-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VTnoP0BfH368MsG+2SNSSGLcU2mfQtlvLctCK5KJ3qcmPIx5U9QOTWjTxhgcV5Io tNj/4X/d6SS9TIz/+XQuRA== 0000950144-00-002573.txt : 20000223 0000950144-00-002573.hdr.sgml : 20000223 ACCESSION NUMBER: 0000950144-00-002573 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 20000222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KRISPY KREME DOUGHNUTS INC CENTRAL INDEX KEY: 0001100270 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-92909 FILM NUMBER: 550752 BUSINESS ADDRESS: STREET 1: 370 KNOLLWOOD ST. STREET 2: SUITE 500 CITY: WINSTON SALEM STATE: NC ZIP: 27103 BUSINESS PHONE: 3367222981 MAIL ADDRESS: STREET 1: 370 KNOLLWOOD ST STREET 2: SUITE 500 CITY: WINSTON SALEM STATE: NC ZIP: 27103 S-1/A 1 KRISPY KREME DOUGHNUTS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2000 REGISTRATION NO. 333-92909 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- KRISPY KREME DOUGHNUTS, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 5812 56-2169715 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
SCOTT A. LIVENGOOD CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 370 KNOLLWOOD STREET 370 KNOLLWOOD STREET WINSTON-SALEM, NORTH CAROLINA 27103 WINSTON-SALEM, NORTH CAROLINA 27103 (336) 725-2981 (336) 725-2981 (Address, including zip code, and telephone (Name, address, including zip code, and telephone number, number, including area code, of registrant's principal including area code, of agent for service) executive offices)
--------------------- COPIES TO: DAVID A. STOCKTON, ESQ. GERALD S. TANENBAUM, ESQ. KILPATRICK STOCKTON LLP CAHILL GORDON & REINDEL 1100 PEACHTREE STREET, N.E., SUITE 2800 80 PINE STREET ATLANTA, GEORGIA 30309 NEW YORK, NEW YORK (404) 815-6500 (212) 701-3000 (404) 815-6555 (FAX) (212) 269-5420 (FAX)
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _______________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _______________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _______________ If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act of 1933, check the following box. [ ] --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON A DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, Dated February 22, 2000 (Krispy Kreme Doughnuts Logo) - -------------------------------------------------------------------------------- 3,000,000 Shares Common Stock - -------------------------------------------------------------------------------- This is the initial public offering of Krispy Kreme Doughnuts, Inc. and we are offering 3,000,000 shares of our common stock. We anticipate that the initial public offering price will be between $18.00 and $20.00 per share. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol KREM. Investing in our common stock involves risks. See "Risk Factors" beginning on page 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Underwriting Public Discounts and Proceeds to Offering Price Commissions Krispy Kreme ------------------- ---------------------- ---------------------- Per Share $ $ $ Total $ $ $
We have granted the underwriters the right to purchase up to an additional 450,000 shares to cover any over-allotments. Deutsche Banc Alex. Brown J.P. Morgan & Co. Dain Rauscher Wessels BB&T Capital Markets The date of this prospectus is , 2000 3 [The inside of the prospectus cover contains photographs of our stores, customers, employees and facilities accompanied by text in substantially the following form: INTRODUCTION: Krispy Kreme has been making doughnuts from a secret recipe since 1937 when the business was founded in a small storefront in Winston-Salem, NC. Today the company is still headquartered in the same city, but while the taste of our doughnuts remains true to the still-secret recipe, it is no secret that the company and its loyal customer following has grown substantially. HEADLINE: OUR PEOPLE DO THE THINGS THAT MAKE THE DIFFERENCE: SUBHEAD: We Make the Mix. COPY: To ensure premium quality, we make our own proprietary mix from our secret recipe in our own mix plant. We test the flour as it arrives and test each batch of mix before it's shipped to our stores. Additionally, we realize the profit from the sale of our mix to our stores. SUBHEAD: We Make the Equipment. COPY: We engineer and manufacture our own doughnutmaking equipment. We build it, we install it and we stand behind it. We design our equipment to work in harmony with our proprietary mix which results in doughnuts with uniform consistency and premium quality. SUBHEAD: We Distribute the Goods. COPY: Our own distribution center offers store operators the convenience of one-stop shopping for key supplies. This includes all food ingredients, juices, Krispy Kreme coffee, signage, display cases, uniforms and other items. By combining our buying power and sourcing from carefully selected, reliable suppliers, we can ensure better quality and pricing to our operators. SUBHEAD: We Make and Sell Doughnuts in Our Stores. COPY: Our stores are doughnut factories that also offer our customers a superior retail experience. Systemwide, we produce over 1.3 billion doughnuts a year in our stores. It is in our stores that our customers first experience our Hot Original Glazed and watch the doughnuts being made in our doughnutmaking theater. The illuminated "Hot Doughnuts Now" neon sign signals that our Hot Original Glazed are coming fresh off the line. The Krispy Kreme experience begins with the first bite of that "hot" doughnut and we believe that a lifetime relationship then develops between the customer and the brand. SUBHEAD: We Sell Off-Premises. COPY: Our customers can also purchase our doughnuts at convenient locations off-premises from our store. Utilizing the capacity of our doughnutmaking equipment enables us to sell fresh doughnuts in grocery stores, convenience stores and other high-traffic locations while improving brand visibility in our markets. SUBHEAD: We Have a Heritage. COPY: We were founded in 1937. Over the last 62 years we have developed a strong brand which has resulted in a loyal customer following. In 1997, our company was recognized as an icon of life in the 20th century with the induction of Krispy Kreme artifacts into the Smithsonian Institution. SUBHEAD: We Have Substantial Growth Potential. COPY: With only 141 stores on the national map, we believe our strongest growth is yet to come. Our growth will be accomplished primarily through well-capitalized area developers with the management capacity to develop multiple stores.] SUBHEAD: Is It About the Doughnut Or About the Experience? COPY: The magic of what some have called a mystical experience begins with the first bite of our Hot Original Glazed doughnut hot off the line. But it doesn't stop there. It's also about the people you're with when you take that first bite...it's about seeing the doughnuts pass through the glaze waterfall, and being smiled at by a Krispy Kreme employee. And it's about knowing that when you come back to any Krispy Kreme store at anytime, anywhere, the doughnut will look and taste the same as you always remembered it. 4 PROSPECTUS SUMMARY This summary contains basic information about us and this offering. Because it is a summary, it does not contain all the information that you should consider before investing. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. Information in this prospectus related to the performance of franchised stores is based solely on information provided by our franchisees. KRISPY KREME DOUGHNUTS, INC. Krispy Kreme is a leading branded specialty retailer of premium quality doughnuts which are made throughout the day in our stores. We opened our first store in 1937 and there were 141 Krispy Kreme stores nationwide, consisting of 59 company-owned and 82 franchised stores, as of October 31, 1999. Our principal business is the high volume production and sale of over 20 varieties of premium quality doughnuts, including our signature Hot Original Glazed. We have established Krispy Kreme as a leading consumer brand with a loyal customer base through our longstanding commitment to quality and consistency. Our place in American society was recognized in 1997 with the induction of Krispy Kreme artifacts into the Smithsonian Institution's National Museum of American History. We differentiate ourselves by combining quality ingredients, vertical integration and a unique retail experience featuring our stores' fully displayed production process, or doughnutmaking theater. The combination of our well-established brand, our one-of-a-kind doughnuts and our strong franchise system creates significant opportunities for continued growth. Our sales growth has been driven by new store openings, as well as systemwide comparable store sales growth of 12.7% in fiscal 1998, 9.7% in fiscal 1999 and 12.4% in the first nine months of fiscal 2000. Our success is based on the strengths described below. COMPETITIVE STRENGTHS Our goal is to become the nation's leading branded specialty retailer of premium quality doughnuts. To achieve this objective, we intend to capitalize on the following strengths: - UNIVERSAL APPEAL OF OUR PRODUCT. The taste, quality and simplicity of our doughnuts, which we believe our customers view as an affordable indulgence, appeal across major demographic groups, including age and income. - PROVEN CONCEPT. Our stores, which are designed to create a multi-sensory retail experience featuring our doughnutmaking theaters, serve both as our primary retail outlets and as platforms to distribute our products through off-premises sales channels. - SIGNIFICANT GROWTH POTENTIAL. With only 141 stores as of October 31, 1999, we believe that we have significant new store expansion opportunities, with an initial emphasis on markets of over 100,000 households. - INGREDIENTS FOR MARKET LEADERSHIP. We believe that the combination of our strong brand, highly differentiated product, high-volume production capability and multiple sales channels provides us with the ability to establish Krispy Kreme as the recognized leader in every market we enter. 1 5 - STRONG FRANCHISE SYSTEM. We are committed to growth through franchising and intend to continue to strengthen our franchise system by attracting experienced and well-capitalized area developers who have the management capacity to develop multiple stores. In the future, we intend to acquire minority equity positions in selected franchisee businesses. - DIRECT STORE DELIVERY CAPABILITIES. We have developed a highly effective direct store delivery system, or DSD, for executing off-premises sales whereby we deliver fresh doughnuts, both packaged and unpackaged, to a variety of supermarkets and convenience stores. - CONTROLLED PROCESS ENSURING CONSISTENT HIGH QUALITY. We produce our proprietary mixes, manufacture our custom doughnutmaking equipment and test all key ingredients through our vertically integrated, highly automated system designed to create quality, consistency and efficiency. - BALANCED FINANCIAL MODEL. Krispy Kreme generates sales and income from three distinct sources -- company stores, franchise fees and royalties and our vertically integrated supply chain -- which we believe provides increased stability to our revenues and earnings and improves our return on investment. GROWTH STRATEGY We believe there are significant opportunities to expand our business by further penetrating existing markets and entering new markets. After establishing our brand in a new market through our retail stores, we attempt to maximize store productivity by selling off-premises to grocery and convenience stores, institutional customers and select co-branding customers. Key elements of our growth strategy include: - OPEN NEW STORES. We plan to expand primarily through franchising with area developers and have existing agreements to open approximately 22 new stores in fiscal 2001 and over 100 new stores between fiscal 2002 and fiscal 2005. This represents 15% store growth in fiscal 2001 and an increase in our store base to over 260 stores by the end of fiscal 2005. - IMPROVE OUR EXISTING STORES' ON-PREMISES SALES. To improve our on-premises sales, we plan to remodel and, in certain instances, close and relocate selected older company-owned stores to emulate the format of our new, highly successful stores in new markets. - INCREASE OUR OFF-PREMISES SALES. We intend to expand our off-premises customer base, as well as increase sales to our existing off-premises customers by continuing to offer premium quality products, category management and superior customer service. --------------------------------------------- Our principal executive offices are located at 370 Knollwood Street, Winston-Salem, North Carolina 27103 and our telephone number is (336) 725-2981. Our web site address is http://www.krispykreme.com. Information on our web site is not a part of this prospectus. 2 6 THE OFFERING Common Stock Offered by Krispy Kreme.............................. 3,000,000 shares Common Stock to be Outstanding after the Offering................. 12,484,957 shares Use of Proceeds.................... - Repayment of borrowings under our loan agreement - A distribution to our existing shareholders as part of our pre-offering corporate reorganization - Remodeling and relocation of selected older company-owned stores - Additional mix production capacity to support expansion - Joint venture investments in area developer stores - General corporate purposes, including working capital needs Dividend Policy.................... We do not anticipate paying any cash dividends in the foreseeable future. Proposed Nasdaq National Market Symbol............................. KREM The table above excludes 1,831,000 shares of common stock issuable upon exercise of stock options outstanding under our stock option plan on October 31, 1999, of which 91,000 were exercisable, and includes 144,737 shares to be contributed to our stock bonus plans contemporaneously with this offering. --------------------------------------------- Except as otherwise indicated or required by the context, references to we, our, us, Krispy Kreme or the company refer to Krispy Kreme Doughnuts, Inc. and its subsidiaries and predecessors. Currently, all of the stock of Krispy Kreme Doughnuts, Inc. is owned by Krispy Kreme Doughnut Corporation, which was incorporated in 1982. Krispy Kreme Doughnuts, Inc., the issuer of the common stock offered by this prospectus, was incorporated in North Carolina in 1999 to be the holding company for Krispy Kreme Doughnut Corporation and its other subsidiaries. This will be effected through a corporate reorganization in the form of a merger in which each outstanding share of common stock of Krispy Kreme Doughnut Corporation will be converted into the right to receive 20 shares of common stock of Krispy Kreme Doughnuts, Inc. and $15.00 in cash. This merger will occur prior to the closing of this offering. See "Business -- Our Pre-Offering Reorganization and Other Matters." Except as otherwise indicated, all information in this prospectus assumes that the reorganization has been effected and assumes no exercise of the underwriters' over-allotment option. --------------------------------------------- We own or have rights to various trademarks and trade names used in our business. These include "Krispy Kreme" and the Krispy Kreme logo and "Hot Doughnuts Now" and the Hot Doughnuts Now logo. This prospectus also includes trademarks, service marks and trade names owned by other companies. 3 7 SUMMARY FINANCIAL DATA The following table shows our summary financial data which you should read together with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and accompanying notes and the other financial data included elsewhere in this prospectus. Per share amounts reflect an exchange ratio in the merger in connection with our holding company formation of 20-for-one, which will have the effect of a 20-for-one stock split. Systemwide sales includes the sales of both our company-owned and franchised stores and excludes the sales of our Support Operations business segment. Our consolidated financial statements appearing elsewhere in this prospectus exclude franchised store sales and include royalties and fees received from our franchisees. The as adjusted balance sheet data give effect to this offering and the merger as if they had occurred on October 31, 1999.
----------------------------------------------------------------------------------------------- YEAR ENDED NINE MONTHS ENDED ------------------------------------------------------------------- ------------------------- JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31, 1995 1996 1997 1998 1999 1998 1999 In thousands, except per share data ----------- ----------- ----------- ----------- ----------- ----------- ----------- and store numbers STATEMENT OF OPERATIONS DATA: Total revenues.... $ 114,986 $ 118,550 $ 132,614 $ 158,743 $ 180,880 $ 133,190 $ 161,571 Provision for restructuring... -- 3,000 -- -- 9,466 -- -- Income (loss) from operations... 6,057 1,230 5,136 5,420 (3,702) 5,950 10,081 Net income (loss)... 4,617 180 2,427 2,714 (3,167) 2,886 5,725 Net income (loss) per share: Basic........... $ .63 $ .02 $ .33 $ .37 $ (.38) $ .37 $ .61 Diluted......... .63 $ .02 $ .33 $ .37 $ (.38) $ .36 $ .61 Shares used in calculation of net income (loss) per share: Basic........... 7,275 7,284 7,284 7,284 8,249 7,890 9,340 Diluted......... 7,275 7,284 7,284 7,284 8,249 7,910 9,440 OPERATING DATA: Systemwide sales... $ 146,715 $ 151,662 $ 167,592 $ 203,439 $ 240,316 $ 176,957 $ 231,956 Number of stores at end of period: Company-owned... 48 53 61 58 61 61 59 Franchised...... 40 42 55 62 70 64 82 --------- --------- --------- --------- ---------- ---------- ---------- Systemwide...... 88 95 116 120 131 125 141 ========= ========= ========= ========= ========== ========== ========== Average weekly sales per store: Company-owned... $ 45 $ 39 $ 39 $ 42 $ 47 $ 47 $ 53 Franchised...... 22 22 22 23 28 28 37
---------------------- AS OF OCTOBER 31, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- In thousands BALANCE SHEET DATA: Working capital............................................. $ 11,683 $ Total assets................................................ 104,691 Long-term debt, including current maturities................ 22,895 -- Total shareholders' equity.................................. 47,524 $92,329
4 8 RISK FACTORS You should carefully consider the risks and uncertainties described below and all other information contained in this prospectus before deciding to purchase shares of our common stock. RISKS PARTICULAR TO KRISPY KREME OUR GROWTH STRATEGY DEPENDS ON OPENING NEW KRISPY KREME STORES. OUR ABILITY TO EXPAND OUR STORE BASE IS INFLUENCED BY FACTORS BEYOND OUR CONTROL, WHICH MAY SLOW STORE DEVELOPMENT AND IMPAIR OUR STRATEGY. Our growth strategy includes, among other things, opening additional franchised stores. The opening and success of these stores is dependent in part on a number of factors, which neither we nor our franchisees can control. If we are not able to address these factors successfully, we may not be able to expand at the rate currently contemplated by our strategy. These factors are discussed below and in "Business." IF OUR FRANCHISEES CANNOT DEVELOP OR FINANCE NEW STORES OR BUILD THEM ON SUITABLE SITES, OUR GROWTH AND SUCCESS WILL BE IMPEDED. Our business is dependent upon our franchisees developing new franchised stores. Our franchisees consist of associates who operate under our original franchising program developed in the 1940s and area developers who operate under our franchising program developed in the mid-1990s. We anticipate most new store growth will be from area developers. Although associates have the exclusive rights to develop their assigned geographic territories, most are not contractually obligated to develop additional stores. Area developers are generally required under development agreements they enter into with us to develop a predetermined number of stores in their areas over the term of their development agreements. Area developers may not have access to the financial resources that they need to open the stores required by their development schedules, or be able to find suitable sites to develop them on. They may not be able to negotiate acceptable lease or purchase terms for the sites, obtain the necessary permits and approvals or meet construction schedules. Any of these problems could slow our growth, impair our strategy and reduce our franchise revenues. IF OUR FRANCHISEES CANNOT OPEN NEW STORES ON SCHEDULE, OUR GROWTH AND SUCCESS WILL BE IMPEDED. Delays in store openings could adversely affect our future operations by slowing new store growth and reducing our franchise 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 store openings. In the past, we have agreed to extend or modify development schedules for certain area developers, and we may do so in the future. Currently, all of our area developers are on schedule to develop a total of 130 additional stores in their territories during their initial development schedule, which is generally five years. WE MAY BE HARMED BY ACTIONS TAKEN BY OUR FRANCHISEES THAT ARE OUTSIDE OF OUR CONTROL. Area developers and associates are generally independent contractors and are not our employees. 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. Consequently, area developers and associates may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store 5 9 personnel. If they do not, our image and reputation may suffer, and systemwide sales could decline. WE MAY BE EXPOSED TO FLUCTUATIONS IN COMMODITY PRICING BECAUSE OF THE LARGE QUANTITIES OF RAW MATERIALS AND OTHER PRODUCTS THAT WE BUY, WHICH MAY UNEXPECTEDLY INCREASE OUR COSTS. The basic raw materials we use are agricultural products such as flour, shortening and sugar. We also purchase other products, such as coffee, in large quantities, and use paper products, films and plastics to package our products. In addition, we are dependent on gasoline for our delivery trucks that supply our off-premises sales customers and natural gas as a fuel in the doughnut production process. Increases in prices of agricultural and food products, packaging materials or fuels could cause substantial and sudden increases in costs that we might not be able to recover through price increases. Shortages or interruptions in the supply of agricultural or food products can result from adverse weather conditions, such as droughts or floods. These shortages or other factors could lead to increased prices for raw materials and some finished goods. Our general policy is to enter into long-term purchase agreements covering one- to three-year periods with specific vendors within a range of prices that we believe are advantageous to us. To the extent commodity prices in the spot market are lower than those we pay our suppliers under our long-term purchase agreements, we are exposed to commodity market risk. In those cases, we pay more for our commodity ingredients than if we had no long-term purchase agreements. WE ARE THE EXCLUSIVE SUPPLIER OF DOUGHNUT MIXES, OTHER KEY INGREDIENTS AND FLAVORS TO ALL KRISPY KREME STORES. IF WE HAVE ANY PROBLEMS SUPPLYING THESE INGREDIENTS, OUR STORES' ABILITY TO MAKE DOUGHNUTS WILL BE NEGATIVELY AFFECTED. We are the exclusive supplier of doughnut mixes and other key ingredients and flavors to all of our company-owned and franchised stores. If our business expands according to our growth strategy, we will require additional capacity to produce our doughnut mixes and other ingredients. In addition, as our business continues to expand on the West Coast and in other geographic areas which are located at greater distances from our sole manufacturing facility in Winston-Salem, North Carolina, we may incur greater costs in supplying our doughnut mixes and other ingredients to these areas and may need to establish one or more additional manufacturing plants. Although we have a backup source to manufacture our doughnut mixes in the event of the loss of our Winston-Salem plant, this facility does not regularly produce our doughnut mixes. Any interruption of existing or planned production capacity at our manufacturing plant could impede our ability or that of our franchisees to make doughnuts. In addition, because we generally enter into long-term purchase agreements with our suppliers, in the event that any of these 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 DOUGHNUTMAKING EQUIPMENT. IF WE HAVE ANY PROBLEMS PRODUCING THIS EQUIPMENT, OUR STORES' ABILITY TO MAKE DOUGHNUTS WILL BE NEGATIVELY AFFECTED. Our Winston-Salem facility is the only location where we manufacture our custom doughnutmaking equipment. Although we have limited backup sources for our equipment, obtaining our equipment quickly in the event of the loss of our Winston-Salem plant would be difficult, and 6 10 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. ANY INTERRUPTION IN THE DELIVERY OF GLAZE FLAVORING FROM OUR ONLY SUPPLIER COULD IMPAIR OUR ABILITY TO MAKE OUR TOP PRODUCT. We are dependent on a sole supplier for our glaze flavoring. Although we are in the process of identifying an alternative source to produce our glaze flavoring, we have not currently identified such a source, and any interruption in the distribution from our current supplier could affect our ability to produce our signature Hot Original Glazed. WE ARE SUBJECT TO FRANCHISE LAWS AND REGULATIONS THAT GOVERN OUR STATUS AS A FRANCHISOR AND REGULATE SOME ASPECTS OF OUR FRANCHISEE 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. Krispy Kreme, as a franchisor, is subject to both regulation by the Federal Trade Commission and state laws regulating the offer and sale of franchises. Our failure to obtain or maintain approvals to sell franchises would cause us to lose franchise revenues. If we are unable to sell new franchises, our growth strategy will be significantly harmed. 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. OUR QUARTERLY RESULTS MAY FLUCTUATE AND COULD FALL BELOW EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS DUE TO SEASONALITY AND OTHER FACTORS, RESULTING IN A DECLINE IN OUR STOCK PRICE. Our quarterly and yearly results have varied in the past, and we believe that our quarterly operating results will vary in the future. For this reason, you should not rely upon our quarterly operating results as indications of future performance. In some future periods, our operating results may fall below the expectations of securities analysts and investors. This could cause the trading price of our common stock to fall. Factors, such as seasonality, which may cause our quarterly results to fluctuate are discussed in this section and in "Business." A NUMBER OF OUR DIRECTORS OWN AND SOME OFFICERS HAVE A FINANCIAL INTEREST IN SOME OF OUR FRANCHISES. THE INTERESTS OF THESE INDIVIDUALS MAY THEREFORE BE POTENTIALLY IN CONFLICT WITH OUR INTERESTS. Some of our directors own and some officers have a financial interest in some of our franchises. As directors and officers of Krispy Kreme, these individuals influence the way our business is managed and the formulation of business strategies. The interests of these individuals may therefore potentially be in conflict with our interests. In addition, we have made guaranties, entered into collateral repurchase agreements and provided other financial assistance to some directors and one officer. You should read "Related Party Transactions" for descriptions of these relationships. OUR FAILURE OR INABILITY TO ENFORCE OUR TRADEMARKS COULD ADVERSELY AFFECT THE VALUE OF OUR BRAND. We own certain common law trademark rights and a number of federal trademark and service mark registrations. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We therefore devote appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, 7 11 may not be enough to prevent imitation by others which might harm our image or our brand position. Although we are not aware of anyone else who is using "Krispy Kreme" or "Hot Original Glazed" or "Hot Doughnuts Now," as a trademark or service mark, we are aware that some businesses are using "Krispy" or a phonetic equivalent as part of a trademark or service mark associated with retail doughnut stores. We believe that, in the instances where "Krispy" or a phonetic equivalent is used, we have superior rights and are taking the necessary legal actions. There may, however, be similar uses we are unaware of which could arise from prior users. These uses 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. 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 PRODUCTS, 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 could also be affected by changing consumer tastes -- for instance, if prevailing health or dietary preferences cause consumers to avoid doughnuts in favor of foods that are perceived as more healthy. THE FOOD SERVICE INDUSTRY IS AFFECTED BY LITIGATION 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 and 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. Adverse publicity about such allegations may negatively affect us and our franchisees, regardless of whether the allegations are true, by discouraging customers from buying our products. We could also incur significant liabilities if a lawsuit or claim results in a decision against us, or litigation costs regardless of the result. 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, supermarkets and convenience stores. 