or previously approved, Franchisee must send samples of all such materials to Franchisor for approval. If Franchisee does not receive Franchisors written disapproval within thirty (30) days after Franchisor receives the materials, they are deemed approved. Franchisee may not use any advertising, promotional, or marketing materials that Franchisor has disapproved. | |
22.13 | Franchisee agrees that any advertising, promotion and marketing it conducts will be completely clear and factual and not misleading and conform to the highest standards of ethical marketing and the promotion policies and System Standards that Franchisor prescribes from time to time. | |
22.14 | At Franchisors option, Franchisor may establish one or more websites to advertise, market, and promote Krispy Kreme Stores, the Products, and/or the Krispy Kreme franchise system (each a System Website). If Franchisor establishes a System Website, Franchisor may require Franchisee to participate in such System Website by including information relating to the STORE. Franchisor will control website traffic and registration of additional domain names. | |
22.15 | Franchisee may not develop, maintain, or authorize any other website that mentions or describes Franchisee or the STORE or that displays any of the Marks without obtaining written approval from Franchisor. | |
22.16 | Franchisor has the right to establish local and/or regional advertising cooperatives for Krispy Kreme Stores in Franchisees local or regional area, covering such geographical areas as Franchisor may designate from time to time. Franchisee must participate in such advertising cooperatives and their programs and abide by their by-laws. Franchisee must contribute such amounts to the advertising cooperatives as they determine from time to time in accordance with their by-laws. Any Krispy Kreme Stores owned by Franchisor or any of its Affiliates located in such designated local or regional areas will contribute to the cooperatives on at least the same basis. Contributions to such local and regional advertising cooperatives are credited toward the annual three percent (3%) advertising expenditures required by Section 22.11. |
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23. | ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS | |
23.1 | Franchisee will, at Franchisees expense, retain all records relating to the development and operation of the STORE. All such records shall be kept at the premises of the STORE, unless Franchisor otherwise approves. Franchisee will furnish to Franchisor via the medium Franchisor prescribes from time to time, in a form consistent with its then-current accounting practices and procedures: (a) by each Reporting Day, reports of the STOREs sales, cost of goods sold, labor expense and number of transactions for the preceding Week; (b) within thirty (30) days after the end of each month, an operating income statement of Franchisee, the STORE, or both for such month and fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied; (c) within forty-five (45) days after the end of each fiscal quarter, a balance sheet and income statement of Franchisee, the STORE, or both for such quarter and fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied; (d) within one hundred twenty days (120) days after the end of Franchisees fiscal year, a balance sheet and an income statement for the STORE and/or Franchisee for such fiscal year (reflecting all year-end adjustments), and a statement of cash flow of the STORE, prepared in accordance with generally accepted accounting principles consistently applied; and (e) upon request by Franchisor, such other data, reports, information and supporting records as Franchisor may from time to time prescribe. | |
23.2 | Franchisee agrees to maintain and to furnish to Franchisor, upon request, complete copies of all withholding, income, sales, value added, use and service tax returns filed by Franchisee reflecting activities of the STORE. | |
23.3 | Franchisor has the right to (a) disclose data derived from all reports; (b) require Franchisee to have audited financial statements prepared on an annual basis; and (c) to access all cash registers/computer terminals and Franchisees Computer System and retrieve all information relating to the STORE, as often as it deems appropriate. Franchisee will take such action as may be necessary to provide such access to Franchisor. Furthermore, Franchisee will immediately report to Franchisor any events or developments which may have a significant or material adverse impact on the operation of the STORE, Franchisees performance under this Agreement, or the goodwill associated with the Marks and Krispy Kreme Stores. Franchisee will sign and verify as correct and complete each report and financial statement submitted by Franchisee in the manner prescribed by Franchisor. | |
23.4 | Each year, Franchisor requires that Franchisee submit an annual business plan for Franchisors review. Further, Franchisor has the right to audit at any time during regular business hours, and without prior notice to Franchisee, to inspect and audit, or cause to be inspected and audited, the business, financial and tax records of the STORE and Franchisee. Franchisee will fully cooperate and cause its employees and agents to fully cooperate with Franchisors representatives and independent accountants hired by Franchisor to conduct any such inspection or audit. Franchisors right to audit includes the right to access the Computer System. In the event any such inspection or audit reveals an understatement of the Net Sales of the STORE, Franchisee will pay to Franchisor, within fifteen (15) days after receipt of the inspection or audit report, the Royalty payments and Brand Fund contributions (and any required advertising cooperative contributions) due on the amount of such understatement, plus interest (at the rate and on the terms provided in this Agreement) from the date originally due until the date of payment. Further, in the event such inspection or audit is made necessary by Franchisees failure to furnish timely any reports or supporting records required to be submitted under this Agreement or if an understatement of Net Sales for the period of any audit is determined by any such audit or inspection to be greater than two percent (2%), Franchisee will reimburse Franchisor for the cost of such inspection or audit, including legal fees, accountants fees and the travel expenses, room and board, per diem charges, and other associated expenses for Franchisors employees. The foregoing remedies are in addition to all other remedies and rights contained in this Agreement or under applicable law. | |
24. | TRANSFER | |
24.1 | This Agreement is fully transferable by Franchisor (without any obligation to provide notice to Franchisee or obtain Franchisees consent) and will inure to the benefit of any assignee or other legal successor to Franchisors interests. Franchisee agrees that Franchisor will have the right, from time to time, to delegate |
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the performance of any portion of or all of its obligations and duties under this Agreement or otherwise in connection with the System to designees, whether the same are Franchisors agents or independent contractors with which Franchisor has contracted to provide such services or perform such duties. | ||||
24.2 | Franchisees rights and duties under this Agreement are personal to Franchisee, or if Franchisee is a business corporation, partnership, limited liability company or any other legal entity, its Owners. Accordingly, neither Franchisee nor any of its Owners may Transfer the Franchise without Franchisors prior approval and without complying with the terms and conditions of Section 24. Any Transfer without such approval or compliance constitutes a breach of this Agreement, and is void and of no force or effect. Notwithstanding the foregoing, Franchisee may not under any circumstances directly or indirectly subfranchise or sublicense any of its rights hereunder. | |||
24.3 | If Franchisor has not exercised its right of first refusal under Section 24.5, Franchisor will not unreasonably withhold its approval of a Transfer of the Franchise that meets all of the reasonable restrictions, requirements and conditions Franchisor imposes on the Transfer, the transferor(s) and/or the transferee(s) from time to time, which shall in any event include, the following: | |||
(a) | Franchisee must be in Good Standing; | |||
(b) | the proposed transferee and its owners (if the proposed transferee is a corporation, partnership, limited liability company or other legal entity) must provide Franchisor on a timely basis all information Franchisor requests, and must be individuals acting in their individual capacities who are of good character and reputation, who must have sufficient business experience, aptitude and financial resources to operate the STORE pursuant to this Agreement and to develop Krispy Kreme Stores and Commissary Facilities pursuant to the Development Agreement, if applicable, and who must otherwise meet Franchisors then-current standards for approval; | |||
(c) | the proposed transferee may not be an entity, or be affiliated with an entity, that is required to comply with the reporting and information requirements of the Securities Exchange Act of 1934, as amended; | |||
(d) | the transferee (and its owners) must agree to be bound by all of the provisions of this Agreement for the remainder of the Term or, at Franchisors option, execute Franchisors then current Franchise Agreement and related documents used in the state where the STORE is located (which may provide for different royalties, advertising contributions and expenditures, duration and other rights and obligations than those provided in this Agreement); | |||
(e) | the transferee must acquire, in a concurrent transaction, all of the rights and obligations of Franchisee and its Affiliates under all agreements between Franchisee or its Affiliates and Franchisor or its Affiliates, including any Development Agreement and all Franchise Agreements and Commissary Facility Agreements executed by Franchisee or its Affiliates pursuant to the Development Agreement or pursuant to any other development or similar agreement with Franchisor; | |||
(f) | Franchisee or the transferee must pay Franchisor a transfer fee in an amount equal to Five Thousand Dollars ($5,000.00); | |||
(g) | Franchisee and its Owners and Affiliates must, except to the extent limited or prohibited by applicable law, execute a general release, in form and substance satisfactory to Franchisor, of any and all claims against Franchisor, its Affiliates and shareholders, members, managers, officers, directors, employees, agents, successors and assigns; | |||
(h) | Franchisee must provide Franchisor with all information requested by Franchisor in connection with the Transfer, and Franchisor must not have disapproved the material terms and conditions of such Transfer (including the price and terms of payment and the amount to be financed by the transferee in connection with such Transfer) on the basis that they are so burdensome as to be likely, in Franchisors reasonable judgment, to adversely affect the transferees operation of the STORE or its compliance with this Agreement, all Franchise Agreements, Commissary Facility Agreements, and Development Agreements being transferred, and any other agreements to be executed by the transferee; |
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(i) | If Franchisee (or any of its Owners or Affiliates) finances any part of the sales price of the transferred interest, Franchisee and/or its Owners or Affiliates must agree that all obligations of the transferee, and security interests reserved by any of them in the assets transferred, will be subordinate to the transferees obligations to pay all amounts due Franchisor and its Affiliates and to otherwise comply with this Agreement, all Franchise Agreements, Commissary Facility Agreements, and Development Agreements being transferred and any other agreements to be executed by the transferee; | |||
(j) | Franchisee and its Owners must execute non-competition and non-solicitation covenants, in form and substance satisfactory to Franchisor, substantially similar to those contained in Section 27.3; and | |||
(k) | Franchisee and its Owners and Affiliates must execute such other documents and do such other things as Franchisor reasonably requires to protect its rights under this Agreement and all Development Agreements, Franchise Agreements, Commissary Facility Agreements and other agreements being transferred. | |||
24.4 | Franchisors approval of a Transfer of the Franchise does not constitute: (a) a representation as to the fairness of the terms of any agreement or arrangement between Franchisee or its Owners and the transferee or as to the prospects for success by the transferee; or (b) a release of Franchisee and its Owners, a waiver of any claims against Franchisee or its Owners or a waiver of Franchisors right to demand the transferees compliance with this Agreement or any other agreements being transferred. Any approval shall apply only to the specific Transfer of the Franchise being proposed and shall not constitute Franchisors approval of, or have any bearing on, any other proposed Transfer of the Franchise. | |||
24.5 | If Franchisee or any of its Owners desires to Transfer the Franchise (other than by gift or bequest), Franchisee or such Owners must obtain a bona fide, executed written offer from a responsible and fully disclosed purchaser (which must contain a confidentiality covenant by Franchisee and the prospective buyer to which Franchisor shall be an intended third party beneficiary) and must deliver immediately to Franchisor a complete and accurate copy of such offer. If the offeror proposes to buy any other property or rights from Franchisee or any of its Owners or Affiliates (other than rights under any Development Agreements, Franchise Agreements or Commissary Facility Agreements) as part of the bona fide offer, the proposal for such property or rights must be set forth in a separate, contemporaneous offer that is fully disclosed to Franchisor, and the price and terms of purchase offered to Franchisee or its Owners for the Transfer of the Franchise must reflect the bona fide price offered therefor and not reflect any value for any other property or rights. | |||
24.6 | Franchisor has the option, exercisable by notice delivered to Franchisee or its Owners within thirty (30) days from the date of delivery of a complete and accurate copy of such offer to Franchisor, to purchase such interest for the price and on the terms and conditions contained in such offer, provided that: (a) Franchisor may substitute cash for any form of payment proposed in such offer; (b) Franchisors credit shall be deemed equal to the credit of any proposed purchaser; (c) Franchisor shall have not less than ninety (90) days from the option exercise date to consummate the transaction; and (d) Franchisor shall not be required to pay deposits (such as earnest money) or to escrow funds prior to closing. Franchisor has the right to investigate and analyze the business, assets and liabilities and all other matters Franchisor deems necessary or desirable in order to make an informed investment decision with respect to the fairness of the terms of the right of first refusal. Franchisor may conduct such investigation and analysis in any manner Franchisor deems reasonably appropriate, and Franchisee and its Owners must cooperate fully with Franchisor in connection therewith. | |||
24.7 | If Franchisor exercises its option to purchase, Franchisor is entitled to purchase such interest subject to all representations and warranties, closing documents, releases, non-competition covenants and indemnities as Franchisor reasonably may require, provided if Franchisor exercises its option as a result of a written offer reflected in a fully negotiated definitive agreement with the proposed purchaser, Franchisor will not be entitled to any additional representations, warranties, closing documents or indemnities that will have a materially adverse effect on Franchisees rights and obligations under the definitive agreement. |
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If Franchisor does not exercise its option to purchase, Franchisee or its Owners may complete the sale to such offeror pursuant to and on the exact terms of such offer, subject to Franchisors approval of the Transfer as provided in Sections 24.2 and 24.3, provided that if the sale to such offeror is not completed within ninety (90) days after delivery of such offer to Franchisor, or if there is a change in the terms of the offer, Franchisee must promptly notify Franchisor and Franchisor shall have an additional option to purchase (on the terms of the revised offer, if any, and otherwise as set forth herein) during the thirty (30)-day period following Franchisees notification of the expiration of the ninety (90)-day period or the change to the terms of the offer. | ||||
24.8 | Neither Franchisee nor any of its Owners or Affiliates may issue or sell, or offer to issue or sell, any of Franchisees securities or any securities of any of its Affiliates, regardless of whether such sale or offer would be required to be registered pursuant to the provisions of the Securities Act of 1933, as amended, or the securities laws of any other jurisdiction and regardless of the means by which such sale is conducted, directly or indirectly, or by operation of law (including by merger, consolidation, reorganization or otherwise) without obtaining Franchisors prior consent and complying with all of its requirements and restrictions concerning use of information about Franchisor and its Affiliates. Neither Franchisee nor any of its Owners or Affiliates may issue or sell Franchisees securities or the securities of any of its Affiliates if: (1) such securities would be required to be registered pursuant to the Securities Act of 1933, as amended, or such securities would be owned by more than 35 persons; or (2) after such issuance or sale, Franchisee or such Affiliate would be required to comply with the reporting and information requirements of the Securities Exchange Act of 1934, as amended. Any memorandum or other communications circulated in connection with any solicitation of offers to purchase that would require Franchisors consent to Transfer the Franchise (through whatever form of transaction, whether through direct or indirect sale of assets or securities, by operation of law or otherwise) shall be subject to approval by Franchisor. | |||
25. | SUCCESSOR FRANCHISE | |||
25.1 | Upon expiration of the Term, Franchisor will grant Franchisee a successor franchise on Franchisors then-current terms if Franchisee and each of its Owners and Affiliates are in full compliance with the provisions of this Agreement and any other agreements with Franchisor or any of its Affiliates, and provided that the following conditions are met: | |||
(a) | Franchisee maintains possession of the Site and agrees to upgrade the STORE to Franchisors then-current standards for Krispy Kreme Stores; | |||
(b) | If Franchisee is unable to maintain possession of the Site, or if in Franchisors judgment the STORE should be relocated, and Franchisee secures a substitute site approved by Franchisor, Franchisee develops such site in compliance with Franchisors then-current standards for Krispy Kreme Stores, and continues to operate the STORE at the Site until operations are transferred to the substitute site; | |||
(c) | Franchisee gives Franchisor written notice of its election to acquire a successor franchise at least six (6) months but not more than twelve (12) months prior to the expiration of the term of the Franchise; | |||
(d) | Franchisee and its Owners and Affiliates are then in compliance with all of the terms and conditions of this Agreement and all other agreements between such parties and Franchisor and its Affiliates, and have been in substantial compliance with all such agreements throughout their respective terms; | |||
(e) | Franchisee and its Owners will execute the terms and conditions of the agreements Franchisor then customarily uses in connection with the grant of successor franchises for Krispy Kreme Stores in the state where the STORE is located; and | |||
(f) | Franchisee and its Owners and Affiliates will execute and deliver general releases, in form satisfactory to Franchisor, of any and all claims against Franchisor and its Affiliates, shareholders, officers, directors, employees, agents, successors, and assigns. | |||
25.2 | Once Franchisor receives notice from Franchisee in accordance with Section 25.1(c) above, Franchisor will give Franchisee notice, within ninety (90) days after Franchisors receipt of Franchisees notice and any supporting information requested by Franchisor, of Franchisors decision: (a) to grant Franchisee |
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a successor franchise; (b) to grant Franchisee a successor franchise on the condition that deficiencies of the STORE, and/or in its operation of the STORE, or such other matters as Franchisor may indicate are deficient in its sole discretion are corrected; or (c) not to grant Franchisee a successor franchise. If Franchisors notice states that Franchisee must cure certain deficiencies of the STORE, its operation or otherwise as a condition to the grant of a successor franchise, Franchisee will have thirty (30) days from the receipt of such notice to cure such deficiencies. If Franchisee does not cure such deficiencies, Franchisor will give Franchisee written notice of a decision not to grant a successor franchise, based upon Franchisee failure to cure such deficiencies, within thirty (30) days after the expiration of the cure period, provided, however, that Franchisor will not be required to give Franchisee such notice if Franchisor decides not to grant Franchisee a successor franchise due to Franchisees breach of this Agreement during the cure period or the thirty (30) day period thereafter. | ||||
26. | TERMINATION OF FRANCHISE | |||
26.1 | Franchisee is in material breach of this Agreement, and this Agreement will automatically terminate without notice, at Franchisors discretion, if: (a) Franchisee becomes insolvent by reason of its inability to pay its debts as they mature; (b) Franchisee is adjudicated bankrupt or insolvent; (c) Franchisee files a petition in bankruptcy, reorganization or similar proceeding under the bankruptcy laws of the United States or has such a petition filed against Franchisee, which is not discharged within thirty (30) days; (d) a receiver or other custodian, permanent or temporary, is appointed for Franchisees business, assets or property; (e) Franchisee requests the appointment of a receiver or makes a general assignment for the benefit of creditors; (f) a final judgment against Franchisee in the amount of Fifty Thousand Dollars ($50,000.00) or more remains unsatisfied of record for sixty (60) days or longer; (g) Franchisees bank accounts, property or accounts receivable are attached; (h) execution is levied against Franchisees business or property; (i) suit is filed to foreclose any lien or mortgage against any of Franchisees assets and such suit is not dismissed within thirty (30) days; (j) Franchisee voluntarily dissolves or liquidates or has a petition filed for corporate or partnership dissolution and such petition is not dismissed within thirty (30) days; or (k) Franchisees assets, property or interest are blocked under any law, ordinance or regulation relating to terrorist activities or if Franchisee is otherwise in violation of any such law, ordinance or regulation. | |||
26.2 | In addition to Franchisors right to terminate pursuant to other provisions of this Agreement and under applicable law, Franchisor has the right to terminate this Agreement, effective upon delivery of notice of termination to Franchisee, if Franchisee or any of its Principal Owners or Affiliates: | |||
(a) | opens the STORE in violation of Section 11.1; | |||
(b) | abandons or fails actively to operate the STORE for five (5) consecutive days, unless a closing of the STORE has been approved by Franchisor; | |||
(c) | makes any material misstatement or omission in the Franchise Application or in any other information, report, or summary provided to Franchisor at any time; | |||
(d) | suffers cancellation or termination of the lease or sublease for the STORE; | |||
(e) | is convicted of, or pleads no contest to, a felony or other crime or offense that Franchisor believes, in its sole judgment, may adversely affect the System or the goodwill associated with the Marks; | |||
(f) | makes an unauthorized Transfer of the Franchise; | |||
(g) | makes any unauthorized use or disclosure of any Confidential Information or uses, duplicates or discloses any portion of the System Standards Manuals in violation of this Agreement; | |||
(h) | fails or refuses to comply with any mandatory specification, standard, or operating procedure prescribed by Franchisor relating to the cleanliness or sanitation of the STORE or violates any applicable health, safety or sanitation law, ordinance or regulation that Franchisor in its sole judgment believes may pose harm to the public or to its reputation, and does not correct such failure, refusal or violation within 24 hours after written notice thereof is delivered to Franchisee; |
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(i) | fails to report accurately Net Sales, to establish, maintain and/or have sufficient funds available in the Account as required by Section 13.3 or fails to make payment of any amounts due Franchisor or any of its Affiliates, and does not correct such failure within ten (10) days after written notice of such failure is delivered to Franchisee; | |||
(j) | fails to make a timely payment of any amount due to a supplier unaffiliated with Franchisor (other than payments which are subject to bona fide dispute), and does not correct such failure within thirty (30) days after Franchisor delivers to Franchisee notice of such failure to comply; | |||
(k) | fails to comply with any other provision of this Agreement or any other mandatory specification, standard or operating procedure or other obligation prescribed in the System Standards Manuals and does not correct such failure within thirty (30) days after notice of such failure to comply is delivered to Franchisee; or | |||
(l) | fails on three (3) or more separate occasions within any period of twelve (12) consecutive months to submit when due reports or other data, information or supporting records or to pay when due Royalties, Brand Fund contributions or other payments due Franchisor, any of its Affiliates or any unaffiliated suppliers or otherwise fails to comply with this Agreement or any mandatory specification, standard or operating procedure or other obligation prescribed in the System Standards Manuals, whether or not such failure is corrected after notice is delivered to Franchisee. | |||
Franchisor has no obligation whatsoever to refund any portion of the Initial Franchise Fee upon any termination. | ||||
26.3 | Franchisor has the option, but not the obligation, to cure any of Franchisees default under Section 26.2. If Franchisor chooses to exercise such option, then within five (5) days of the date Franchisor sends Franchisee notice of Franchisors expenses incurred in curing Franchisees default, Franchisee shall reimburse Franchisor for all such expenses. | |||
27. | EFFECT OF TERMINATION OR EXPIRATION | |||
27.1 | Within ten (10) days after the effective date of termination or expiration (without renewal) of this Agreement, Franchisee must pay Franchisor and its Affiliates all Royalties, Brand Fund contributions, amounts owed for purchases from Franchisor or its Affiliates, interest due on any of the foregoing and all other amounts owed to Franchisor or its Affiliates which are then unpaid. | |||
27.2 | Upon the termination or expiration (without renewal) of this Agreement, Franchisee will: | |||
(a) | not directly or indirectly at any time or in any manner use any Mark, any colorable imitation of any Mark or any other indicia of a Krispy Kreme Store or Commissary Facility; | |||
(b) | take such action as may be required to cancel all fictitious or assumed name registrations relating to Franchisees use of any Mark; | |||
(c) | notify the telephone company and all telephone directory publishers of the termination or expiration of Franchisees right to use any telephone number and any regular, classified or other telephone directory listings associated with any Mark and to authorize transfer of the number to Franchisor or at its direction; | |||
(d) | if Franchisor does not exercise its option to purchase the STORE pursuant to Section 27.5, promptly remove from the Site, and discontinue using for any purpose, all signs, fixtures, furniture, decor items, advertising materials, forms and other materials and supplies which display any of the Marks or any distinctive features, images, or designs associated with Krispy Kreme Stores or Commissary Facilities and, at Franchisees expense, make such alterations as may be necessary to distinguish the Site so clearly from its former appearance as a Krispy Kreme Store as to prevent any possibility of confusion by the public; |
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(e) | immediately cease to use all Confidential Information and return to Franchisor all copies of the System Standards Manuals and any other confidential materials which have been loaned to Franchisee; | |||
(f) | immediately discontinue any mode of communications on the Internet directly or indirectly relating to the STORE, including any websites or web pages, and immediately take all steps required by Franchisor to transfer to Franchisor any domain name associated with the STORE (such as executing a registrant name change agreement with the applicable registrar). Franchisee irrevocably appoints an authorized officer of Franchisor as Franchisees duly authorized agent and attorney-in-fact to execute all instruments and take all steps to transfer such domain names; | |||
(g) | immediately discontinue the use of any proprietary software; and | |||
(h) | within thirty (30) days after the effective date of termination or expiration, furnish evidence satisfactory to Franchisor of Franchisees compliance with the foregoing obligations. | |||
27.3 | Upon termination or expiration (without renewal) of this Agreement, neither Franchisee nor any Restricted Person will, for a period of two (2) years commencing on the effective date of such termination or expiration or the date on which Franchisee ceases to conduct its activities under this Agreement, whichever is later: | |||
(a) | have any Ownership Interest in a Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility open or under construction on the effective date of termination or expiration; | |||
(b) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility then open or under construction; | |||
(c) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility then open or under construction, where such services (i) are substantially similar to those provided to Franchisee; or (ii) create a relationship between Franchisee or the Restricted Person and such Competitive Business in which Franchisee or the Restricted Person could be reasonably expected to benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any Confidential Information to such Competitive Business; | |||
(d) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility, or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Franchisee to hire any such Person, then Franchisee agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | |||
(e) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility as the case may be. | |||
Franchisee and each of its Owners expressly acknowledges the possession of skills and abilities of a general nature and other opportunities for exploiting such skills in other ways, so that enforcement of the covenants contained in Section 27.3 will not deprive any of them their personal goodwill or ability to earn a living. If Franchisee or any of its Owners fails or refuses to abide by any of the foregoing covenants and Franchisor obtains enforcement in a judicial or arbitration proceeding, the obligations under the breached covenant will be tolled during the period(s) of time that the covenant is breached and/or Franchisor seeks to enforce it and will continue in effect for a period of time ending two (2) years after the date of the order enforcing the covenant. |
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27.4 | Upon termination or expiration (without renewal) of this Agreement, Franchisor shall have the right, exercisable by giving notice thereof within thirty (30) days after the date of such termination or expiration, to purchase (and, if necessary, take possession of and remove from the Site) any and all equipment used or useable at the STORE (including all equipment that contains or embodies patents owned by Franchisor or any of its Affiliates) at its net book value, determined in accordance with generally accepted accounting principles, consistently applied. This right is separate and apart from Franchisors rights under Section 27.5. | |
27.5 | Upon termination or expiration (without renewal) of this Agreement, Franchisor shall have the right, exercisable by giving notice thereof (Appraisal Notice) within thirty (30) days after the date of such termination or expiration, to require that a determination be made of the Fair Market Value (as defined below) of any or all of the assets of the STORE which Franchisee owns, including inventory of non-perishable products, materials, supplies, furniture, equipment, signs, and any and all leasehold improvements, fixtures, building and land, but excluding any cash and short-term investments and any items not meeting Franchisors specifications for Krispy Kreme Stores (the Purchased Assets). Notwithstanding the foregoing, if Franchisee notifies Franchisor not less than one hundred eighty (180) days nor more than two hundred seventy (270) days prior to the expiration of this Agreement that Franchisee does not desire to enter into a successor franchise agreement on expiration, then Franchisor agrees, if Franchisor desires to exercise its right to purchase, to give Franchisee the Appraisal Notice at least one hundred twenty (120) days prior to the date of expiration of this Agreement. | |
27.6 | Upon delivery of the Appraisal Notice, Franchisee may not sell or remove any of the assets of the STORE from the Premises (other than in the ordinary course of business) and must give Franchisor, its designated agents and the Appraisers (as defined below) full access to the STORE and all of Franchisees books and records at any times during customary business hours in order to conduct inventories and determine the purchase price for the Purchased Assets. | |
27.7 | The Fair Market Value shall be defined as the amount at which an arms length purchaser would be willing to pay for the Purchased Assets, assuming that the Purchased Assets would be used for the operation of a Krispy Kreme Store under a valid franchise agreement reflecting the then-current (or if Franchisor is not offering franchises at that time, then the most recent) standard terms upon which Franchisor offers franchises for Krispy Kreme Stores. Under no circumstances will any value be attributed to any goodwill associated with the Marks or any value attributed to the System (all of which Franchisee acknowledges to be owned by Franchisor and its Affiliates). In the first instance, Fair Market Value shall be determined by consultation between Franchisor and Franchisee. If Franchisee and Franchisor are unable to agree on the Fair Market Value of the Purchased Assets within fifteen (15) days after the Appraisal Notice, then Fair Market Value will be determined by calculating the mean average of three (3) separate appraisals done by three (3) independent appraisers (Appraisers). Franchisor and Franchisee shall each designate one (1) Appraiser within thirty (30) days of the Appraisal Notice and the two (2) Appraisers so designated will select a third (3rd) Appraiser within ten (10) days thereafter. If the two designated Appraisers are unable to select a third (3rd) Appraiser within such ten (10) days, then the third (3rd) Appraiser shall be selected, on demand of either party, by the director of the Regional Office of the American Arbitration Association located nearest to Winston-Salem, North Carolina. | |
27.8 | Each Appraiser will make his or her determination and submit a written report (Appraisal Report) to Franchisee and Franchisor as soon as practicable, but in no event more than thirty (30) days after his or her appointment. Each party may submit in writing to the Appraisers its judgment of Fair Market Value (together with its reasons therefor and with copies to each other); however, the Appraisers shall not be limited to these submissions and may make such independent investigations as they reasonably determine to be necessary. The Appraisers fees and costs shall be borne equally by the parties. | |
27.9 | Franchisor has the option, exercisable by delivering notice thereof within thirty (30) days after submission of the last Appraisal Report (or the date that an agreement is reached, if the parties agree to the Fair Market Value), to agree to purchase the Purchased Assets at the Fair Market Value, as so determined. Franchisor shall have the unrestricted right to assign this option to purchase separate and apart from the remainder of this Agreement. |
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27.10 | If Franchisor exercises its option to purchase, the purchase price for the Purchased Assets will be paid in cash at the closing, which will occur at the place, time and date Franchisor designates, but not later than sixty (60) days after the exercise of Franchisors option to purchase the Purchased Assets. At the closing, Franchisor will be entitled to all representations, warranties, covenants, title insurance policies and other closing documents and post-closing indemnifications and hold-backs as Franchisor reasonably requires, including: (a) instruments transferring good and marketable title to the Purchased Assets, free and clear of all liens, encumbrances, and liabilities, to Franchisor or its designee, with all sales and other transfer taxes paid by Franchisee; (b) an assignment of all leases of assets used in the operation of the STORE, including land, building and/or equipment (or if an assignment is prohibited, a sublease to Franchisor or its designee for the full remaining term and on the same terms and conditions as Franchisees lease, including renewal and/or purchase options), provided, however, that if any of Franchisees Owners or Affiliates directly or indirectly owns the land, building and/or equipment of the STORE, Franchisee will, at Franchisors option, cause such Owner or Affiliate to grant to Franchisor a lease at reasonable and customary rental rates and other terms prevailing in the community where the STORE is located; and (c) a general release by Franchisee and its Owners and Affiliates in form and substance satisfactory to Franchisor. | |
27.11 | If Franchisee cannot deliver clear title to all of the Purchased Assets, or if there are other unresolved issues, the closing of the sale may, at Franchisors option, be accomplished through an escrow on such terms and conditions as Franchisor deems appropriate, including the making of payments, to be deducted from the purchase price, directly to third parties in order to obtain clear title to all of the Purchased Assets. Further, Franchisee and Franchisor shall comply with any applicable Bulk Sales provisions of the Uniform Commercial Code as enacted in the state where the STORE is located and all applicable state and local sales and income tax notification and/or escrow procedures. Franchisor has the right to set off against and reduce the purchase price by any and all amounts owed by Franchisee or any of its Owners or Affiliates to Franchisor or any of its Affiliates. | |
27.12 | Upon delivery of the Appraisal Notice and pending (a) determination of Fair Market Value, (b) Franchisors option period, and (c) the closing of the purchase, Franchisor may authorize continued temporary operations of the STORE pursuant to the terms of this Agreement, subject to the supervision and control of one or more of Franchisors appointed managers. | |
27.13 | Franchisors exercise of any of its rights under Section 27 will be in addition to and not in limitation of any other rights and remedies it may have in the event of any breach or default by Franchisee. | |
27.14 | All the obligations of Franchisee and its Owners and Affiliates under this Agreement, which expressly or by their nature survive or are intended to survive the termination or expiration of this Agreement, will continue in full force and effect subsequent to and notwithstanding the termination or expiration until they are satisfied in full or by their nature expire. | |
28. | RELATIONSHIP OF PARTIES/INDEMNIFICATION | |
28.1 | Neither this Agreement nor the dealings of the parties pursuant to this Agreement shall create any fiduciary relationship or any other relationship of trust or confidence between the parties hereto. Franchisor and Franchisee, as between themselves, are and shall be independent contractors. | |
28.2 | Franchisee understands and agrees that Franchisor may operate and change the System and its business in any manner that is not expressly and specifically prohibited by this Agreement. Whenever Franchisor has expressly reserved in this Agreement or is deemed to have a right and/or discretion to take or withhold an action, or to grant or decline to grant Franchisee a right to take or withhold an action, except as otherwise expressly and specifically provided in this Agreement, Franchisor may make its decision or exercise its right and/or discretion on the basis of its judgment of what is in its best interests, including its judgment of what is in the best interests of its franchise network, at the time its decision is made or its right or discretion is exercised, without regard to whether: (a) other reasonable alternative decisions or actions could have been made by Franchisor; (b) Franchisors decision or action promotes its financial or other individual interest; (c) Franchisors decision or action applies differently to Franchisee and one or |
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more other franchisees or its company-owed operations; or (d) Franchisors decision or the exercise of its right or discretion is adverse to Franchisees interests. In the absence of an applicable statute, Franchisor will have no liability to Franchisee for any such decision or action. The parties intend that the exercise of Franchisors right or discretion will not be subject to limitation or review. If applicable law implies a covenant of good faith and fair dealing in this Agreement, the parties agree that such covenant shall not imply any rights or obligations that are inconsistent with a fair construction of the terms of this Agreement and that this Agreement grants Franchisor the right to make decisions, take actions and/or refrain from taking actions not inconsistent with Franchisees rights and obligations hereunder. | ||
Nothing contained in this Agreement, nor arising from the conduct of the parties hereunder, is intended to make either party a general or special agent, joint venturer, partner or employee of the other for any purpose whatsoever. Franchisee must conspicuously identify itself in all dealings with customers, lessors, contractors, suppliers, public officials, employees and others as the owner of the rights granted hereunder and must place such other notices of independent ownership on such forms, business cards, stationery, advertising and other materials as we may require from time to time. Franchisee is solely responsible for all employment decisions with respect to its personnel, including hiring, firing, compensation, training, supervision and discipline, and regardless whether Franchisee receives advise from Franchisor on any of these subjects. | ||
28.3 | Franchisee may not make any express or implied agreements, warranties, guarantees or representations or incur any debt in Franchisors name or on its behalf or represent that the relationship of the parties hereto is anything other than that of independent contractors. Franchisor will not be obligated by or have any liability under any agreements made by Franchisee with any third party or for any representations made by Franchisee to any third party. Franchisor will not be obligated for any damages to any person or property arising directly or indirectly out of the operation of Franchisees business hereunder. | |
28.4 | Franchisor will have no liability for any sales, use, service, occupation, excise, gross receipts, income, property or other taxes, whether levied upon Franchisee or the STORE, in connection with the business Franchisee conducts (except for taxes Franchisor is required by law to collect from Franchisee with respect to purchases from Franchisor). Payment of all such taxes is Franchisees responsibility. | |
28.5 | Franchisor agrees to indemnify Franchisee against, and to reimburse Franchisee for, all damages for which Franchisee is held liable as a result of a claim that Franchisees authorized use of any Mark or of any of Franchisors other intellectual property rights pursuant to and in full compliance with this Agreement infringes on the rights of another person and, except as provided herein, for all costs Franchisee reasonably incurs in defending any such claim brought against Franchisee, provided that Franchisee has timely notified Franchisor of such claim and provided further that Franchisee and Franchisees Principal Owners and Affiliates are in full compliance with this Agreement and with all other agreements entered into with Franchisor or any of its Affiliates. HDN Development Corporation or its agent or assignee, at its sole discretion, is entitled to prosecute, defend and/or settle any such proceeding arising out of Franchisees use of any Mark or other intellectual property right pursuant to this Agreement and, if HDN Development Corporation or its agent or assignee undertakes to prosecute, defend and/or settle any such matter, Franchisor, HDN Development Corporation or its agent or assignee, has no obligation to indemnify or reimburse Franchisee for any fees or disbursements of any legal counsel retained by Franchisee. | |
28.6 | Franchisee agrees to indemnify Franchisor, its Affiliates and their respective directors, officers, employees, shareholders, members, managers, agents, successors and assigns (collectively Indemnified Parties), and to hold the Indemnified Parties harmless to the fullest extent permitted by law, from any and all losses and expenses (as defined below) incurred in connection with any litigation or other form of adjudicatory procedure, claim, demand, investigation, or formal or informal inquiry (regardless of whether it is reduced to judgment) or any settlement thereof which arises directly or indirectly from, or as a result of, a claim of a third party against any one or more of the Indemnified Parties, including those in connection with (a) Franchisees failure to perform or breach of any covenant, agreement, term or provision of this Agreement, (b) Franchisees breach of any representation or warranty contained in this Agreement, (c) Franchisees marketing, promotion, advertisement or sale of any of the products and services offered by the STORE, |
31
including unfair or fraudulent advertising claims (whether in print advertising, electronic media or otherwise), and product liability claims, (d) Franchisees development, ownership, operation and/or closing of the STORE, (e) Franchisees failure to pay any amounts owed to a supplier, (f) claims by Franchisees employees (including workers or unemployment compensation), (g) personal injury claims, (h) Franchisees failure to comply with any law, and (i) any allegedly unauthorized service or act, rendered or performed in connection with this Agreement, (collectively Event) and regardless of whether it resulted from any strict or vicarious liability imposed by law on the Indemnified Parties. The foregoing indemnity shall apply even if it is determined that the Indemnified Parties negligence caused such loss, liability or expense, in whole or in part, provided, however, that this indemnity will not apply to any liability arising from a breach of this Agreement by Franchisor or with respect to any Indemnified Party whose gross negligence or willful acts caused such liability (except to the extent that joint liability is involved, in which event the indemnification provided herein will extend to any finding of comparative or contributory negligence attributable to Franchisee). The term losses and expenses includes compensatory, exemplary, and punitive damages; fines and penalties; attorneys fees; experts fees; court costs; costs associated with investigating and defending against claims; settlement amounts; judgments; compensation for damages to our reputation and goodwill; and all other costs associated with any of the foregoing losses and expenses. Franchisor agrees to give Franchisee reasonable notice of any event of which Franchisor becomes aware for which indemnification may be required, and Franchisor may elect (but is not obligated) to direct the defense thereof, provided that the selection of counsel shall be subject to Franchisees consent, which consent shall not be unreasonably withheld or delayed. Franchisor may, in its reasonable discretion, take such actions as Franchisor deems necessary and appropriate to investigate, defend, or settle any event or take other remedial or corrective actions with respect thereto as may be necessary for the protection of the Indemnified Parties or Krispy Kreme Stores generally, provided however, that any settlement (to the extent payment is made by Franchisee) shall be subject to Franchisees consent, which consent shall not be unreasonably withheld or delayed. Further, notwithstanding the foregoing, if the insurer on a policy or policies obtained in compliance with this Agreement agrees to undertake the defense of an Event (an Insured Event), Franchisor agrees not to exercise its right to select counsel to defend the Event if such would cause Franchisees insurer to deny coverage. Franchisor reserves the right to retain counsel to represent Franchisor with respect to an Insured Event at Franchisors sole cost and expense. | ||