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 stores' sales and profit margins. Many of our competitors or potential competitors have substantially greater financial and other resources than us which may allow them to react to changes in pricing, marketing and the quick service restaurant industry better than us. Also, many of our competitors are less dependent on a single, primary product than we are. 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. 8 12 THE COSTS TO COMPLY WITH GOVERNMENT REGULATIONS RELATING TO FOOD SERVICE STORES AND EMPLOYMENT COULD INCREASE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND IMPEDE NEW STORE DEVELOPMENT. Our business depends on our ability to maintain numerous store sites where food is prepared and sold, and our strategy depends on opening new stores. These operations are subject to federal, state and local government regulations relating to the preparation and sale of food, building and zoning requirements and other matters. To date, federal and state environmental regulations have not had a material effect on our operations, but more stringent and varied requirements of local government with respect to zoning, building codes, land use and environmental factors have in the past increased, and can be expected in the future to increase store operating costs, and the time and cost required for opening new stores. Because many of our employees and our franchisees' employees are paid hourly rates based upon federal and state minimum wage laws, recent legislation increasing the minimum wage has resulted in higher labor costs for us and our franchisees. In addition, our operations and those of our franchisees are also subject to other laws governing employer relationships with employees, including overtime, working and safety conditions and citizenship requirements. The costs to comply with any of these laws could also increase. We cannot assure you that we or our franchisees will be able to pass any of these additional costs on to customers in whole or in part. RISKS RELATING TO THE OFFERING WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING AND MAY NOT USE THEM EFFECTIVELY. As of the date of this prospectus, we cannot specify with certainty the particular uses for the net proceeds we will receive from this offering. We currently intend to use the net proceeds from the offering as described under "Use of Proceeds" in this prospectus, but our management will have broad discretion in the use of the net proceeds. If our management fails to apply these funds effectively, we may not be successful in our efforts to grow our business and revenues. 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. Our stock price could also be negatively affected. See "Description of Capital Stock -- Anti-Takeover Provisions of Krispy Kreme's Articles of Incorporation, Bylaws and Shareholder Rights Plan." 9.3 MILLION, OR 74.8%, OF OUR TOTAL OUTSTANDING SHARES ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE FUTURE, WHICH COULD DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. After this offering, we will have outstanding approximately 12.5 million shares of common stock, or 12.9 million shares if the underwriters fully exercise their over-allotment option. This includes the 3 million shares that we are selling in this offering, which may be resold in the public market immediately, unless held by one of our affiliates, and the 144,737 shares to be contributed to our stock bonus plans. The remaining 74.8%, or 9.3 million shares, of our total outstanding shares will 9 13 become available for resale in the public market one year after this offering. However, it is possible that these shares may be sold sooner if they are registered under the Securities Act of 1933. For a more detailed description, see "Shares Eligible for Future Sale." As restrictions on resale end, the prevailing market price of our common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. Our ability to raise additional capital through future issuances of equity securities could also be impaired. As soon as practicable after this offering, we intend to register for resale 1,913,000 shares of common stock reserved under our stock option plan, of which options exercisable into 1,831,000 shares of common stock were outstanding as of October 31, 1999. Options for 91,000 shares were exercisable as of that date. OUR EXISTING SHAREHOLDERS WILL CONTINUE TO CONTROL US AFTER THIS OFFERING, AND THEY MAY MAKE DECISIONS WITH WHICH YOU MAY DISAGREE. After this offering, our existing shareholders will beneficially hold approximately 74.8% of our outstanding common stock, or approximately 72.2% if the underwriters' over-allotment option is exercised in full. Our executive officers and directors as a group -- currently 16 persons -- will beneficially hold approximately 23.1% of our outstanding common stock after this offering, including currently exercisable stock options, or 22.3% if the over-allotment option is fully exercised. Consequently, our existing shareholders will continue to control us after this offering is completed, and our officers and directors will continue to be significant holders. Through their voting power, these persons may make decisions regarding Krispy Kreme with which you may disagree. YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IF YOU PURCHASE COMMON STOCK IN THIS OFFERING. The initial public offering price is substantially higher than the net tangible book value per share of the outstanding common stock will be immediately after this offering. Any common stock you purchase in this offering will have a post-offering net tangible book value per share of $7.40 less than the initial public offering price, assuming an initial public offering price of $19.00 per share, which is the mid-point of the range shown on the cover page of this prospectus. Future issuances of our common stock, including issuances in connection with stock option exercises, could cause further dilution. 10 14 FORWARD-LOOKING STATEMENTS This prospectus contains statements about future events and expectations which are characterized as forward-looking statements. Forward-looking statements are based on management's beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to them. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Factors that could contribute to these differences include those discussed in "Risk Factors" and in other sections of this prospectus. The words believe, may, will, should, anticipate, estimate, expect, intend, objective, seek, strive or similar words, or the negatives of these words, identify forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors. 11 15 USE OF PROCEEDS Krispy Kreme is offering for sale 3,000,000 shares of common stock by this prospectus. Based on an assumed initial public offering price of $19.00 per share, the mid-point of the range shown on the cover page of this prospectus, we estimate that our net proceeds from the sale of these shares will be approximately $51.8 million after deducting the underwriting discounts and estimated offering expenses. Our estimated net proceeds will be approximately $59.8 million if the underwriters exercise their option to purchase an additional 450,000 shares from us to cover over-allotments. We expect to use our net proceeds for the following purposes in the following approximate amounts: - Repayment of $30 million in borrowings under our loan agreement, which we anticipate will be outstanding when we consummate this offering - A distribution of $7 million to our existing shareholders as part of our pre-offering corporate reorganization The remainder will be used for: - Remodeling and relocation of selected older company-owned stores - Additional mix production capacity to support expansion - Joint venture investments in area developer stores - General corporate purposes, including working capital needs Although we do not contemplate any changes in our use of proceeds, we may reprioritize the uses listed above, or use some proceeds for other purposes in the event extra proceeds are available or the specified uses require less capital than expected. Our loan agreement covers both a revolving line of credit and a term loan. At our option, the revolving line of credit bears interest at either our lender's prime rate minus 110 basis points or a rate equal to LIBOR plus 100 basis points. Alternatively, we can choose to convert all or a portion of our indebtedness under the revolving line of credit to a term loan for a period of 60, 84 or 120 months with interest based on, at our option, either: (1) a variable prime rate method; (2) a variable LIBOR method; or (3) a swap rate method with a prime rate-linked cap. Interest on our term loan is computed on the same basis as the revolving line of credit, except that the rate has a floor of 5.500% and a ceiling of 8.125%. At October 31, 1999, our revolving line of credit and term loan both bore interest rates of 6.401%. As of October 31, 1999, $4.2 million was outstanding under the term loan and $18.7 million under the revolving line of credit. None of our indebtedness incurred in the past year was used for purposes other than for working capital needs. If we do not prepay it, indebtedness under our revolving credit facility matures in July 2002, and under our term loan, in June 2001. Pending application of the net proceeds as described above, we will invest the net proceeds in short-term, interest-bearing investment grade or government securities. 12 16 DIVIDEND POLICY We intend to retain our earnings to finance the expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination regarding cash dividend payments will be made by our board of directors and depends upon the following factors: - - Earnings - Capital requirements - - Our financial condition - Restrictions in financing agreements - Other factors deemed relevant by the board of directors
Dividend payments are restricted by our loan agreement to 50% of our net income for the immediately preceding fiscal year. We have routinely declared cash dividends on our common stock in the past. The following table shows total and per share cash dividends we have declared on the shares of our common stock during the periods indicated:
------------------------------------------------------- YEAR ENDED NINE MONTHS ENDED ----------------------------------- ----------------- FEBRUARY 1, 1998 JANUARY 31, 1999 OCTOBER 31, 1999 ---------------- ---------------- ----------------- Total cash dividends declared................ $1,179,562 $1,517,787 $ -- Per share.................................... $ 0.16 $ 0.16 $ --
13 17 CAPITALIZATION The following table shows, as of October 31, 1999, our cash and cash equivalents, short-term debt and capitalization, both actual and as adjusted. The adjustment gives effect to: - The merger in connection with our holding company formation - The sale of 3,000,000 shares of common stock in this offering, assuming an initial public offering price of $19.00 per share, which is the mid-point of the range shown on the cover page of this prospectus - The application of a portion of the estimated net proceeds from that sale, after deducting underwriting discounts and estimated offering expenses, to repay bank debt and pay a distribution to our existing shareholders as described in "Use of Proceeds" You should read the following capitalization data in conjunction with "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and accompanying notes and the other financial data included elsewhere in this prospectus.
--------------------- OCTOBER 31, 1999 --------------------- ACTUAL AS ADJUSTED ------- ----------- In thousands, except share data Cash and cash equivalents................................... $ 3,944 $25,854 ======= ======= Short-term debt: Current maturities of long-term debt...................... $ 2,400 $ -- ======= ======= Long-term debt, excluding current maturities................ $20,495 $ -- ------- ------- Shareholders' equity: Preferred stock, no par value; 10,000,000 shares authorized after the merger; none issued and outstanding............................................ -- -- Common stock, $10.00 par value; 1,000,000 shares authorized before the merger; 467,011 and 0 shares issued and outstanding................................. 4,670 -- Common stock, no par value; 100,000,000 shares authorized after the merger; 0 and 12,484,957 shares issued and outstanding............................................ -- Paid-in capital........................................... 10,805 67,285 Notes receivable.......................................... (2,547) (2,547) Retained earnings......................................... 34,596 27,591 ------- ------- Total shareholders' equity............................. 47,524 92,329 ------- ------- Total capitalization................................... $68,019 $92,329 ======= =======
The table above excludes 1,831,000 shares of common stock issuable upon the exercise of stock options outstanding under our stock option plan on October 31, 1999, of which 91,000 were exercisable, and includes 144,737 shares to be contributed to our stock bonus plans contemporaneously with this offering. 14 18 DILUTION Our net tangible book value as of October 31, 1999 was $47,523,705, or $5.09 per share of common stock. Net tangible book value per share is the amount by which total tangible assets exceeds total liabilities, divided by the total number of shares of common stock outstanding. Our adjusted net tangible book value as of October 31, 1999 would have been $92,328,540, or $7.40 per share, after giving effect to the sale of 3,000,000 shares of common stock offered by this prospectus at an assumed initial offering price of $19.00 per share, the midpoint of the range shown on the cover page of this prospectus, and after deducting estimated underwriting discounts and estimated offering expenses and the distribution to be paid to existing shareholders as part of the corporate reorganization in connection with this offering. This represents an immediate increase in the net tangible book value of $2.31 per share to existing shareholders, in addition to the cash distribution they will receive, and an immediate dilution of $11.60 per share to new investors. The following table illustrates the per share dilution: -------------- Assumed initial public offering price....................... $19.00 Net tangible book value per share as of October 31, 1999................................................... $5.09 Increase attributable to the sale of shares offered hereby................................................. $2.31 ----- Adjusted net tangible book value after this offering........ $ 7.40 ------ Dilution in the net tangible book value to new investors.............................................. $11.60 ======
The following table shows, as of October 31, 1999, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing shareholders, reduced to reflect the cash distribution the existing shareholders will receive, and by new investors in this offering at an assumed initial offering price of $19.00 per share, the midpoint of the range shown on the cover page of this prospectus:
------------------------------------------------------------ SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing shareholders................... 9,340,220 75.7% $15,474,673 23.0% $ 1.66 New investors........................... 3,000,000 24.3 51,810,000 77.0 $17.27 ---------- ----- ----------- ----- Total......................... 12,340,220 100.0% $67,284,673 100.0% ========== ===== =========== =====
The tables above exclude 144,737 shares to be contributed to our stock bonus plans contemporaneously with this offering and assume no exercise of stock options outstanding as of October 31, 1999 under our stock option plan. If any of the options are exercised, there will be further dilution to new investors. 15 19 SELECTED FINANCIAL DATA The following table shows selected financial data for Krispy Kreme. The selected historical statement of operations data for each of the years ended, and the selected historical balance sheet data as of January 29, 1995, January 28, 1996, February 2, 1997, February 1, 1998 and January 31, 1999 have been derived from our audited consolidated financial statements, some of which are included in this prospectus. Those consolidated financial statements and the accompanying notes have been audited by PricewaterhouseCoopers LLP, independent public accountants. Please note that our fiscal year ended February 2, 1997 contained 53 weeks. The selected historical statement of operations data for the nine months ended, and the selected historical balance sheet data as of, November 1, 1998 and October 31, 1999 are derived from our unaudited consolidated financial statements, which are included in this prospectus, except for the historical balance sheet as of November 1, 1998. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present the data for those periods fairly. Operating results for interim periods are not necessarily indicative of results for a full fiscal year. Per share amounts reflect an exchange ratio in the merger in connection with our holding company formation of 20-for-one, which will have the effect of a 20-for-one stock split. Systemwide sales includes the sales of both our company-owned and franchised stores and excludes the sales of our Support Operations business segment. Our consolidated financial statements appearing elsewhere in this prospectus exclude franchised store sales and include royalties and fees received from our franchisees. You should read the following selected financial data in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and accompanying notes and the other financial data included elsewhere in this prospectus.
----------------------------------------------------------------------------------------------- YEAR ENDED NINE MONTHS ENDED ------------------------------------------------------------------- ------------------------- JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31, 1995 1996 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- ----------- ----------- In thousands, except per share data STATEMENT OF OPERATIONS DATA: Total revenues.................. $ 114,986 $ 118,550 $ 132,614 $ 158,743 $ 180,880 $ 133,190 $ 161,571 Operating expenses.............. 98,587 104,717 116,658 140,207 159,941 116,019 137,821 General and administrative expenses...................... 7,578 6,804 7,630 9,530 10,897 7,885 10,171 Depreciation and amortization expenses...................... 2,764 2,799 3,189 3,586 4,278 3,336 3,498 Provision for restructuring..... -- 3,000 -- -- 9,466 -- -- --------- --------- --------- --------- ---------- ---------- ---------- Income (loss) from operations... 6,057 1,230 5,137 5,420 (3,702) 5,950 10,081 Interest expense, net, and other......................... (1,291) 930 1,091 895 1,577 1,049 847 --------- --------- --------- --------- ---------- ---------- ---------- Income (loss) before income taxes......................... 7,348 300 4,046 4,525 (5,279) 4,901 9,234 Provision (benefit) for income taxes......................... 2,731 120 1,619 1,811 (2,112) 2,015 3,509 --------- --------- --------- --------- ---------- ---------- ---------- Net income (loss)............... $ 4,617 $ 180 $ 2,427 $ 2,714 $ (3,167) $ 2,886 $ 5,725 ========= ========= ========= ========= ========== ========== ========== Net income (loss) per share: Basic......................... $ .63 $ .02 $ .33 $ .37 $ (.38) $ .37 $ .61 Diluted....................... .63 .02 .33 .37 (.38) .36 .61 Shares used in calculation of net income (loss) per share: Basic......................... 7,275 7,284 7,284 7,284 8,249 7,890 9,340 Diluted....................... 7,275 7,284 7,284 7,284 8,249 7,910 9,440 Cash dividends declared per common share.................. $ .16 $ .16 $ .16 $ .16 $ .16 $ -- $ --
16 20
----------------------------------------------------------------------------------------------- YEAR ENDED NINE MONTHS ENDED ------------------------------------------------------------------- ------------------------- JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31, 1995 1996 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- ----------- ----------- In thousands, except store numbers OPERATING DATA: Systemwide sales................ $ 146,715 $ 151,662 $ 167,592 $ 203,439 $ 240,316 $ 176,957 $ 231,956 Number of stores at end of period: Company-owned................. 48 53 61 58 61 61 59 Franchised.................... 40 42 55 62 70 64 82 --------- --------- --------- --------- ---------- ---------- ---------- Systemwide.................... 88 95 116 120 131 125 141 ========= ========= ========= ========= ========== ========== ========== Average weekly sales per store: Company-owned................. $ 45 $ 39 $ 39 $ 42 $ 47 $ 47 $ 53 Franchised.................... 22 22 22 23 28 28 37
----------------------------------------------------------------------------------------------- AS OF AS OF ------------------------------------------------------------------- ------------------------- JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31, 1995 1996 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- ----------- ----------- In thousands BALANCE SHEET DATA: Working capital................. $ 7,730 $ 5,742 $ 10,148 $ 9,151 $ 8,387 $ 7,811 $ 11,683 Total assets.................... 67,257 72,888 78,005 81,463 93,181 93,400 104,691 Long-term debt, including current maturities............. 12,533 18,311 20,187 20,870 21,020 20,053 22,895 Total shareholders' equity...... 35,817 35,033 36,516 38,265 42,247 49,587 47,524
17 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with the financial statements and the accompanying notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including, but not limited to, those described under "Risk Factors" and included in other portions of the prospectus. COMPANY OVERVIEW AND INDUSTRY OUTLOOK Our principal business, which began in 1937, is owning and franchising Krispy Kreme doughnut stores where we make and sell over 20 varieties of premium quality doughnuts, including our Hot Original Glazed. Each of our stores is a doughnut factory with the capacity to produce from 2,400 dozen to over 6,000 dozen doughnuts daily. Consequently, each store has significant fixed or semi- fixed costs, and margins and profitability are significantly impacted by doughnut production volume and sales. Our doughnut stores are versatile in that most can support multiple sales channels to more fully utilize production capacity. These sales channels are comprised of: - ON-PREMISES SALES. Sales to customers visiting our stores, including the drive-through windows, along with deeply discounted sales to community organizations that in turn sell our products for fundraising purposes. - OFF-PREMISES SALES. Daily sales of fresh doughnuts on a branded, unbranded and private label basis to convenience and grocery stores and select co-branding customers. Doughnuts are sold to these customers on trays for display and sale in glass-enclosed cases and in packages for display and sale on both stand-alone display units and on our customers' shelves. "Branded" refers to products sold bearing the Krispy Kreme brand name. "Unbranded" products are sold unpackaged from the retailer's display case. "Private label" products carry the retailer's brand name or some other non-Krispy Kreme brand. In addition to our retail stores, we are vertically integrated. Our Support Operations business unit produces doughnut mixes and manufactures our doughnutmaking equipment, which all of our stores are required to purchase. Additionally, it operates a distribution center that provides Krispy Kreme stores with essentially all supplies for the critical areas of their business. This business unit is volume-driven, and its economics are enhanced by the opening of new stores. Our vertical integration allows us to: - Maintain the consistency and quality of our products throughout our system - Utilize volume buying power which helps lower the cost of supplies to each of our stores - Enhance our profitability We expect doughnut industry sales to continue growing. We believe growth in the fragmented doughnut market will be aided by a variety of factors, including a shift from food consumed at home to food consumed away from home, increased snack food consumption and increased doughnut sales through in-store bakeries. We intend to expand our concept primarily through opening new franchise stores in territories across the continental United States. We may also enter into joint ventures with some of our franchisees. As of October 31, 1999, there were a total of 141 Krispy Kreme stores nationwide consisting of 59 company-owned and 82 franchised stores. In fiscal 2001, we anticipate opening approximately 22 new stores under existing agreements, all of which are expected to be franchise 18 22 stores. Additionally, our franchisees are contractually obligated to open over 100 new stores in the period fiscal 2002 through fiscal 2005. As we expand the Krispy Kreme concept, we will incur infrastructure costs in the form of additional personnel to support the expansion, and additional facilities costs to provide mixes, equipment and other items necessary to operate the various new stores. In the course of building this infrastructure, we may incur unplanned costs which could negatively impact our operating results. RESULTS OF OPERATIONS In order to facilitate an understanding of the results of operations for each period presented, we have included a general overview along with an analysis of business segment activities. In addition to this analysis, refer to Note 1, Nature of Business and Significant Accounting Policies, in our audited consolidated financial statements. A guide to the discussion for each period is presented below. OVERVIEW. Outlines information on total systemwide sales, which includes both company-owned and franchised stores, and systemwide comparable store sales. Systemwide sales includes the sales of both our company-owned and franchised stores and excludes the sales of our Support Operations business segment. Our consolidated financial statements appearing elsewhere in this prospectus exclude franchised store sales and include royalties and fees received from our franchisees. We believe systemwide sales data is significant because it shows the overall penetration of our brand, consumer demand for our products and the correlation between systemwide sales and our total revenues. A store is added to our comparable store base in its nineteenth month of operation. A summary discussion of our consolidated results is also presented. SEGMENT RESULTS. In accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," we have three reportable segments. A description of each of the segments follows. - COMPANY STORE OPERATIONS. Represents the results of our company-owned stores. Company stores make and sell doughnuts and complementary products through the sales channels discussed above. Expenses for this business unit include store level expenses along with direct general and administrative expenses. - FRANCHISE OPERATIONS. Represents the results of our franchise program. We have two franchise programs: (1) the associate program, which is our original franchising program developed in the 1940s, and (2) the area developer program, which was developed in the mid-1990s. Associates pay royalties of 3.0% of on-premises sales and 1.0% of all other sales, with the exception of private label sales, for which they pay no royalties. Area developers pay royalties of 4.5% of all sales, contribute 1.0% of all sales to our national advertising fund and pay franchise fees ranging from $20,000 to $40,000 per store. See "Business -- Store Ownership" for further information on our franchising programs. Expenses for this business segment include costs incurred to recruit new franchisees and to monitor and aid in the performance of these stores and direct general and administrative expenses. - SUPPORT OPERATIONS. Represents the results of our Support Operations business unit, located in Winston-Salem, North Carolina. This business unit buys ingredients used to produce doughnut mixes and manufactures doughnutmaking equipment which all of our stores are required to purchase. Additionally, this business unit purchases and sells essentially all supplies necessary to operate a Krispy Kreme store, including all food ingredients, juices, Krispy Kreme coffee, signage, display cases, uniforms and other items. Generally, shipments are made to each of our stores on a weekly basis by common carrier. 19 23 All intercompany transactions between Support Operations and Company Store Operations have been eliminated in consolidation. Expenses for this business unit include all expenses incurred at the manufacturing and distribution level along with direct general and administrative expenses. OTHER. Includes a discussion of significant line items not discussed in the overview or segment discussions, including general and administrative expenses, depreciation and amortization expenses, provision for store closings and restructuring, interest expense, net, and other expenses and the provision for income taxes. Our fiscal year is based on a 52 or 53 week year. The fiscal year ends on the Sunday closest to the last day in January. The table below shows our operating results for fiscal 1997 (53 weeks ended February 2, 1997), fiscal 1998 (52 weeks ended February 1, 1998) and fiscal 1999 (52 weeks ended January 31, 1999) and for the nine months ended November 1, 1998 (39 weeks) and October 31, 1999 (39 weeks) expressed as a percentage of total revenues. Certain operating data are also shown for the same periods.