28.7 | In furtherance of the indemnity contained in Section 28.6, during the Term, Franchisee agrees to maintain commercial general liability insurance, product liability coverage, automobile liability insurance, workers compensation insurance, employers liability insurance and any other insurance policies as Franchisor may require from time to time, insuring Franchisee and the Indemnified Parties against the matters described in Section 28.6, including claims for bodily and personal injury, death and property damage, among other things, caused by or occurring in conjunction with the conduct of business by Franchisee pursuant to this Agreement, under one or more policies of insurance acceptable to Franchisor and containing minimum liability coverage Franchisor prescribes from time to time. Each such insurance policy will name Franchisor as an additional insured and will provide for thirty (30) days prior written notice to Franchisor of any material modification, cancellation, or expiration of such policy. Each such insurance policy will give Franchisor notice of default under the policy and the opportunity to cure such default on Franchisees behalf. Simultaneous with the execution of this Agreement, Franchisee will provide Franchisor with evidence of such insurance; thereafter, Franchisee will furnish to Franchisor annually and upon the replacement or material modification of any insurance policy providing the coverage required under this Agreement, a copy of the certificate of insurance or other evidence requested by Franchisor that such insurance coverage is continuously in force without interruption. The maintenance of sufficient insurance coverage (both as to the type and limits of coverage) for the STORE is Franchisees sole responsibility. | |
28.8 | The terms of Section 28 will survive the termination or expiration of this Agreement. | |
29. | MISCELLANEOUS | |
29.1 | This Agreement and all issues arising from or relating to this Agreement shall be governed by and construed under the laws of the State of North Carolina, provided the foregoing shall not constitute a waiver of Franchisees rights under any applicable franchise law of another state. Otherwise, in the event |
32
of any conflict of law, North Carolina law will prevail, without regard to the application of North Carolina conflict of law principles, except that any North Carolina law regulating the sale of franchises or business opportunities or governing the relationship of a franchisor and its franchisees will not apply unless its jurisdictional requirements are met independently without reference to this section. | ||
29.2 | Franchisee and each of its Owners agree that the U.S. District Court for the Middle District of North Carolina, or if such court lacks jurisdiction, the Superior Court (or its successor) for Forsyth County North Carolina, shall be the venue and exclusive forum in which to adjudicate any case or controversy arising from or relating to this Agreement, or any Development Agreement, Commissary Facility Agreement or any other Franchise Agreement, including any guarantees or covenants by Franchisees Owners. In the event a case or controversy is to be heard by the Superior Court (or its successor) for Forsyth County North Carolina, any party may request that the matter be assigned to the North Carolina Business Court. Franchisee and each of its Owners irrevocably submit to the jurisdiction of such courts and waive any objections to either the jurisdiction of or venue in such courts. Franchisee and each of its Owners irrevocably waive, to the fullest extent they may lawfully do so, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding and agree that service of process for purposes of any such suit, action or proceeding need not be personally served or served within the State of North Carolina but may be served with the same effect as if they were served within the State of North Carolina, by certified mail or any other means permitted by law, addressed to Franchisee and its Owners (as applicable) at the address set forth herein. Nothing contained herein shall affect Franchisors rights to bring a suit, action or proceeding in any other appropriate jurisdiction, including any suit, action or proceeding brought by Franchisor to enforce any judgment against Franchisee or any of its Owners entered by a State or Federal Court. | |
29.3 | Franchisor may obtain at any time in any court of competent jurisdiction any injunctive relief, including temporary restraining orders and preliminary injunctions, against conduct or threatened conduct for which no adequate remedy at law may be available or which may cause Franchisor irreparable harm. Franchisor may have such injunctive relief, without bond, but upon due notice, in addition to such further and other relief as may be available at equity or in law, and Franchisees sole remedy in the event of the entry of such injunction, shall be the dissolution of such injunction, if warranted, upon hearing duly had (all claims for damages by reason of the wrongful issuance of any such injunction being expressly waived hereby). Franchisee and each of its Owners acknowledges that any violation of Sections 16, 17.3, 18, 19, 20, 24.3(j) or 27.3 would result in irreparable injury to Franchisor for which no adequate remedy at law may be available. Accordingly, Franchisee and each of its Owners consent to the issuance of an injunction at Franchisors request (without posting a bond or other security) prohibiting any conduct in violation of any of those sections and agree that the existence of any claims Franchisee or any of its Owners may have against Franchisor, whether or not arising herefrom, shall not constitute a defense to the enforcement of any of those Sections. | |
29.4 | If Franchisor claims in any judicial proceeding that Franchisee owes Franchisor or any of its Affiliates money or that Franchisee has otherwise breached this Agreement and Franchisor prevails on such claims, then Franchisor shall be awarded its costs and expenses incurred in connection with such proceedings, including reasonable attorneys fees. | |
29.5 | Except with respect to any of Franchisees obligations herein regarding the Confidential Information, the Marks, and any other intellectual property rights of Franchisor, Franchisor and Franchisee (and its Owners) each waives, to the fullest extent permitted by law, any right to or claim for any punitive or exemplary damages against the other. Franchisee and each of its Owners waives, to the fullest extent permitted by applicable law, the right to recover consequential damages for any claim directly or indirectly arising from or relating to this Agreement. FURTHERMORE, THE PARTIES AGREE THAT ANY LEGAL ACTION IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED TO THE COURT SITTING WITHOUT A JURY, AND ALL PARTIES WAIVE ANY RIGHT TO HAVE ANY ACTION TRIED BY JURY. |
33
29.6 | Every part of this Agreement shall be considered severable. If for any reason any part of this Agreement is held to be invalid, that determination shall not impair the other parts of this Agreement. If any covenant herein which restricts competitive activity is deemed unenforceable by virtue of its scope in terms of geographical area, type of business activity prohibited and/or length of time, but could be rendered enforceable by reducing any part or all of it, Franchisee and Franchisor agree that it will be so modified as to remain enforceable to the fullest extent permissible under applicable law. If any applicable law requires a greater prior notice of the termination of or refusal to enter into a successor franchise than is required hereunder, a different standard of good cause, or the taking of some other action not required hereunder, the prior notice, good cause standard and/or other action required by such law shall be substituted for the comparable provisions hereof. If any provision of this Agreement or any specification, standard or operating procedure prescribed by Franchisor is invalid or unenforceable under applicable law, Franchisor has the right, in its sole discretion, to modify such invalid or unenforceable provision, specification, standard or operating procedure to the extent required to make it valid and enforceable. | |
29.7 | Franchisor and Franchisee may by written instrument signed by the waiving party unilaterally waive or reduce any obligation of the other under this Agreement. Any waiver granted by Franchisor shall be without prejudice to any other rights Franchisor may have, will be subject to continuing review by Franchisor and may be revoked, in its sole discretion, at any time and for any reason, effective upon delivery to Franchisee of 10 days prior notice. Franchisee and Franchisor shall not be deemed to have waived any right reserved by this Agreement by virtue of any custom or practice of the parties at variance with it; any failure, refusal or neglect by Franchisee or Franchisor to exercise any right under this Agreement or to insist upon exact compliance by the other with its obligations hereunder; any waiver, forbearance, delay, failure or omission by Franchisor to exercise any right, whether of the same, similar or different nature, with respect to other Krispy Kreme Stores; or the acceptance by Franchisor of any payments due from Franchisee after any breach of this Agreement. | |
29.8 | The rights of Franchisor and Franchisee hereunder are cumulative and no exercise or enforcement by Franchisor or Franchisee of any right or remedy hereunder shall preclude the exercise or enforcement by Franchisor or Franchisee of any other right or remedy hereunder which Franchisor or Franchisee is entitled to enforce by law. | |
29.9 | The language of this Agreement shall be construed according to its fair meaning and not more strictly against any one party than the other. The Basic Terms, introduction, personal guarantees and covenants, exhibits, schedules and riders (if any) to this Agreement are a part of this Agreement, which constitutes the entire agreement of the parties with respect to the subject matter hereof. Except as otherwise expressly provided herein, there are no other oral or written agreements, understandings, representations or statements relating to the subject matter of this Agreement, other than the Franchise Disclosure Document, that either party may or does rely on or that will have any force or effect. Nothing in this Agreement shall be deemed to confer any rights or remedies on any person or legal entity not a party hereto. This Agreement shall not be modified except by written agreement signed by both parties. | |
29.10 | The headings of sections are for convenience only and do not limit or construe their contents. The word including shall be construed to include the words without limitation. The term Franchisee is applicable to one or more persons, a corporation, limited liability company or a partnership and its owners, as the case may be. If two or more persons are at any time Franchisee hereunder, whether as partners, joint venturers or otherwise, their obligations and liabilities to Franchisor shall be joint and several. | |
29.11 | References to a controlling interest in an entity shall mean more than fifty percent (50%) of the equity and voting control of such entity. | |
29.12 | This Agreement is binding on the parties hereto and their respective executors, administrators, heirs, assigns and successors in interest. This Agreement may be executed in multiple copies, each of which shall be deemed an original. Time is of the essence in this Agreement. |
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29.13 | Whenever this Agreement requires the approval or consent of either party, the other party shall make written request therefor, and such approval or consent shall be obtained in writing; provided however, unless specified otherwise in this Agreement, such party may withhold approval or consent for any reason or for no reason at all. Furthermore, unless specified otherwise in this Agreement, no such approval or consent shall be deemed to constitute a warranty or representation of any kind, express or implied, and the approving or consenting party shall have no responsibility, liability or obligation arising therefrom. | |||
29.14 | All notices, requests and reports permitted or required to be delivered by this Agreement shall be deemed delivered: (a) at the time delivered by hand to the recipient party (or to an officer, director or partner of the recipient party); (b) one (1) business day after being placed in the hands of a commercial courier service for guaranteed overnight delivery; or (c) five (5) business days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the party to be notified at its most current principal business address of which the notifying party has been notified in writing. All payments and reports required by this Agreement shall be sent to Franchisor at the address identified in this Agreement unless and until a different address has been designated by written notice. No restrictive endorsement on any check or in any letter or other communication accompanying any payment shall bind Franchisor, and its acceptance of any such payment shall not constitute an accord and satisfaction. | |||
30. | ACKNOWLEDGMENTS | |||
30.1 | By initialing below, Franchisee hereby specifically acknowledges the following: | |||
(a) | Domicile. Franchisee acknowledges that Franchisee is not a domiciliary or a resident of any state, other than the state where the STORE is located or, if different, the state listed in the Basic Terms as Franchisees address. | |||
Initials ________/________ | ||||
(b) | Receipt of Franchise Disclosure Document. Franchisee acknowledges having received Franchisors Franchise Disclosure Document at least fourteen (14) calendar days before signing a binding agreement or before making any payment to Franchisor or any of its Affiliates relating to this Agreement. Franchisee has read and understands Franchisors Franchise Disclosure Document. | |||
Initials ________/________ | ||||
(c) | No Inconsistent Representations. Franchisee acknowledges that no representations have been made to Franchisee which are inconsistent with information presented in Franchisors Franchise Disclosure Document, and Franchisee has not relied on any representations inconsistent with or not contained in Franchisors Franchise Disclosure Document. | |||
Initials ________/________ | ||||
(d) | Business Risks; Independent Investigation. Franchisee recognizes that the nature of Krispy Kreme Stores and Commissary Facilities may change over time, that an investment in a Krispy Kreme Store or Commissary Facility involves business risks and that the success of the investment is largely dependent on Franchisees own business abilities, efforts and financial resources. Franchisee has conducted an independent investigation of the business contemplated by this Agreement and recognizes that the food service industry is highly competitive. | |||
Initials ________/________ | ||||
(e) | Independent Counsel. Franchisee acknowledges having had the opportunity to seek independent counsel concerning the execution of this Agreement and the operation of the Franchise. | |||
Initials ________/________ |
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(f) | No Guarantee or Assurance. Franchisee has not received from Franchisor or its representatives or relied on any statement, representation, guaranty or assurance, express or implied, as to the revenues, profits or success of the business venture contemplated by this Agreement, nor has Franchisee received from Franchisor or its representatives any information from which Franchisee may easily ascertain a specific level or range of actual or potential sales, income, gross or net profits from franchised or non-franchised Krispy Kreme Stores or Commissary Facilities. | |||
Initials ________/________ |
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the Effective Date.
KRISPY KREME DOUGHNUT CORPORATION | [FRANCHISEE] | |||
By: | By: | |||
Title: | Title: | |||
Dated: | Dated: |
36
EXHIBIT A
TO THE FRANCHISE AGREEMENT BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
_______________________________
DATED _______________,
________
FRANCHISEE INFORMATION
1. | Form of Entity of Franchisee. | |
(a) Corporation or Limited Liability Company. Franchisee was organized on ___________, _________ under the laws of the State of ______. Its Federal Identification Number is ________________. It has not conducted business under any name other than its corporate or company name. The following is a list of all of Franchisees directors and officers or managing members as of _______________, _______. |
Name of Each Director/Officer/Managing Member | Position(s) Held | |||
(b) Partnership. Franchisee is a [general] [limited] partnership formed on ___________, _________ under the laws of the State of _______. Its Federal Identification Number is ______________________. It has not conducted business under any name other than its partnership name. The following is a list of all of Franchisee s general partners as of, ___________, _________. |
Name of Each General Partner | ||
A-1
2. | Owners. Franchisee and each of its Owners represents and warrants that the following is a complete and accurate list of all Owners of Franchisee, including the full name and mailing address of each Owner, and fully describes the nature and extent of each Owners interest in Franchisee. Franchisee and each Owner as to his/her ownership interest, represents and warrants that each Owner is the sole and exclusive legal and beneficial owner of his/her ownership interest in Franchisee, free and clear of all liens, restrictions, agreements and encumbrances of any kind or nature, other than those required or permitted by this Agreement. | |
Owners Name and Mailing Address | Percentage and Nature of Ownership Interest | ||
Submitted by Franchisee and
Accepted by Franchisor and
made a part of the Franchise
Agreement as of_____, ___.
KRISPY KREME DOUGHNUT CORPORATION, | (Name of corporation, limited liability | |||||
a North Carolina corporation | company or partnership) | |||||
By: | By: | |||||
Print Name: | Print Name: | |||||
Title: | Title: | |||||
By: | ||||||
Print Name: | ||||||
Title: | ||||||
Owners: | ||||||
(Signature) | ||||||
(Print Name) | ||||||
(Signature) | ||||||
(Print Name) |
A-2
EXHIBIT B
TO THE FRANCHISE AGREEMENT BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
________________________________
DATED _______________,
________
PRINCIPAL OWNERS PERSONAL GUARANTY
OF
FRANCHISEES OBLIGATIONS (Guaranty)
In consideration of, and as an inducement to, the execution of the Krispy Kreme Doughnut Corporation Franchise Agreement dated as of _______________, _________ (the Agreement) by and between KRISPY KREME DOUGHNUT CORPORATION (Franchisor), and ____________ (Franchisee), each of the undersigned Principal Owners of a ten percent (10%) or greater interest in Franchisee hereby personally and unconditionally: (a) guarantees to Franchisor and its successors and assigns, for the term of the Agreement and thereafter as provided in the Agreement, that Franchisee shall punctually pay and perform each and every undertaking, agreement and covenant set forth in the Agreement (and any amendments) and that each and every representation of Franchisee made in connection with the Agreement (and any amendments) are true, correct and complete in all respects at and as of the time given; and (b) agrees personally to be bound by each and every provision in the Agreement (and any amendments).
Each of the undersigned waives: (a) acceptance and notice of acceptance by Franchisor of the foregoing undertakings; (b) notice of demand for payment of any indebtedness or nonperformance of any obligations hereby guaranteed; (c) protest and notice of default to any party with respect to the indebtedness or nonperformance of any obligations hereby guaranteed; (d) any right that the undersigned may have to require that an action be brought against Franchisee or any other person as a condition of liability; (e) notice of any amendment to the Agreement; (f) any and all other notices and legal or equitable defenses to which that the undersigned may be entitled; and (g) the provisions of N.C. General Statutes § 26.7 et seq.
Each of the undersigned consents and agrees that: (a) the undersigneds direct and immediate liability under this guaranty shall be joint and several; (b) the undersigned shall render any payment or performance required under the Agreement upon demand if Franchisee fails or refuses to do so punctually; (c) such liability shall not be contingent or conditioned upon pursuit by Franchisor of any remedies against Franchisee or any other person; and (d) such liability shall not be diminished, relieved or otherwise affected by any extension of time, credit or other indulgence which Franchisor may from time to time grant to Franchisee or to any other person including the acceptance of any partial payment or performance or the compromise or release of any claims, none of which shall in any way modify or amend this guaranty, which shall be continuing and irrevocable until satisfied in full.
Each of the undersigned agrees that the U.S. District Court for the Middle District of North Carolina, or if such court lacks jurisdiction, the Superior Court (or its successor) for Forsyth County North Carolina, shall be the venue and exclusive forum in which to adjudicate any case or controversy arising from or relating to this Guaranty. In the event a case or controversy is to be heard by the Superior Court (or its successor) for Forsyth County North Carolina, any party may request that the matter be assigned to the North Carolina Business Court. Each of the undersigned irrevocably submits to the jurisdiction of such courts and waives any objections to either the jurisdiction of or venue in such courts. Each of the undersigned irrevocably waives, to the fullest extent he/she may lawfully do so, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding and agrees that service of process for purposes of any such suit, action or proceeding need not be personally served or served within the State of North Carolina but may be served with the same effect as if the undersigned were served within the State of North Carolina, by certified mail or any other means permitted by law addressed to the undersigned at the address set forth herein. Nothing contained herein shall affect Franchisors rights to bring a suit, action or proceeding in any other appropriate jurisdiction, including any suit, action or proceeding brought by Franchisor to enforce any judgment against the undersigned entered by a State or Federal Court.
B-1
Each of the undersigned waives all rights to payments and claims for reimbursement or subrogation which any of the undersigned may have against Franchisee arising as a result of the undersigneds execution of and performance under this Guaranty.
IN WITNESS WHEREOF, each of the undersigned has hereunto affixed his/her signature as of the _____day of ________, _____.
PERCENTAGE OF OWNERSHIP | GUARANTOR(S) | |
INTERESTS IN FRANCHISEE | ||
(Signature) | ||
(Print Name) | ||
(Address) | ||
(Signature) | ||
(Print Name) | ||
(Address) | ||
(Signature) | ||
(Print Name) | ||
(Address) | ||
(Signature) | ||
(Print Name) | ||
(Address) | ||
Subscribed and sworn to before me | ||
this _____ day of _________, _____. | ||
Notary Public | ||
My Commission expires:________ |
B-2
EXHIBIT C
TO THE FRANCHISE AGREEMENT BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
______________________________
DATED ______________,
________
INVESTOR PERSONAL COVENANTS
REGARDING
CONFIDENTIALITY,
NON-COMPETITION AND NON-SOLICITATION
In conjunction with your investment in __________ (Franchisee) a ______________, the undersigned _________________ (Owner), acknowledges and agrees as follows:
1. Franchisee owns and operates a Krispy Kreme Store pursuant to a franchise agreement dated ____________________, _________ (Franchise Agreement) with Krispy Kreme Doughnut Corporation (Franchisor), which Franchise Agreement requires persons with legal or beneficial ownership interests in Franchisee to be personally bound by the confidentiality and noncompetition covenants contained in the Franchise Agreement. All capitalized terms contained herein shall have the same meaning set forth in the Franchise Agreement.
2. Owner owns or intends to own a __________________ percent (__ %) legal or beneficial ownership interest in Franchisee and acknowledges and agrees that the execution of this Agreement is a condition to Franchisees ability to enter into the Franchise Agreement and/or Owners ability to invest in Franchisee. Owner has received good and valuable consideration for executing this Agreement. Franchisor may enforce this Agreement directly against Owner.
3. Owner may gain access to information comprising Franchisors Confidential Information as a result of investing in Franchisee. The Confidential Information is proprietary and includes Franchisors trade secrets. Owner hereby agrees that while Owner has a legal or beneficial ownership interest in Franchisee and thereafter, Owner: (a) will not use the Confidential Information in any other business or capacity; (b) will maintain the confidentiality of the Confidential Information; and (c) will not make unauthorized copies of any portion of the Confidential Information, whether through electronic media, writings, or other tangible or intangible means of expression. Without limiting the foregoing, Owner (i) acknowledges that he/she may have access to Franchisors material non-public information and that of its parent, Krispy Kreme Doughnut Inc. (KKDI), and that the securities laws prohibit trading in KKDI securities while in possession of such information, and (ii) agrees to refrain from trading in KKDI securities in violation of such laws. If Owner ceases to have an interest in Franchisee, Owner must deliver to Franchisor any such Confidential Information in his/her possession or control.
4. Notwithstanding anything to the contrary contained herein and provided Owner has obtained Franchisors prior written consent, the restrictions on Owners disclosure and use of the Confidential Information will not apply to the following:
(a) | information, methods, procedures, techniques and knowledge which are or become generally known in the food service business, other than through disclosure (whether deliberate or inadvertent) by Franchisee, Franchisees Owners, agents, or employees; and | ||
(b) | the disclosure of the Confidential Information in judicial, arbitration or administrative proceedings to the extent that Owner is legally compelled to disclose such information, provided Owner has notified Franchisor prior to such disclosure and has used its best efforts to obtain, and has afforded Franchisor sufficient opportunity to seek an appropriate protective order and obtain, assurances satisfactory to Franchisor of confidential treatment for the information required to be so disclosed. |
C-1
5. Owner acknowledges and agrees that Franchisor would be unable to (a) protect the Confidential Information against unauthorized use or disclosure; (b) preserve the prestige, integrity, and goodwill of the Products, Marks, and System; or (c) encourage the free exchange of ideas and information among Krispy Kreme Stores and Commissary Facilities if franchisees and owners of Krispy Kreme Stores and Commissary Facilities or their owners were permitted to engage in or benefit from certain competitive activities. Therefore, except as expressly authorized by another written agreement with Franchisor, Owner agrees that during the term of the Franchise Agreement or during such time as Owner has an Ownership Interest in Franchisee (whichever is shorter), without Franchisors prior written consent, Owner shall not directly or indirectly (including through a Restricted Person):
(i) | have any Ownership Interest in a Competitive Business; | ||
(ii) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business; | ||
(iii) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business, where such services could be reasonably expected to benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any Confidential Information to such Competitive Business; | ||
(iv) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility, or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Owner to hire any such Person, then Owner agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | ||
(v) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility as the case may be. |
6. Upon termination of the Franchise Agreement or Owners Ownership Interest in Franchisee (whichever first occurs), Owner shall not directly or indirectly (including through a Restricted Person), for a period of two (2) years commencing on the effective date of such termination:
(a) | have any Ownership Interest in a Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility then open or under construction; | ||
(b) | perform services as a director, officer, manager, partner, or supervisory or management-level employee, of any Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility then open or under construction; | ||
(c) | perform services as an employee, consultant, representative, agent or otherwise for a Competitive Business located within a radius of ten (10) miles of the Site or of any other Krispy Kreme Store or Commissary Facility then open or under construction, where such services could be reasonably expected to benefit, either directly or indirectly, whether financially or otherwise, from the disclosure of any Confidential Information to such Competitive Business; | ||
(d) | recruit or hire any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility or who has been Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility within the past six (6) months without obtaining prior written permission from Franchisor and that Persons employer. If Franchisor permits Owner to hire any such Person, then Owner agrees to pay Franchisor a non-refundable Management Development Fee in the amount of Twenty-Five Thousand Dollars ($25,000) per hired employee as of the date of hire; or | ||
(e) | induce or attempt to induce any Person who is Franchisors employee or the employee of any Krispy Kreme Store or Commissary Facility to discontinue working for Franchisor or such Krispy Kreme Store or Commissary Facility as the case may be. |
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7. Owner expressly acknowledges the possession of skills and abilities of a general nature and the opportunity to exploit such skills in other ways, so that enforcement of the covenants contained in Sections 5 and 6 of these covenants will not deprive him/her of his/her personal goodwill or ability to earn a living. If any covenant herein which restricts competitive activity is deemed unenforceable by virtue of its scope or in terms of geographic area, type of business activity prohibited and/or length of time, but could be rendered enforceable by reducing any part or all of it, Owner agrees that it will be enforced to the fullest extent permissible under applicable law and public policy. Franchisor may obtain in any court of competent jurisdiction any injunctive relief, including temporary restraining orders and preliminary injunctions, against conduct or threatened conduct for which no adequate remedy at law may be available or which may cause it irreparable harm. Owner acknowledges that any violation of Sections 4, 5, or 6 of these covenants would result in irreparable injury for which no adequate remedy at law may be available. If Franchisor files a claim to enforce this Agreement and prevails in such proceeding, Owner agrees to reimburse Franchisor for all its costs and expenses, including reasonable attorneys fees.
8. Owner agrees that the U.S. District Court for the Middle District of North Carolina, or if such court lacks jurisdiction, the Superior Court (or its successor) for Forsyth County North Carolina, shall be the venue and exclusive forum in which to adjudicate any case or controversy arising from or relating to these covenants. In the event a case or controversy is to be heard by the Superior Court (or its successor) for Forsyth County North Carolina, any party may request that the matter be assigned to the North Carolina Business Court. Owner irrevocably submits to the jurisdiction of such courts and waives any objections to either the jurisdiction of or venue in such courts. Owner irrevocably waives, to the fullest extent he or she may lawfully do so, the defense of an inconvenient forum to the maintenance of such suit, action or proceeding and agrees that service of process for purposes of any such suit, action or proceeding need not be personally served or served within the State of North Carolina but may be served with the same effect as if he or she were served within the State of North Carolina, by certified mail or any other means permitted by law, addressed to Owner at the address set forth herein. Nothing contained herein shall affect Franchisors rights to bring a suit, action or proceeding in any other appropriate jurisdiction, including any suit, action or proceeding brought by Franchisor to enforce any judgment against Owner entered by a State or Federal Court.
9. If Franchisor claims in any judicial proceeding that Owner has breached any of the covenants contained herein, and Franchisor prevails on such claims, then Franchisor shall be awarded its costs and expenses incurred in connection with such proceedings, including reasonable attorneys fees.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Agreement on the ___ day of _________, ______.
OWNER | |
(Signature) | |
(Print Name) | |
(Address) |
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EXHIBIT D
TO THE FRANCHISE AGREEMENT BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
______________________________
DATED ______________,
________
Automatic Debit Notification (ADN)
Program
Authorization for ACH Debits or Credits
The undersigned Franchisee hereby
authorizes Krispy Kreme Doughnut Corporation (KKDC) to initiate debit and/or
credit entries via the Automated Clearing House (ACH) to the bank account
established with the bank shown below. This authority is to remain in full and
force and effect until the bank has received written notification from
Franchisee of the termination of such authority and such termination has been
confirmed in writing by KKDC.
BANK NAME | City, State | |
Bank Transit/ABA Number | Bank Account Number | |
Franchisee (Print Name) | ||
By: | ||
Title: | ||
Date: |
D-1
EXHIBIT E
TO THE FRANCHISE AGREEMENT BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND
______________________________
DATED______________,
________
AUTHORIZED OFF-PREMISES SALES
By signing below, Franchisor authorizes Franchisee to make sales of the specified Products to the following locations on a non-exclusive basis from Store Number ______located at ___________________________. Capitalized terms used herein shall have the meanings ascribed to them in the Franchise Agreement for Store Number ____. Franchisor may impose other terms and conditions from time to time by written directives. This authorization runs concurrently with the term of the Franchise Agreement for the store and terminates automatically and without notification on any termination or expiration of that agreement. In addition, either party may terminate this authorization, with or without cause, upon 180-days written notice to the other party.
Products: | ||||||
Locations: | ||||||
KRISPY KREME DOUGHNUT CORPORATION | FRANCHISEE | |||||
By: | By: | |||||
Its: | Its: | |||||
Date: | Date: |
E-1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (Agreement) dated as of November 7, 2007 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 Kenneth J. Hudson (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 Executives failure or refusal to perform the Executives 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 Executives conviction of or plea of nolo contendere to any felony (other than a traffic infraction), (iii) an act or acts on the Executives 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 Executives 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 Companys 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 Companys 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 Companys 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.
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 the most senior human resources officer of (A) the Company or (B) in the event of a merger, consolidation or other business combination involving the Company, the successor to the Companys 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 Executives status under clause (ii) of this sentence or his 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 Executives 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
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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 his 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.
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 Company. 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 November 7, 2007 (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 of Human Resources and Organizational Development of the Company reporting directly to the most senior executive officer and shall be the Companys most senior human resources officer. During the Employment Period, the Executive also shall serve as Senior Vice President of Human Resources and Organizational Development of KKDC and shall be KKDCs most senior human resources officer. 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; 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 his 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 Executives performance of his 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 $250,000 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 his job performance and compensation, and if deemed appropriate by the Board or its Compensation Committee, in their discretion, the Executives 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 Executives annual target bonus shall be equal to 40% of Base Salary. The Compensation Committee of the Board and the Board shall set targets with respect to and otherwise determine Executives bonus in accordance with the Companys then current incentive plans.
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 him in the course of performing his 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.
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ARTICLE 5
TERM AND TERMINATION
SECTION 5.01. Term. The Employment Period will terminate on November 7, 2010, 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 November 7, 2010 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 his 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 Executives entitlements under any other benefit plan or program shall be as determined thereunder. In addition, promptly following any such termination, the Executive (or his 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 Executives 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 Executives 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 Executives 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.
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 Executives resignation or leaving of his 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 Executives 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 his covered dependents shall continue to receive medical insurance coverage benefits from the Companies, with the same contribution toward such coverage from the Executive or his 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 Executives Permanent Disability, insurance benefits will continue under the Companies long term disability plan in accordance with its terms.
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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 his death, on the date of his 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.
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 Executives 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 his Base Salary and his 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 Executives 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 Executives 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 him, except to the extent he reasonably believes that such disclosure or use is directly related to and appropriate in connection with the Executives 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 his 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 his 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 Executives 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 Executives 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 Executives possession or within his 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 his knowledge all such materials have been delivered to the Companies or destroyed.
ARTICLE 9
NON-COMPETITION AND NONSOLICITATION
SECTION 9.01. Noncompetition. The Executive acknowledges that, during his employment with the Companies, he will become familiar with trade secrets and other Confidential Information concerning the Company and its Subsidiaries and his 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), he 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 Executives 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 his Base Salary and his annual target bonus in effect for the year during which his 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
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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 Executives 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 Companys products have been sold at any time in the one-year period ending on the last day of the Executives employment with the Companies;
(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 Companys products have been sold at any time in the one-year period ending on the last day of Executives 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 Companys products have been sold at any time in the one-year period ending on the last day of the Executives 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 Executives services are unique, and (c) a breach or threatened breach by him of any of his 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 his 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 he 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 his own costs incurred in defending such action, including but not limited to court fees, arbitration costs, mediation costs, attorneys fees and disbursements.
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 he 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 Executives 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.
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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 Executives 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.
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 Companys 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 his 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.
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.
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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 his 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 his rights or delegate his obligations under this Agreement without the written consent of the Companies (other than to his 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.
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.
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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: General Counsel
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.
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.
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.
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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.
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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/ Daryl G. Brewster |
Daryl G. Brewster | |
Chief Executive Officer | |
KRISPY KREME DOUGHNUT CORPORATION | |
By: | /s/ Douglas R. Muir |
Douglas R. Muir | |
Chief Financial Officer | |
EXECUTIVE | |
/s/ Kenneth J. Hudson | |
Kenneth J. Hudson |
S-1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (Agreement) dated as of November 7, 2007 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 Jeffrey B. Welch (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 Executives failure or refusal to perform the Executives 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 Executives conviction of or plea of nolo contendere to any felony (other than a traffic infraction), (iii) an act or acts on the Executives 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 Executives 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 Companys 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 Companys 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 Companys 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.
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 the most senior international operations and franchise officer of (A) the Company or (B) in the event of a merger, consolidation or other business combination involving the Company, the successor to the Companys 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 Executives status under clause (ii) of this sentence or his 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 Executives 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 his 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.
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Notice of Termination has the meaning set forth in Section 5.06.
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 Company. 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 November 7, 2007 (the Effective Date) and ending as provided in Section 5.01 (the Employment Period).
ARTICLE 3
POSITION AND DUTIES
SECTION 3.01. Position and Duties. During the Employment Period, the Executive shall serve as Senior Vice President and General Manager of Global Franchise Operations and Development of the Company reporting directly to the most senior executive officer and shall be the Companys most senior international operations and franchise officer. During the Employment Period, the Executive also shall serve as Senior Vice President and General Manager of Global Franchise Operations and Development of KKDC and shall be KKDCs most senior international operations and franchise officer. 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; 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 his 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
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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 Executives performance of his 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 $315,000 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 his job performance and compensation, and if deemed appropriate by the Board or its Compensation Committee, in their discretion, the Executives 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 Executives annual target bonus shall be equal to 40% of Base Salary. The Compensation Committee of the Board and the Board shall set targets with respect to and otherwise determine Executives bonus in accordance with the Companys then current incentive plans.
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 him in the course of performing his 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 November 7, 2010, 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 November 7, 2010 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 his 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 Executives entitlements under any other benefit plan or program shall be as determined thereunder. In addition, promptly following any such termination, the Executive (or his estate or legal representative) shall be reimbursed for all Reimbursable Expenses incurred by the Executive prior to such termination.
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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 Executives 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 Executives 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 Executives 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.
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 Executives resignation or leaving of his 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 Executives 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 his covered dependents shall continue to receive medical insurance coverage benefits from the Companies, with the same contribution toward such coverage from the Executive or his 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 Executives 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 his death, on the date of his 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.
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.
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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 Executives 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 his Base Salary and his 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 Executives 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 Executives 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 him, except to the extent he reasonably believes that such disclosure or use is directly related to and appropriate in connection with the Executives 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 his 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.
ARTICLE 7
INTELLECTUAL PROPERTY
SECTION 7.01. Ownership of Intellectual Property. In the event that the Executive as part of his 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 Executives employment hereunder).
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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 Executives 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 Executives possession or within his 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 his knowledge all such materials have been delivered to the Companies or destroyed.
ARTICLE 9
NON-COMPETITION AND NONSOLICITATION
SECTION 9.01. Noncompetition. The Executive acknowledges that, during his employment with the Companies, he will become familiar with trade secrets and other Confidential Information concerning the Company and its Subsidiaries and his 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), he 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 Executives 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 his Base Salary and his annual target bonus in effect for the year during which his 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 Executives 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 Companys products have been sold at any time in the one-year period ending on the last day of the Executives employment with the Companies;
(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;
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(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 Companys products have been sold at any time in the one-year period ending on the last day of Executives 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 Companys products have been sold at any time in the one-year period ending on the last day of the Executives 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;
(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 Executives services are unique, and (c) a breach or threatened breach by him of any of his 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 his 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.
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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 he 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 his own costs incurred in defending such action, including but not limited to court fees, arbitration costs, mediation costs, attorneys fees and disbursements.
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 he 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 Executives 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 Executives 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
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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.
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 Companys 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 his 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.
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.
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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.
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 his 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.
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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 his rights or delegate his obligations under this Agreement without the written consent of the Companies (other than to his 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.
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.
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.
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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.
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.
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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/ Daryl G. Brewster | ||
Daryl G. Brewster | |||
Chief Executive Officer | |||
KRISPY KREME DOUGHNUT CORPORATION | |||
By: | /s/ Douglas R. Muir | ||
Douglas R. Muir | |||
Chief Financial Officer | |||
EXECUTIVE | |||
/s/ Jeffrey B. Welch | |||
Jeffrey B. Welch |
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KRISPY KREME DOUGHNUTS,
INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (this Agreement) is made as of ______________ (the Grant Date), by and between Krispy Kreme Doughnuts, Inc., a North Carolina corporation having its principal office at 370 Knollwood Street, Winston-Salem, North Carolina 27103 (the Corporation), and ______________ (the Optionee).
W I T N E S S E T H:
WHEREAS, the Board of Directors and shareholders of the Corporation have approved the Krispy Kreme Doughnuts, Inc. 2000 Stock Incentive Plan (the Plan), for the purposes and subject to the provisions set forth in the Plan;
WHEREAS, pursuant to authority granted to it in the Plan, the Compensation Committee of the Board of Directors of the Corporation (the Committee) has, on behalf of the Corporation, granted to Optionee an option to purchase shares of the Corporations Common Stock, no par value per share (the Common Stock or the Stock), as set forth below; and
WHEREAS, this Agreement evidences the grant of such option pursuant to the Plan.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises set forth below and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
1. Summary of Grant
Number of Shares:
Option Exercise
Price:
Date of Grant:
2. Grant of Option
This Agreement sets forth the terms of a nonqualified option granted to the Optionee to purchase from the Corporation, during the period specified in Sections 3 and 4 of this Agreement, a total of ______________ shares of Common Stock, at the purchase price of ______________ per share (the Exercise Price), in accordance with the terms and conditions stated in this Agreement. The shares of Common Stock subject to the option granted hereby are referred to below as the Shares, and the option to purchase such Shares is referred to below as the Option.
3. Vesting and Exercise of Option
The Option shall vest and become exercisable in increments in accordance with the schedule set forth below, provided that the Option shall vest and become exercisable with respect to an increment as specified only if the Optionee has not incurred a Termination of Employment prior to the vesting date with respect to such increment:
(a) no portion of the Option shall vest or become exercisable prior to the first anniversary of the Grant Date;
(b) on the first anniversary of the Grant Date one fourth of the number of shares in the Option (as indicated in Section 1) shall vest and become exercisable;
(c) on the second anniversary of the Grant Date an additional one fourth of the number of shares in the Option (as indicated in Section 1) shall vest and become exercisable;
(d) on the third anniversary of the Grant Date an additional one fourth of the number of shares in the Option (as indicated in Section 1) shall vest and become exercisable; and
(e) on the fourth anniversary of the Grant Date the remaining one fourth of the number of shares in the Option (as indicated in Section 1) shall vest and become exercisable.
Notwithstanding the vesting provisions described above, the Option shall vest and become exercisable with respect to 100% of the Shares upon the Optionees Termination of Employment if the Optionees Termination of Employment is due to his or her Retirement, death or Disability.
The schedule set forth above is cumulative, so that Shares as to which the Option has become vested and exercisable pursuant to the provisions above may be purchased pursuant to exercise of the Option at any date subsequent to vesting but prior to termination of the Option. The Option may be exercised at any time and from time to time to purchase up to the number of Shares as to which it is then vested and exercisable.
The Option will become vested and exercisable in full upon a Change in Control, provided that Optionee has not incurred a Termination of Employment prior to the date of such Change in Control. In the event of a Change in Control, the Board, in its sole discretion, may send Optionee prior written notice of the effectiveness of such event and the last day on which Optionee may exercise the Option. In such event, Optionee may, upon compliance with all of the terms of this Agreement and the Plan, purchase any or all of the Shares with respect to which the Option is vested and exercisable on or prior to the last day specified in such notice, and, to the extent the Option is not exercised, it shall terminate at 5:00 P.M., Eastern Standard Time, on the last day specified in such notice. For purposes hereof, Change in Control shall have the meaning set forth in the Plan, except in the case of a transaction described in clauses (1) or (3) of paragraph (b) of such definition, the consummation of such a transaction, rather than the approval by shareholders of the Corporation of such transaction or agreement to effect such a transaction, shall constitute a Change in Control.
4. Termination of Option
Unless adjusted by the Committee in its sole discretion, the Option shall remain exercisable as specified in Section 3 above until 5:00 p.m., Eastern Standard Time, on the earliest to occur of the dates specified below, upon which date the Option shall terminate:
(a) the date all of the Shares are purchased pursuant to the terms of this Agreement;
(b) upon the expiration of 90 days following the Optionees Termination of Employment for any reason other than his or her Retirement, death, Disability, or for Cause;
(c) upon the expiration of 180 days following Optionees Termination of Employment on account of his or her Disability;
(d) upon the expiration of 360 days following Optionees Termination of Employment on account of his or her death;
(e) immediately upon Optionees Termination of Employment for Cause, as defined below in Section 21(a);
(f) on the last date specified in the notice described in Section 3 above in the event of a Change in Control; or
(g) on the ten year anniversary of the Grant Date (the Expiration Date).
Upon its termination, the Option shall have no further force or effect and Optionee shall have no further rights under the Option or to any Shares which have not been purchased pursuant to prior exercise of the Option.
5. Manner of Exercise of Option
(a) Exercise. The Option may be exercised only by (i) Optionees completion, execution and delivery to the Corporation of a notice of exercise and (ii) the payment to the Corporation, pursuant to the terms of this Agreement, of an amount equal to the Exercise Price multiplied by the number of Shares being purchased as specified in Optionees notice of exercise (the Purchase Price). Optionees notice of exercise shall be given in the manner specified in Section 10 but any exercise of the Option shall be effective only when the items required by the preceding sentence are actually received by the Corporation. The notice of exercise shall be in
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the form attached to this Agreement. Notwithstanding anything to the contrary in this Agreement, the Option may be exercised only if compliance with all applicable federal and state securities laws can be effected, with the Committee being the final arbitrator thereof, in its sole and absolute discretion, in the event of any dispute between the Corporation and the Optionee with regard to the interpretation of such laws.
(b) Form of Payment. Payment of the Purchase Price may be made (i) by check payable to the order of the Corporation for an amount in U.S. dollars equal to the Purchase Price of such Shares; (ii) by authorizing a third party to sell a portion of the Shares acquired upon exercise of the Option and remit to the Corporation a sufficient portion of the sales proceeds to pay the full Purchase Price; or (iii) by combining the above methods.