------------------------------------------------------------------- YEAR ENDED NINE MONTHS ENDED --------------------------------------- ------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31, 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Total revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses...................... 88.0 88.3 88.4 87.1 85.3 General and administrative expenses..... 5.8 6.0 6.0 5.9 6.3 Depreciation and amortization expenses.............................. 2.4 2.3 2.4 2.5 2.2 Provision for restructuring............. -- -- 5.2 -- -- -------- -------- -------- -------- -------- Income (loss) from operations........... 3.8 3.4 (2.0) 4.5 6.2 Interest expense, net, and other........ 0.8 0.6 1.0 0.8 0.5 -------- -------- -------- -------- -------- Income (loss) before income taxes....... 3.0 2.8 (3.0) 3.7 5.7 Provision (benefit) for income taxes.... 1.2 1.1 (1.2) 1.5 2.2 -------- -------- -------- -------- -------- Net income (loss)..................... 1.8% 1.7% (1.8)% 2.2% 3.5% ======== ======== ======== ======== ======== In thousands OPERATING DATA: Systemwide sales........................ $167,592 $203,439 $240,316 $176,957 $231,956 Increase in comparable store sales: Company-owned......................... 5.5% 11.5% 11.1% 11.3% 10.2% Systemwide............................ 4.9% 12.7% 9.7% 10.2% 12.4%
20 24 The table below shows business segment revenues and operating expenses expressed in dollars. Support Operations revenues are shown net of intercompany sales eliminations. See Note 3 to our unaudited consolidated financial statements and Note 10 to our audited consolidated financial statements. Operating expenses exclude depreciation and amortization expenses.
------------------------------------------------------------------- YEAR ENDED NINE MONTHS ENDED --------------------------------------- ------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31, 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- In thousands REVENUES BY BUSINESS SEGMENT: Company Store Operations................ $113,940 $132,826 $145,251 $108,172 $121,104 Franchise Operations.................... 1,709 2,285 3,236 2,297 3,798 Support Operations...................... 16,965 23,632 32,393 22,721 36,669 -------- -------- -------- -------- -------- Total revenues........................ $132,614 $158,743 $180,880 $133,190 $161,571 ======== ======== ======== ======== ======== OPERATING EXPENSES BY BUSINESS SEGMENT: Company Store Operations................ $100,655 $117,252 $129,297 $ 94,358 $103,814 Franchise Operations.................... 1,575 2,368 2,731 1,931 2,791 Support Operations...................... 14,428 20,587 27,913 19,730 31,217 -------- -------- -------- -------- -------- Total operating expenses.............. $116,658 $140,207 $159,941 $116,019 $137,822 ======== ======== ======== ======== ========
The following table shows business segment revenues expressed as a percentage of total revenues and business segment operating expenses expressed as a percentage of applicable business segment revenues. Operating expenses exclude depreciation and amortization expenses.
------------------------------------------------------------------- YEAR ENDED NINE MONTHS ENDED --------------------------------------- ------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31, 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- REVENUES BY BUSINESS SEGMENT: Company Store Operations................... 85.9% 83.7% 80.3% 81.2% 75.0% Franchise Operations....................... 1.3 1.4 1.8 1.7 2.4 Support Operations......................... 12.8 14.9 17.9 17.1 22.6 ----- ----- ----- ----- ----- Total revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== OPERATING EXPENSES BY BUSINESS SEGMENT: Company Store Operations................... 88.3% 88.3% 89.0% 87.2% 85.7% Franchise Operations....................... 92.2% 103.6% 84.4% 84.1% 73.5% Support Operations......................... 85.0% 87.1% 86.2% 86.8% 85.1% Total operating expenses................... 88.0% 88.3% 88.4% 87.1% 85.3%
21 25 Additionally, data on store opening activity are shown below. Transferred stores represent stores sold between the company and franchisees.
-------------------------------- COMPANY- OWNED FRANCHISED TOTAL --------- ----------- ------ YEAR ENDED FEBRUARY 2, 1997 Beginning count............................................. 53 42 95 Opened...................................................... 7 15 22 Closed...................................................... -- (1) (1) Transferred................................................. 1 (1) -- -- -- --- Ending count.............................................. 61 55 116 == == === YEAR ENDED FEBRUARY 1, 1998 Beginning count............................................. 61 55 116 Opened...................................................... -- 7 7 Closed...................................................... (2) (1) (3) Transferred................................................. (1) 1 -- -- -- --- Ending count.............................................. 58 62 120 == == === YEAR ENDED JANUARY 31, 1999 Beginning count............................................. 58 62 120 Opened...................................................... -- 14 14 Closed...................................................... -- (3) (3) Transferred................................................. 3 (3) -- -- -- --- Ending count.............................................. 61 70 131 == == === NINE MONTHS ENDED OCTOBER 31, 1999 Beginning count............................................. 61 70 131 Opened...................................................... 2 13 15 Closed...................................................... (4) (1) (5) Transferred................................................. -- -- -- -- -- --- Ending count.............................................. 59 82 141 == == ===
NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED WITH NINE MONTHS ENDED NOVEMBER 1, 1998 Overview Systemwide sales increased to $232.0 million in the first nine months of fiscal 2000 from $177.0 million in the first nine months of fiscal 1999, an increase of 31.1%. This increase was comprised of company store sales increases of $12.9 million and franchise store sales increases of $42.1 million. Systemwide comparable store sales, with 111 stores in the comparable store base, increased 12.4%. The overall systemwide sales increase was driven by comparable store sales improvement and the opening of new stores. Total company revenues increased to $161.6 million in the first nine months of fiscal 2000 from $133.2 million in the first nine months of fiscal 1999, an increase of 21.3%. This increase was comprised of Company Store Operations revenues increases of $12.9 million, Franchise Operations revenues increases of $1.5 million and Support Operations revenues increases of $13.9 million. Net income increased 98.4% to $5.7 million from $2.9 million. Net income as a percentage of total revenues was 3.5% in the first nine months of fiscal 2000 compared with 2.2% in the first nine months of fiscal 1999. 22 26 Company Store Operations Company Store Operations revenues. Company Store Operations revenues increased to $121.1 million in the first nine months of fiscal 2000 from $108.2 million in the first nine months of fiscal 1999, an increase of 12.0%. Comparable store sales, with 56 stores in the comparable store base, increased by 10.2%. The revenue growth was primarily due to strong growth in sales from both our on-premises and off-premises sales channels. On-premises sales increased approximately $3.2 million and off-premises sales increased approximately $9.7 million. On-premises sales grew principally as a result of more customer visits and an increase in brand awareness generated by national publicity and our national store expansion. Our company stores continued to benefit from an increase in the number of stores we serve via our off-premises sales programs. The current period revenue increase in off-premises sales is due primarily to the addition of new convenience store outlets. Company Store Operations operating expenses. Company Store Operations operating expenses increased to $103.8 million in the first nine months of fiscal 2000 from $94.4 million in the first nine months of fiscal 1999, an increase of 10.0%. Company Store Operations operating expenses as a percentage of Company Store Operations revenues were 85.7% in the first nine months of fiscal 2000 compared with 87.2% in the first nine months of fiscal 1999. The decrease in Company Store Operations operating expenses as a percentage of revenues was due to increased operating efficiencies resulting from increased sales levels at our stores. These additional sales have utilized excess production capacity thereby enhancing the stores' profitability. Franchise Operations Franchise Operations revenues. Franchise Operations revenues increased to $3.8 million in the first nine months of fiscal 2000 from $2.3 million in the first nine months of fiscal 1999, an increase of 65.3%. The growth in revenue was primarily due to the opening of 13 franchise stores in the first nine months of fiscal 2000 and the impact of 14 franchise stores opened in fiscal 1999 being open for the full nine months in fiscal 2000. Many of these stores have had company record-setting opening week on-premises sales levels and their on-premises sales have remained strong in the months following their openings. Franchise Operations operating expenses. Franchise Operations operating expenses increased to $2.8 million in the first nine months of fiscal 2000 from $1.9 million in the first nine months of fiscal 1999, an increase of 44.5%. Franchise Operations operating expenses as a percentage of Franchise Operations revenues were 73.5% in the first nine months of fiscal 2000 compared with 84.1% in the first nine months of fiscal 1999. The decrease in Franchise Operations operating expenses as a percentage of revenues was due to leveraging the infrastructure we have built in preparing for our expansion. In prior years, we hired and trained personnel to oversee the expansion of our concept across the country. In addition to our management training program, they received field training primarily consisting of working with and learning from existing personnel who were qualified to oversee store operations. As these personnel have successfully completed their training, we have been able to open additional stores without incurring significant incremental personnel costs. Support Operations Support Operations revenues. Support Operations sales to franchise stores increased to $36.7 million in the first nine months of fiscal 2000 from $22.7 million in the first nine months of fiscal 1999, an increase of 61.4%. The primary reason for the increase in revenues was the opening of new franchise stores, including current period openings, the impact of stores opened in fiscal 1999 and comparable store sales increases. Increased doughnut sales through both the on-premises and off-premises sales channels by franchise stores translated into increased revenues for Support 23 27 Operations from sales of mixes, sugar, shortening and other supplies. Also, each of these new stores is required to purchase doughnut manufacturing equipment and other peripheral equipment from Support Operations, thereby enhancing Support Operations sales. An increase in doughnut manufacturing equipment prices of approximately 20.0% also contributed. Support Operations operating expenses. Support Operations operating expenses increased to $31.2 million in the first nine months of fiscal 2000 from $19.7 million in the first nine months of fiscal 1999, an increase of 58.2%. Support Operations operating expenses as a percentage of Support Operations revenues were 85.1% in the first nine months of fiscal 2000 compared with 86.8% in the first nine months of fiscal 1999. The decrease in Support Operations operating expenses as a percentage of revenues was due to the increased capacity utilization and resulting economies of scale of the mix and equipment manufacturing operations attributable to the increased volume in the facilities. Favorable commodities prices also contributed. Other General and administrative expenses. General and administrative expenses increased to $10.2 million in the first nine months of fiscal 2000 from $7.9 million in the first nine months of fiscal 1999, an increase of 29.0%. General and administrative expenses as a percentage of total revenues were 6.3% in the first nine months of fiscal 2000 compared with 5.9% in the first nine months of fiscal 1999. The primary reason for the increase in these expenses was our continued investment in infrastructure to support our expansion. The investment in infrastructure consisted primarily of the hiring of new personnel in corporate support departments. Costs incurred in the first nine months of fiscal 2000 for these personnel, including salaries and benefits, increased approximately $953,000 over the first nine months of fiscal 1999. Depreciation and amortization expenses. Depreciation and amortization expenses increased to $3.5 million in the first nine months of fiscal 2000 from $3.3 million in the first nine months of fiscal 1999, an increase of 4.9%. Depreciation and amortization expenses as a percentage of total revenues were 2.2% in the first nine months of fiscal 2000 compared with 2.5% in the first nine months of fiscal 1999. Depreciation and amortization expenses increased due to capital asset additions. Provision for restructuring. During the nine months ended October 31, 1999, we reassessed certain provisions of our accrued restructuring expense initially recorded in the fourth quarter of fiscal 1999. This reassessment, along with the sale of a parcel of land included in the provision, resulted in a net charge to operating expenses of $86,000. See Note 5 to our unaudited consolidated financial statements. Interest expense. Interest expense decreased to $1.1 million in the first nine months of fiscal 2000 from $1.2 million in the first nine months of fiscal 1999, a decrease of 4.5%. Borrowing amounts were fairly consistent in the first nine months of each fiscal year; however, interest rates were lower in the first nine months of fiscal 2000 compared with the first nine months of fiscal 1999. Provision for income taxes. The provision for income taxes is based on the effective tax rate applied to the respective nine-month period's pre-tax income. The provision for income taxes increased 74.1% to $3.5 million in the first nine months of fiscal 2000 representing a 38.0% effective rate. The provision in the first nine months of fiscal 1999 was $2.0 million representing an effective rate of 41.1%. 24 28 YEAR ENDED JANUARY 31, 1999 COMPARED WITH YEAR ENDED FEBRUARY 1, 1998 Overview Systemwide sales increased to $240.3 million in fiscal 1999 from $203.4 million in fiscal 1998, an increase of 18.1%. This increase was comprised of company store sales increases of $12.4 million and franchise store sales increases of $24.5 million. Systemwide comparable store sales, with 104 stores in the comparable store base, increased 9.7%. The overall systemwide sales increase was driven by comparable store sales improvement and the opening of new stores. Total company revenues increased to $180.9 million in fiscal 1999 from $158.7 million in fiscal 1998, an increase of 13.9%. This increase was comprised of Company Store Operations revenues increases of $12.4 million, Franchise Operations revenues increases of $951,000 and Support Operations revenues increases of $8.8 million. For fiscal 1999, the net loss was $3.2 million compared with net income of $2.7 million for fiscal 1998. The net loss in fiscal 1999 was due to a provision for restructuring of $9.5 million, discussed below. Absent this provision, net income for fiscal 1999 would have been $2.5 million, or 1.4% of total revenues, compared with $2.7 million, or 1.7% of total revenues, in fiscal 1998. Company Store Operations Company Store Operations revenues. Company Store Operations revenues increased to $145.3 million in fiscal 1999 from $132.8 million in fiscal 1998, an increase of 9.4%. Comparable store sales, with 56 stores in the comparable store base, increased by 11.1%. The revenue growth was primarily driven by an increase in the number of off-premises outlets that we serve. Our sales efforts were particularly directed at convenience stores. Company Store Operations operating expenses. Company Store Operations operating expenses increased to $129.3 million in fiscal 1999 from $117.3 million in fiscal 1998, an increase of 10.3%. Company Store Operations operating expenses as a percentage of Company Store Operations revenues were 89.0% in fiscal 1999 compared with 88.3% in fiscal 1998. The increase in Company Store Operations operating expenses as a percentage of revenues was primarily due to a charge of $2.3 million for store closings and impairment costs in the normal course of business. The charge consisted of $417,000 related to the write-off of unamortized leasehold improvements for two stores to be closed and the accrual of $283,000 in remaining lease costs on a site that will not be used. The remaining $1.6 million related to the write-down of building and equipment of a facility that will remain open but whose carrying value we determined was not fully recoverable. The impact of this charge was offset by increased operating efficiencies resulting from increases in the off-premises sales channels discussed above. The stores' operations benefited from the utilization of excess production capacity. Additionally, we converted our direct store delivery, or DSD, route system for packaged products from a daily delivery system to an every other day system which reduced our route delivery costs. Franchise Operations Franchise Operations revenues. Franchise Operations revenues increased to $3.2 million in fiscal 1999 from $2.3 million in fiscal 1998, an increase of 41.6%. This growth in revenue was primarily due to the opening of 14 new franchise stores in fiscal 1999 along with the seven franchise stores opened in fiscal 1998 having a full year of operating results in fiscal 1999. Franchise Operations operating expenses. Franchise Operations operating expenses increased to $2.7 million in fiscal 1999 from $2.4 million in fiscal 1998, an increase of 15.3%. Franchise Operations operating expenses as a percentage of Franchise Operations revenues were 84.4% in fiscal 1999 compared with 103.6% in fiscal 1998. The decrease in Franchise Operations operating 25 29 expenses as a percentage of revenues was due to leveraging the infrastructure we put in place in preparation for additional store openings. In prior years, we began to hire and train personnel to oversee the expansion of our concept across the country. Their training consisted primarily of working with and learning from existing personnel who were qualified to oversee store operations. As these personnel have successfully completed their training, we have been able to open additional stores without incurring significant incremental personnel costs. Support Operations Support Operations revenues. Support Operations sales to franchise stores increased to $32.4 million in fiscal 1999 from $23.6 million in fiscal 1998, an increase of 37.1%. Support Operations revenues were impacted primarily by the opening of new stores in fiscal 1999 and a full year of operations for those franchise stores opened in fiscal 1998. Each of these stores was supplied with doughnut manufacturing equipment and other equipment necessary to open each store thereby enhancing Support Operations sales. Additionally, a few existing franchise stores began to implement off-premises sales programs, thereby increasing the amount of mixes and other supplies they purchased from Support Operations. Support Operations operating expenses. Support Operations operating expenses increased to $27.9 million in fiscal 1999 from $20.6 million in fiscal 1998, an increase of 35.6%. Support Operations operating expenses as a percentage of Support Operations revenues was 86.2% in fiscal 1999 compared with 87.1% in fiscal 1998. The decrease in Support Operations operating expenses as a percentage of revenues was primarily due to increased sales volumes utilizing existing capacity in our mix, equipment and distribution operations. Increased freight costs of approximately $830,000 incurred in delivering products to new stores opened outside our traditional Southeastern markets partially offset these efficiency gains. Other General and administrative expenses. General and administrative expenses increased to $10.9 million in fiscal 1999 from $9.5 million in fiscal 1998, an increase of 14.4%. General and administrative expenses as a percentage of total revenues were 6.0% in both fiscal 1999 and fiscal 1998. The primary reason for the increase in the dollar amount of these expenses was our continued investment in infrastructure to support growth and enhance our profitability. The investment in infrastructure consisted primarily of the hiring of new personnel in corporate support departments. Costs incurred in fiscal 1999 for these personnel, including salaries and benefits, increased approximately $700,000 over fiscal 1998. Depreciation and amortization expenses. Depreciation and amortization expenses increased to $4.3 million in fiscal 1999 from $3.6 million in fiscal 1998, an increase of 19.3%. Depreciation and amortization expenses as a percentage of total revenues were 2.4% in fiscal 1999 compared with 2.3% in fiscal 1998. Depreciation and amortization expenses increased due to capital asset additions. Provision for restructuring. In late fiscal 1999, the board of directors approved a restructuring plan for assets and operations determined either to be inconsistent with our strategy or whose carrying value may not be fully recoverable. Of the total restructuring and impairment charge of $9.5 million, $7.8 million relates to the closing of five double drive-through company-owned stores and the write-down of five other inactive double drive-through stores and sites, including provisions to write-down associated land, building and equipment costs to estimated net realizable value and to cover operating lease commitments associated with these stores. An additional $700,000 relates to future lease payments on double drive-through buildings subleased to franchisees. We determined that the double drive-through stores were inconsistent with our strategy as the space constraints in these stores did not allow them to efficiently execute both on- 26 30 premises and off-premises sales and these facilities were not producing adequate levels of brand value for the company. Also included in the charge is a $1.0 million write-down of a facility that produces fried pies and honey buns. These products are not expected to form a core part of our expansion strategy. Of the total provision, $5.6 million represents a charge for future cash outflows, primarily in the form of lease payments on land and buildings, while $3.6 million represents a write-down or write-off of land and buildings. Future cash outflows will be paid over each remaining lease term and we believe that cash flow from operations will be adequate to fund these cash needs. These stores are scheduled to be closed by the end of fiscal year 2000. No severance costs were included as a part of the restructuring provision. We anticipate future benefits as a result of avoiding the losses incurred each year by the closed stores, reduced depreciation costs on those assets which we determined were impaired and a write-off of the carrying value of three double drive-through buildings which had never been placed in service. As of October 31, 1999, there have been no material changes in the restructuring plan as it was originally recorded. Interest expense. Interest expense decreased to $1.5 million in fiscal 1999 from $1.6 million in fiscal 1998, a decrease of 6.0%. The decrease was due to slightly lower borrowing levels as a result of improved cash flow during the year. Provision for income taxes. The provision (benefit) for income taxes in fiscal 1999 and fiscal 1998 is based on the effective tax rate applied to the respective year's pre-tax book income (loss) effective tax rate. Our fiscal 1999 income tax benefit was $2.1 million representing a 40% effective tax rate compared with a provision of $1.8 million representing a 40% effective tax rate in fiscal 1998. We recorded a deferred tax benefit for the fiscal 1999 pre-tax book loss as the items which gave rise to these losses will be utilized to reduce our future taxable income. YEAR ENDED FEBRUARY 1, 1998 COMPARED WITH YEAR ENDED FEBRUARY 2, 1997 Overview Systemwide sales increased to $203.4 million in fiscal 1998 from $167.6 million in fiscal 1997, an increase of 21.4%. This increase was comprised of company store sales increases of $18.9 million and franchise store sales increases of $17.0 million. Systemwide comparable store sales, with 96 stores in the comparable store base, increased 12.7%. The overall systemwide sales increase was driven by comparable store sales improvement and the opening of new stores. Total company revenues increased to $158.7 million in fiscal 1998 from $132.6 million in fiscal 1997, an increase of 19.7%. This increase was comprised of Company Store Operations revenues increases of $18.9 million, Franchise Operations revenues increases of $576,000 and Support Operations revenues increases of $6.7 million. Net income increased to $2.7 million in fiscal 1998 from $2.4 million in fiscal 1997, an increase of 11.8%. Net income as a percentage of revenues was 1.7% in fiscal 1998 compared with 1.8% in fiscal 1997. Company Store Operations Company Store Operations revenues. Company Store Operations revenues increased to $132.8 million in fiscal 1998 from $113.9 million in fiscal 1997, an increase of 16.6%. Comparable store sales, with 52 stores in the comparable store base, increased by 11.5%. The revenue growth was primarily due to significant growth in our in-store bakery and convenience store off-premises sales programs. Company Store Operations operating expenses. Company Store Operations operating expenses increased to $117.3 million in fiscal 1998 from $100.7 million in fiscal 1997, an increase of 16.5%. 27 31 Company Store Operations operating expenses as a percentage of Company Store Operations revenues were 88.3% in both fiscal 1998 and fiscal 1997. The operating efficiencies from the incremental sales revenues, primarily generated by the off-premises sales channels, were offset by start-up costs in these programs related to the delivery of doughnuts to in-store bakeries and convenience stores. These start-up costs included training and personnel costs. Franchise Operations Franchise Operations revenues. Franchise Operations revenues increased to $2.3 million in fiscal 1998 from $1.7 million in fiscal 1997, an increase of 33.7%. This revenue growth was primarily due to the opening of seven new franchise stores in fiscal 1998 along with 15 franchise stores opened in fiscal 1997 having a full year of operating results in fiscal 1998. Franchise Operations operating expenses. Franchise Operations operating expenses increased to $2.4 million in fiscal 1998 from $1.6 million in fiscal 1997, an increase of 50.4%. Franchise Operations operating expenses as a percentage of revenues were 103.6% in fiscal 1998 compared with 92.2% in fiscal 1997. We invested significantly in building our infrastructure for our national expansion in fiscal 1998, primarily through hiring additional personnel to oversee the expansion. Support Operations Support Operations revenues. Support Operations sales to franchise stores increased to $23.6 million in fiscal 1998 from $17.0 million in fiscal 1997, an increase of 39.3%. Support Operations revenues were impacted primarily by the opening of new stores in fiscal 1998 and a full year's sales of those franchise stores opened in fiscal 1997. Support Operations operating expenses. Support Operations operating expenses increased to $20.6 million in fiscal 1998 from $14.4 million in fiscal 1997, an increase of 42.7%. Support Operations operating expenses as a percentage of revenues were 87.1% in fiscal 1998 compared with 85.0% in fiscal 1997. As our franchisees began to open stores outside the Southeast, we incurred increases in both freight costs and start-up costs. Other General and administrative expenses. General and administrative expenses increased to $9.5 million in fiscal 1998 from $7.6 million in fiscal 1997, an increase of 24.9%. The primary reason for the increase in these expenses was our continued investment in infrastructure to support growth and enhance our profitability. Costs incurred in fiscal 1998 for personnel in corporate support departments, including salaries and benefits, increased approximately $585,000 over fiscal 1997. Along with personnel additions, we incurred increased costs in travel, employee benefits and information technology. Depreciation and amortization expenses. Depreciation and amortization expenses increased to $3.6 million in fiscal 1998 from $3.2 million in fiscal 1997, an increase of 12.4%. Depreciation and amortization expenses as a percentage of total revenues were 2.3% in fiscal 1998 compared with 2.4% in fiscal 1997. Depreciation and amortization expenses increased due to capital asset additions. Interest expense. Interest expense increased to $1.6 million in fiscal 1998 from $1.3 million in fiscal 1997, an increase of 22.4%. Although borrowing levels were fairly consistent between the two years, interest rates were higher in fiscal 1998 than in fiscal 1997. Provision for income taxes. The provision for income taxes in fiscal 1998 and fiscal 1997 is based on the effective tax rate applied to the respective year's pre-tax book income. Our fiscal 1998 income tax provision was $1.8 million representing a 40% effective tax rate compared with a provision of $1.6 million representing a 40% effective tax rate in fiscal 1997. 28 32 QUARTERLY RESULTS The following tables set forth unaudited quarterly information for each of the eight fiscal quarters in the two year period ended October 31, 1999. Per share amounts reflect an exchange ratio in the merger in connection with our holding company formation of 20-for-one, which will have the effect of a 20-for-one stock split. This quarterly information has been prepared on a basis consistent with our audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year.