(c) Issuance and Delivery of Shares. As soon as practicable following receipt of such notice and payment, the Corporation shall notify the Optionee of any payment required under subsection (d) below. The Corporation shall deliver a certificate or certificates for the Shares to the Optionee as soon as practicable after the Optionee has made any payment required under subsection (d) below. Shares issued pursuant to the exercise of this option will be issued only in the name of Optionee and may not be transferred into the name of any agent of or nominee for Optionee until such time as Optionee has complied with the terms of this Agreement.
(d) Withholding Obligation. Issuance of Shares upon exercise of the Option shall be subject to the condition that the Optionee shall pay to the Corporation, in addition to the Purchase Price, the minimum amount the Corporation is required by law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with such exercise of the Option, if any. In lieu of the payment specified in this paragraph, Optionee may satisfy the obligation, in whole or in part, by the methods specified in subsection (b) above.
(e) Deferral of Issuance of Shares. Anything in this Agreement to the contrary notwithstanding, if, at any time specified herein for the issuance of Shares to Optionee, any law, or any regulation or requirement of the Securities and Exchange Commission or other governmental authority having jurisdiction over such matter shall require either the Corporation or Optionee to take any action in connection with the Shares then to be issued, the issuance of such Shares shall be deferred until such action shall have been taken; the Corporation shall be under no obligation to take such action; and the Corporation shall have no liability whatsoever as a result of the non-issuance of such shares, except to refund to Optionee any consideration tendered in respect of the Purchase Price.
(f) Stop Transfer Instructions. The Corporation may impose stop-transfer instructions with respect to any Shares (or other securities) subject to any restriction set forth in this Agreement until the restriction has been satisfied or terminates.
6. Restrictions on Transfer of Option
(a) Except as otherwise provided in subsections (b), (c) and (d) below, the Option may not be sold, exchanged, delivered, assigned, bequeathed or gifted, pledged, mortgaged, hypothecated or otherwise encumbered, transferred or permitted to be transferred, or otherwise disposed of, whether voluntarily, involuntarily or by operation of law (including, without limitation, the laws of bankruptcy, intestacy, descent and distribution or succession) or on an absolute or contingent basis. For purposes of this Section, any reference to Optionee shall (when applicable) be deemed to be and include references to Optionees estate, executors or administrators, personal or legal representatives and transferees (direct or indirect).
(b) If permitted by the Committee, Optionee may transfer this Option to members of his or her Immediate Family (as defined below), to one or more trusts for the benefit of such Immediate Family members, to one or more partnerships where such Immediate Family members are the only partners, or to one or more limited liability companies (or similar entities) where such Immediate Family members are the only members or beneficial owners of the entity, if (i) the Optionee does not receive any consideration in any form whatsoever for such transfer, (ii) such transfer is permitted under applicable tax laws, and (iii) if the Optionee is an Insider, such transfer is permitted under Rule 16b-3 of the Exchange Act as in effect from time to time. For purposes hereof, Immediate Family means the Optionee and the Optionees spouse, children and grandchildren.
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(c) In the event of Optionees death, the Option may be transferred to any executor, administrator, personal or legal representative, legatee, heir or distributee of the estate of Optionee.
(d) In the event of Optionees divorce, Optionee may transfer some or all of the Option to his or her former spouse incident to Optionees divorce from the former spouse.
(e) As a condition precedent to the transfer of the Option, each and every prospective transferee shall (i) provide or cause to be provided to the Corporation, at its request, sufficient evidence of the legal right and authority of such prospective transferee to have the Option so transferred and (ii) comply with the provisions of this Agreement. Any Option so transferred pursuant to this Section shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to said Option immediately prior to the transfer thereof, and any reference in this Agreement to the performance of services for the Corporation by the Optionee shall continue to refer to the performance by the transferring Optionee.
7. Rights Prior to Exercise
Optionee shall not be deemed for any purpose to be a shareholder of the Corporation with respect to any Shares as to which this Option shall not have been exercised and payment made as hereby provided and a stock certificate for such Shares actually issued to Optionee. No adjustment will be made for dividends or other rights for which the record date is prior to the date of such issuance.
8. Employment of Optionee
Nothing in this Agreement shall be construed as constituting a commitment, guarantee, agreement or understanding of any kind or nature that the Corporation, any Subsidiary or affiliate shall continue to employ Optionee, nor shall this Agreement affect in any way the right of the Corporation, any Subsidiary or affiliate to terminate the employment or other service of Optionee at any time and for any reason. By Optionees execution of this Agreement, Optionee acknowledges and agrees that Optionees employment or other service to the Corporation, any Subsidiary or affiliate is at will. No change of Optionees duties with respect to the Corporation, any Subsidiary or affiliate shall result in, or be deemed to be, a modification of any of the terms of this Agreement. Optionee acknowledges and agrees that the award and acceptance of the Options pursuant to this Agreement does not entitle Optionee to future grants under the Plan or any other plan.
9. Burden and Benefit
(a) This Agreement shall be binding upon and inure to the benefit of any assignee or successor in interest to the Corporation, whether by merger, consolidation or the sale of all or substantially all of the Corporations assets.
(b) This Agreement shall be binding upon and inure to the benefit of Optionee and his or her legal representative and any person to whom the Options may be transferred by will, the applicable laws of descent and distribution, or otherwise in accordance with the terms of the Plan.
10. Notices
Any and all notices under this Agreement shall be in writing, and sent by hand delivery or by certified or registered mail (return receipt requested and first-class postage prepaid), in the case of the Corporation, to its principal executive offices to the attention of the Chief Financial Officer, and, in the case of Optionee, to Optionees address as shown on the Corporations records.
11. Specific Performance
Strict compliance by Optionee shall be required with each and every provision of this Agreement. The parties hereto agree that the Shares are unique, that Optionees failure to perform the obligations provided by this Agreement will result in irreparable damage to the Corporation and that specific performance of Optionees obligations may be obtained by suit in equity.
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12. Entire Agreement
The parties hereto agree that this Agreement sets forth all of the promises, agreements, conditions, understandings, warranties, and representations between the parties with respect to the Option and Shares and that there are no promises, agreements, conditions, understandings, warranties, or representations, oral or written, express or implied between the parties with respect to the Option and Shares other than as set forth in this Agreement and in the Plan. Any modifications or any waiver of any provision contained in this Agreement shall not be valid unless made in writing and signed by the person or persons sought to be bound by such waiver or modifications.
13. Severability
The provisions of the Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provision to the extent enforceable in any jurisdiction, shall nevertheless be binding and enforceable.
14. Waiver
The waiver by the Corporation of a breach of any provision of this Agreement by the Optionee shall not operate or be construed as a waiver of any subsequent breach by the Optionee.
15. Terms and Conditions of Plan
The Option and the terms and conditions set forth herein are subject in all respects to the terms and conditions of the Plan (which are incorporated herein by reference). Except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. To the extent that any conflict may exist between any term or provision of this Agreement and any term or provision of the Plan, such term or provision of the Plan shall control.
16. Authority of Committee
All determinations made by the Committee with respect to the interpretation, construction and application of any provision of this Agreement shall be final, conclusive and binding on the parties.
17. Covenants and Representations of Optionee
Optionee represents, warrants, covenants and agrees with the Corporation as follows:
(a) Optionee has not relied upon the Corporation with respect to any tax consequences related to the grant or exercise of this Option, or the disposition of Shares purchased pursuant to its exercise. Optionee acknowledges that, as a result of the grant and/or exercise of the Option, Optionee may incur a substantial tax liability. Optionee assumes full responsibility for all such consequences and the filing of all tax returns and elections Optionee may be required or find desirable to file in connection therewith.
(b) Optionee will not distribute or resell any Shares (or other securities) issuable upon exercise of the Option granted hereby in violation of law. Optionee shall comply with all provisions of the Corporations Securities Trading Policy and the Corporations Stock Ownership Guidelines, each as in effect from time to time.
(c) The agreements, representations, warranties and covenants made by Optionee herein with respect to the Option shall also extend to and apply to all of the Shares issued to Optionee from time to time pursuant to exercise of the Option. Acceptance by Optionee of any certificate representing Shares shall constitute a confirmation by Optionee that all such agreements, representations, warranties and covenants made herein continue to be true and correct at that time.
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18. Limitation of Liability
The liability of the Corporation under this Agreement and in the award of the Shares hereunder is limited to the obligations set forth herein with respect to such award, and nothing herein contained shall be interpreted as imposing any liability in favor of the Optionee or any others with respect to any loss, cost or expense which Optionee or any others may incur in connection with or arising out of any transaction involving the Shares.
19. Governing Law
This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of North Carolina, without giving effect to the conflict of laws provisions thereof.
20. Definitions
(a) Retirement shall mean the Optionees Termination of Employment at a time when for an Optionee, the sum of the Optionees age and years of employment with the Corporation, its Subsidiaries and affiliates equals or exceeds 65.
(b) Termination of Employment means the discontinuance of the Optionees service relationship with the Corporation, its Subsidiaries and affiliates, including but not limited to service as an Optionee of the Corporation, its Subsidiaries and affiliates, as a non-Optionee member of the board of directors of the Corporation, or as a consultant or advisor to the Corporation, its Subsidiaries and affiliates. Except to the extent provided otherwise in an Agreement or determined otherwise by the Committee, a Termination of Employment shall not be deemed to have occurred if the capacity in which the Optionee provides service to the Corporation changes (for example, a change from consultant status to Optionee status or vice versa) or if the Optionee transfers among the various entities constituting the Corporation and its Subsidiaries and affiliates, so long as there is no interruption in the provision of service by the Optionee to the Corporation and its Subsidiaries and affiliates. The determination of whether an Optionee has incurred a Termination of Employment shall be made by the Committee in its discretion. An Optionee shall not be deemed to have incurred a Termination of Employment if the Optionee is on military leave, sick leave, or other bona fide leave of absence approved by the Corporation of 180 days or fewer (or any longer period during which the Optionee is guaranteed reemployment by statute or contract.) In the event an Optionees leave of absence exceeds this period, he or she will be deemed to have incurred a Termination of Employment on the day following the expiration date of such period.
21. Forfeiture in the Event of Competition and/or Solicitation or other Detrimental Acts
In return for granting the Option to Optionee, Optionee agrees to the following restrictions:
(a) Optionee expressly agrees and covenants that during the Restricted Period (as defined below), Optionee shall not, without the prior written consent of the Corporation, directly or indirectly:
(i) own, manage, control, participate in, consult with, become employed by or otherwise render services to any Competitive Business (as defined below) in the Territory (as defined below), except that it shall not be considered a violation of this clause for the Optionee to be a passive owner of not more than two percent of the outstanding stock of any class of any corporation which is publicly traded, so long as Optionee has no active participation in the business of such corporation;
(ii) induce or attempt to induce any customer, supplier, client or other business relation of the Corporation or its affiliates to cease doing business with the Corporation or its affiliates if such cessation could reasonably be expected to result in material harm to the Corporation;
(iii) induce or attempt to induce any Optionee of the Corporation or its affiliates to leave the employ of the Corporation or its affiliates, or in any way interfere with the relationship between the Corporation or its affiliates and any person employed by them; or
(iv) violate the Corporations Securities Trading Policy.
(b) Optionee expressly agrees and covenants that Optionee will not, without the prior written consent of the Corporation, directly or indirectly, disclose or use at any time before or after Optionees Termination of Employment any Confidential Information (as defined below) of which Optionee is or becomes aware, whether
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or not such information is developed by Optionee, except to the extent such disclosure or use is directly related to and appropriate in connection with Optionees performance of duties assigned to Optionee by the Corporation or its affiliates. Under all circumstances and at all times, Optionee will take all appropriate steps to safeguard Confidential Information in his or her possession and to protect it against disclosure, misuse, espionage, loss and theft.
(c) If the Committee determines that Optionee has violated any provisions of this Section 21 or that Optionees employment has been terminated for Cause, then Optionee agrees and covenants that:
(i) Optionee shall automatically forfeit any rights Optionee may have with respect to the Option as of the date of such determination; and
(ii) if Optionee has exercised all or any part of the Option within the twelve-month period immediately preceding a violation of this Section 21 or termination of Optionees employment for Cause, upon the Corporations demand, Optionee shall immediately deliver to the Corporation an amount equal to the gain realized by Optionee upon such exercise (the excess of the aggregate Fair Market Value, on the date of exercise, of the Common Stock received upon exercise over the aggregate exercise price of the Option with respect to such Common Stock, then less any taxes paid which are not refundable or for which the Optionee does not otherwise receive a tax credit or other form of reimbursement).
(d) Definitions. For purposes of this Section 21, the following definitions shall apply:
(i) Competitive Business means any business listed on Exhibit A hereto.
(ii) Confidential Information means information that is not generally known to the public and that was or is used, developed or obtained by the Corporation or its affiliates in connection with the business of the Corporation or its affiliates 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 Optionee; or (c) the disclosure of which is consented to in writing by the Corporation.
(iii) Restricted Period means the period during which Optionee is employed by the Corporation or an affiliate and twelve months following the date that Optionee ceases to be employed by the Corporation or an affiliate for any reason whatsoever.
(iv) Territory means:
(A) The entire United States and any other country where the Corporation or any of its Subsidiaries, joint venturers, franchisees or affiliates has operated a retail facility at which the Corporations products have been sold at any time in the one-year period ending on the last day of Optionees employment with the Corporation or its affiliates;
(B) 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;
(C) 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 Corporation or any of its Subsidiaries, joint venturers, franchisees or affiliates has operated a retail facility at which the Corporations products have been sold at any time in the one-year period ending on the last day of Optionees employment with Corporation or its affiliates;
(D) 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 Corporations products have been sold at any time in the one-year period ending on the last day of Optionees employment with the Corporation or its affiliates; and
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(E) 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.
(e) The Corporation may require Optionee, in connection with the exercise of the Option, to certify in a manner acceptable to the Corporation that Optionee has not violated the terms of this Section 21 and may decline to give effect to such exercise if Optionee fails so to certify. If Optionee is required to repay any Option gain to the Corporation pursuant to this Section 21, Optionee shall pay such amount in such manner and on such terms and conditions as the Corporation may require, and the Corporation shall be entitled to withhold or set-off against any other amount owed to Optionee by the Corporation or any of its affiliates (other than any amount owed to Optionee under any retirement plan intended to be qualified under Section 401(a) of the Code) up to any amount sufficient to satisfy any unpaid obligation of Optionee under this Section 21.
(f) Optionee acknowledges and agrees that the period, scope and geographic areas of restriction imposed upon Optionee by the provisions of Section 21 are fair and reasonable and are reasonably required for the protection of the Corporation. In the event that any part of this Agreement, including, without limitation, Section 21, is held to be unenforceable or invalid, the remaining parts of Section 21 and this Agreement shall nevertheless continue to be valid and enforceable as though the invalid portions were not a part of this Agreement. If any one of the provisions in this Section 21 is held to be excessively broad as to period, scope and geographic areas, any such provision shall be construed by limiting it to the extent necessary to be enforceable under applicable law.
(g) Optionee acknowledges that breach by Optionee of this Agreement would cause irreparable harm to the Corporation and that, in the event of such breach, the Corporation shall have, in addition to monetary damages and other remedies at law, the right to an injunction, specific performance and other equitable relief to prevent violations of your obligations hereunder.
(h) If the Corporation is required to prepare an accounting restatement due to the material noncompliance of the Corporation as a result of misconduct pertaining to any financial reporting requirement under the securities laws (Misconduct), and such Misconduct is the result of actions taken by either the Chief Executive Officer and/or the Chief Financial Officer, then such of the Chief Executive Officer and/or the Chief Financial Officer as have committed such Misconduct as determined by the Committee shall reimburse the Corporation for (1) any bonus or other incentive-based or equity-based compensation received by either or both of them, as applicable, from the Corporation during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (whichever first occurs) of the financial document embodying the financial reporting requirement that gives rise to the restatement; and (2) any profits realized by either or both of them, as applicable, from the sale of securities of the Corporation during that 12-month period.
22. Holding Period After Resignation or Termination
In return for granting the Option to Optionee, Optionee agrees that in the event of Optionees Termination of Employment in a manner that would otherwise permit Optionee to exercise Optionees Options after leaving employment by the Corporation, Optionee will nevertheless delay making any transactions in the Corporations stock until such time as the Corporation has filed its next succeeding quarterly (10-Q) or annual (10-K) financial filing, as applicable, with the U. S. Securities and Exchange Commission.
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IN WITNESS WHEREOF, the Corporation and Optionee have executed this Agreement hereto as of the day and year first above written.
KRISPY KREME DOUGHNUTS, INC. | |||
By: | |||
Title: | |||
OPTIONEE | |||
Signature: | |||
Printed Name: |
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STOCK OPTION EXERCISE FORM
This form must be completed and returned to Krispy Kremes Chief Financial Officer on or before 1:00 p.m. Eastern Standard Time on date of exercise.
NAME (please print): | SOCIAL SECURITY NO.: |
SECTION I | |
HOME ADDRESS: | WORK ADDRESS: |
HOME TELEPHONE: | WORK TELEPHONE: |
SECTION II: I wish to exercise the following options:
A | B | C | D |
NUMBER OF | EXERCISE | TOTAL PURCHASE PRICE: | |
GRANT DATE | OPTIONS | PRICE | (COLUMN B x COLUMN C) |
TOTAL |
SECTION III | SECTION IV | |||||
I elect to pay my taxes on this transaction | ||||||
I elect to pay for my shares (check one): | (check one): | |||||
£ | Broker assisted Cashless Exercise for | £ | Sell shares to cover taxes (Cashless Exercise for | |||
Cash | Cash/Stock) | |||||
£ | Cash Purchase by Check (payable to | £ | Check (payable to Krispy Kreme Doughnuts, Inc.) | |||
Krispy Kreme Doughnuts, Inc.) | (required for Cash Purchases) |
Signature | Date of Exercise |
Return | KRISPY KREME DOUGHNUT |
form to: | CORPORATION |
ATTN: Chief Financial Officer | |
P.O. Box 83 | |
Winston-Salem, NC 27102 | |
Phone: 336-725-2981 |
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Summary of Annual Incentive Plan
Krispy Kreme has an informal annual incentive plan which represents, in most cases, the short-term component of our incentive compensation package. This plan was originally adopted by the Compensation Committee in July 2006 and was expanded to cover executive officers in December 2006. This plan ties the incentive compensation payable to the employee principally to the attainment of specific, objective performance targets. These targets are based on actual overall company performance compared to our business plan objectives. It is expected that key plan measurements will include revenues, EBITDA, cash flow from operations, other company performance metrics and, to reflect the importance of building sustainable growth, other measurements based on progress in achieving our mission and strategic objectives. The targets will not be based, implicitly or explicitly, on meeting or exceeding any earnings guidance, consensus earnings estimates or similar measures.
The amount of cash incentives potentially payable to employees is determined based on (1) a target cash incentive amount which is set as a percentage of an individual employees salary and (2) how actual results compare to the targeted performance measures.
Key plan measurements for executive officers and other employees normally will be determined on an annual basis and cash incentives will be payable (in compliance with applicable tax rules regarding deferred compensation) in the first quarter of the fiscal year following the year in which performance is tested.
The Compensation Committee has the authority under the annual incentive plan to adjust any goal with respect to the executive officers and the other employees. These decisions are subjective and based generally on a review of the circumstances affecting results to determine if any events were unusual or unforeseen.
KRISPY KREME DOUGHNUTS, INC.
2000
STOCK INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT is made as of _________________, by and between Krispy Kreme Doughnuts, Inc., a North Carolina corporation having its principal office at 370 Knollwood Street, Winston-Salem, North Carolina 27103 (the Corporation), and _________________ (Employee).
W I T N E S S E T H:
WHEREAS, the Board of Directors and shareholders of the Corporation have approved the Krispy Kreme Doughnuts, Inc. 2000 Stock Incentive Plan (the Plan), for the purposes and subject to the provisions set forth in the Plan;
WHEREAS, pursuant to authority granted to it in the Plan, the Compensation Committee of the Board of Directors of the Corporation (the Committee) has, on behalf of the Corporation, granted to Employee restricted shares of Common Stock of Krispy Kreme Doughnuts, Inc., as set forth below; and
WHEREAS, this Agreement evidences the grant of restricted stock under the Plan.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises set forth below and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
1. Award of Restricted Stock
This Agreement sets forth the terms of an award to the Employee of _________________restricted shares of the Corporations Common Stock (the Restricted Stock), subject to, and in accordance with, the restrictions, terms and conditions set forth in this Agreement. The grant date of this award of Restricted Stock is _________________ (Grant Date).
2. Restrictions
If Employee remains employed by the Corporation, Employee shall become vested in the Restricted Stock in _________________ equal installments beginning on _________________, and continuing on the next ___________ anniversaries of the Grant Date (each such date shall be a Vesting Date), all as set forth below:
Cumulative Number | |
of | |
Date | Shares Vested |
On each Vesting Date, Employee shall own the vested shares of Restricted Stock free and clear of all restrictions imposed by this Agreement. The Corporation shall deliver a certificate(s) (or other evidence of ownership, such as book entry) for the vested shares of Restricted Stock to Employee as soon as practical after each Vesting Date. For purposes of this Agreement, employment with a Subsidiary of the Corporation shall be considered employment with the Corporation.
3. Certificates
The Restricted Stock granted hereunder may be evidenced in such manner as the Committee shall determine, including, but not limited to tracking through book entry. If certificates representing Restricted Stock are registered in the name of the Employee, the Committee may require that such certificates bear an appropriate legend (the Restrictive Legend) referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Corporation retain physical possession of the certificates, and that the Employee deliver a stock power to the Corporation, endorsed in blank, relating to the Restricted Stock. Upon the vesting of the Restricted Stock pursuant to the terms hereof and the satisfaction of any withholding tax liability pursuant to Section 8 hereof, the certificates evidencing such vested shares of Common Stock, not bearing the Restrictive Legend, shall be delivered to the Employee or other evidence of vesting of shares of Common Stock shall be provided to the Employee, such as tracking through book entry.
4. Rights as a Shareholder
Except as otherwise provided in this Agreement and the Plan, Employee shall have all of the rights of a shareholder of the Corporation with respect to the shares of Restricted Stock, including the right to vote such shares. All dividends declared and paid by the Corporation on shares of Restricted Stock shall be paid in the form of Restricted Stock having a Fair Market Value on the dividend payment date equal to the amount of the cash dividend. Such shares of Restricted Stock will vest at the same time as the shares of Restricted Stock in respect of which they are issued and shall otherwise have terms identical to the terms of such Restricted Stock.
5. Effect of Termination of Employment on Restricted Stock
Any unvested Restricted Stock shall be automatically forfeited upon the Employees Termination of Employment for any reason other than due to Employees death, Retirement or Disability. In the event of a Termination of Employment of the Employee due to his or her death, Retirement or Disability, the Restricted Stock will become immediately vested in full.
6. Nontransferability
The Restricted Stock shall not be transferable or assignable, other than by will or the laws of descent and distribution, and any such purported transfer or assignment shall be null and void without the express consent of the Committee. Employee agrees to appropriate legends on the Restricted Stock in order to reflect the vesting provisions set forth herein and to reflect any restrictions required by applicable securities laws.
7. Change in Control
In the event of a Change in Control, the restrictions on the Restricted Stock shall lapse and the Restricted Stock shall become vested in full, provided that Employee has not incurred a Termination of Employment prior to the date thereof. For purposes hereof, Change in Control shall have the meaning set forth in the Plan, except in the case of a transaction described in clauses (1) or (3) of paragraph (b) of such definition, the consummation of such a transaction, rather than the approval by shareholders of the Corporation of such transaction or an agreement to effect such a transaction, shall constitute a Change in Control.
8. Taxes and Withholding
(a) Employee shall be responsible for all federal, state and local income taxes payable with respect to this award of Restricted Stock. Employee shall have the right to make such elections under the Internal Revenue Code of 1986, as amended, as are available in connection with this award of Restricted Stock. The Corporation and
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Employee agree to report the value of the Restricted Stock in a consistent manner for federal income tax purposes. Employee acknowledges that he or she may incur substantial tax liability as a result of the grant of Restricted Stock to him or her upon the lapse of the restrictions hereunder.
(b) The Corporation shall have the right to retain and withhold from any vesting of Restricted Stock the minimum amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to such vesting. At its discretion, the Corporation may require Employee to immediately reimburse the Corporation for any such taxes required to be withheld and may withhold any distribution in whole or in part until the Corporation is so reimbursed. In lieu thereof, the Corporation shall have the right to withhold from any other cash amounts due to Employee an amount equal to such taxes required to be withheld or withhold and cancel (in whole or in part) a number of shares of Restricted Stock having a market value not less than the amount of such taxes. In addition, Employee may elect to satisfy the withholding requirement, in whole or in part, by having the Corporation withhold Shares with a Fair Market Value equal to the minimum statutory tax required to be withheld.
9. Modification of Agreement
This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto.
10. Severability
The provisions of the Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially unenforceable provision to the extent enforceable in any jurisdiction, shall nevertheless be binding and enforceable.
11. Notices
Any and all notices under this Agreement shall be in writing, and sent by hand delivery or by certified or registered mail (return receipt requested and first-class postage prepaid), in the case of the Corporation, to its principal executive offices to the attention of the Chief Financial Officer, and, in the case of Employee, to Employees address as shown on the Corporations records.
12. Binding Effect
(a) This Agreement shall be binding upon and inure to the benefit of any assignee or successor in interest to the Corporation, whether by merger, consolidation or the sale of all or substantially all of the Corporations assets.
(b) This Agreement shall be binding upon and inure to the benefit of Employee and his or her legal representative and any person to whom the Restricted Stock may be transferred by will, the applicable laws of descent and distribution, or otherwise in accordance with the terms of the Plan.
13. Agreement to be Bound by Plan
Employee hereby acknowledges that Employee fully understands his or her rights under the Plan, and that Employee agrees to be bound by all the terms and provisions of the Plan.
14. Plan Controls
The Restricted Stock and the terms and conditions set forth herein are subject in all respects to the terms and conditions of the Plan (which are incorporated herein by reference). Except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. To the extent that any conflict may exist between any term or provision of this Agreement and any term or provision of the Plan, such term or provision of the Plan shall control.
15. Rights to Future Grants; Compliance with Law
Nothing in this Agreement shall be construed as constituting a commitment, guarantee, agreement or understanding of any kind or nature that the Corporation, any Subsidiary or affiliate shall continue to employ Employee, nor shall this Agreement affect in any way the right of the Corporation, any Subsidiary or affiliate to terminate the employment or other service of Employee at any time and for any reason. By Employees execution
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of this Agreement, Employee reaffirms and acknowledges and agrees that Employees employment or other service to the Corporation, any Subsidiary or affiliate is at will. No change of Employees duties with respect to the Corporation, any Subsidiary or affiliate shall result in, or be deemed to be, a modification of any of the terms of this Agreement. Employee acknowledges and agrees that the award and acceptance of Restricted Stock pursuant to this Agreement does not entitle Employee to future grants under the Plan or any other plan.
16. Covenants and Representations of Employee
Employee represents, warrants, covenants and agrees with the Corporation as follows:
(a) Employee has not relied upon the Corporation with respect to any tax consequences related to the grant or sale of the Restricted Stock. Employee acknowledges that, as a result of the grant and vesting of Restricted Stock and/or sale of Shares, Employee may incur a substantial tax liability. Employee assumes full responsibility for all such consequences and the filing of all tax returns and elections Employee may be required or find desirable to file in connection therewith.
(b) Employee will not distribute or resell any Restricted Stock (or other securities) issuable upon lapse of the restrictions hereunder in violation of law. Employee shall comply with all provisions of the Corporations Securities Trading Policy and the Corporations Stock Ownership Guidelines, each as in effect from time to time.
(c) The agreements, representations, warranties and covenants made by Employee herein with respect to the Restricted Stock shall also extend to and apply to all of the Shares issued to Employee from time to time upon the lapse of the restrictions. Acceptance by Employee of any certificate representing Shares shall constitute a confirmation by Employee that all such agreements, representations, warranties and covenants made herein continue to be true and correct at that time.
17. Governing Law
This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of North Carolina, without giving effect to the conflicts of laws provisions thereof.
18. Waiver
The waiver by the Corporation of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee.
19. Limitation of Liability
The liability of the Corporation under this Agreement and in the award of the Restricted Stock hereunder is limited to the obligations set forth herein with respect to such award, and nothing herein contained shall be interpreted as imposing any liability in favor of Employee or any others with respect to any loss, cost or expense which Employee or others may incur in connection with or arising out of any transaction involving the Restricted Stock.
20. Entire Agreement
The parties hereto agree that this Agreement sets forth all of the promises, agreements, conditions, understandings, warranties, and representations between the parties with respect to the award of Restricted Stock and that there are no promises, agreements, conditions, understandings, warranties, or representations, oral or written, express or implied between the parties with respect to the award of Restricted Stock other than as set forth in this Agreement and in the Plan. Any modifications or any waiver of any provision contained in this Agreement shall not be valid unless made in writing and signed by the person or persons sought to be bound by such waiver or modifications.
21. Authority of Committee
All determinations made by the Committee with respect to the interpretation, construction and application of any provision of this Agreement shall be final, conclusive and binding on the parties.
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22. Definitions
(a) Retirement shall mean Employees Termination of Employment at a time when, the sum of Employees age and years of employment with the Corporation, its Subsidiaries and affiliates equals or exceeds 65.
(b) Termination of Employment means the discontinuance of Employees service relationship with the Corporation, its Subsidiaries and affiliates, including but not limited to service as an employee of the Corporation, its Subsidiaries and affiliates, as a non-employee member of the board of directors of the Corporation, or as a consultant or advisor to the Corporation, its Subsidiaries and affiliates. Except to the extent provided otherwise in an agreement or determined otherwise by the Committee, a Termination of Employment shall not be deemed to have occurred if the capacity in which Employee provides service to the Corporation changes (for example, a change from consultant status to Employee status, or vice versa) or if Employee transfers among the various entities constituting the Corporation and its Subsidiaries and affiliates, so long as there is no interruption in the provision of service by Employee to the Corporation and its Subsidiaries and affiliates. The determination of whether an Employee has incurred a Termination of Employment shall be made by the Committee in its discretion. An Employee shall not be deemed to have incurred a Termination of Employment if Employee is on military leave, sick leave, or other bona fide leave of absence approved by the Corporation of 180 days or fewer (or any longer period during which Employee is guaranteed reemployment by statute or contract.) In the event an Employees leave of absence exceeds this period, he or she will be deemed to have incurred a Termination of Employment on the day following the expiration date of such period.
23. Forfeiture in the Event of Competition and/or Solicitation or other Detrimental Acts
In return for granting the Restricted Stock to Employee, Employee agrees to the following restrictions.
(a) Employee expressly agrees and covenants that during the Restricted Period (as defined below), Employee shall not, without the prior written consent of the Corporation, directly or indirectly:
(i) own, manage, control, participate in, consult with, become employed by or otherwise render services to any Competitive Business (as defined below) in the Territory (as defined below), except that it shall not be considered a violation of this clause for the Employee to be a passive owner of not more than two percent of the outstanding stock of any class of any corporation which is publicly traded, so long as Employee has no active participation in the business of such corporation;
(ii) induce or attempt to induce any customer, supplier, client or other business relation of the Corporation or its affiliates to cease doing business with the Corporation or its affiliates if such cessation could reasonably be expected to result in material harm to the Corporation;
(iii) induce or attempt to induce any employee of the Corporation or its affiliates to leave the employ of the Corporation or its affiliates, or in any way interfere with the relationship between the Corporation or its affiliates and any person employed by them; or
(iv) violate the Corporations Securities Trading Policy.
(b) Employee expressly agrees and covenants that Employee will not, without the prior written consent of the Corporation, directly or indirectly, disclose or use at any time before or after Employees Termination of Employment any Confidential Information (as defined below) of which Employee is or becomes aware, whether or not such information is developed by Employee, except to the extent such disclosure or use is directly related to and appropriate in connection with Employees performance of duties assigned to Employee by the Corporation or its affiliates. Under all circumstances and at all times, Employee will take all appropriate steps to safeguard Confidential Information in his or her possession and to protect it against disclosure, misuse, espionage, loss and theft.
(c) If the Committee determines that Employee has violated any provisions of this Section 23 or that Employees employment has been terminated for Cause, then Employee agrees and covenants that:
(i) Employee shall automatically forfeit any rights Employee may have with respect to the Restricted Stock as of the date of such determination; and
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(ii) if Employee has exercised all or any part of the Restricted Stock within the twelve-month period immediately preceding a violation of this Section 23 or termination of Employees employment for Cause, upon the Corporations demand, Employee shall immediately deliver to the Corporation an amount equal to the gain realized by Employee upon such exercise (the excess of the aggregate Fair Market Value, on the date of exercise, of the Common Stock received upon exercise over the aggregate exercise price of the Restricted Stock with respect to such Common Stock, then less any taxes paid which are not refundable or for which the Employee does not otherwise receive a tax credit or other form of reimbursement).
(d) Definitions. For purposes of this Section 23, the following definitions shall apply:
(i) Competitive Business means any business listed on Exhibit A hereto.
(ii) Confidential Information means information that is not generally known to the public and that was or is used, developed or obtained by the Corporation or its affiliates in connection with the business of the Corporation or its affiliates 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 Employee; or (c) the disclosure of which is consented to in writing by the Corporation.
(iii) Restricted Period means the period during which Employee is employed by the Corporation or an affiliate and twelve months following the date that Employee ceases to be employed by the Corporation or an affiliate for any reason whatsoever.
(iv) Territory means:
(A) The entire United States and any other country where the Corporation or any of its Subsidiaries, joint venturers, franchisees or affiliates has operated a retail facility at which the Corporations products have been sold at any time in the one-year period ending on the last day of Employees employment with the Corporation or its affiliates;
(B) 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;
(C) 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 Corporation or any of its Subsidiaries, joint venturers, franchisees or affiliates has operated a retail facility at which the Corporations products have been sold at any time in the one-year period ending on the last day of Employees employment with Corporation or its affiliates;
(D) 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 Corporations products have been sold at any time in the one-year period ending on the last day of Employees employment with the Corporation or its affiliates; and
(E) 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.
(e) The Corporation may require Employee, in connection with the exercise of the Restricted Stock, to certify in a manner acceptable to the Corporation that Employee has not violated the terms of this Section 23 and may decline to give effect to such exercise if Employee fails so to certify. If Employee is required to repay any Restricted Stock gain to the Corporation pursuant to this Section 23, Employee shall pay such amount in such manner and on such terms and conditions as the Corporation may require, and the Corporation shall be entitled to withhold or set-off against any other amount owed to Employee by the Corporation or any of its affiliates (other than any amount owed to Employee under any retirement plan intended to be qualified under Section 401(a) of the Code) up to any amount sufficient to satisfy any unpaid obligation of Employee under this Section 23.
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(f) Employee acknowledges and agrees that the period, scope and geographic areas of restriction imposed upon Employee by the provisions of Section 23 are fair and reasonable and are reasonably required for the protection of the Corporation. In the event that any part of this Agreement, including, without limitation, Section 23, is held to be unenforceable or invalid, the remaining parts of Section 23 and this Agreement shall nevertheless continue to be valid and enforceable as though the invalid portions were not a part of this Agreement. If any one of the provisions in this Section 23 is held to be excessively broad as to period, scope and geographic areas, any such provision shall be construed by limiting it to the extent necessary to be enforceable under applicable law.
(g) Employee acknowledges that breach by Employee of this Agreement would cause irreparable harm to the Corporation and that, in the event of such breach, the Corporation shall have, in addition to monetary damages and other remedies at law, the right to an injunction, specific performance and other equitable relief to prevent violations of your obligations hereunder.
(h) If the Corporation is required to prepare an accounting restatement due to the material noncompliance of the Corporation as a result of misconduct pertaining to any financial reporting requirement under the securities laws (Misconduct), and such Misconduct is the result of actions taken by either the Chief Executive Officer and/or the Chief Financial Officer, then such of the Chief Executive Officer and/or the Chief Financial Officer as have committed such Misconduct as determined by the Committee shall reimburse the Corporation for (1) any bonus or other incentive-based or equity-based compensation received by either or both of them, as applicable, from the Corporation during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (whichever first occurs) of the financial document embodying the financial reporting requirement that gives rise to the restatement; and (2) any profits realized by either or both of them, as applicable, from the sale of securities of the Corporation during that 12-month period.
24. Holding Period After Resignation or Termination
In return for granting the Restricted Stock to Employee, Employee agrees that in the event of Employees Termination of Employment in a manner that would otherwise permit Employee to exercise Employees Restricted Stocks after leaving employment by the Corporation, Employee will nevertheless delay making any transactions in the Corporations stock until such time as the Corporation has filed its next succeeding quarterly (10-Q) or annual (10-K) financial filing, as applicable, with the U. S. Securities and Exchange Commission.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
KRISPY KREME DOUGHNUTS, INC. | |||
By: | |||
Title: | |||
EMPLOYEE | |||
Signature: | |||
Printed Name: |
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REAL PROPERTY PURCHASE AGREEMENT
THIS REAL PROPERTY PURCHASE AGREEMENT (Agreement) is made and entered into this 21stday of December, 2007 (the Effective Date), by and between KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation (herein referred to as Seller), and HARLAN BAKERIES, INC., an Indiana corporation (hereinafter referred to as Purchaser).
WITNESSETH:
WHEREAS, Seller now owns and desires to sell to Purchaser and Purchaser desires to acquire from Seller certain real property more particularly described hereinafter upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements herein set forth, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby expressly acknowledged by the parties hereto, Seller and Purchaser do hereby covenant and agree as follows:
1. Agreement to Buy and Sell. Upon the terms and conditions set forth in this Agreement, Purchaser agrees to buy from Seller, and Seller agrees to sell to Purchaser, all of that certain real property lying and being in the City of Effingham, County of Effingham, State of Illinois, commonly known as 1200 Stevens Avenue, as more particularly described in Exhibit A attached hereto and by reference made a part hereof (hereinafter referred to as the Land), together with Sellers right, title and interest in the approximately 190,000 square foot building thereon (the Building), and any and all other buildings, improvements, appurtenances, rights, privileges and easements benefiting, belonging or pertaining to the Land, and any right, title and interest of Seller in and to any land lying in the bed of any street, road or highway in front of or adjoining the Land, together with any strips or gores relating to the Land (the Land, improvements, and the foregoing easements and interests being hereinafter referred to collectively as the Property), and further together with all equipment, machinery, parts, supplies, furniture, fixtures, and owned software located in or affixed to the Property (collectively, the Personal Property) as of the date an inventory of the Personal Property is completed, subject to, and as specified in, Section 4(e) below. It is hereby acknowledged by the parties that, notwithstanding the foregoing, the Personal Property does not include any proprietary equipment or materials, leased equipment or machinery (unless the applicable lease is assumed by Purchaser in accordance with Section 7(d)), raw materials, or finished product of Seller located or stored in the Commissary portion of the Building nor any materials, inventories, signs or proprietary fixtures located in the Distribution Warehouse portion of the Building. Specific items also excluded from Personal Property are described on Schedule A-1 hereto. Seller shall not convey to Purchaser any claims relating to any real property tax refunds or rebates for periods occurring prior to Closing (as hereinafter defined), existing insurance claims, and any other existing claims or causes of actions accruing prior to the Closing Date, which claims shall be reserved by Seller and are not included as part of the Property.
2. Binder Deposit. Within two (2) business days after the full execution of this Agreement, Purchaser shall deliver the sum of Three Hundred Thousand and 00/100 Dollars ($300,000.00) to Chicago Title Insurance Corporation (the Escrow Agent) as a good faith deposit for the purposes of this Agreement (the Binder Deposit), to be applied as part payment of the Purchase Price at Closing, or to be otherwise disbursed in accordance with the provisions of this Agreement. The Escrow Agent will also act as the Closing Agent.
3. Purchase Price. Purchaser shall pay to Seller, in consideration of the conveyance of the Property to Purchaser, the purchase price of Eleven Million Eight Hundred Thousand and 00/100 Dollars ($11,800,000.00) (the Purchase Price), which Purchase Price shall be paid by Purchaser to Seller at the Closing (as hereinafter defined) by wire transfer of immediately available funds. Purchaser may elect, in Purchasers sole discretion, to purchase raw materials inventory of Seller which are located on the Property as of the date of Closing. In addition to the Purchase Price set forth above, Purchaser shall pay at Closing an amount equal to Sellers cost of the raw materials inventories if Purchaser elects to purchase the same.