-------------------------------------------------------------------------------- THREE MONTHS ENDED -------------------------------------------------------------------------------- FEB. 1, MAY 3, AUG. 2, NOV. 1, JAN. 31, MAY 2, AUG. 1, OCT. 31, 1998 1998 1998 1998 1999 1999 1999 1999 ------- ------- ------- ------- -------- ------- ------- --------- In thousands, except per share data Total revenues................... $40,147 $45,070 $42,941 $45,179 $47,690 $53,328 $51,356 $56,887 Operating expenses............... 36,017 38,386 37,999 39,634 43,922 45,499 44,131 48,192 General and administrative expenses....................... 3,344 2,846 2,469 2,570 3,013 2,864 3,658 3,649 Depreciation and amortization expenses....................... 701 1,116 1,110 1,110 942 1,102 1,159 1,237 Provision for restructuring...... -- -- -- -- 9,466 -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations.... 85 2,722 1,363 1,865 (9,653) 3,863 2,408 3,809 Interest expense, net, and other expenses....................... 88 348 350 351 527 307 331 208 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes.......................... (3) 2,374 1,013 1,514 (10,180) 3,556 2,077 3,601 Provision (benefit) for income taxes.......................... (1) 991 395 629 (4,127) 1,351 790 1,368 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss).............. $ (2) $ 1,383 $ 618 $ 885 $(6,053) $ 2,205 $ 1,287 $ 2,233 ======= ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share: Basic.......................... $ -- $ .19 $ .08 $ .10 $ (.65) $ .24 $ .14 $ .24 Diluted........................ -- .19 .08 .10 (.65) .23 .14 .24
Our operating results for these eight quarters expressed as percentages of applicable revenues were as follows:
----------------------------------------------------------------------------- THREE MONTHS ENDED ----------------------------------------------------------------------------- FEB. 1, MAY 3, AUG. 2, NOV. 1, JAN. 31, MAY 2, AUG. 1, OCT. 31, 1998 1998 1998 1998 1999 1999 1999 1999 ------- ------ ------- ------- -------- ------ ------- -------- Total revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses.................... 89.7 85.2 88.5 87.7 92.1 85.3 85.9 84.7 General and administrative expenses... 8.3 6.3 5.7 5.7 6.3 5.4 7.1 6.4 Depreciation and amortization expenses............................ 1.7 2.5 2.6 2.5 2.0 2.1 2.3 2.2 Provision for restructuring........... -- -- -- -- 19.8 -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations......... 0.3 6.0 3.2 4.1 (20.2) 7.2 4.7 6.7 Interest expense, net, and other expenses............................ 0.3 0.7 0.9 0.8 1.2 0.6 0.7 0.4 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes..... -- 5.3 2.3 3.3 (21.4) 6.6 4.0 6.3 Provision (benefit) for income taxes............................... -- 2.2 0.9 1.4 (8.7) 2.5 1.5 2.4 ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)................... -- 3.1% 1.4% 1.9% (12.7)% 4.1% 2.5% 3.9% ===== ===== ===== ===== ===== ===== ===== =====
29 33 Historically, we have experienced seasonal variability in our quarterly operating results, with higher profits per store in the first and third quarters than in the second and fourth quarters. The seasonal nature of our operating results is expected to continue. LIQUIDITY AND CAPITAL RESOURCES Because management generally does not monitor liquidity and capital resources on a segment basis, this discussion is presented on a consolidated basis. We funded our capital requirements for fiscal 1997, 1998 and 1999 and for the nine months ended October 31, 1999 primarily through cash flow generated from operations, but also through borrowings under our line of credit and term loan facility. A private stock offering in fiscal 1999 also contributed to funding our cash needs. Net cash flow from operations was $2.7 million in fiscal 1997, $7.1 million in fiscal 1998, $11.7 million in fiscal 1999 and $7.5 million for the nine months ended October 31, 1999. The trend of improved operating cash flow is due to an improvement in our net income, net of the impact of the provision for store closings and restructuring in fiscal 1999. Operating cash flow has been negatively impacted by additional investments in working capital, primarily accounts receivable and inventories, as a result of the expansion of our off-premises sales programs and the opening of new stores which we either own or supply. Net cash used for investing activities was $3.4 million in fiscal 1997, $5.9 million in fiscal 1998, $11.8 million in fiscal 1999 and $8.2 million in the nine months ended October 31, 1999. Investing activities primarily consist of capital expenditures for property, plant and equipment. These capital expenditures primarily relate to expenditures to support our off-premises sales programs, maintenance, capital expenditures for existing stores and equipment, development of new stores and the acquisition of stores from existing franchisees. Net cash provided by (used for) financing activities was $759,000 in fiscal 1997, ($456,000) in fiscal 1998, $1.5 million in fiscal 1999 and ($91,000) in the nine months ended October 31, 1999. Financing activities in fiscal 1997 and fiscal 1998 consisted primarily of borrowings under our line of credit and payment of cash dividends. Fiscal 1999 financing activities consisted primarily of proceeds from a private stock offering, payment of cash dividends and the issuance of notes. Our financing activities in the first nine months of fiscal 2000 have consisted primarily of borrowings under our line of credit and payment of cash dividends declared in fiscal 1999. We entered into a new loan agreement on December 29, 1999. This agreement, which is unsecured, provides a $40 million revolving line of credit and a $12 million term loan. The loan agreement expires on July 10, 2002. Under the terms of the loan agreement, interest on the revolving line of credit is paid monthly and charged at either the lender's prime rate less 110 basis points or at the one-month LIBOR rate plus 100 basis points. There is no interest, fee or other charge for the unadvanced portion of the revolving line of credit. A provision of the loan agreement allows us to convert, prior to the expiration date of the agreement, all or a portion of the outstanding principal balance of the revolving line of credit to a term loan for a period of 60, 84 or 120 months. Concerning interest on the term loan, we have the option of either a variable prime rate based method, a variable LIBOR based method or a swap rate based method with a ceiling tied to the prime rate at the time of conversion. As of the date of this prospectus, no amounts from the $40 million revolving line of credit facility have been converted to a term loan. The loan agreement entered into on December 29, 1999 replaced a previous unsecured agreement which had a $28 million revolving line of credit and a $12 million term loan. Other than an increase in the amount of the line of credit facility, all other provisions of the prior loan agreement were essentially the same as those of the current agreement. As of October 31, 1999, $18.7 million 30 34 was outstanding under the line of credit facility and $4.2 million was outstanding under the term loan. The $12 million term loan entered into on December 29, 1999 was a continuation of the $12 million term loan contained in the previous loan agreement. Interest on the $12 million term loan is computed on the same basis as the revolving line of credit except that the floor and ceiling rates are 5.500% and 8.125%, respectively. Repayment of this loan began on July 20, 1996 in the amount of monthly principal payments of $200,000 plus interest; the final payment is on June 20, 2001. The term loan may be prepaid without penalty or premium at any time. The loan agreement entered into on December 29, 1999 requires us to maintain a consolidated tangible net worth of $41 million through January 28, 2001. For each fiscal year thereafter, the agreement requires us to maintain a consolidated tangible net worth of $41 million plus (1) an amount equal to 75% of the net proceeds from this offering and (2) 50% of our net income for each fiscal year. Capital expenditures for each fiscal year are limited to $35 million. The loan agreement also contains covenants which place various restrictions on sales of properties, our ability to enter into collateral repurchase agreements and guaranties, the payment of dividends and other customary financial and nonfinancial covenants. In the next five years, we will use cash primarily for the following activities: - Repayment of borrowings under our loan agreement - A distribution of approximately $7 million to our existing shareholders as part of our pre-offering corporate reorganization - Remodeling and relocation of selected older company-owned stores - Additional mix production capacity to support expansion - Joint venture investments in area developer stores - General corporate purposes, including working capital needs Our capital requirements for the items outlined above may be significant. These capital requirements will depend on many factors including our overall performance, the pace of store expansion and company store remodels, the requirements for joint venture arrangements and infrastructure needs for both personnel and facilities. To date, we have primarily relied on cash flow generated from operations and our line of credit to fund our capital needs. We believe that the proceeds from this offering, cash flow generated from operations and our borrowing capacity under our line of credit will be sufficient to meet our capital needs for the remainder of fiscal 2000 and in fiscal 2001 through 2005. If additional capital is needed, we may raise such capital through public or private equity or debt financings. Future capital funding transactions may result in dilution to purchasers in this offering. However, there can be no assurance that additional capital will be available or be available on satisfactory terms. Our failure to raise additional capital could have one or more of the following effects on our operations and growth plans over the next five years: - Slowing our plans to remodel and relocate older company-owned stores - Reducing the number and amount of joint venture investments in area developer stores - Slowing the building of our infrastructure in both personnel and facilities We conduct some of our corporate and store operations from leased facilities and lease certain equipment under operating leases. Generally, these have initial lease periods of five to 18 years, and contain provisions for renewal options of five to ten years. 31 35 INFLATION We do not believe that inflation has had a material impact on our results of operations in recent years. However, we cannot predict what effect inflation may have on our results of operations in the future. YEAR 2000 The "year 2000 issue" refers to the possible failure of many computer systems that may arise as a result of existing computer software and hardware using only the last two digits to refer to a year. We believe that the most significant internal risk posed by the year 2000 issue was the possibility of a failure of our accounting systems, either at our corporate offices, at our Winston-Salem manufacturing and distribution facility or at our stores. Third parties whose potential year 2000 problems could have had the greatest effect on us are our banks, the company that processes our payroll and maintains our human resources databases and companies that supply our key raw materials. Prior to the year 2000 date change, we completed reviews of the ability of our hardware and software serving critical internal functions in our stores and in our corporate offices to accurately handle the transition of dates from 1999 to 2000. As of the date of this prospectus, we estimate that we have spent $1 million for the dual purpose of upgrading the functionality of systems while at the same time achieving year 2000 compliance. Additionally, we have developed contingency plans for critical functions in certain corporate departments and business units to address potential year 2000 issues. Since entering the year 2000, we have not experienced any significant disruptions to our business, nor are we aware of any significant year 2000 issues impacting our banks, vendors or customers. We will continue to monitor our critical systems over the next several months for any delayed effects of the year 2000 date change, but do not expect any significant exposure from our internal systems or from the actions of our banks, vendors and customers. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS We are exposed to market risk from changes in interest rates on our outstanding bank debt. Our revolving line of credit bears interest at either our lender's prime rate minus 110 basis points or a rate equal to LIBOR plus 100 basis points. We elect the rate on a monthly basis. Additionally, our term loan bears interest under the same method as our revolving line of credit except that the rate is capped with a floor of 5.500% and a ceiling of 8.125%. The interest cost of our bank debt is affected by changes in either prime or LIBOR. Such changes could adversely impact our operating results. We have no derivative financial interests or derivative commodity instruments in our cash or cash equivalents. On any business day that we have excess cash available, we use it to pay down our revolving line of credit. We purchase certain commodities such as flour, sugar and soybean oil. These commodities are usually purchased under long-term purchase agreements, generally one to three years, at a fixed price. We are subject to market risk in that the current market price of any commodity item may be below our contractual price. We do not use financial instruments to hedge commodity prices. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities," effective for years beginning after June 15, 2000, Krispy Kreme's fiscal year 2002. FAS 32 36 133 requires that all derivatives be recorded on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The adoption of FAS 133 is not expected to have a material impact on Krispy Kreme's financial statements. 33 37 BUSINESS OVERVIEW Krispy Kreme is a leading branded specialty retailer of premium quality doughnuts. We have established Krispy Kreme as a leading consumer brand with a loyal customer base through our longstanding commitment to quality and consistency. We differentiate ourselves by combining quality ingredients and a vertically integrated production process with a unique retail experience featuring our stores' fully displayed production process, or doughnutmaking theater. In the mid-1990s, we began repositioning Krispy Kreme from a wholesale bakery model to a specialty retail concept. Initiatives supporting the repositioning included increasing the size of our doughnuts, redesigning our stores to enhance the total customer experience and adding channels of distribution where our products are displayed in a manner consistent with our on-premises presentation. As a result of the success of these initiatives, we began expanding nationwide primarily through franchising with experienced, well-capitalized area developers. We believe that Krispy Kreme has significant opportunities for continued growth. Our sales growth has been driven by new store openings, as well as systemwide comparable store sales growth of 12.7% in fiscal 1998, 9.7% in fiscal 1999 and 12.4% in the first nine months of fiscal 2000. Our success is based on the strengths described below. COMPETITIVE STRENGTHS THE UNIVERSAL APPEAL OF OUR PRODUCT. Our market research indicates that Krispy Kreme's breadth of appeal extends across major demographic groups, including age and income. In addition to their taste, quality and simplicity, our doughnuts are an affordable indulgence. This has contributed to many of our customers purchasing doughnuts by the dozen for their office, clubs and family. Demand for our doughnuts occurs throughout the day, with approximately half of our on-premises sales occurring in the morning and half in the afternoon and evening. A PROVEN CONCEPT. Krispy Kreme is a focused yet versatile concept. Each of our distinctive Krispy Kreme stores is a doughnutmaking theater with the capacity, depending on equipment size, to produce from 2,400 dozen to over 6,000 dozen doughnuts daily. Our stores serve as our primary retail outlets. They are also designed to create a multi-sensory experience around our unique product and production process which is important to our brand-building efforts. In addition to these on-premises sales, we have developed multiple channels of sales outside our stores, which we refer to as off-premises sales. These sales channels improve the visibility of our brand, increase the convenience of purchase and capture sales from a wide variety of settings and occasions. Additionally, the ability to generate sales outside of our stores, utilizing the stores' existing production capacity, minimizes the risk of an underperforming on-premises sales location. STRONG GROWTH POTENTIAL. With only 141 stores, we believe that we are in the infancy of our growth. Our highest priority expansion plans focus on markets with over 100,000 households. These markets are most attractive because of their dense population characteristics which enable us to achieve economies of scale in local operations infrastructure and brand building efforts. We also believe our universal product appeal, combined with our strategy that utilizes multiple sales channels, will facilitate our expansion into smaller markets. 34 38 THE INGREDIENTS FOR MARKET LEADERSHIP. The doughnut industry, an approximately $4.7 billion market in 1998, is large, fragmented and characterized by low-volume outlets with undifferentiated product quality. We believe that we have the ability to become the recognized leader in every market we enter through our unique combination of: - A strong brand - A highly differentiated product - High-volume production capacity - A market penetration strategy using multiple sales channels A PROVEN FRANCHISE SYSTEM. Krispy Kreme is committed to growth through franchising. Our franchisees consist of associates who operate under our original franchising program developed in the 1940s and area developers who operate under our franchising program developed in the mid-1990s. See "-- Store Ownership." We intend to continue to strengthen our franchise system by attracting experienced and well-capitalized area developers who have the management capacity to develop multiple stores. Our development strategy permits us to grow in a controlled manner and enables us to ensure that each area developer strictly adheres to our high standards of quality and service. We prefer that area developers have ownership and successful operating experience in multi-unit food operations within the territory they propose for development. To ensure a consistent high quality product, we require each franchisee to purchase our proprietary mixes and doughnutmaking equipment. We devote significant resources to providing our franchisees with assistance in site selection, store design, employee training and marketing. Many of our franchisees are also our shareholders. Additionally, in the future, we intend to acquire minority equity positions in selected franchisee businesses. We believe that common ownership of equity will serve to further strengthen our relationships and align our mutual interests. DIRECT STORE DELIVERY CAPABILITIES. Krispy Kreme has developed a highly effective direct store delivery system, or DSD, for executing off-premises sales. We deliver fresh doughnuts, both packaged and unpackaged, to a variety of retail customers, such as supermarkets and convenience stores. Through our company-owned and franchised store operations, our route drivers are capable of taking customer orders and delivering products directly to our customers' retail locations where they are typically merchandised from Krispy Kreme branded displays. We have also developed national account relationships and implemented electronic invoicing and payment systems with some large DSD customers. We believe these competencies, coupled with our premium products, will provide us with significant sales opportunities by allowing us to assume the role of category manager for doughnut products in both the in-store bakery and food service distribution channels. A CONTROLLED PROCESS ENSURING CONSISTENT HIGH QUALITY. Krispy Kreme has a vertically integrated, highly automated system designed to create quality, consistency and efficiency. Our doughnutmaking process starts well before the store-level operations with: - Our owned and operated manufacturing plant which produces our proprietary mixes - Our state-of-the-art laboratory that tests all key ingredients and each batch of mix produced - Our self-manufactured, custom stainless steel doughnutmaking equipment Additionally, at the store-level, we provide a 13-week manager training program covering the critical skills required to operate a Krispy Kreme store and a comprehensive training program for all positions in the store. We also provide easy-to-follow procedures for producing and finishing our doughnuts. 35 39 A BALANCED FINANCIAL MODEL. Krispy Kreme generates sales and income from three distinct sources: company stores, franchise fees and royalties and a vertically integrated supply chain, which we refer to as Support Operations. In addition to lowering the cost of goods sold for our stores, Support Operations generates attractive margins on sales of our mixes and equipment. Our franchising approach to growth minimizes our capital requirements and provides a highly attractive royalty stream. We believe this financial model provides increased stability to our revenues and earnings and improves our return on investment. Our Company Store Operations, Franchise Operations and Support Operations comprise three reportable segments under generally accepted accounting principles. You can review financial data for these segments in Note 3 to our unaudited consolidated financial statements and Note 10 to our audited consolidated financial statements. BUSINESS MODEL Krispy Kreme is a vertically integrated company structured to support and profit from the high volume production and sale of branded and unbranded high quality doughnut products. "High volume, high quality" has always been the foundation of our economic strategy. Our business is driven by two complementary business units: Store Operations, both company and franchise, and Support Operations. Independently, each is designed to ensure quality and to benefit from economies of scale. Collectively, both function as an integrated, cost-efficient system. STORE OPERATIONS. Our principal source of revenue is the sale of doughnuts produced and distributed by Store Operations. As part of our unique business model, our stores are both retail outlets and highly automated, high volume producers of our doughnut products and can sell their products through our multiple sales channels. - ON-PREMISES SALES. Each of our stores offers at least 15 of our more than 20 varieties of doughnuts, including our signature Hot Original Glazed and nine other prescribed varieties. We also sell our special blend Krispy Kreme coffee, other beverages, other bakery items and collectible memorabilia such as tee shirts, sweatshirts and hats. Fundraising sales, described in "-- Marketing", are another component of on-premises sales. In order to establish our brand identity with the total store experience and because of the higher margins associated with on-premises sales, we plan to focus our initial sales efforts on this channel. - OFF-PREMISES SALES. We accomplish off-premises sales through our direct store delivery system which is designed to: (1) generate incremental sales; (2) increase market penetration and brand awareness; (3) increase customer convenience; (4) optimize our stores' production capacity; and (5) improve a store's return on investment. As of October 31, 1999, 97 of our stores sold to major grocery store chains, including Kroger, Food Lion, Giant Food and Acme Markets and to over 1,500 convenience stores, as well as to select co-branding customers. SUPPORT OPERATIONS. The mission of our Support Operations is to create competitive advantages for our stores while operating as a profitable business enterprise. We have developed important operating competencies and capabilities which we use to support our stores, including: - Strong product knowledge and technical skills - Control of all critical production and distribution processes - Collective buying power 36 40 The basic raw materials used in our products are flour, sugar, shortening and packaging materials. We obtain most of these materials under long-term purchase agreements and in the commodity spot markets. We implement the mission of Support Operations through three strategic business units: - MIX MANUFACTURING. We produce all of our proprietary doughnut mixes at our manufacturing facility in Winston-Salem, North Carolina. We control production of this critical input in order to ensure that our products meet quality expectations and to maximize our profit potential. Manufacturing and selling our own mixes allows us to capture the profit that normally would accrue to an outside supplier and is more cost effective than purchasing from third party vendors. Our mixes are produced according to our high quality standards which include: -- Requiring each carefully selected supplier to meet or exceed industry standards -- Receiving truckloads of our main ingredients daily -- Testing each incoming key ingredient -- Testing each batch of mix - EQUIPMENT MANUFACTURING. We manufacture proprietary doughnutmaking equipment which our franchisees are required to purchase. Our carefully engineered equipment, when combined with our proprietary mixes, produces doughnuts with uniform consistency and high quality. Manufacturing our equipment results in several advantages including: -- Flexibility. We manufacture several models, with varying capacities, which are capable of producing multiple products and fitting unusual store configurations. -- Cost-effectiveness. We believe our costs are lower than if we purchased our equipment from third parties. -- Efficiency. We continually refine our equipment design to ensure maximum automation and thereby reduce in-store labor costs and/or improve consistency. - DISTRIBUTION CENTER. Also located at our Winston-Salem complex is our distribution center, which is capable of supplying our stores with all of their key supplies including all food ingredients, juices, Krispy Kreme coffee, signage, display cases, uniforms and other items. Stores must use our doughnut mixes and special blend coffee exclusively. In addition, all store operators have agreed contractually through our Supply Chain Alliance Program to purchase all of their requirements for the critical areas of their business through 2002. We believe that our ability to distribute supplies to our operators produces several advantages including: -- Economies of scale. We are able to purchase at volume discount prices which we believe are lower than those that would be available to our operators individually. In addition, we are selective in choosing our suppliers and require that they meet certain standards with regard to quality and reliability. Also, inventory is controlled on a systemwide basis rather than at the store level. -- Convenience. Our distribution center offers our operators the convenience of one-stop shopping. We are able to supply our operators with all of the key items they need to operate their stores which enables them to focus their energies on running their stores, rather than managing supplier relationships. 37 41 KRISPY KREME BRAND ELEMENTS Krispy Kreme is a blend of several important brand elements which has created a special bond with many of our customers. The key elements are: - ONE-OF-A-KIND TASTE. The taste experience of our doughnuts is the foundation of our concept and the common thread that binds generations of our loyal customers. Our doughnuts are made from a secret recipe that has been in our company since 1937. We use only premium ingredients, which are blended by our custom equipment, to create this unique and very special product. - DOUGHNUTMAKING THEATERS. Each of our stores showcases our doughnutmaking process. Our goal is to provide our customers with a unique entertainment experience, and in addition, visibly reinforce our commitment to quality and freshness. - HOT DOUGHNUTS NOW. The Hot Doughnuts Now sign, when illuminated, is a signal that our Hot Original Glazed are being made. The Hot Doughnuts Now sign is a strong impulse purchase generator and an integral contributor to our brand's mystique. Our Hot Original Glazed are made for several hours every morning and evening, and at other special times during the day. - DESTINATION LOCATIONS. Our full-service stores incorporate doughnutmaking theaters, which are designed to produce a multi-sensory customer experience and establish a strong brand identity. Our research indicates that many of our stores have the geographic drawing power comparable to a regional shopping mall and that our customers, on average, drive 14 miles from their homes to our stores. - AFFORDABLE INDULGENCES. Our doughnuts are reasonably priced to ensure that they are affordable for the widest audience possible. - COMMUNITY RELATIONSHIPS. We are a national company, yet we are committed to strong local community relationships. Our store operators support their local communities through fundraising programs and the sponsorship of charitable events. Many of our loyal customers have warm memories of selling Krispy Kremes to raise money for their schools, clubs and community organizations. INDUSTRY OVERVIEW Krispy Kreme competes in the doughnut market, a highly fragmented industry, which, according to industry sources, had sales of approximately $4.7 billion in 1998. We expect doughnut sales to grow due to a variety of factors, including: (1) the growth in two-income households and corresponding shift to foods consumed away from home; (2) increased snack food consumption; and (3) further growth of doughnut purchases from in-store bakeries. We view the fragmented competition in the doughnut industry as an opportunity for our continued growth. We also believe that the premium quality of our products and the strength of our brand will help enhance the growth and expansion of the overall doughnut market. GROWTH STRATEGY Krispy Kreme is a proven concept with an established heritage. The strength of our brand and our attractive unit economics position us very well for growth. We plan to increase our revenues and profits by expanding our store base, improving on-premises sales at existing stores, and increasing off-premises sales. 38 42 EXPAND OUR STORE BASE. We view our stores as platforms from which we pursue on-premises as well as off-premises sales opportunities. We have existing agreements with our franchisees to open approximately 22 new stores in fiscal 2001 and over 100 new stores between fiscal 2002 and fiscal 2005. This represents 15% store growth in fiscal 2001 and an increase in our store base to over 260 stores by the end of fiscal 2005. The addition of new stores will be accomplished primarily through franchising with area developers following a prescribed development plan for their respective territories. An initial development plan has been created to optimally penetrate territories with over 100,000 households. The plan assumes stores will be built in high density, prime-retailing locations in order to maximize customer traffic and on-premises sales volumes. We believe a territory-based development strategy creates substantial benefits to both Krispy Kreme and our area developers. These benefits include: - Real estate procurement and development - Scale to cost-justify a strong local support infrastructure - Brand building and advertising - Ability to make marketwide commitments to chain store customers With respect to new store growth, we believe that secondary markets in the United States with less than 100,000 households also offer additional sales and profit growth opportunities. Although we operate successfully in some secondary markets today, we believe that our primary expansion territories are sufficient to achieve our intermediate growth objectives. IMPROVE EXISTING STORES' ON-PREMISES SALES. Our area developers have demonstrated that a store employing our updated design located in a densely populated area is capable of generating and sustaining high volume on-premises sales. Many of our stores built prior to 1997 were designed primarily as wholesale bakeries and their formats and site attributes differ considerably from newer stores. In order to improve the on-premises sales of some of these stores, we plan to remodel many of our company-owned stores and, in some limited instances, close or relocate certain stores to a more dynamic area within their territories. Finally, we consistently evaluate improvements or additions to our product line in order to increase same store sales levels and balance seasonality of sales. INCREASE OFF-PREMISES SALES. In new markets, we typically focus our initial efforts on on-premises sales and then leverage the store platform to capitalize on off-premises opportunities. We intend to secure additional grocery and convenience store customers, as well as increase sales to our existing customer base by offering premium quality products, category management and superior customer service. In new markets where capacity utilization remains high solely from servicing on-premises sales, we may develop commissary production facilities to service off-premises sales. We believe that once high brand awareness has been established in a market, a commissary has the potential to improve market penetration and profitability. UNIT ECONOMICS We believe that Krispy Kreme unit economics represent an attractive investment opportunity for our area developers and as such are a significant factor contributing to the growth and success of the Krispy Kreme concept. We estimate that the investment for a new store, excluding land and pre-opening costs, is $500,000 for a building of approximately 3,600 square feet and $500,000 for equipment, furniture and fixtures. 39 43 The following table provides certain financial information relating to company-owned and franchised stores. Average weekly sales per store are calculated by dividing store revenues by the actual number of sales weeks included in each period. Company-owned stores' operating cash flow is store revenues less all direct store expenses other than depreciation expenses.