4. Due Diligence. (a) At all times during the Review Period (as defined below) and for such period as is necessary to permit Purchaser to satisfy the conditions described in Section 4(d) and otherwise subject to the provisions of this Section 4, until such time as this Agreement is either settled or terminated, Purchaser,
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Purchasers authorized agents, employees, consultants, architects, engineers and contractors, as well as others authorized by Purchaser, shall have reasonable access to the Property and shall be entitled to enter upon the Property and make such surveying, architectural, engineering, topographical, geological, soil, subsurface, environmental, water drainage, and other studies respecting the condition of the Property, availability of water, sewer, natural gas, and other utility services in sufficient quantities to meet Purchasers requirements, and such other investigations, inspections, evaluations, studies, tests and measurements (collectively, the Investigations) as Purchaser deems necessary or advisable. Purchasers rights hereunder to conduct Investigations shall be subject to the following requirements and limitations: (i) any entry upon the Property by Purchaser, Purchasers authorized agents and employees, as well as others authorized by Purchaser shall require at least twenty-four (24) hours advance notice to Seller of the date and time of the entry and the specific Investigations to be conducted in connection with the entry, and (ii) the Investigations shall not result in any material adverse change to the physical characteristics of the Property (and Purchaser shall be obligated to reasonably repair and restore any damage to the Property resulting from the Investigations). Seller shall be entitled to have one or more representatives present to observe or monitor the Investigations on the Property. Purchaser agrees to indemnify and hold Seller harmless from and against any and all claims, costs, losses, expenses, and liabilities, including reasonable attorneys fees, arising out of claims for injury, including death, to persons or physical injury to property resulting from Purchasers conduct of the Investigations (collectively, the Purchasers Indemnification Obligations). Notwithstanding the foregoing, Purchaser shall not be entitled to conduct any environmental Investigations on the Property beyond a Phase I environmental site assessment (i.e. no sampling, drilling, etc.) without first obtaining Sellers prior written consent.
Purchaser acknowledges that underground and/or aboveground utility lines cross or may cross the Land, possibly including, without limitation, electrical transmission lines and natural gas lines, some or all of which may cause serious injury to persons (including death) or property if disturbed without the proper safety precautions being observed. Purchaser acknowledges and agrees that Seller makes no representations or warranties with respect to the presence or location of any utility lines. Purchaser further acknowledges and agrees that, prior to any drilling, digging, grading, excavating or other activity on the Property by Purchaser or its agents, contractors, employees, licensees or other authorized representatives, Purchaser, as part of its due diligence, shall make appropriate inquiries directly with all applicable utility companies to confirm the presence, absence and/or actual location of any underground and/or aboveground utility lines on the Property, and Purchaser shall indemnify and hold harmless Seller from and against any and all claims for injury to persons (including death) or property arising out of or incident to any drilling, digging, grading, excavation or other activities by or on behalf of Purchaser on the Property (the foregoing indemnification by Purchaser shall be included as part of Purchasers Indemnification Obligations).
Notwithstanding any term or provision herein to the contrary, the provisions in this Agreement (including in this Section 4) relating to the Investigations shall apply to all Investigations conducted by Purchaser and Purchasers authorized agents, employees, consultants, architects, engineers and contractors both prior to the Effective Date and from and after the Effective Date until Closing or the termination of this Agreement. Purchaser will remain liable to Seller for the full amount of damages suffered by Seller under this Section 4, notwithstanding the completion of the Closing hereunder, the termination of this Agreement by Purchaser or Seller, or a default by Purchaser under this Agreement and the collection by Seller of liquidated damages (if any).
(b) In the event Purchaser elects to terminate Purchasers obligations in accordance with the provisions of this Agreement, Purchaser shall deliver to Seller, without warranty or representation as to accuracy, completeness or validity, a copy of all surveys, engineering studies, development plans, and any other documents and reports, that Purchaser may have obtained or developed from any source as a result of the Investigations relating to the Property, and shall assign to Seller, if assignable, all licenses and permits procured by the Purchaser relating to the Property.
(c) Purchaser shall have from the Effective Date until December 24, 2007 (the Review Period) to examine the Property as provided in Section 4(a) above and thereafter shall have such other rights to examine the Property to satisfy the conditions described in Section 4(d) and to perform the Survey work under Section 5 hereof. Purchaser may terminate this Agreement by written notice given to Seller at any time prior to 5:00 p.m. Eastern
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Time on the last day of the Review Period. In the event of such termination, all but $10 of the Binder Deposit shall be refunded to Purchaser (with the retained $10 being paid to Seller in consideration of the Review Period), this Agreement shall be deemed of no further force and effect, and Purchaser and Seller shall have no further rights, obligations or liabilities hereunder, save and except Purchasers Indemnification Obligations which shall survive any such termination. In the event Purchaser does not terminate this Agreement on or before the expiration of the Review Period, then the Binder Deposit shall be deemed fully earned by Seller and non-refundable except as otherwise set forth in Sections 5(b) or 11(a) below.
(d) Notwithstanding the provisions of Section 4(c) above and the Investigations conducted by Purchaser prior to the expiration of the Review Period, Purchasers obligation to consummate the transactions contemplated by this Agreement shall be subject to the following conditions, which must be satisfied to Purchasers satisfaction or waived in writing by Purchaser on or prior to Closing:
(i) Purchaser will have the right to perform Investigations as to the structural integrity of the Building and if performed, such studies shall fail to identify any material structural defects;
(ii) Purchaser will have the right to perform Investigations as to the environmental condition of the Property and if performed, such studies shall fail to identify any material recognized environmental defects, failure to comply with applicable laws or contamination requiring any remediation activity or which impacts the current operations at the Property;
(iii) Purchaser will have applied for incentives and/or credits under the Illinois Economic Development for a Growing Economy program and Purchaser will have received approval as to such incentives and/or credits.
In the event that any such conditions are not satisfied by the latest date upon which the Closing can occur pursuant to Section 6, Purchaser may terminate this Agreement by written notice given to Seller. In the event of such termination, all but $10 of the Binder Deposit shall be refunded to Purchaser, this Agreement shall be deemed of no further force and effect, and Purchaser and Seller shall have no further rights, obligations or liabilities hereunder, save and except Purchasers Indemnification Obligations, which shall survive any such termination.
(e) Seller shall promptly (and in any event within two (2) days after the Effective Date) deliver to Purchaser a copy of Sellers current policy of or commitment for title insurance and any other reports or studies relating to the Property or its condition that are in Sellers actual possession or to which Seller has reasonable access, including, without limitation (to the extent that Seller has the same), surveys, geotechnical reports, and related documents, as-built construction plans and engineering studies (collectively, Sellers Documentation). In the event the Closing fails to occur for any reason, Purchaser agrees to return promptly to Seller all copies in Purchasers possession of Sellers Documentation, including any and all copies that are in the possession of Purchasers consultants and agents. Purchaser agrees and acknowledges that Sellers Documentation shall be delivered as a courtesy only and without any warranty or representation as to the accuracy, completeness, or validity of the same
(f) At least two business days before the Closing, Purchaser and Seller shall conduct a physical inventory (the Inventory) of the equipment, machinery, parts, supplies, fixtures, and owned software, which shall comprise the Personal Property and be conveyed by Seller to Purchaser with the Property. When completed, the Inventory shall be attached to this Agreement as Exhibit C. Seller further represents and warrants that the Personal Property included in the Property when the same was inspected by Purchaser on December 7, 2007 will be included in the sale as of the Closing, except for such items as will have been used in the ordinary course of business by Seller. Purchaser acknowledges and agrees that Seller may work the raw materials inventory down to negligible amounts by the time of the Closing. Purchaser understands and acknowledges that some of the forklifts used by Seller at the Property are leased by the Seller, and that Seller intends to return all of the leased forklifts to the owner on or before the Closing, unless Purchaser assumes the leases for the same pursuant to Section 7(d). Owned forklifts will be transferred to Purchaser together with the Property. Should Purchaser elect to purchase any of Sellers raw materials, Purchaser and Seller shall conduct a separate physical inventory of the raw materials on the Property the day before Closing, and confirm Sellers cost for the same to be paid by Purchaser to Seller at Closing in a separate writing to be executed by both parties at Closing.
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5. Title and Survey. (a) Seller shall cause Chicago Title Insurance Company (the Title Company, which shall also be the Escrow Agent and/or the Closing Agent) to issue to Purchaser a current commitment for a standard ALTA 2006 form owners policy of title insurance (the Title Commitment) setting forth the status of title to the Property and committing the Title Company to issue at then-current standard premium rates a standard ALTA 2006 form Owners Policy of Title Insurance insuring Purchasers fee simple interest in the Property with gap coverage. Seller shall also provide to Purchaser a current ALTA as-built staked survey of the Property (the Survey). Any title encumbrances or exceptions which are described on Exhibit B, attached hereto and incorporated herein by reference, or which are disclosed by the Title Commitment and/or Survey, to which Purchaser does not object within the Title Review Period (as set forth in (b) below), shall be deemed to be permitted exceptions to the status of Sellers title (Permitted Exceptions).
(b) Not later than the fifth (5th) business day following Purchasers receipt of both the Title Commitment and the Survey (the Title Review Period), Purchaser shall give Seller written notice of any objections to the marketability of Sellers title, including objections that are disclosed by Purchasers examination of the Title Commitment or the Survey. The failure of Purchaser to provide such notice to Seller on or before the expiration of the Title Review Period shall constitute a waiver of all of Purchasers rights under this Section 5 as such rights relate to title matters of record and survey matters that would be revealed by a current, accurate physical survey of the Property as of the expiration of the Title Review Period. If Purchaser gives proper notice of objections as provided above, Seller shall have ten (10) business days from receipt of written notice thereof to have such objections satisfied (which may, for purposes of this Agreement, include causing the Title Company to insure the Property without exception to such objection), or to give Purchaser written notice of assurance that such objections shall be satisfied at Closing, or to give Purchaser written notice of Sellers inability or refusal to satisfy the objections. If such objections are not properly satisfied within such ten (10) business day period, Purchaser, as its sole and exclusive remedy, may elect either (i) to terminate this Agreement, or (ii) to accept and approve all such unsatisfied objections and to complete the purchase of the Property. Purchaser shall notify Seller of its election within five (5) business days after receipt by Purchaser of Sellers written notice of Sellers inability or refusal to satisfy the objections. If Purchaser elects to terminate this Agreement as hereinabove provided, the Binder Deposit shall be returned to Purchaser (minus $10) and the parties hereto shall have no further rights, obligations or liabilities with respect to each other hereunder, except for Purchasers Indemnification Obligations which shall survive such termination. Intervening title exceptions and encumbrances which first arise on or after the effective date of the Title Commitment shall be governed by the terms of Section 5(c) below.
(c) At Closing, the closing attorney or agent conducting the Closing (the Closing Agent) may hold the moneys representing the Purchase Price until Purchaser or the Title Company updates the title examination and records the Deed (as hereinafter defined). In the event there are any intervening title exceptions or encumbrances revealed by such title update which first arise on or after the effective date of the Title Commitment and which are not Permitted Exceptions hereunder, the Purchaser shall advise Seller of same and the Closing shall be delayed in order to permit Seller a reasonable opportunity to remedy the same; provided Seller shall have no obligation to do so. If Seller determines that it will not remedy the intervening matters (which remedy, for the purpose of this Agreement, may be causing the Title Company to insure the Property without exception for such intervening matter(s)) within a reasonable period of time, Purchaser, as Purchasers sole remedy, shall elect within five (5) days following notice of such determination by Seller either (i) to waive its objection(s) to such intervening matter(s) and to close its purchase of the Property, with no reduction in the Purchase Price, in which event such intervening matter(s) shall be deemed Permitted Exceptions for purpose of this Agreement, or (ii) to terminate this Agreement and receive a refund of the Binder Deposit and the Purchase Price (if it has been paid), in which event neither Purchaser or Seller shall have any further obligations to the other hereunder, except for Purchasers Indemnification Obligations which shall survive any such termination. If Purchaser fails to notify Seller of its election within such five (5) day period, Purchaser shall be deemed conclusively to have elected the option set forth in (i) above and the parties will proceed immediately thereafter to Closing.
6. Closing and Closing Date. The consummation of the sale by Seller and the purchase by Purchaser of the Property (the Closing) shall occur no later than January 31, 2008 (unless extended as a result of the provisions contained in Section 5 above), at a mutually convenient time and location in Effingham, Illinois (or such other location as to which the parties may mutually agree), and may be accomplished by electronic,
4
overnight, or facsimile delivery of documents to and from the parties and the Closing Agent. At Closing, Seller shall execute and deliver to Purchaser (i) a special warranty deed (the Deed) conveying fee simple title to the Property to Purchaser, excepting only the Permitted Exceptions and all easements, rights of way, restrictions and other matters of record (other than any outstanding mortgages or deeds of trust or other monetary liens (which shall not include the payment of real estate taxes, which are addressed separately herein), which shall be paid and satisfied at Closing), (ii) an Affidavit of Seller which has as its subject matter averments that, with respect to the Property, there are no liens, or rights to a lien, for services, labor or materials furnished and/or imposed by law and not shown by the public records and such other matters as may be required by the Title Company to delete the preprinted exceptions from the title policy, (iii) an Affidavit of Seller stating that Seller is not a foreign person, as that term is defined in §1445 of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, and otherwise in form and content sufficient to eliminate Purchasers withholding obligations under §1445 with respect to the sale and purchase of the Property, (iv) a Bill of Sale for the Personal Property (with the Inventory attached as an exhibit thereto) substantially in the form attached hereto as Exhibit E, and (v) any other documents deemed reasonably necessary by Purchaser or the Closing Agent to consummate the transaction contemplated herein in accordance with the terms of this Agreement, subject at all times to Sellers prior review and approval, which shall not be unreasonably withheld, delayed or conditioned. At Closing, Purchaser shall pay the Purchase Price plus the amount fixed by the parties as the value of the raw materials Purchaser may elect to purchase pursuant to Section 3 hereof; provided, however, the parties expressly agree and acknowledge that Seller may leave a certain amount of raw materials in the silo storage containers on the Property and Purchaser shall not be required to pay any amount for such raw materials.
7. Expenses and Prorations; Utilities. (a) All real property ad valorem taxes applicable to the Property shall be prorated on a tax year basis as of the date of Closing between Seller and Purchaser, such proration to be based upon the most recently available tax rate and valuation with respect to the Property; provided, however, that upon the issuance of the tax bills for such taxes for the year of Closing, if the actual taxes for the year of Closing vary from the amount estimated for such taxes at Closing by $200.00 or more, Purchaser and Seller shall promptly make such adjustments as may be necessary to insure that the actual amount of such taxes for the year of Closing shall be prorated between Purchaser and Seller as of the date of Closing. All income and rents due (if any) or expenses paid (if any) or due (if any) for the month in which Closing occurs shall be prorated as of the date of Closing between Seller and Purchaser.
(b) Seller shall, at the Closing, pay Sellers attorneys fees, the cost of preparing the Deed, fifty percent (50%) of the fees and costs charged by the Closing Agent (the Closing Agents Fees), the costs of the Survey, the premium for Purchasers Owners policy of title insurance, including gap coverage (but not including charges for any endorsements to such policy which Purchaser may desire), all confirmed governmental or private assessments which are due and payable on or before the date of Closing, and, except as specifically provided for otherwise hereunder, any other costs customarily paid by sellers of real property in the State of Illinois in similar commercial transactions.
(c) Purchaser shall pay, at or prior to Closing, all costs incurred in performing the Investigations, fifty percent (50%) of the Closing Agents Fees, the cost of any endorsements to Purchasers Owners title insurance policy and the premium for Purchasers lenders (if any) policy of title insurance, Purchasers attorneys fees, all other expenses incurred by Purchaser in acquiring the Property, and, except as specifically provided for otherwise hereunder, all other costs customarily paid by buyers of real property in the State of Illinois in similar commercial transactions. Purchaser shall take title to the Property subject to all pending governmental or private assessments, if any. The costs of all recording fees with respect to the Deed from Seller to Purchaser and all documentary stamp, revenue, or transfer taxes and fees imposed or levied by any governmental authority with respect to the sale and transfer of the Property to Purchaser, will be paid by either Seller or Purchaser in accordance with custom and practice in the State of Illinois in similar commercial transactions.
(d) Sellers existing leases are described on Exhibit D hereto. Purchaser will assume those leases so indicated on Exhibit D and may at its election assume those leases so indicated on Exhibit D by notice to Seller within the timeframe specified on Exhibit D. Certain leases may not be assumed by Purchaser and are so indicated on Exhibit D. Seller will cooperate with Purchaser in having all utilities serving the Property (including, without
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limitation, electricity, gas, water, sewer, and telephone service) transferred into Purchasers name as of the date of Closing, provided, however, Seller shall be entitled to receive any and all deposits associated with the utilities, and Seller shall be solely responsible to pay the balances due to the utility providers through the date of Closing. Seller shall transfer and Purchaser shall assume the wastewater discharge permit for the Property.
8. Representations and Warranties of Seller. Seller hereby makes the following express representations and warranties with respect to the Seller, which are true, as of the Effective Date and which shall be true as of the date of Closing:
(a) Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of North Carolina, has the authority and power to enter into this Agreement and to consummate the transactions contemplated herein, and upon execution hereof will be legally obligated to Purchaser in accordance with the terms and conditions of this Agreement. There are no attachments, executions, assignments for the benefit of creditors, receiverships, conservatorship or voluntary or involuntary proceedings in bankruptcy or pursuant to any debtor relief laws pending against Seller which would affect the Property or the Personal Property or the ability of Seller to proceed with the transactions contemplated hereby.
(b) This Agreement and all documents that are to be executed by Seller and delivered to Purchaser at Closing are, or at the time of Closing, as applicable, will be, duly authorized, executed and delivered by Seller, and all consents required under Sellers organizational documents, by law or under any agreements to which Seller may be subject have been obtained, except for any such consent requirements which will be rendered inapplicable if Seller consummates this transaction and the proceeds are used to satisfy Sellers obligations to any such party from whom consent would otherwise be required. The individual executing this Agreement on behalf of Seller is duly authorized and empowered to enter into this Agreement. This Agreement and all such documents will not violate any provisions of any agreement or judicial order to which Seller is a party or to which Seller, the Property, or the Personal Property is subject.
(c) This Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms. The execution, delivery, and performance by Seller of this Agreement and any other instruments and documents to be executed and delivered in connection with this Agreement by Seller do not, and will not, result in any violation of, or conflict with, or constitute a default under, the provisions of any mortgage, deed of trust, indenture, lease, security agreement, or other instrument or agreement (except for any as to which consent requirements will be rendered inapplicable pursuant to Section 8(b) above), or any law, regulation, rule, requirement, agreement, restriction, order, writ, decree, or judgment to which Seller or by which Seller is bound or to which Seller is subject.
(d) Seller currently receives real estate tax abatements at the Property. Purchaser has been advised by governmental authorities that such abatements are transferable to Purchaser at Closing and Seller will use its reasonable best efforts to cooperate in any such transfer to Purchaser at Closing by executing any and all necessary or appropriate documents and otherwise assisting Purchaser in such transfer, although Seller shall not be required to incur out of pocket expenses or other obligations in this regard.
9. Covenants of Seller. Seller hereby covenants and agrees that, from and after the Effective Date until the date of Closing, Seller shall not, without the prior written consent of Purchaser, materially change or alter the physical condition of the Property, or grant or otherwise create or consent to the creation of any easement, restriction, lien, assessment or encumbrance affecting the Property or any portion or portions thereof, or pursue or consent to the pursuit of any rezoning of the Property or any portion or portions thereof.
10. Representations, Warranties, and Covenants of Purchaser. (a) Purchaser hereby represents and warrants that Purchaser is a duly formed and validly existing corporation under the laws of the State of Indiana. All action required by Purchasers organizational documents to effectuate this transaction (including the consent of all shareholders, directors, owners, or members, if necessary) has been taken, and Purchaser has full power and right to enter into and perform Purchasers obligations under this Agreement and to purchase the Property as herein provided. This Agreement has been duly executed and delivered on behalf of Purchaser. The individual executing this Agreement on behalf of Purchaser is duly authorized and empowered to enter into this Agreement. This Agreement constitutes the legal, valid and binding obligations of the Purchaser, enforceable against Purchaser
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in accordance with its terms. The execution, delivery, and performance by Purchaser of this Agreement and any other instruments and documents to be executed and delivered in connection with this Agreement by Purchaser do not, and will not, result in any violation of, or conflict with, or constitute a default under, the provisions of any mortgage, deed of trust, indenture, lease, security agreement, or other instrument or agreement, or any law, regulation, rule, requirement, agreement, restriction, order, writ, decree, or judgment to which Purchaser or by which Purchaser is bound or to which Purchaser is subject.
(b) OFAC Certification. Purchaser hereby certifies, for itself and on behalf of its individual partners, shareholders, members, beneficiaries, or owners, that:
(i) Neither Purchaser, nor any individual partner, shareholder, member, beneficiary, or owner, is acting, directly or indirectly, for or on behalf of any person, group, entity, or nation named by any Executive Order or the United States Treasury Department as a terrorist, Specially Designated National and Blocked Person, or other banned or blocked person, entity, nation, or transaction pursuant to any law, order, rule, or regulation that is enforced or administered by the Office of Foreign Assets Control; and,
(ii) Neither Purchaser, nor any individual partner, shareholder, member, beneficiary, or owner, is engaged in this transaction, directly or indirectly, on behalf of, or instigating or facilitating this transaction, directly or indirectly, on behalf of any such person, group, entity, or nation.
Purchaser hereby agrees to defend, indemnify, and hold harmless Seller from and against any and all claims, damages, losses, risks, liabilities, and expenses (including reasonable attorneys fees at all tribunal levels) arising from or related to any breach of the certifications set forth in this subsection 10(b) and shall be deemed a part of Purchasers Indemnification Obligations.
(c) Seller shall terminate, effective as of Closing, all employment agreements or employment relationships it has with its employees at the Property. A list of the current employees is attached hereto as Exhibit F. Purchaser agrees to use its reasonable best efforts to hire and employ all such terminated employees (except those terminated employees who do not fulfill Purchasers ordinary pre-employment requisites, such as background checks and drug tests) effective on the day following the Closing Purchaser shall pay any such hired employee in accordance with its wage scale which is to be comparable to Sellers wage scale and Purchaser expects to maintain comparable types and levels of benefits as Seller provided the employees on the date of Closing (including recognizing the years of service each employee had with Seller as being the same years of service each employee has with Purchaser as of the date of Closing). Notwithstanding Purchasers hiring of Sellers terminated employees, Purchaser specifically shall not assume, and Seller shall remain liable for, any obligation or liability to employees of Seller or any governmental agencies or authorities, regardless of whether such employee is subsequently employed by Purchaser, which arise out of, or relate to, or involve, such employees relationship with Seller. Within five (5) business days after the execution hereof, Seller will provide to Purchaser all information concerning wages and benefits for Sellers employees. Furthermore, Seller will permit Purchaser to review employment files of current employees at the Property, provided that this information is held by Purchaser in confidence, and from and after December 26, 2007 Seller will permit Purchaser to interview such employees.
(d) PURCHASER EXPRESSLY AGREES, UNDERSTANDS, AND ACCEPTS THAT THE PROPERTY AND THE PERSONAL PROPERTY ARE BEING OFFERED BY THE SELLER IN AS IS, WHERE IS, AND WITH ALL FAULTS CONDITION, AND, EXCEPT AS SPECIFICALLY SET FORTH HEREIN OR IN THE DEED OR THE BILL OF SALE, WITH ABSOLUTELY NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED (EXCEPT WARRANTY OF TITLE), INCLUDING, WITHOUT LIMITATION, WARRANTY AS TO: THE CONDITION OF THE LAND; THE HABITABILITY OR CONDITION OF ANY BUILDINGS OR IMPROVEMENTS; THE STATUS, OPERABILITY OR CONDITION OF ANY FIXTURES, EQUIPMENT, MACHINERY, PLUMBING, ELECTRICAL, HVAC, HYDRAULICS, OR ANY OTHER SYSTEMS OR APPARATUS INSTALLED ON OR SERVING THE PROPERTY OR COMPRISING ANY PART OF THE PERSONAL PROPERTY; THE SUITABILITY OR FITNESS OF THE PROPERTY OR THE PERSONAL PROPERTY FOR ANY PARTICULAR USE; INCOME POTENTIAL; OPERATING EXPENSES; MARKETABILITY; COMPLIANCE WITH ANY ZONING ORDINANCES
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OR ANY OTHER LAWS, RULES, AND REGULATIONS; OR ANY ENVIRONMENTAL MATTERS, INCLUDING, BUT NOT LIMITED TO, THE PRESENCE OF HAZARDOUS MATERIALS OR HAZARDOUS WASTE. PURCHASER, MOREOVER, ACKNOWLEDGES (I) THAT PURCHASER HAS ENTERED INTO THIS AGREEMENT WITH THE INTENTION OF MAKING AND RELYING UPON ITS OWN INVESTIGATION OF THE PHYSICAL, ENVIRONMENTAL, ECONOMIC AND LEGAL CONDITION OF THE PROPERTY AND (II) EXCEPT AS SPECIFICALLY SET FORTH HEREIN, THAT IT HAS NOT RELIED IN ANY MANNER UPON ANY STATEMENTS BY SELLER OR ANY AGENT OF SELLER, OR UPON ANY OF SELLERS DOCUMENTATION, AND (III) THAT IT HAS NOT RECEIVED FROM SELLER ANY ACCOUNTING, TAX, LEGAL, ARCHITECTURAL, ENGINEERING, PROPERTY MANAGEMENT, ENVIRONMENTAL, OR OTHER ADVICE WITH RESPECT TO THIS TRANSACTION AND IS RELYING SOLELY UPON THE ADVICE OF ITS OWN ACCOUNTING, TAX, LEGAL, ARCHITECTURAL, ENGINEERING, PROPERTY MANAGEMENT, ENVIRONMENTAL, AND OTHER ADVISORS.
11. Defaults. (a) In the event Seller fails to comply with or perform any of the covenants, agreements and obligations to be performed by Seller under the terms and provisions of this Agreement, Purchaser shall give Seller written notice of such failure. If Seller shall fail to cure such default within five (5) days after receipt of Purchasers written notice thereof (the Sellers Cure Period), Purchaser shall have the right and option, as Purchasers sole and exclusive remedy, to either (i) terminate this Agreement upon written notice to Seller at any time after the expiration of the Sellers Cure Period, whereupon the Binder Deposit shall be refunded to Purchaser and the parties hereto shall have no further rights, obligations or liabilities with respect to each other hereunder, (except for Purchasers Indemnification Obligations which shall survive such termination), or (ii) demand and compel by an action for specific performance or similar legal proceedings, if necessary, the immediate conveyance of the Property by Seller in compliance with the terms and conditions of this Agreement.
(b) If the sale and purchase of the Property is not consummated on account of Purchasers default hereunder, Seller shall give Purchaser written notice of such default. If Purchaser shall fail to cure such default within five (5) days after receipt of Sellers written notice thereof (the Purchasers Cure Period), Seller shall be entitled to terminate this Agreement upon written notice to Purchaser at any time after the expiration of the Purchasers Cure Period (and Purchasers Indemnification Obligations shall survive such termination), to retain the Binder Deposit and to recover Sellers out of pocket expenses plus any damages incurred by Seller in excess of the amount of the Binder Deposit as a result of Purchasers breach, which excess amount shall be capped at $1,000,000. Notwithstanding the foregoing, in the event Purchaser fails to pay the Binder Deposit within the time specified by the applicable provisions of this Agreement, Seller shall not be required to deliver any notice of such default prior to immediately exercising its rights or remedies hereunder.
12. Possession of Property. Seller shall deliver to Purchaser full and exclusive possession of the Property on the date of Closing; provided, however, Purchaser agrees that Seller shall retain the right to store certain materials, inventories, equipment, supplies, and other personal property not sold to Purchaser hereunder on one (1) full row of the storage racking system located in the distribution warehouse portion of the Building for up to fifteen (15) days following Closing (the Holding Period). Purchaser shall exercise ordinary care and prudence with respect to Sellers personal property remaining in the Building during the Holding Period. On or before the expiration of the Holding Period, Purchaser shall forklift all such personal property of Seller at Sellers direction out of the Building on to Sellers transportation vehicle(s), and Seller hereby releases and holds Purchaser harmless from and against any damage or loss to Sellers personal property which is handled by Purchaser as contemplated hereby, except for any damages caused as a result of Purchasers gross negligence.
13. Damage or Destruction / Condemnation. (a) Until the Closing, the risk of loss or damage to the Property shall be borne by the Seller. In the event the Property is damaged so that the Property cannot be conveyed in substantially the same condition as it was at the time of this Agreement, Purchaser shall have the option of either (i) terminating this Agreement by giving written notice thereof to Seller, whereupon the Binder Deposit shall be refunded to the Purchaser and the parties shall have no further rights, obligations or liabilities to each other hereunder (except for Purchasers Indemnification Obligations which shall survive such termination), or (ii) requiring Seller to convey the Property to Purchaser pursuant to the terms and provisions hereof and to transfer
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and assign to Purchaser at Closing all of Sellers right, title and interest in and to any insurance proceeds which may be available by reason of such damage or casualty. Seller represents and warrants to Purchaser that Sellers deductible under its property casualty insurance policy is $75,000.
(b) In the event the Property, or any material portion or portions thereof which are necessary for the Propertys use as of the Effective Date, shall be taken or condemned by any governmental authority or other entity prior to the date of Closing, or in the event Purchaser receives notice of a proposed taking prior to the date of Closing, Purchaser shall have the option of either (i) terminating this Agreement by giving written notice thereof to Seller, whereupon the Binder Deposit shall be refunded to the Purchaser and the parties shall have no further rights, obligations or liabilities to each other hereunder (except for Purchasers Indemnification Obligations which shall survive such termination), or (ii) requiring Seller to convey the remaining portion of the Property to Purchaser pursuant to the terms and provisions hereof and to transfer and assign to Purchaser at Closing all of Sellers right, title and interest in and to any award made or to be made by reason of such condemnation. Seller and Purchaser hereby further agree that Purchaser shall have the right to participate in all negotiations with any such governmental authority relating to the Property or to the compensation to be paid for any portion or portions thereof condemned by such governmental authority or other entity.
14. Brokers Commission. Seller represents and warrants to Purchaser that Hart Corporation (the Broker) has acted as its sole broker in connection with the sale of the Property. Seller shall pay the Broker a real estate sales commission pursuant to Sellers separate agreement with the Broker. Purchaser shall and does hereby indemnify and hold harmless Seller from and against any claim for any real estate sales commission, finders fees or like compensation in connection with the sale contemplated hereby and arising out of any act or agreement of Purchaser which may be claimed or asserted by any other broker.
15. Notices. Any notices which may be permitted or required hereunder shall be in writing and sent to the address set forth below, and shall be deemed to have been duly given as of the date and time (a) the same are personally delivered (signature release required), or (b) if delivered by overnight courier guaranteeing next business day delivery (signature release required), one (1) business day after the deposit thereof with a reputable overnight courier with all delivery charges prepaid, or (c) if sent by facsimile, on the day such facsimile is transmitted (or on the first business day following such transmittal if such transmittal is sent on a non-business day), provided the original notice must also be sent by one of the other permitted means as provided herein in this Section 15 or (d) the date delivery of the same is refused.
SELLER:
Krispy Kreme Doughnut
Corporation
370 Knollwood Street, Suite
500
Winston-Salem, North Carolina
27103
Attention: General
Counsel
Telephone:
336-733-3725
Telecopier: 336-726-8253
With a copy
to: Scott T. Horn,
Esquire
Allman Spry Leggett & Crumpler,
P.A.
380 Knollwood Street, Suite
700
Winston-Salem, North Carolina
27103
Telephone:
336-722-2300
Telecopier: 336-721-0414
PURCHASER:
Harlan Bakeries,
Inc.
7597 E. U.S. Highway
36
Avon, Indiana
46123
Attention: Hal P.
Harlan
Telephone:
317-894-8270
Telecopier: 317-894-8290
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With a copy
to: Roberts E.
Inveiss
Bose McKinney & Evans
LLP
135 N. Pennsylvania
Street
2700 First Indiana
Plaza
Indianapolis, Indiana
46204
Telephone:
317-684-5373
Telecopier: 317-223-0373
16. General Provisions. No failure of either party to exercise any power given hereunder or to insist upon strict compliance with any obligation specified herein, and no custom or practice at variance with the terms hereof, shall constitute a waiver of either partys right to demand exact compliance with the terms hereof. This Agreement contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force or effect. Any amendment to this Agreement shall not be binding upon any of the parties hereto unless such amendment is in writing and executed by both Seller and Purchaser. The provisions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, executors, personal representatives, and successors. This Agreement shall not be assignable by Purchaser, however, at the election of Purchaser, this Agreement may be assigned, and this transaction may be closed in the name of, and the Deed delivered to, Harlan Development Company, LLC, or a subsidiary or affiliate of Purchaser or Harlan Development Company, LLC. Subject to Section 17 below, time is of the essence with respect to all provisions of this Agreement. This Agreement and all amendments hereto shall be governed by and construed under the laws of the state in which the Property is located. This Agreement may be executed in multiple counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same agreement. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all genders, the singular shall include the plural and vice versa. The headings inserted at the beginning of each paragraph are for convenience only, and do not add to or subtract from the meaning of the contents of each paragraph or section. Seller and Purchaser do hereby covenant and agree that such documents as may be legally necessary or otherwise appropriate to carry out the terms of this Agreement shall be executed and delivered by each party at the Closing, and that the parties will cooperate with one another after the Closing to execute such additional documents as may be necessary to carry out such terms.
17. Day for Performance. Wherever herein there is a day or time period established for performance and such day or the expiration of such time period is a Saturday, Sunday or legal holiday, then such time for performance shall be automatically extended to the next business day.
18. Survival of Provisions. All covenants, warranties and agreements set forth in this Agreement shall survive the Closing of the transaction contemplated hereby and shall survive the execution or delivery of any and all deeds and other documents at any time executed or delivered under, pursuant to or by reason of this Agreement, and shall survive the payment of all monies made under, pursuant to or by reason of this Agreement.
19. Severability. This Agreement is intended to be performed in accordance with, and only to the extent permitted by, all applicable laws, ordinances, rules and regulations. If any provision of this Agreement, or the application thereof to any person or circumstance, shall for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby but rather shall be enforced to the greatest extent permitted by law.
20. Attorneys Fees. In the event suit is brought to enforce or interpret all or any portion of this Agreement or in the event suit is brought for any default or alleged default hereunder, the prevailing party in such suit shall be entitled to recover from the other party reasonable attorneys fees incurred by the prevailing party in connection with such suit. Without limiting the generality of the foregoing, reasonable attorneys fees under this Agreement shall never exceed the attorneys fees amount determined at the normal hourly rate charged by the person doing the work, regardless of whether such fees bear a reasonable relationship to the relief obtained.
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21. Public Statements; Confidentiality. Seller and Purchaser agree that, unless otherwise required by law, they will not make any public statement, including without limitation, any press release, with respect to this Agreement and the transactions contemplated hereby without first allowing the other party an opportunity to review such statement and render an approval thereof. It is the intention of this subparagraph that Seller and Purchaser must agree as to the timing and content of any information contained in any public statement or press release regarding the transaction contemplated hereby. The parties agree to exercise reasonableness when asked to consent to the content of any such press release or other public statement regarding this transaction. Notwithstanding the above, either party may make any public disclosure required by law (such as disclosures required by Form 8-K) without the consent of the other party. Any information supplied by Seller to Purchaser pursuant hereto will be treated as confidential and will not be communicated to any third parties (other than Purchasers counsel, accountants and other experts advising Purchaser in connection with this transaction). Such information will be made available by Purchaser only on a need to know basis. The obligation of confidentiality does not apply to any information which: (i) was in the public domain at the time of its communication to Purchaser or its representative, (ii) enters the public domain through no fault of Purchaser subsequent to the time of its communication to Purchaser, and (iii) was in the possession of Purchaser free of any obligation of confidence at the time of its communication to Purchaser or its representatives.
[SIGNATURE PAGES FOLLOW]
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SIGNATURE PAGE TO REAL PROPERTY PURCHASE
AGREEMENT
BY AND BETWEEN
KRISPY KREME
DOUGHNUT CORPORATION, SELLER, and
HARLAN BAKERIES, INC.,
PURCHASER
IN WITNESS WHEREOF, Purchaser has caused this Agreement to be executed (in multiple originals, one of which is retained by each party hereto) this 21st day of December, 2007, as an offer to Seller upon the terms and conditions herein contained.
PURCHASER: | |
HARLAN BAKERIES, INC. | |
By: | /s/Hugh P. Harlan |
Name: | Hugh P. Harlan |
Title: | President |
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SIGNATURE PAGE TO REAL PROPERTY PURCHASE
AGREEMENT
BY AND BETWEEN
KRISPY KREME
DOUGHNUT CORPORATION, SELLER, and
HARLAN BAKERIES, INC.,
PURCHASER
IN ACCEPTANCE HEREOF, Seller has caused this Agreement to be executed (in multiple originals, one of which is retained by each party hereto) by its duly authorized officer this 21st day of December, 2007, (which date shall be inserted as the Effective Date on the first page of this Agreement) as an acceptance of the foregoing offer of Purchaser.
SELLER: | |
KRISPY KREME DOUGHNUT CORPORATION, | |
a North Carolina corporation | |
By: | /s/ M. Bradley Wall |
Name: | M. Bradley Wall |
Title: | SVP Supply Chain |
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EXHIBIT 21
LIST OF SUBSIDIARIES*
Jurisdiction of | ||||
Incorporation | ||||
or | ||||
Subsidiary | Organization | |||
Golden Gate Doughnuts, LLC | North Carolina | |||
HD Capital Corporation | Delaware | |||
HDN Development Corporation | Kentucky | |||
Hot Doughnuts Now International Ltd. | Switzerland | |||
KK Asia Pacific Ltd. | Hong Kong | |||
KK Canada Holdings, Inc. | North Carolina | |||
Krispy K Canada Company | Nova Scotia, Canada | |||
Krispy Kreme Canada, Inc. | North Carolina | |||
Krispy Kreme Doughnut Corporation | North Carolina | |||
Krispy Kreme International Ltd. | Switzerland | |||
Krispy Kreme Management I, LLC | North Carolina | |||
Krispy Kreme Management II, LLC | North Carolina | |||
Krispy Kreme Management III, LLC | North Carolina | |||
Krispy Kreme Mobile Store Company | North Carolina | |||
North Texas Doughnuts, L.P. | Texas | |||
Northeast Doughnuts, LLC | North Carolina | |||
Panhandle Doughnuts, LLC | North Carolina | |||
Southern Doughnuts, LLC | North Carolina | |||
Southwest Doughnuts, LLC | North Carolina |
* | This list excludes non-material subsidiaries that are in the process of being dissolved. |
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-38236, 333-38250, 333-47326, 333-87092 and 333-97787) and Form S-8 filed as post-effective amendment No. 2 to Registration Statement on Form S-4 (No. 333-103434) of Krispy Kreme Doughnuts, Inc. of our report dated April 17, 2008 relating to the financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K for the fiscal year ended February 3, 2008.
/s/ PricewaterhouseCoopers LLP |
Greensboro, North Carolina |
April 17, 2008
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James H. Morgan, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 registrants other certifying officer 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting.
/s/ James H. Morgan |
James H. Morgan |
Chief Executive Officer |
April 17, 2008
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Douglas R. Muir, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 registrants other certifying officer 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting.
/s/ Douglas R. Muir |
Douglas R. Muir |
Chief Financial Officer |
Date: April 17, 2008
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 Annual Report on Form 10-K of Krispy Kreme Doughnuts, Inc. (the Company) for the fiscal year ended February 3, 2008 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: April 17, 2008
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.
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 Annual Report on Form 10-K of Krispy Kreme Doughnuts, Inc. (the Company) for the fiscal year ended February 3, 2008, 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: April 17, 2008
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.