------------------------------------------------------------------- YEAR ENDED NINE MONTHS ENDED --------------------------------------- ------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31, 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- In thousands Average weekly sales per store: Company-owned........................ $ 39 $ 42 $ 47 $ 47 $ 53 Franchised........................... 22 23 28 28 37 Company-owned stores' operating cash flow as a percentage of store revenues............................. 20.5% 20.6% 22.7% 21.9% 25.2%
Average weekly sales for company-owned stores are higher than for franchised stores due to the lower average weekly sales volumes of older associate stores that are included in the franchised stores' calculations. However, franchised stores' average weekly sales have been increasing as higher-volume area developer stores become a larger proportion of the franchised store base. Additionally, new area developer stores' sales are principally on-premises sales, which have higher operating margins than off-premises sales. Company-owned and associate stores generate a significant percentage of revenues from lower-margin off-premises sales. STORE DEVELOPMENT AND OPERATIONS SITE SELECTION. Our objective is to create highly visible destination locations. Our comprehensive site selection process focuses on: - High volume traffic - High household density - Proximity to both daytime employment and residential centers - Proximity to other retail traffic generators We work closely with our franchisees to assist them in selecting sites. A site selection team visits each site and the surrounding area before approving a store location. We believe that this process ensures that each new store will comply with our standards. STORE OPERATIONS. Our new stores are approximately 3,600 square feet. They are equipped with automated doughnutmaking equipment capable of making approximately 240 dozen doughnuts per hour. This capacity can support sales in excess of $100,000 per week. We outline uniform specifications and designs for each Krispy Kreme store and require compliance with our standards regarding the operation of the store, including, but not limited to: - Varieties of products - Product specifications - Sales channels - Packaging - Sanitation and cleaning - Signage - Furniture and fixtures - Image and use of logos and trademarks - Training - Marketing and advertising We also require the use of a computer and cash register system with specified capabilities to ensure the collection of sales information necessary for effective store management. All of our franchisees provide us with weekly sales reports and periodic financial statements. 40 44 We routinely assist our franchisees with issues such as: - Operating procedures - Advertising and marketing programs - Administrative, bookkeeping and accounting procedures - Public relations - Generation of sales and operating data We also provide an opening team which consists of up to nine people, to provide on-site training and assistance during the first two weeks of operation for each initial store opened by a new franchisee. The number of opening team members providing this assistance is reduced with each subsequent store opening. Our stores which engage in off-premises sales typically operate on a 24-hour schedule. Other stores generally operate from 5:30 a.m. to 1:00 a.m. seven days a week, excluding Christmas. Traditionally, our sales have been slower during the Christmas holiday season and the summer months. QUALITY STANDARDS AND CUSTOMER SERVICE. We encourage all of our employees to be courteous, helpful, knowledgeable and attentive. We emphasize the importance of performance by linking a portion of both a company store manager's and an assistant store manager's incentive compensation to profitability and customer service. We also encourage high levels of customer service and the maintenance of our high quality standards by frequently monitoring our stores through a variety of methods including periodic quality audits and "mystery shoppers." In addition, our Customer Experience Department handles customer comments and also conducts routine satisfaction surveys of our off-premises customers. MANAGEMENT AND STAFFING. It is important that our corporate staff and store managers work as a team. Our Senior Vice President, Company Store and Associate Operations, and Senior Vice President, Area Developer Operations report to our Chief Operating Officer. Together, they are responsible for corporate interaction with our store operations division and store management. Through our divisional directors, each of whom is responsible for a specific geographic region, we communicate frequently with all store managers and their staffs using: store audits; weekly communications by telephone or e-mail; and scheduled and surprise store visits. We offer a comprehensive 13-week training program, conducted both at our headquarters and at designated stores, which provides store managers the critical skills required to operate a Krispy Kreme store. We plan to add computer-based training modules that will enhance the program. Our staffing varies depending on a store's size, volume of business, and number of sales channels. Stores with sales through all sales channels have approximately 35 employees handling on-premises sales, processing, production, bookkeeping and sanitation and between 2-15 delivery personnel. Area developers frequently hire employees from leasing agencies and employ staff based on store volume and size. Hourly employees, along with delivery personnel, are trained by local store management through hands-on experience and training manuals. We believe that our success is a natural result of the growth and development of our people. We are developing a career model for both management and non-exempt employees which will focus on personal development and career growth. The program will link an individual's economic, career and personal goals with our corporate and store-level goals. 41 45 STORE OWNERSHIP We divide our stores into three categories of ownership: company stores, associate stores and area developer stores. We refer to associates and area developers as franchisees, collectively. COMPANY STORES. Krispy Kreme owned 59 stores as of October 31, 1999. Most of these stores were developed between 1937 and 1996 and: (1) were designed as wholesale bakeries; (2) generate a majority of their sales volume through off-premises sales; (3) are located in the Southeast; and (4) are larger than new Krispy Kreme stores. ASSOCIATES. We had 25 associates who operated 49 stores as of October 31, 1999. Associate stores have attributes which are similar to those of company stores. This group generally concentrates on growing sales within their current base of stores rather than developing new stores or new territories. With two exceptions, associates are not obligated to develop additional stores within their territories. We cannot grant licenses to other franchisees or sell products bearing the Krispy Kreme brand name within an associate's territory during the term of their license agreement. Associates are typically parties to 15-year licensing agreements which generally permit them to operate stores using the Krispy Kreme system within a specific territory. Associates pay royalties of 3.0% of on-premises sales and 1.0% of all other sales, with the exception of private label sales for which there are no royalties. They are not currently required to contribute to the public relations and advertising fund. Our associates who are shareholders are parties to franchise agreements which will be extended automatically for a period of 20 years following this offering and thereafter are renewed automatically for five-year periods, unless previously terminated by either party. We do not plan to license any new Krispy Kreme franchisees under the terms of the associate license agreement. AREA DEVELOPERS. In the mid-1990s, we began to strategically expand nationally to new territories through area developers. Under this structure, we license territories, usually defined by metropolitan statistical areas, to area developers who are capable of developing a prescribed number of stores within a specified time period. Area developer stores typically are designed and developed in locations favorable to achieving high volume on-premises sales, although they are also equipped to generate off-premises sales. As of October 31, 1999, we had 13 area developers operating 33 stores with contractual commitments to open an additional 130 stores in their territories during their initial development schedule, which is generally five years. Preferred area developer candidates are multi-unit food operators with a high level of knowledge about the local territory or territories they will develop. They must have a proven financial capability to fully develop their territories. Each of our area developers is required to enter into two types of agreements: a development agreement which establishes the number of stores to be developed in an area and a franchise agreement for each store which they open. Area developers typically pay franchise fees ranging from $20,000 to $40,000 for each store which they develop. Our current standard franchise agreement provides for a 15-year term. The agreement is renewable subject to our discretion and can be terminated for a number of reasons including the failure of the franchisee to make timely payments within applicable grace periods subject to state law. Area developers pay a 4.5% royalty fee on all sales and are required to contribute 1.0% of all sales to a company-administered public relations and advertising fund. In addition to a franchise agreement, all area developers have signed development agreements which require them to develop a specified number of stores on or before specific dates. Generally, these agreements have a five-year term. If area developers fail to develop their stores on schedule, 42 46 we have the right to terminate the agreement and develop company-owned stores, or develop stores through new area developers or joint ventures. Generally, we do not provide financing to our franchisees. We do, however, have a program permitting franchisees to lease proprietary Krispy Kreme equipment from our primary bank, and we will guarantee the leases. Currently, one franchisee has taken advantage of this program, and we do not anticipate that the program will grow substantially. MARKETING Krispy Kreme's approach to marketing is a natural extension of our brand equity, brand attributes, relationship with our customers, and our values. We believe we have a responsibility to our customers to engage in marketing activities that are consistent with, and further reinforce, their confidence and strong feelings about Krispy Kreme. Accordingly, we have established certain guiding brand principles which include: - We will not attempt to define the Krispy Kreme experience for our customer - We prefer to have our customers tell their Krispy Kreme stories and share their experiences with others - We will focus on enhancing customer experiences through product-focused, value-added activities - We will develop local, community-based relationships in all Krispy Kreme markets To build our brand and drive our comparable store sales in a manner aligned with our brand principles, we have focused our marketing activities in the following areas: STORE EXPERIENCE. Our stores are where customers first experience a Hot Original Glazed. Customers know that when our Hot Doughnuts Now sign in the store window is illuminated, they can see our doughnuts being made and enjoy a Hot Original Glazed within seconds after it passes through the glaze waterfall. We believe this begins a lifetime relationship with our customers and forms the foundation of the Krispy Kreme experience. RELATIONSHIP MARKETING. Most of our brand-building activities are grassroots-based and focus on developing relationships with various constituencies, including consumers, schools, communities and businesses. Specific initiatives include: - Product donations to local radio and television stations, schools, government agencies, and other community organizations - Good neighbor product deliveries to create trial uses - Sponsorship of local events and nonprofit organizations - A "Good Grades Program" which recognizes scholastic achievement with certificates and free doughnuts - Our "Krispy Kreme Ambassador Program" which enlists our fans as ambassadors in new markets to generate awareness and excitement around a new store opening FUNDRAISING SALES. Fundraising sales are high volume sales to local charitable organizations at discounted prices. Charities in turn resell our products at prices which approximate retail. We believe that providing a fundraising program to local community organizations and schools helps demonstrate our commitment to the local community, enhances brand awareness, increases consumer loyalty and attracts more customers into our stores. 43 47 PRODUCT PLACEMENT. Since fiscal 1997, as we began growing nationally, there has been a significant increase in our product placements and references to our products on television programs and in selected films, including NBC Today Show, Rosie O'Donnell, The Tonight Show with Jay Leno, Ally McBeal, NYPD Blue, The Practice and Primary Colors. We have been mentioned in more than 80 television shows during 1998 and 1999. We have also been featured or mentioned in over 1,000 print publications in those two years, including The Wall Street Journal., The New York Times, the Washington Post, the Los Angeles Times, Forbes and Fast Company. We believe the increasing number of placements and references are a reflection of the growing interest in our product and brand. ADVERTISING. Relationship marketing and product placement have been central to building our brand awareness. Although our marketing strategy has not historically employed traditional advertising, we intend to develop and test media advertising in a manner consistent with our brand principles. STORE LOCATIONS AND OTHER PROPERTIES STORES. As of October 31, 1999, there were 141 Krispy Kreme stores operating in 27 states, 59 of which were owned by us, 33 of which were owned by area developers and 49 of which were owned by associates. The following map and table shows the geographic location of these stores by ownership category. 44 48 (MAP AND LIST SHOWING KRISPY KREME STORE LOCATIONS) 45 49 All of our stores, except for our Charlotte manufacturing facility, have on-premises sales, and 97 stores also engage in off-premises sales. Of the 59 stores we operated ourselves as of October 31, 1999, we owned the land and buildings for 32 stores. We leased both the building and the land for 12 stores. We leased only the building for six stores, and we leased only the land for nine stores. SATELLITE STORES. Our franchisees operated 14 satellite locations as of October 31, 1999. A satellite location is a retail doughnut store that does not produce doughnuts on site. Satellite locations are supplied with doughnuts from another local Krispy Kreme store that has production capability. SPECIAL PRODUCTION FACILITIES. The manufacturing facility in Charlotte, North Carolina produces doughnuts and other bakery items, such as honey buns, fruit pies, dunkin sticks and miniature doughnuts for off-premises sales. OTHER PROPERTIES. Our corporate headquarters is located in Winston-Salem, North Carolina. We occupy this facility of approximately 35,000 square feet under a lease which expires on December 31, 2009, with one five-year renewal option. We also own a 137,000 square foot manufacturing plant and distribution center in Winston-Salem. MANAGEMENT INFORMATION SYSTEMS Krispy Kreme has a management information system that allows for the rapid communication of extensive information among our corporate office, support operations, company stores, associates and area developers. Our franchisees and other affiliates connect to this system through our Intranet and have access to e-mail and the ability to provide financial reporting. We have adopted a balanced scorecard approach for measuring key performance drivers in each of our business units. Scorecard data are generated internally through our management information system. An enterprise resource planning system supports all major financial and operating functions within the corporation including financial reporting, inventory control and human resources. A comprehensive data warehouse system supports the financial and operating needs of our Store Operations and Support Operations. All company stores have been retrofitted with a Windows NT-based point of sale, or POS, system. This POS system provides each store with the ability to more closely manage on-premises and off-premises sales while providing a kiosk into our Intranet. We poll the sales information from each store's POS system which gives us the ability to analyze data regularly. Daily two-way electronic communication with our stores permits sales transactions to be uploaded and price changes to be downloaded to in-store POS servers. Direct store delivery sales operations have access to an internally-developed route accounting system networked into the corporate Intranet. Information from these systems is polled weekly and aggregated into the corporate manufacturing data warehouse. All information technology hardware, including POS systems, is leased. COMPETITION Our competitors include retailers of doughnuts and snacks sold through supermarkets, convenience stores, restaurants and retail stores. We compete against Dunkin' Donuts, which has the largest number of outlets in the doughnut retail industry, as well as against regionally and locally owned doughnut shops. We compete on elements such as food quality, concept, convenience, location, customer service and value. Customer service, including frequency of deliveries and maintenance of fully stocked shelves, is an important factor in successfully competing for shelf space in grocery stores and convenience stores. 46 50 We believe that our controlled process, which ensures the high volume production of premium quality doughnuts, makes us strong competitors in both food quality and value. Through our comprehensive site selection process and uniform store specifications and designs, we identify premiere locations that are highly visible and increase customer convenience. We believe that in the in-store bakery market, many operators are looking for cost-effective alternatives to making doughnuts on-site. With a quality product and recognized brand name, Krispy Kreme has been able to provide a turnkey program that is profitable for the grocer. In addition, we also believe that we compete effectively in convenience stores. There is an industry trend moving towards expanded fresh product offerings during morning and evening drive times, and products are either sourced from a central commissary or brought in by local bakeries. Krispy Kreme provides a fresh daily delivery, merchandised in an attractive branded display which retailers must use to participate in the program. Through effective signage and merchandising, operators are able to draw customers into the store, thus gaining add-on sales. As category management increases in this segment, growth will come from increased market penetration and enhanced display opportunities for our products. In the packaged doughnut market we offer a full product line of doughnuts and snacks that are sold on a consignment basis and are typically merchandised on a free-standing branded display. We compete primarily with other well known producers of baked goods such as Hostess and Dolly Madison and some regional brands. TRADEMARKS Our doughnut shops are operated under the Krispy Kreme name and we use over 40 federally registered trademarks, including "Krispy Kreme" and "Hot Doughnuts Now" and the logos associated with these marks. We have also registered some of our trademarks in approximately 20 other countries. We license the use of these trademarks to our franchisees for the operation of their doughnut shops. We also license the use of certain trademarks to convenience stores and grocery stores in connection with the sale of some of our products at those locations. Although we are not aware of anyone else who is using "Krispy Kreme" or "Hot Doughnuts Now" as a trademark or service mark, we are aware that some businesses are using "Krispy" or a phonetic equivalent, such as "Crispie Creme," as part of a trademark or service mark associated with retail doughnut stores. There may be similar uses we are unaware of which could arise from prior users. We aggressively pursue persons who unlawfully and without our consent use our trademarks. GOVERNMENT REGULATION LOCAL REGULATION. Our stores are subject to licensing and regulation by a number of government authorities, which may include health, sanitation, safety, fire, building and other agencies in the states or municipalities in which our doughnut shops are located. Developing new doughnut stores in particular areas could be delayed by problems in obtaining the required licenses and approvals or by more stringent requirements of local government bodies with respect to zoning, land use and environmental factors. Our standard development and franchise agreements require our area developers and associates to comply with all applicable federal, state and local laws and regulations, and indemnify us for costs we may incur attributable to their failure to comply. FOOD PRODUCT REGULATION. Our doughnut mixes are produced at our manufacturing facility in Winston-Salem, North Carolina. The North Carolina Department of Agriculture has regulatory power over food products shipped from this facility, as well as from Krispy Kreme's commissary in Charlotte, North Carolina. Similar state regulations may apply to products shipped from our 47 51 doughnut shops to grocery or convenience stores. Many of our grocery and convenience store customers require us to guarantee our products' compliance with applicable food regulations. As is the case for other food producers, numerous other government regulations apply to our products. For example, the ingredient list, product weight and other aspects of our product labels are subject to state and federal regulation for accuracy and content. Most states will periodically check the product for compliance. The use of various product ingredients and packaging materials is regulated by the U.S. Department of Agriculture and the Federal Food and Drug Administration. Conceivably, one or more ingredients in our products could be banned and substitute ingredients would then need to be found. FRANCHISE REGULATION. We must comply with regulations adopted by the Federal Trade Commission, or the FTC, and with several state laws that regulate the offer and sale of franchises. The FTC's Trade Regulation Rule on Franchising, or the FTC Rule, and certain state laws require that we furnish prospective franchisees with a franchise offering circular containing information prescribed by the FTC Rule and applicable state laws and regulations. We also must comply with a number of state laws that regulate some substantive aspects of the franchisor-franchisee relationship. These laws may limit a franchisor's ability to: terminate or not renew a franchise without good cause; prohibit interference with the right of free association among franchisees; disapprove the transfer of a franchise; discriminate among franchisees with regard to charges, royalties and other fees, and place new stores near existing franchises. To date, these laws have not precluded us from seeking franchisees in any given area and have not had a material adverse effect on our operations. Bills intended to regulate certain aspects of franchise relationships have been introduced into Congress on several occasions during the last decade, but none has been enacted. EMPLOYMENT REGULATIONS. We are subject to state and federal labor laws that govern our relationship with employees, such as minimum wage requirements, overtime and working conditions and citizenship requirements. Many of our on-premises and delivery personnel are paid at rates related to the federal minimum wage. Accordingly, further increases in the minimum wage could increase our labor costs. Furthermore, the work conditions at our facilities are regulated by the Occupational Safety and Health Administration and subject to periodic inspections. OTHER REGULATIONS. We have several contracts to serve United States military bases, which require compliance with certain applicable regulations. The stores which serve these military bases are subject to health and cleanliness inspections by military authorities. These accounts are not material to our overall business. We are also subject to federal and state environmental regulations, but we currently believe that these will not have a material effect on our operations. EMPLOYEES As of October 31, 1999 we had 2,923 employees. Of these, 196 were employed in our administrative offices and 100 were employed in our manufacturing and distribution centers. In our company-owned stores and commissaries, we have 2,627 employees. Of these, 2,364 are full-time, including 182 managers and administrators. None of our employees are parties to a collective bargaining agreement, although we have experienced occasional unionization initiatives. We believe our relationships with our employees are good. 48 52 LEGAL PROCEEDINGS As of the date of this prospectus, we are not a party to any litigation that we believe is likely to have a material effect on our financial condition or results of operations. OUR PRE-OFFERING REORGANIZATION AND OTHER MATTERS Currently, all of the stock of Krispy Kreme Doughnuts, Inc. is owned by Krispy Kreme Doughnut Corporation, which was incorporated in 1982. Krispy Kreme Doughnuts, Inc., the issuer of the common stock offered by this prospectus, was incorporated in North Carolina in 1999 to be the holding company for Krispy Kreme Doughnut Corporation and its other subsidiaries. This will be effected through a corporate reorganization in the form of a merger in which each outstanding share of common stock of Krispy Kreme Doughnut Corporation will be converted into the right to receive 20 shares of common stock of Krispy Kreme Doughnuts, Inc. and $15.00 in cash. This merger will occur prior to the closing of this offering. As a result of the merger, Krispy Kreme Doughnut Corporation will become a wholly-owned subsidiary of Krispy Kreme Doughnuts, Inc., and all the shareholders of Krispy Kreme Doughnut Corporation will become shareholders of Krispy Kreme Doughnuts, Inc. We believe that the holding company structure will provide greater organizational flexibility and broaden the alternatives available for future financings. The new holding company structure will create a framework for future growth, promote new business opportunities and facilitate the formation of joint ventures or other business combinations with third parties. After this offering, we intend to furnish to our shareholders annual reports containing audited financial statements and quarterly reports containing unaudited interim financial information for the first three quarters of each fiscal year. 49 53 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following contains information concerning our directors and executive officers as of December 10, 1999, each of whom will continue to serve in the following capacities for both us and our operating subsidiary after this offering:
- ------------------------------------------------------------------------------------------------ DIRECTOR NAME AGE POSITION TERM EXPIRES - ------------------------------------------------------------------------------------------------ Scott A. Livengood....... 47 Chairman of the Board of Directors, President and 2001 Chief Executive Officer John N. McAleer.......... 41 Vice Chairman of the Board of Directors and 2002 Executive Vice President, Concept Development J. Paul Breitbach........ 62 Executive Vice President, Finance, Administration -- and Support Operations Margaret M. Urquhart..... 50 Executive Vice President and Chief Operating -- Officer Randy S. Casstevens...... 34 Senior Vice President, Finance and Secretary -- L. Stephen Hendrix....... 50 Senior Vice President, Company Store and -- Associate Operations Michelle P. Parman....... 37 Senior Vice President, Corporate Development -- Robert H. Vaughn, Jr..... 43 Senior Vice President, Area Developer Operations -- Philip R.S. Waugh, Jr.... 39 Senior Vice President, Franchise Development -- Frank E. Guthrie......... 60 Director 2000 William T. Lynch, Jr..... 57 Director 2002 Joseph A. McAleer, Jr.... 49 Director 2001 Robert L. McCoy.......... 50 Director 2000 Robert J. Simmons........ 76 Director 2000 Steven D. Smith.......... 46 Director 2001 Robert L. Strickland..... 68 Director 2002
- --------------- SCOTT A. LIVENGOOD has been employed by Krispy Kreme since 1978. He was appointed Chairman of the board of directors in October 1999. He has served as Chief Executive Officer since February 1998 and as President since August 1992. From August 1992 to January 1998, Mr. Livengood was also Chief Operating Officer. He has served as a director since February 1994. JOHN N. MCALEER has been employed by Krispy Kreme since 1981. Mr. McAleer has served as Executive Vice President, Concept Development and as Vice Chairman of the board of directors since October 1999. He has also served as Executive Vice President, Brand Development from March 1998 until October 1999, Executive Vice President, Marketing from August 1992 until March 1998 and as Senior Vice President, Marketing, Real Estate and Construction from September 1990 until August 1992. Mr. McAleer has served as a director since September 1990 and served as Chairman of the board of directors from February 1998 until October 1999. Mr. McAleer is the brother of Mr. Joseph A. McAleer, Jr., another member of the board of directors. 50 54 J. PAUL BREITBACH has been employed by Krispy Kreme since November 1992 as Executive Vice President, Finance, Administration and Support Operations. From 1973 to November 1992, Mr. Breitbach was a partner at the accounting firm of Price Waterhouse, and from 1983 to 1992 was managing partner of that firm's Winston-Salem, North Carolina office. From 1987 to 1992 he was also group managing partner for all Price Waterhouse offices in North Carolina and South Carolina. Mr. Breitbach is a certified public accountant. MARGARET M. URQUHART has been employed with Krispy Kreme as Executive Vice President and Chief Operating Officer since December 1999. Prior to joining Krispy Kreme, Ms. Urquhart was President of Lowes Foods, a supermarket chain, since November 1995. From July 1993 until November 1995, Ms. Urquhart was President of Spurwink Consulting Group, a consulting firm advising national consumer goods manufacturers and retailers. Previously, she was employed for 17 years in various capacities with Hannaford Bros. Co., a supermarket chain, including as President of its subsidiary, Wellby Super Drug Stores. RANDY S. CASSTEVENS has been employed by Krispy Kreme since 1993. Mr. Casstevens has served as Senior Vice President, Finance, since April 1998 and as Secretary since November 1995. Prior to joining Krispy Kreme, Mr. Casstevens was employed by Price Waterhouse from 1987 to 1993. Mr. Casstevens is a certified public accountant. L. STEPHEN HENDRIX has been employed by Krispy Kreme since January 1978. From October 1993 to March 1995, Mr. Hendrix served as Senior Vice President, Development. Mr. Hendrix has served as Senior Vice President, Company Store and Associate Operations, since March 1995. MICHELLE P. PARMAN has been employed by Krispy Kreme since 1993. Ms. Parman has served as Senior Vice President, Corporate Development since April 1998. Previously, she served as Vice President, Strategic Planning. Before joining Krispy Kreme, Ms. Parman was employed by Price Waterhouse from 1984 to 1993. Ms. Parman is a certified public accountant. ROBERT H. VAUGHN, JR. has been employed by Krispy Kreme since March 1998. Mr. Vaughn has served as Senior Vice President, Area Developer Operations since December 1999. Previously, he served as Senior Vice President, Sales and Marketing. From January 1993 to March 1998, Mr. Vaughn was President of Gullwing Productions, a licensed apparel company. Mr. Vaughn also served in various capacities with Hanes Printables, a printed and embroidered sportswear manufacturer and a division of Sara Lee Knit Products and the Sara Lee Corporation, from September 1987 until November 1992. PHILIP R.S. WAUGH, JR. has been employed by Krispy Kreme since May 1993. He has served as Senior Vice President, Franchise Development since April 1998. Previously, he served as Vice President, Franchising. From October 1991 until he joined Krispy Kreme, Mr. Waugh served as Vice President, Corporate Banking with Southern National Bank of North Carolina. From 1982 until October 1991, he served in various capacities with Wachovia Bank, N.A. Mr. Waugh is a co-owner of Midwest Doughnuts, LLC, our Kansas City franchisee. FRANK E. GUTHRIE has been a director since February 1994. Mr. Guthrie has been President of Magic City Doughnuts Corp., our Orlando area franchisee, since 1998, and co-owns that company with another one of our directors, Mr. McCoy. He has also been President and owner of Classic City Doughnuts Corp., our Athens, Georgia franchisee, since 1992. Additionally, he has been employed by Augusta Doughnut Company, our Augusta, Georgia franchisee, in various capacities since 1961, and he is currently its President and majority owner. WILLIAM T. LYNCH, JR. has been a director since November 1998. He has served as President and Chief Executive Officer of Liam Holdings LLC, a marketing and capital management firm, since 51 55 April 1997. Mr. Lynch retired as President and Chief Executive Officer of Leo Burnett Co. in March 1997 after serving with that advertising agency for 31 years. JOSEPH A. MCALEER, JR. has been a director since May 1988. Mr. McAleer served as Chairman of the board of directors and Chief Executive Officer from September 1995 until his retirement from Krispy Kreme in January 1998. He also served as President from May 1988 until August 1992 and as Chief Operating Officer from May 1988 until August 1992. Mr. McAleer is a co-owner with Mr. Smith, another one of our directors, of Dallas Doughnuts, our Dallas/Fort Worth franchisee. Mr. McAleer is also manager and owner of Mackk LLC, our Mobile, Alabama franchisee. Mr. McAleer is the brother of John N. McAleer, Vice Chairman of our board of directors. ROBERT L. MCCOY has been a director since February 1994. Mr. McCoy has been President and majority owner of Gulf Florida Doughnut Corp., our Tampa, Florida franchisee, since November 1983, and he is Vice President and co-owner of Magic City Doughnuts with Mr. Guthrie. ROBERT J. SIMMONS has been a director since May 1989. Since 1970, he has also been the President and majority owner of Simac, Inc., our Akron, Ohio franchisee. STEVEN D. SMITH has been a director since April 1991. Since April 1997, Mr. Smith has been President, and a co-owner with Mr. Joseph A. McAleer, Jr., of Dallas Doughnuts. He has also been President and majority owner of Dales Doughnut Corp., our Tallahassee and Panama City, Florida franchisee, since 1985 and Dales of Dothan, Inc., our Dothan, Alabama franchisee, since 1991. He has also been the Chief Executive Officer and owner of Smiths Doughnuts Inc., our Tuscaloosa, Alabama franchisee, since 1994. ROBERT L. STRICKLAND has been a director since November 1998. Mr. Strickland retired as Chairman of the Board of Directors of Lowe's Companies, Inc., a home improvement retailer, in January 1998, after 41 years of service. He is still a director of Lowe's. Mr. Strickland is also a director of T. Rowe Price Associates, an investment management firm, and Hannaford Bros. Co., a supermarket chain. BOARD OF DIRECTORS CLASSIFICATION OF DIRECTORS The board of directors is divided into three classes under our articles of incorporation. Class I consists of three directors who will stand for election at the annual meeting of shareholders to be held in 2000. Class II consists of three directors who will stand for election at the annual meeting of shareholders to be held in 2001. Class III consists of three directors who will stand for election at the annual meeting of shareholders to be held in 2002. We intend to nominate two additional independent directors for election to the board shortly after this offering. After their initial term following this offering, directors in each class will serve for a term of three years. Our bylaws provide that directors can be removed only with cause by a two-thirds majority of the shareholders. Officers are chosen by and serve at the discretion of the board of directors. BOARD COMMITTEES The audit committee has the responsibility to review our audited consolidated financial statements and accounting practices and to consider and recommend the employment of, and approve the fee arrangements with, independent accountants for both audit functions and for advisory and other consulting services. Messrs. William T. Lynch, Jr., Steven D. Smith, Frank E. Guthrie and Robert J. Simmons comprise the members of the audit committee. The compensation committee reviews and approves the compensation and benefits for our executive officers and the employee benefit plans for all other employees. It makes recommendations to our board of directors regarding these matters. Messrs. Robert L. Strickland, Robert L. McCoy and Joseph A. McAleer, Jr. comprise the members of the compensation committee. 52 56 EXECUTIVE COMPENSATION The table below provides information concerning the total compensation received for services rendered to Krispy Kreme during its fiscal year ended January 30, 2000 by our chief executive officer and Krispy Kreme's four other highest paid executive officers, who are referred to as the named officers. "Other annual compensation" includes perquisites and other personal benefits paid to each of the named officers, such as automobile allowances, club dues and medical insurance premiums. Amounts under "LTIP Payouts" represent bonuses paid to cover loan repayments due to Krispy Kreme in connection with the recognition of income upon the conversion of the Long-Term Incentive Plan, or LTIP, by the named officer. See "-- Other compensation -- Conversion of the Long-Term Incentive Plan" for more information. Amounts under "All Other Compensation" represent the dollar value of bonuses credited to the named officers under our stock bonus plans. See "-- Other Compensation -- Stock Bonus Plan" and "-- Supplemental Retirement Plan." Fiscal 2000 Summary Compensation Table
--------------------------------------------------------------------------------- LONG-TERM COMPENSATION ANNUAL COMPENSATION ----------------------------- ---------------------------------- COMMON SHARES OTHER ANNUAL UNDERLYING LTIP ALL OTHER NAMED OFFICER SALARY BONUS COMPENSATION OPTIONS PAYOUTS COMPENSATION - ------------- -------- -------- ------------ ------------------ -------- ------------ Scott A. Livengood........ $332,446 $448,386 $66,751 580,000 $151,098 $ 46,331 Chairman of the Board, President and Chief Executive Officer J. Paul Breitbach......... 234,731 297,316 57,547 150,000 162,434 33,169 Executive Vice President, Finance, Administration and Support Operations John N. McAleer........... 199,845 253,129 52,903 150,000 80,636 28,240 Vice Chairman of the Board and Executive Vice President, Concept Development L. Stephen Hendrix........ 130,091 125,502 31,824 60,000 35,729 16,565 Senior Vice President, Company Store and Associate Operations Robert H. Vaughn, Jr...... 139,792 132,798 3,372 60,000 -- 16,425 Senior Vice President, Area Developer Operations
STOCK OPTIONS In fiscal 1999, we established the 1998 Stock Option Plan. Under the terms of the plan, 1,913,000 shares of our common stock are reserved for issuance to employees and directors. Grants may be made to participants in the form of either incentive stock options or nonqualified stock options. A board committee is granted discretion to administer the plan. Options granted to employees under the plan vest ratably over a three-year period commencing with the second anniversary of the grant date. Options granted to directors under the plan vest ratably over a three-year period commencing on the grant date of the options. In fiscal 1999, 1,558,000 options were granted to all employees as a group, and 273,000 options were granted to non-employee directors. All such grants were made under our 1998 stock option plan and are nonqualified stock options. The options are for a term of ten years and vest in one- 53 57 third increments over a three-year period that begins on the second anniversary after the date of grant. Under the terms of the plan, any forfeitures of options by participants for any reason will be granted to Mr. Livengood, up to a maximum of 140,000 shares. All shares of our common stock acquired pursuant to the exercise of stock options are subject to a stock purchase agreement and, at the board committee's discretion, a separate voting agreement, neither of which will be in effect following the completion of this offering. No options were granted to the named officers in fiscal 2000. The following table shows information concerning stock options held by each of the named officers at January 30, 2000. None of the named officers held exercisable options as of that date. The value of unexercised in-the-money options assumes the fair value at fiscal year end was $19.00 per share, which is the mid-point of the range shown on the cover page of this prospectus. Fiscal Year End Option Values
----------------------------------------------- VALUE OF UNEXERCISED COMMON SHARES IN-THE-MONEY UNDERLYING UNEXERCISED OPTIONS NAMED OFFICER OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END - ------------- -------------------------- ------------------ Scott A. Livengood................................... 580,000 $8,015,600 J. Paul Breitbach.................................... 150,000 2,073,000 John N. McAleer...................................... 150,000 2,073,000 L. Stephen Hendrix................................... 60,000 829,200 Robert H. Vaughn, Jr................................. 60,000 829,200
RETIREMENT INCOME PLAN FOR KEY EMPLOYEES Effective May 1, 1994, we established a noncontributory, nonqualified defined benefit pension plan known as the Retirement Income Plan for Key Employees for certain of our key employees. The benefits under the retirement plan are based on years of service after 1993 and average final compensation during the employee's career. The following table shows estimated annual benefits payable to participants in the retirement plan upon retirement at age 65 at the specified remuneration in the various years of service classifications: Retirement Plan Table
--------------------------------------- YEARS OF SERVICE --------------------------------------- FINAL AVERAGE COMPENSATION 15 20 25 30 - -------------------------- ------- ------- -------- -------- $100,000................................................ $15,000 $20,000 $ 25,000 $ 30,000 $200,000................................................ 30,000 40,000 50,000 60,000 $300,000................................................ 45,000 60,000 75,000 90,000 $400,000................................................ 60,000 80,000 100,000 120,000
Except for Mr. Vaughn, each of the named officers has five years of credited service. Final average compensation is based solely on the officer's salary. Benefits are computed on a straight-life annuity basis and are not subject to any deductions. OTHER COMPENSATION Conversion of the Long-Term Incentive Plan The Employees' Long-Term Incentive Plan, or the LTIP, enabled eligible employees to defer some or all of bonuses earned under our incentive compensation plans. The deferred amounts were converted to units of phantom stock based on a formula contained in the LTIP. The phantom stock 54 58 units granted under the LTIP were credited with dividends in a manner identical to our common stock. Pursuant to the terms of the LTIP, a participant's account was to be distributed to him in accordance with the deferral election made by the participant. In fiscal 1999, we determined that it was in Krispy Kreme's best interest to liquidate the LTIP. Accordingly, we undertook a conversion program whereby phantom stock units under the LTIP were converted into an equivalent number of actual shares of Krispy Kreme common stock. Participants who elected to participate in the conversion received a distribution of shares of our common stock. Non-participants received a cash payout. All shares so distributed are subject to a stock purchase agreement and a special voting agreement, neither of which will be in effect upon completion of this offering. Because the distribution of shares of our common stock pursuant to the conversion triggered recognition of income for participants, we established a loan program by which we made 10-year loans with fixed 6% rates of interest available to senior executive participants in an amount equal to 45% of the amount of income recognized as a result of the conversion. Pursuant to this program, we extended loans to the following officers and directors on August 31, 1998:
----------------------------------------- AMOUNT OUTSTANDING OFFICER OR DIRECTOR PRINCIPAL AMOUNT AS OF OCTOBER 31, 1999 - ------------------- ---------------- ---------------------- Scott A. Livengood....................................... $449,730 $415,610 J. Paul Breitbach........................................ 532,279 491,897 John N. McAleer.......................................... 261,406 241,574 L. Stephen Hendrix....................................... 124,663 115,205 Joseph A. McAleer, Jr.................................... 504,390 466,123
Some of our other officers and directors also received loans of less than $60,000. Although we are not legally obligated to do so, we have paid and intend to pay supplemental bonuses to the participants over the ten-year period of the loan in an amount necessary to enable the participant to make the loan payment due us after payment of federal and state taxes. The amounts shown in the "Fiscal 2000 Summary Compensation Table" under the "LTIP Payouts" column reflects the bonuses paid to the named officers in that year. Stock Bonus Plan Effective February 1, 1999, we established a stock bonus plan. The stock bonus plan provides that Krispy Kreme, in its discretion, may make annual contributions to the plan. Contributions will be made either in the form of Krispy Kreme stock or, if made in cash, invested primarily in Krispy Kreme stock. Company contributions are allocated to eligible employees based on a specific percentage of compensation. Supplemental Retirement Plan Effective February 1, 1999, we established a nonqualified supplemental retirement plan for certain management employees. This plan has two components. It provides for "make-whole" contributions to certain management employees whose benefits under the stock bonus plan are limited as a result of legal restrictions on the amount of compensation that can be taken into account under the stock bonus plan. Under this component of this plan, we intend to make a contribution consistent with the contribution made for participants in the stock bonus plan. Contributions will be made in the form of Krispy Kreme stock, or if made in cash, invested primarily in Krispy Kreme stock. In the future, the plan will also provide eligible participants with the opportunity to defer the same percentage of compensation that nonhighly compensated employees can defer under our 401(k) plan. 55 59 Subject to tax limits, we intend to fund the stock bonus plan and the stock bonus component of the supplemental retirement plan for fiscal 2000 by contributing 144,737 shares of stock contemporaneously with this offering. Amounts credited to the named officers for stock bonuses in fiscal 2000 are shown under the "All Other Compensation" column in the "Fiscal 2000 Summary Compensation Table." Compensation of directors We compensate each director who is not an employee with an annual fee of $18,800. Beginning in our fiscal year ending January 28, 2001, this fee will be paid quarterly. Non-employee directors also receive additional fees of $300 per quarter for miscellaneous expenses and approximately $200 monthly for insurance coverage for themselves and their spouses. In addition to these fees, we reimburse each director for travel and other related expenses incurred in attending meetings of the board of directors. In fiscal 1999, we granted each of our seven non-employee directors nonqualified stock options for 39,000 shares under the 1998 stock option plan. These options vest ratably over a three-year period commencing on the grant date and have an exercise price of $5.18 per share. Options for 91,000 shares are currently exercisable. Restricted stock plan In November 1993 and April 1994, the board of directors authorized the issuance of 252,900 and 50,000 shares of restricted stock, respectively, to some of our directors and officers. We made loans to each of the participants for the purchase of these restricted shares. The loans were repaid over a four to six year period and bore interest at 6% per annum. All of these loans have been repaid and all restrictions on the purchased shares have lapsed. The following named officers received loans to purchase restricted stock: Scott A. Livengood -- $155,311; J. Paul Breitbach -- $116,652; and John N. McAleer -- $52,844. Some of our other directors also received loans in amounts not exceeding $60,000. We paid the restricted stock plan participants a bonus each year equal to the installment due on the loan. EXECUTIVE CONTRACTS, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS Employment contracts Krispy Kreme has entered into employment agreements with the following named officers: Scott A. Livengood. Mr. Livengood's employment agreement expires on August 10, 2002. Commencing on August 10, 2000, the term of the agreement is automatically extended for successive one-year periods each year as of August 10, unless Krispy Kreme notifies him, on or before that date each year, that his term is not being extended. Mr. Livengood receives an annual salary of $332,446 and is eligible for annual increases and a performance-based bonus. Additionally, Mr. Livengood receives non-incentive compensation in the amount of $5,081 per month. He is entitled to participate in and receive other employee benefits which may include, but are not limited to, benefits under any life, health, accident, disability, medical, dental and hospitalization insurance plans, use of a company automobile or an automobile allowance, and other perquisites and benefits as are provided to senior managers. Mr. Livengood's employment agreement may be terminated by Krispy Kreme for good cause. If the agreement is terminated without good cause, Mr. Livengood is entitled to a severance payment consisting of: - An amount equal to his current annual base salary and non-incentive compensation through the expiration date of the agreement 56 60 - A lump sum payment, payable within 30 days of termination, equal to his current monthly base salary multiplied by the number of months between the month of discharge and the preceding August, inclusive - A lump sum payment, payable within 30 days of termination, equal to three times Mr. Livengood's bonus, calculated at 50% of his annualized base salary for the then current fiscal year, and discounted at the rate of 6% per annum Mr. Livengood is entitled to the same payments if he terminates his employment after a change in control of Krispy Kreme and his duties or responsibilities with Krispy Kreme are diminished, or he is required to relocate or Krispy Kreme fails to maintain his corporation or benefits levels. If Mr. Livengood's employment is terminated by reason of death, retirement or voluntary termination, Krispy Kreme will pay him or his estate his base salary, non-incentive compensation, bonuses and benefits through the expiration date of the agreement. In the event he dies, his estate will be paid a $5,000 benefit. In the event Mr. Livengood's employment is terminated by reason of disability, Krispy Kreme will pay his base salary, non-incentive compensation, bonuses and benefits for a period of six months following the date of disability. In addition, if Mr. Livengood is terminated for any reason other than by voluntary termination or upon a change in control of Krispy Kreme (whether or not he terminates employment), his outstanding stock options will fully vest. Krispy Kreme will also pay Mr. Livengood an additional amount equal to any excise tax he is required to pay due to any payments under his agreement constituting "excess parachute payments" under the Internal Revenue Code, as well as any additional income taxes or excise taxes imposed on such payments. In the event Mr. Livengood's employment is terminated for good cause or he terminates voluntarily, Mr. Livengood will be subject to a non-compete agreement for a period of two years following the termination. During this two year period, Mr. Livengood will be prohibited from engaging in the business of making and selling doughnuts and complementary products within certain defined geographical areas. This prohibition does not apply, however, to Mr. Livengood's development rights described in "Related Party Transactions." John N. McAleer. Mr. McAleer's employment agreement expires on August 10, 2002. Commencing on August 10, 2000, the term of this agreement is automatically extended for successive one-year periods each year as of August 10, unless Krispy Kreme notifies him, on or before that date each year, that his term is not being extended. Mr. McAleer receives an annual salary of $199,845 and is eligible for annual increases and for a performance-based bonus. Additionally, Mr. McAleer receives non-incentive compensation in the amount of $3,927 per month. Mr. McAleer is entitled to participate in and receive other employee benefits and perquisites similar to those provided to Mr. Livengood, and the severance provisions for Mr. McAleer are also similar to Mr. Livengood's. J. Paul Breitbach. Mr. Breitbach's employment agreement expires on August 10, 2001. Commencing on August 10, 2000, the term of this agreement is automatically extended for successive one-year periods each year as of August 10, unless Krispy Kreme notifies him, on or before that date each year, that his term is not being extended. Mr. Breitbach receives an annual salary of $234,732 and is eligible for annual increases and for a performance-based bonus. Additionally, Mr. Breitbach receives non-incentive compensation in the amount of $4,314 per month. Mr. Breitbach is entitled to participate in and receive other employee benefits and perquisites similar to those provided to Mr. Livengood, and the severance provisions for Mr. Breitbach are also similar to Mr. Livengood's. 57 61 Termination arrangements On August 10, 1999, our board of directors approved the transfer to Mr. Livengood of some membership benefits to the Educational Foundation of the University of North Carolina at Chapel Hill upon Mr. Livengood's termination of service. Change-in-control arrangements The option agreements under our stock option plan provide that all options become vested and exercisable upon a corporate reorganization, as defined in the stock option plan, provided that the executives Krispy Kreme employed on the date of that corporate reorganization remain employed by Krispy Kreme on the date of the corporate reorganization. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Robert L. Strickland, Robert L. McCoy and Joseph A. McAleer, Jr. comprised the members of the compensation committee during our fiscal year ended January 30, 2000. Mr. McAleer is a former executive officer of Krispy Kreme, and both Messrs. McAleer and McCoy conduct business with Krispy Kreme through franchises as described in "Related Party Transactions." 58 62 PRINCIPAL SHAREHOLDERS The following table presents information regarding the beneficial ownership of common stock as of October 28, 1999 by: (1) each person who beneficially owns more than 5% of our common stock; (2) each of our directors and named officers; and (3) all current executive officers and directors as a group. Beneficial ownership is determined under the rules of the Securities and Exchange Commission, or SEC. These rules deem common stock subject to options currently exercisable, or exercisable within 60 days, to be outstanding for purposes of computing the percentage ownership of the person holding the options or of a group of which the person is a member, but they do not deem such stock to be outstanding for purposes of computing the percentage ownership of any other person or group. To our knowledge, except under applicable community property laws or as otherwise indicated, the persons named in the table have sole voting and sole investment control with regard to all shares beneficially owned. The applicable percentage ownership for each shareholder before the offering is based on 9,340,220 shares of common stock outstanding as of October 28, 1999. The percentages for after the offering give effect to the issuance of 3,000,000 shares in this offering and the contribution of 144,737 shares to our new stock bonus plan contemporaneously with this offering.
---------------------------------------- PERCENT BENEFICIALLY OWNED ------------------- NUMBER OF SHARES BEFORE AFTER NAME BENEFICIALLY OWNED OFFERING OFFERING - ---- ------------------ -------- -------- Jeanne McAleer Sanderford (1)......................... 2,533,480 27.1% 20.3% Robert L. McCoy (2)(3)(4)............................. 705,380 7.5 5.6 Bonnie Silvey Vandegrift (4)(5)....................... 625,000 6.7 5.0 Carolyn McCoy (4)(6).................................. 550,000 5.9 4.4 Joseph A. McAleer, Jr. (2)............................ 455,720 4.9 3.6 John N. McAleer....................................... 346,520 3.7 2.8 J. Paul Breitbach (7)................................. 324,560 3.5 2.6 Scott A. Livengood.................................... 307,860 3.3 2.5 Steven D. Smith (2)(8)................................ 193,580 2.1 1.5 Frank E. Guthrie (2)(9)............................... 180,380 1.9 1.4 Robert J. Simmons (2)(10)............................. 133,000 1.4 1.1 L. Stephen Hendrix.................................... 73,460 * William T. Lynch (2)(11).............................. 33,000 * Robert L. Strickland (2).............................. 33,000 * Robert H. Vaughn, Jr.................................. 20,000 * All directors and executive officers as a group (16 persons)............................................ 2,905,500 30.8 23.1
- --------------- * Less than one percent. (1) Includes: (a) 2,344,060 shares owned by the estate of Joseph A. McAleer, of which Mrs. Sanderford is the executrix. Mrs. Sanderford's address is 6148 Lennox Place, Mobile, Alabama 36693; (b) 2,000 shares held by a trust for the benefit of Carter Reid Sanderford, of which Mrs. Sanderford is the trustee; and (c) 2,000 shares held by a trust for the benefit of Ryan Nicholas Sanderford, of which Mrs. Sanderford is the trustee. 59 63 (2) Includes 13,000 shares issuable upon the exercise of currently vested stock options awarded under our stock option plan. (3) Includes: (a) 15,000 shares owned beneficially by Patricia B. McCoy, Mr. McCoy's spouse; (b) 20,000 shares held by the Patricia B. McCoy Revocable Trust, a trust of which Patricia B. McCoy is the sole trustee; (c) 10,000 shares held by the Robert L. McCoy Revocable Trust, a trust of which Mr. McCoy is the sole trustee; (d) 9,200 shares held by the William Robert McCoy Trust established under the Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian; (e) 9,300 shares held by the Julie Ann McCoy Trust established under the Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian; (f) 9,000 shares held by the Robert Bailey McCoy Trust established under the Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian; (g) 9,000 shares held by the Sarah Elizabeth McCoy Trust established under the Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian; (h) 9,000 shares held by the Lisa Michelle McCoy Trust established under the Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian; and (i) 9,000 shares held by the Michael Phillip McCoy Trust established under the Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian. Mr. McCoy's address is 8425 North Florida Avenue, Tampa, Florida 33604. (4) Includes 550,000 shares held by the B.L. McCoy, Jr. Residual Trust, a trust of which Carolyn McCoy, Robert L. McCoy and Bonnie Silvey Vandegrift are co-trustees. (5) Mrs. Vandegrift's address is 5 Robin Circle, Brevard, North Carolina, 28712. (6) Mrs. McCoy's address is College Walk Apartment 224, Neely Road, Brevard, North Carolina, 28712. (7) Includes 67,800 shares held by the Breitbach Children's Trust, a trust of which Mr. Breitbach is the sole trustee. (8) Includes 28,320 shares owned beneficially by Connie Sue Smith, Mr. Smith's spouse. (9) Includes 132,000 shares owned by Mr. Guthrie indirectly through his ownership of 60% of the outstanding voting shares of Augusta Doughnut Company. (10) Includes 80,000 shares owned by Mr. Simmons indirectly through his ownership of 60% of the outstanding shares of Simac, Inc. (11) Includes 20,000 shares owned by Mr. Lynch indirectly through his ownership of 100% of the outstanding shares of Liam Holdings, LLC. 60 64 RELATED PARTY TRANSACTIONS ASSOCIATES' LICENSE AGREEMENTS WITH RELATED PARTIES We are parties to associates' license agreements with some of our directors. Our associates' license agreements permit the associate to sublicense the franchise to a company which is majority-owned and principally managed by the associate. Our director-associates have generally sublicensed in this manner. These agreements grant each associate a license to produce, market, package and sell Krispy Kreme doughnuts and other products in a specified territory. We have agreed to extend the license agreements of our existing shareholders, which include our director-associates, for a term of 20 years commencing upon the completion of this offering. Each associate must purchase mixes and equipment from us and, as a result, we have outstanding accounts receivable, from time to time, with each of our associates. Additionally, our associates pay us franchise royalties. The table below shows Support Operations sales to and royalties from our directors' affiliated franchise companies during the periods indicated.
---------------------------------------------------- YEAR ENDED ---------------------------------------------------- DIRECTOR AND FRANCHISE COMPANIES FEBRUARY 2, 1997 FEBRUARY 1, 1998 JANUARY 31, 1999 - -------------------------------- ---------------- ---------------- ---------------- In thousands Frank E. Guthrie: Augusta Doughnut Company................ $392 $639 $669 Classic City Doughnuts Corp............. 225 229 236 Joseph A. McAleer, Jr.: Mackk LLC............................... -- -- 1,878 Robert L. McCoy: Gulf Florida Doughnut Corp.............. 1,016 1,290 1,868 Robert J. Simmons: Simac, Inc.............................. 445 578 576 Steven D. Smith: Dales Doughnut Corp..................... 681 646 803 Dale's Doughnuts of Dothan, Inc......... 231 287 288 Smiths Doughnuts, Inc................... 329 429 435
Our agreement with Mr. Guthrie, which he has sublicensed to Magic City Doughnuts Corporation, obligates him to develop and operate a total of four stores in the Orlando, Florida area by December 31, 2001, one of which was open as of December 2, 1999. Mr. Guthrie co-owns Magic City Doughnuts with Mr. McCoy. Our agreement with Mr. Joseph A. McAleer, Jr., which he has sublicensed to Dallas Doughnuts, obligates him to develop and operate a total of eight stores in the Dallas/Fort Worth territory by December 31, 2003, one of which was open as of December 2, 1999. Mr. Joseph A. McAleer, Jr. co-owns Dallas Doughnuts with Mr. Smith. We are also parties to associates' license agreements with two brothers-in-law of Messrs. Joseph A. McAleer, Jr. and John N. McAleer, our Vice Chairman and Executive Vice President, Concept Development. Mr. William J. Dorgan operates stores in Biloxi and Gulfport, Mississippi through Dorgan's Doughnut Company, Inc. Total Support Operations sales to and royalties from Dorgan's Doughnuts were $211,000 in fiscal 1997, $315,000 in fiscal 1998 and $332,000 in fiscal 1999. Since September 1998, Pat Silvernail has operated two stores in Macon, Georgia through S&P of Macon, Inc. THE KINGSMILL PLAN In December 1994, we implemented a plan to provide franchise opportunities to corporate management, which we refer to as the Kingsmill Plan. Under the terms of the Kingsmill Plan, we 61 65 agreed to make franchise opportunities available to members of corporate management who met our ordinary franchisee qualifications and to provide financial assistance in the form of collateral repurchase agreements and company guaranties of bank loans. We established similar franchise opportunity plans for store managers and associate operators. We anticipate terminating the plan, except for existing participants with whom we have entered into or agreed to enter into a franchise agreement. The collateral repurchase agreements and guaranties we have made pursuant to the Kingsmill Plan are described below. DEVELOPMENT RIGHTS OF OFFICERS AND DIRECTORS We entered into a letter agreement with Mr. Scott A. Livengood, our Chairman, President and Chief Executive Officer, on April 12, 1994. We granted Mr. Livengood the option to develop stores in Alamance, Durham and Orange Counties, North Carolina, and the State of Colorado pursuant to the Kingsmill Plan. Mr. Livengood subsequently relinquished his development rights to the State of Colorado and obtained the rights to develop stores in Northern California, also pursuant to the Kingsmill Plan. Mr. Livengood anticipates releasing these rights in favor of Krispy Kreme. It is contemplated that Mr. Livengood will purchase a minority interest (not more than 7.5%) in a limited liability company to which Krispy Kreme will grant the area development rights for Northern California and a minority interest (not more than 7.5%) in future joint ventures between Krispy Kreme and other area developers. Mr. Livengood will not be active in the management of the ventures while employed by Krispy Kreme. Also, he will not receive any financial assistance from us under the Kingsmill Plan or any other arrangement. Additionally, the terms of the franchise agreements for these ventures will be consistent with other area developers. In August 1999, Mr. John N. McAleer, our Vice Chairman and Executive Vice President, Concept development, obtained area development rights for the metropolitan areas of Portland and Seattle pursuant to the Kingsmill Plan. Mr. McAleer anticipates releasing these rights in favor of Krispy Kreme. Upon approval by the board of directors, it is contemplated that Mr. McAleer will purchase a minority interest in a limited liability company to which Krispy Kreme will grant area development rights for the metropolitan areas of Portland, Seattle, Anchorage, Honolulu and Vancouver. Mr. McAleer will not be active in the management of the territory while employed by Krispy Kreme. Also, he will not receive any financial assistance from us under the Kingsmill Plan or any other arrangement. Additionally, the terms of the franchise agreement for this territory will be consistent with other area developers. Pursuant to the Kingsmill Plan, we are a party to an area development agreement with Midwest Doughnuts, LLC, dated May 29, 1996. Mr. Philip R.S. Waugh, Jr., our Senior Vice President, Franchise Development, owns 50% of the membership interests in Midwest Doughnuts. Under the terms of the agreement, the area developer is required to open a minimum of four stores in the Kansas City territory, three of which were open as of December 2, 1999. The requirement to open a fourth store has been suspended. Total Support Operations sales to and royalties from Midwest Doughnuts were $388,000 in fiscal 1997, $545,000 in 1998 and $1.4 million in fiscal 1999. We entered into a letter agreement with Mr. Joseph A. McAleer, Jr., a Krispy Kreme director, on February 15, 1994 granting him the option to acquire three stores located in Mobile, Alabama. Mr. McAleer purchased the stores on February 1, 1998 for a total purchase price of $1.6 million, subject to certain adjustments. The purchase price was determined on the basis of the amount paid for the stores in 1990, the face value of store receivables and the cost of the store's inventory, mutually determined by Mr. McAleer and Krispy Kreme. We also granted Mr. McAleer the right to develop up to ten stores in the New Orleans, Louisiana territory. 62 66 COLLATERAL REPURCHASE AGREEMENTS, FRANCHISEE GUARANTIES AND OTHER AGREEMENTS On December 21, 1998, we entered into collateral repurchase agreements in favor of Suntrust Bank, Central Florida, National association with respect to a loan incurred by Magic City Doughnut Corporation in the original principal amount of $435,000. Messrs. Frank E. Guthrie and Robert L. McCoy, two of our directors, co-own Magic City Doughnut Corporation. The loan is secured by the equipment used in the operation of a Krispy Kreme store located in Winter Park, Florida and a pledge of company stock owned by: (1) Mr. Guthrie; (2) a trust of which Mr. McCoy is the sole trustee; and (3) Mrs. Patricia B. McCoy, who is Mr. McCoy's spouse. In the event that the borrower defaults on the loan, we are obligated to repurchase the equipment at a purchase price equal to the lesser of $302,000 or the unpaid balance of the loan. We are also obligated to purchase the pledged shares from the bank at book value. On September 18, 1998, we entered into a guaranty agreement with Mr. Beattie F. Armstrong and Beattie F. Armstrong, Inc. for Mr. Pat Silvernail and his wife, Mrs. Shannon McAleer Silvernail, and S&P of Macon, Inc., our Macon, Georgia franchisee. Mrs. Silvernail is the sister of, and Mr. Silvernail is consequently a brother-in-law to, Mr. Joseph A. McAleer, Jr. and Mr. John N. McAleer. Under the terms of the agreement, we agreed to guarantee two loans in the combined original principal amount of $1.0 million obtained by the Silvernails and S&P of Macon to finance the purchase of a Krispy Kreme associates' license agreement and the two Macon stores. On March 31, 1998 and December 31, 1998, respectively, we entered into a collateral repurchase agreement and a guaranty agreement in favor of Bank of Blue Valley with respect to a loan in the amount of $765,000 incurred by Midwest Doughnuts under the terms of the Kingsmill Plan. Mr. Philip R.S. Waugh, Jr., who is our Senior Vice President, Franchise Development, is a 50% owner of Midwest Doughnuts. The loan is secured by the equipment used in the operation of a Krispy Kreme store located in Merriam, Kansas. In the event Midwest Doughnuts defaults on the loan, we are obligated to repurchase the equipment at a purchase price equal to the lesser of $335,000 or the unpaid portion of the loan used to fund the purchase of the pledged assets. In addition to our obligation under the collateral repurchase agreement, we are obligated under the guaranty agreement to pay the lender up to $205,000 in the event Midwest Doughnuts defaults on the loan. On January 30, 1998, we entered into a collateral repurchase agreement in favor of Branch Banking and Trust Company with respect to loans incurred by Mackk, LLC in the maximum aggregate principal amount of $1.8 million. Mr. Joseph A. McAleer, Jr. is the manager and owner of Mackk, LLC. The loans are secured in part by the equipment and other items of personal property used in the operation of three Krispy Kreme stores located in Mobile, Alabama. The loans are further secured by a pledge of shares of Krispy Kreme stock owned by Mr. McAleer. In the event that Mackk, LLC defaults on the loans, we are obligated to repurchase the equipment and personal property at a purchase price equal to the lesser of $325,000 or the unpaid portion of the loans used to fund the purchase of the pledged assets. We are also required to purchase the pledged shares from the bank at book value in the event of default. We have been released from our obligations under this collateral repurchase agreement. On January 2, 1998, we entered into a collateral repurchase agreement in favor of Branch Banking and Trust Company with respect to a loan incurred by the Brevard Tennis and Athletic Club, Incorporated and Mrs. Bonnie Silvey Vandegrift in the original principal amount of $326,000. Mrs. Vandegrift beneficially owns more than 5% of our outstanding stock and is the sister of Mr. Robert L. McCoy, one of our directors. The loan is secured by a pledge of Krispy Kreme stock personally owned by Mrs. Vandegrift. In the event that the borrower defaults on the loan, we are obligated to purchase the pledged shares from the bank at book value. 63 67 On October 15, 1997, we entered into a collateral repurchase agreement and a guaranty agreement in favor of Bank of Blue Valley with respect to a loan in the amount of $765,000 incurred by Midwest Doughnuts under the terms of the Kingsmill Plan. The loan is secured by the equipment used in the operation of a Krispy Kreme store located in Overland Park, Kansas. In the event Midwest Doughnuts defaults on the loan, we are obligated to repurchase the equipment at a purchase price equal to the lesser of $205,000 or the unpaid portion of the loan used to fund the purchase of the pledged assets. In addition to our obligation under the collateral repurchase agreement, we are obligated under the guaranty agreement to pay the lender up to $300,000 in the event Midwest Doughnuts defaults on the loan. On December 1, 1997, we entered into a commitment letter among Krispy Kreme, Branch Banking and Trust Company, Mr. Waugh and the other owners of Midwest Doughnuts pursuant to the Kingsmill Plan. Under the terms of the commitment letter, we agreed to guarantee loans obtained by Mr. Waugh and the other members of Midwest Doughnuts to finance the development of two Krispy Kreme stores in the Kansas City territory. Our maximum liability under the two guaranties was limited to $150,000. We have been released from these guarantees. On October 22, 1996, we entered into a collateral repurchase agreement in favor of Branch Banking and Trust Company with respect to a loan incurred by Gulf Florida Doughnut Corp. in the original principal amount of $180,000. Mr. McCoy, one of our directors, is the President and majority owner of Gulf Florida Doughnut Corp. The loan is secured by a pledge of Mr. McCoy's Krispy Kreme shares. In the event that the borrower defaults on the loan, we are obligated to purchase the pledged shares from the bank at book value. On May 29, 1996, we entered into a collateral repurchase agreement and a guaranty agreement in favor of The First National Bank of Olathe with respect to a loan in the amount of $905,000 incurred by Mr. Waugh and the other members of Midwest Doughnuts under the terms of the Kingsmill Plan. The loan is secured by the equipment used in the operation of a Krispy Kreme store located in Independence, Missouri. In the event Midwest Doughnuts defaults on the loan, we are obligated to repurchase the equipment at a purchase price equal to the lesser of $300,000 or the unpaid portion of the loan used to fund the purchase of the pledged assets. In addition to our obligation under the collateral repurchase agreement, we are obligated under the guaranty agreement to pay the lender up to $300,000 in the event Midwest Doughnuts defaults on the loan. On May 16, 1996, we entered into a guaranty agreement with Branch Banking and Trust Company for Mr. Waugh and the other members of Midwest Doughnuts pursuant to the Kingsmill Plan. Under the terms of the agreement, we agreed to guarantee a loan in the original principal amount of $200,000 obtained by Mr. Waugh and the other members of Midwest Doughnuts to finance expansion in the Kansas City market. Our maximum liability under the guaranty was limited to $175,000. We have been released from the guaranty. On March 1, 1996, we entered into a collateral repurchase agreement in favor of Wachovia Bank of North Carolina, N.A. with respect to two separate loans incurred by Mr. Steven D. Smith, one of our directors, in the original principal amounts of $310,000 and $900,000. The loans were secured by store equipment and other personal property and a pledge of Mr. Smith's Krispy Kreme shares. In the event of default, we were obligated to purchase the pledged shares from the bank at book value and to repurchase the equipment at a purchase price equal to the greater of its amortized cost or 20% of its original cost. Those loans have been fully repaid. On July 7, 1995, we entered into a collateral repurchase agreement in favor of First National Bank of Ohio with respect to a loan incurred by Simac, Inc. in the original principal amount of $340,000. Mr. Robert J. Simmons, a Krispy Kreme director, is the President and majority owner of Simac, Inc., our Akron, Ohio franchisee. The loan is secured by the equipment and personal property assets 64 68 used in the operation of a Krispy Kreme store located in Middleburg Heights, Ohio. In the event that Simac, Inc. defaults on the loan, we are obligated to repurchase the bank's collateral at a purchase price equal to the lesser of the unpaid balance of the loan or the amortized cost of the pledged assets. On September 29, 1996, we leased the Middleburg Heights, Ohio store for a term of five years from Mr. Simmons and certain related parties. Under the terms of the lease we are required to pay annual rent in the amount of $72,000 and have the option to purchase the store for a total purchase price equal to $1.0 million. On February 25, 1994, we entered into an equipment repurchase and amendment to associates' license agreement with Mr. William J. Dorgan, a brother-in-law to Messrs. Joseph A. McAleer, Jr. and John N. McAleer. This agreement was in connection with financing in the aggregate amount of $1.2 million obtained by Mr. Dorgan and his wife, Mrs. Patricia M. Dorgan, from Branch Banking and Trust Company, relating to Mr. Dorgan's Biloxi and Gulfport, Mississippi franchises. Upon termination of Mr. Dorgan's associates' license agreement for any reason, we are obligated to repurchase some equipment used in the operation of Mr. Dorgan's stores at a purchase price of $350,000. We also executed a collateral repurchase agreement in favor of Branch Banking and Trust Company with respect to Krispy Kreme stock pledged by Mrs. Dorgan, who is a sister to Messrs. Joseph A. McAleer, Jr. and John N. McAleer, as collateral for the loan. Under the terms of the collateral repurchase agreement, in the event of default on the loan, we are required to repurchase the pledged common stock at book value and/or the equipment under the terms of the equipment repurchase agreement. On February 1, 1993, we entered into an equipment repurchase agreement and amendment to associate's license agreement with Mr. Smith, one of our directors. Upon termination of Mr. Smith's associates' license agreement for any reason, we are obligated to repurchase some equipment used in the operation of the franchise store in Dothan, Alabama at a purchase price equal to the greater of its amortized cost or 20% of its original cost of $335,000. Mr. Smith operates his Dothan franchise through Dale's Doughnuts of Dothan, Inc. We have been released from our obligations under this repurchase agreement. On September 22, 1992, we entered into an equipment repurchase and amendment to associates' license agreement with Mr. Guthrie, one of our directors. Upon the termination of Mr. Guthrie's associates' license agreement for any reason, we are obligated to repurchase some equipment used in the operation of the franchise store in Athens, Georgia at a purchase price equal to the greater of its amortized cost or 20% of its original cost of $348,000. Mr. Guthrie operates his Athens franchise through Classic City Doughnuts. LOAN AGREEMENTS AND OTHER TRANSACTIONS We have entered into loan agreements with some of our directors and officers as described below. On March 13, 1997, we made two loans to Midwest Doughnuts, LLC in the principal amounts of $66,000 and $34,000, bearing interest at 9.25% and the prime rate plus 1%, respectively. Mr. Waugh, our Senior Vice President, Franchise Development, is a 50% owner of Midwest Doughnuts. The loans, which have been fully repaid, were secured by the equipment and property used in connection with a Krispy Kreme store located in Independence, Missouri. On November 17, 1995, we made a loan to Mr. Livengood, our Chairman, President and Chief Executive Officer, in the principal amount of $333,000. The loan, which has been fully repaid, provided bridge financing in the purchase of a personal residence. The loan was secured by a deed of trust and bore interest at the rate applicable to our revolving line of credit. On November 17, 1995, we made a loan to Mr. John N. McAleer, our Vice Chairman and Executive Vice President, Concept Development, in the principal amount of $80,000. The loan, which has 65 69 been fully repaid, provided bridge financing in the purchase of a personal residence. The loan was secured by a deed of trust and bore interest at the rate applicable to our revolving line of credit. We have waived the payment of royalties by Mr. Guthrie in connection with his Athens, Georgia store, operated through Classic City Doughnuts, during the past several years due to operational difficulties the store has encountered. The cumulative amount of these royalties during the last three fiscal years did not exceed $60,000. In connection with the holding company formation occurring in conjunction with this offering, each existing shareholder of our operating subsidiary, including our directors, officers and their affiliates, will receive 20 shares of common stock in our holding company, plus $15.00 in cash, in exchange for each share of operating subsidiary common stock they hold. We have extended loans to some of our officers and directors to cover tax payments in connection with the conversion of our LTIP and to purchase shares of restricted stock, as described in "Management -- Executive Compensation -- Other compensation." POLICY ON RELATED PARTY TRANSACTIONS On November 10, 1999, our board of directors adopted a resolution whereby all future transactions with related parties, including any loans from us to our officers, directors, principal shareholders or affiliates, must be approved by a majority of the disinterested members of the board of directors and must be on terms no less favorable to us than could be obtained from unaffiliated third parties. The audit committee of the board of directors will be responsible for reviewing all related party transactions on a continuing basis and potential conflict of interest situations where appropriate. 66 70 DESCRIPTION OF CAPITAL STOCK Our articles of incorporation authorize the issuance of up to 100,000,000 shares of common stock and 10,000,000 shares of preferred stock, the rights and preferences of which may be established from time to time by our board of directors. Upon completion of this offering, 12,484,957 shares of common stock and no shares of preferred stock will be outstanding. As of October 28, 1999, we had approximately 114 shareholders. COMMON STOCK Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders and do not have cumulative voting rights. Thus, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive ratably any dividends that may be declared by our board of directors out of funds legally available for dividends, subject to any preferential dividend rights of outstanding preferred stock. If we liquidate, dissolve or wind up, the holders of common stock are entitled to receive ratably all of our assets available after payment of all debts and other liabilities, subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights or any rights to share in any sinking fund. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. There has been no established public trading market for our common stock before this offering. PREFERRED STOCK Our articles of incorporation authorize the issuance of up to 10,000,000 shares of preferred stock from time to time in one or more series and with terms of each series stated in our board's resolutions providing for the designation and issue of that series. Our articles also authorize the board of directors to determine the dividend, voting, conversion, redemption and liquidation preferences, rights, privileges and limitations pertaining to each series of preferred stock that we issue. Without seeking any shareholder approval, our board of directors may issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock and could have the effect of delaying, deferring or preventing a change in control. Other than the issuance of the series of preferred stock previously authorized by the board of directors in connection with the shareholder rights plan described below, we have no present plans to issue any shares of preferred stock. ANTI-TAKEOVER PROVISIONS OF KRISPY KREME'S ARTICLES OF INCORPORATION, BYLAWS AND SHAREHOLDER RIGHTS PLAN The rights of our shareholders are governed by provisions in our articles of incorporation, bylaws and shareholder rights plan that are intended to affect any attempted change in control. Our articles of incorporation opt us out of some provisions of North Carolina law that would otherwise affect attempted changes in control of Krispy Kreme. CLASSIFICATION OF DIRECTORS Our bylaws provide that our board of directors consists of not more than 15 nor less than nine members. The board of directors has the power to set the authorized number of directors by majority vote of the whole board within those limits. The board currently consists of nine directors, two of whom are employed by Krispy Kreme and five of whom are Krispy Kreme franchisees. Our bylaws also divide the board into three classes serving staggered three-year terms. The 67 71 classification of directors could prevent a shareholder, or group of shareholders, having majority voting power, from obtaining control of our board until the second annual shareholders' meeting following the date that the shareholder, or group of shareholders, obtains majority voting power. Thus, this provision may discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of us. ADVANCE NOTICE PROVISIONS Our bylaws provide that shareholders must provide timely notice in writing to bring business before an annual meeting of shareholders or to nominate candidates for election as directors at an annual meeting of shareholders. Notice for an annual meeting is timely if our Secretary receives the written notice not less than 40 days prior to the scheduled annual meeting. If less than 50 days notice of the meeting is given or made by us to the shareholders, a shareholder's notice will be timely if received by our Secretary on the tenth day following the date such notice was given or made. The bylaws also specify the form and content of a shareholder's notice. These provisions may prevent shareholders from bringing matters before an annual meeting of shareholders or from making nominations for directors at an annual meeting of shareholders. SHAREHOLDER RIGHTS PLAN We intend to implement a shareholder rights plan prior to completing this offering. To do so, our board of directors will declare a dividend of one preferred share purchase right for each share of Krispy Kreme common stock. Each share purchase right entitles the registered holder to purchase from us one one-hundredth (1/100) of a share of Krispy Kreme Series A Participating Cumulative Preferred Stock, $1.00 par value per share, at a price of $ per one one-hundredth of a Series A preferred share. The exercise price and the number of Series A preferred shares issuable upon exercise are subject to adjustments from time to time to prevent dilution. The share purchase rights are not exercisable until the earlier to occur of (1) 10 days following a public announcement that a person or group of affiliated or associated persons -- referred to as an acquiring person -- have acquired beneficial ownership of 15% or more of our 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 our outstanding shares of common stock. If we are acquired in a merger or other business combination, or if 50% or more of our consolidated assets or earning power is sold after a person or group has become an acquiring person, proper provision will be made so that each holder of a share purchase right -- other than share purchase rights beneficially owned by the acquiring person, which will thereafter be void -- will have the right to receive, upon exercise of the share purchase right at the then current exercise price, the number of shares of common stock of the acquiring company which at the time of the transaction have a market value of two times the share purchase right exercise price. If any person or group becomes an acquiring person, proper provision shall be made so that each holder of a share purchase right -- other than share purchase rights beneficially owned by the acquiring person, which will thereafter be void -- will have the right to receive upon exercise, and without paying the exercise price, the number of shares of Krispy Kreme common stock with a market value equal to the share purchase right exercise price. Series A preferred shares purchasable upon exercise of the share purchase rights will not be redeemable. Each Series A preferred share will be entitled to a minimum preferential dividend payment of $1.00 per share and will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock. In the event we liquidate, the holders of the Series A 68 72 preferred shares will be entitled to a minimum preferential liquidation payment of $1.00 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 , unless that expiration date is extended or unless the share purchase rights are redeemed or exchanged by Krispy Kreme. At any time before an acquiring person acquires beneficial ownership of 15% or more of our outstanding common stock, our board of directors may redeem the share purchase rights in whole, but not in part, at a price of $.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. A more detailed description and terms of the share purchase rights are set forth in a rights agreement between Krispy Kreme and , as rights agent. This rights agreement could have the effect of discouraging tender offers or other transactions that might otherwise result in Krispy Kreme shareholders receiving a premium over the market price for their common stock. DIRECTOR REMOVAL AND VACANCIES A director may be removed only with cause by the vote of the holders of a two-thirds majority of the shares entitled to vote for the election of directors. Our bylaws generally provide that any board vacancy may be filled by a majority of the remaining directors, even if less than a quorum, which is normally a majority of the authorized number of directors. A vacancy resulting from an increase in the authorized number of directors may only be filled by the shareholders at an annual or special meeting. ABILITY TO CONSIDER OTHER CONSTITUENCIES Our articles of incorporation permit our board of directors, in determining what is believed to be in the best interest of Krispy Kreme, to consider the interests of our employees, customers, suppliers and creditors, the communities in which our offices or other facilities are located and all other factors our directors may consider pertinent, in addition to considering the effects of any actions on Krispy Kreme and our shareholders. Pursuant to this provision, our board of directors may consider many judgmental or subjective factors affecting a proposal, including certain nonfinancial matters. On the basis of these considerations, our board may oppose a business combination or other transaction which, viewed exclusively from a financial perspective, might be attractive to some, or even a majority, of our shareholders. INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS Our bylaws provide for indemnification of directors to the fullest extent permitted by North Carolina law. The articles of incorporation, to the extent permitted by North Carolina law, eliminate or limit the personal liability of directors to Krispy Kreme and its shareholders for monetary damages for breach of the duty of care. Such indemnification may be available for liabilities arising in connection with this offering. To the extent that limitation of liability or indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling Krispy Kreme under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. Our bylaws also allow us to indemnify our officers, 69 73 employees, agents and other persons to the fullest extent permitted by North Carolina law. Our bylaws obligate us, under certain circumstances, to advance expenses to our directors, officers, employees and agents in defending an action, suit or proceeding for which indemnification may be sought. We can also indemnify someone serving at our request as a director, officer, trustee, partner, employee or agent of one of our subsidiaries or of any other organization against these liabilities. Our bylaws also provide that we have the power to purchase and maintain insurance on behalf of any person who is or was one of our directors, officers, employees or agents against any liability asserted against that person or incurred by that person in these capacities, whether or not we would have the power to indemnify that person against these liabilities under North Carolina law. We maintain insurance on behalf of all of our directors and executive officers. TRANSFER AGENT AND REGISTRAR Branch Banking and Trust Company will act as the transfer agent and registrar for our common stock. 70 74 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering there has been no public market for our common stock, and we cannot predict the effect, if any, that sales of our common stock or the availability of common stock for sale will have on its market price. Nevertheless, sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could negatively affect the market price of our common stock and impair our ability to raise capital through the sale of our equity securities in the future. Upon completion of this offering, we will have approximately 12.5 million shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options under the plan. Of these shares, the 3 million shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, unless held by affiliates of our company, as that term is defined in Rule 144 under the Securities Act. For purposes of Rule 144, an affiliate is a person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, Krispy Kreme. Any shares held by one of our affiliates will be subject to the resale limitations of restricted stock as defined in Rule 144 under the Securities Act. All of our officers, directors and shareholders will agree not to sell any shares of common stock for 180 days after the date of this prospectus without the prior written consent of J.P. Morgan Securities Inc., subject to some exceptions. Beginning one year after this offering, 9.3 million shares will become eligible for sale in reliance upon Rule 144 under the Securities Act. It is possible that these shares may be sold sooner if the sale is registered under the Securities Act. We may, but are not obligated to, undertake such a registration to permit our shareholders to sell their shares in the public market or in private transactions after the expiration of the contractual restrictions described above. In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of our common stock for at least one year is entitled to sell, within any three-month period, a number of shares that is not more than the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately 125,000 shares immediately after this offering, or - the average weekly trading volume of the common stock during the four calendar weeks before a notice of the sale is filed. Sales under Rule 144 must also comply with manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days before a sale, and who has beneficially owned the restricted shares for at least two years, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Subject to limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon regarding the resale of securities originally purchased from us by our employees, directors, officers, consultants or advisors before the date we become subject to the reporting requirements of the Exchange Act, under written compensatory benefit plans or written contracts relating to compensation of those persons. In addition, the SEC has indicated that Rule 701 will apply to the typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of these options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the 180-day contractual 71 75 restrictions described above, beginning 90 days after the date of this prospectus, may be sold (1) by persons other than affiliates, subject only to the manner of sale provisions of Rule 144, and (2) by affiliates under Rule 144 without compliance with its one-year holding period requirement. Based on stock option grants as of the date of this prospectus, options for shares will be exercisable upon the expiration of the 180-day restricted period. We have agreed not to offer, sell or dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock or any rights to acquire common stock for a period of 180 days after the date of this prospectus without the prior written consent of J.P. Morgan Securities Inc. with a limited number of exceptions. We intend to file one or more registration statements under the Securities Act to register all shares of common stock issued, issuable or reserved for issuance under our stock option plan. These registration statements are expected to be filed as soon as practicable after the date of this prospectus and will automatically become effective upon filing. Following this filing, shares registered under these registration statements will, subject to the 180-day lock-up agreements described above and Rule 144 volume limitations applicable to affiliates, be available for sale in the open market. 72 76 UNDERWRITING Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Dain Rauscher Incorporated and BB&T Capital Markets, a division of Scott & Stringfellow, Inc. have severally agreed to purchase from Krispy Kreme the following respective number of shares of common stock at a public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus:
---------------- NUMBER OF SHARES UNDERWRITERS ---------------- Deutsche Bank Securities Inc................................ J.P. Morgan Securities Inc.................................. Dain Rauscher Incorporated.................................. BB&T Capital Markets/Scott & Stringfellow, Inc.............. --------- Total............................................. 3,000,000 =========
The underwriting agreement provides that the obligations of the several underwriters to purchase the shares of common stock offered hereby are subject to certain conditions precedent and that the underwriters will purchase all shares of the common stock offered hereby, other than those covered by the over-allotment option described below, if any of these shares are purchased. The underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of $ per share under the public offering price. The underwriters may allow, and these dealers may re-allow, a concession of not more than $ per share to other dealers. After the initial public offering, representatives of the underwriters may change the offering price and other selling terms. We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to 450,000 additional shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock offered hereby. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of additional shares of common stock as the number of shares of common stock to be purchased by it in the above table bears to the total number of shares of common stock offered hereby. We will be obligated, pursuant to the option, to sell these additional shares of common stock to the underwriters to the extent the option is exercised. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the 3,000,000 shares are being offered. The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is % of the initial public offering price. We have agreed to pay the underwriters the following fees, assuming either no exercise or full exercise by the underwriters of the underwriters' over-allotment option:
TOTAL FEES ------------------------------------------------------ WITHOUT EXERCISE OF WITH FULL EXERCISE FEE PER OVER-ALLOTMENT OF OVER-ALLOTMENT SHARE OPTION OPTION ----------- ------------------- ------------------ Fees paid by Krispy Kreme..................... $ $ $
73 77 In addition, we estimate that our share of the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $ . We have agreed to indemnify the underwriters against some specified types of liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments the underwriters may be required to make in respect of any of these liabilities. Each of our officers and directors and our shareholders has agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any portion of our common stock held by these persons prior to this offering or common stock issuable upon exercise of options held by these persons for a period of 180 days after the effective date of the registration statement of which this prospectus is a part without the prior written consent of J.P. Morgan Securities Inc., subject to limited exceptions. This consent may be given at any time without public notice. The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. In order to facilitate the offering of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of our common stock. Specifically, the underwriters may over-allot shares of our common stock in connection with this offering, thus creating a short position in our common stock for their own account. A short position results when an underwriter sells more shares of common stock than that underwriter is committed to purchase. Additionally, to cover these over-allotments or to stabilize the market price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. Finally, the representatives, on behalf of the underwriters, may also reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. These transactions may be effected on the Nasdaq National Market or otherwise. The underwriters are not required to engage in these activities and, if commenced, may end any of these activities at any time. At our request, the underwriters have reserved shares of common stock for sale to our officers, directors and management, Krispy Kreme franchisees and some of their management, current shareholders, persons having business relationships with us and friends who have expressed an interest in participating in this offering, through a directed share program. We expect these persons to purchase no more than 15% of the common stock offered in this offering. The underwriters intend to seek lock-up agreements from select participants in the directed share program. The number of shares available for sale to the general public will be reduced to the extent these persons purchase reserved shares. We have applied to have the common stock quoted on the Nasdaq National Market under the symbol KREM. It is expected that delivery of the shares will be made to investors on or about , 2000. As described under "Use of Proceeds" in this prospectus, we intend to use a portion of the proceeds of this offering to repay borrowings under our existing loan agreement with our bank, Branch Banking and Trust Company. We estimate that this repayment will exceed 10% of the net proceeds we receive from this offering. BB&T Capital Markets, a division of Scott & Stringfellow, Inc., one of the representatives, is an affiliate of Branch Banking and Trust Company. In view of this relationship, this offering is being conducted in accordance with Conduct Rules 2710(c)(8) and 2720(c)(3) of the National Association of Securities Dealers, Inc., which provide that the offering 74 78 price to the public may not be higher than that recommended by a qualified independent underwriter who has participated in the preparation of the registration statement and prospectus and has exercised the usual standards of due diligence with respect thereto. J.P. Morgan Securities Inc. has agreed to serve as the qualified independent underwriter, and the offering price to the public will not be higher than the price recommended by J.P. Morgan Securities Inc. From time to time in the ordinary course of their respective businesses, some of the underwriters and their affiliates have engaged in and may in the future engage in commercial banking and/or investment banking transactions with Krispy Kreme and its affiliates. PRICING OF THIS OFFERING Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock has been determined by negotiation among us and the representatives of the underwriters. Among the primary factors considered in determining the public offering price were: - Prevailing market conditions - Our results of operations in recent periods - The present stage of our development - The market capitalizations and stages of development of other companies that we and the representatives of the underwriters believe to be comparable to our business - Estimates of our business potential LEGAL MATTERS Certain legal matters with respect to the validity of common stock offered hereby are being passed upon for us by Kilpatrick Stockton LLP, Atlanta, Georgia and Winston-Salem, North Carolina. Cahill Gordon & Reindel, New York, New York, is acting as counsel to the underwriters in connection with certain legal matters relating to the common stock offered hereby. EXPERTS The financial statements of Krispy Kreme Doughnut Corporation as of February 1, 1998 and January 31, 1999 and for each of the three years in the period ended January 31, 1999 and the balance sheet of Krispy Kreme Doughnuts, Inc. as of December 3, 1999 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION This prospectus is part of a registration statement on Form S-1 that Krispy Kreme has filed with the SEC covering the shares of common stock that Krispy Kreme is offering. This prospectus does not contain all of the information presented in the registration statement, and you should refer to that registration statement with its exhibits for further information. Statements in this prospectus describing or summarizing any contract or other document are not complete, and you should review the copies of those documents filed as exhibits to the registration statement for more detail. You may read and copy the registration statement at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For information on the operation of the Public Reference 75 79 Room, call the SEC at 1-800-SEC-0330. You can also inspect our registration statement on the Internet at the SEC's web site, http://www.sec.gov. After this offering, we will be required to file annual, quarterly, and current reports, proxy and information statements and other information with the SEC. You can review this information at the SEC's Public Reference Room or on the SEC's web site, as described above. 76 80 KRISPY KREME DOUGHNUT CORPORATION INDEX TO THE FINANCIAL STATEMENTS
PAGE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ---- Unaudited Consolidated Balance Sheets....................... F-2 Unaudited Consolidated Statements of Operations............. F-3 Unaudited Consolidated Statements of Cash Flows............. F-4 Notes to Unaudited Consolidated Financial Statements........ F-5 AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants........................... F-9 Consolidated Balance Sheets................................. F-10 Consolidated Statements of Operations....................... F-11 Consolidated Statements of Shareholders' Equity............. F-12 Consolidated Statements of Cash Flows....................... F-13 Notes to Audited Consolidated Financial Statements.......... F-14
KRISPY KREME DOUGHNUTS, INC. INDEX TO THE FINANCIAL STATEMENT
PAGE AUDITED BALANCE SHEET ---- Report of Independent Accountants........................... F-27 Balance Sheet............................................... F-28 Notes to Balance Sheet...................................... F-28
F-1 81 KRISPY KREME DOUGHNUT CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEETS
------------------------------------------- PRO FORMA JANUARY 31, OCTOBER 31, OCTOBER 31, 1999 1999 1999 (NOTE 7) ----------- ------------ -------------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................. $ 4,312,518 $ 3,944,201 $ 3,944,201 Accounts receivable, less allowance for doubtful accounts of $975,000 (January 31, 1999) and $1,602,000 (October 31, 1999)....................... 13,775,436 17,944,741 17,944,741 Accounts receivable, affiliates....................... 1,297,372 1,698,979 1,698,979 Other receivables..................................... 535,309 1,723,467 1,723,467 Inventories........................................... 9,754,194 9,884,675 9,884,675 Prepaid expenses...................................... 1,528,617 1,317,446 1,317,446 Deferred income taxes................................. 2,120,288 4,074,804 4,074,804 Assets held for sale.................................. 325,000 400,000 400,000 ----------- ------------ ------------ Total current assets........................ 33,648,734 40,988,313 40,988,313 Property and equipment, net........................... 53,575,399 58,192,290 58,192,290 Deferred income taxes................................. 3,036,134 2,633,468 2,633,468 Other assets.......................................... 2,920,746 2,876,991 2,876,991 ----------- ------------ ------------ Total assets................................ $93,181,013 $104,691,062 $104,691,062 =========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable...................................... $11,404,763 $ 13,401,989 $ 13,401,989 Dividends payable..................................... 1,517,786 -- -- Capital distribution to shareholders payable.......... -- -- 7,005,165 Accrued salaries and wages............................ 2,445,863 2,645,649 2,645,649 Accrued restructuring expenses........................ 1,690,772 1,007,878 1,007,878 Accrued expenses...................................... 4,648,142 7,068,862 7,068,862 Current maturities of long-term debt.................. 2,400,000 2,400,000 2,400,000 Income taxes payable.................................. 1,154,637 2,780,890 2,780,890 ----------- ------------ ------------ Total current liabilities................... 25,261,963 29,305,268 36,310,433 ----------- ------------ ------------ Compensation deferred (unpaid)........................ 792,204 789,526 789,526 Long-term debt........................................ 18,620,409 20,495,421 20,495,421 Accrued restructuring expenses........................ 4,742,270 5,118,209 5,118,209 Other long-term obligations........................... 1,517,176 1,458,933 1,458,933 ----------- ------------ ------------ Total long-term liabilities................. 25,672,059 27,862,089 27,862,089 SHAREHOLDERS' EQUITY -- SUBJECT TO REDEMPTION: Common stock, $10 par value, 1,000,000 shares authorized; issued and outstanding -- 467,011 (January 31, 1999 and October 31, 1999)............. 4,670,110 4,670,110 4,670,110 Paid-in capital....................................... 10,804,563 10,804,563 10,804,563 Notes receivable, employees........................... (2,098,559) (2,546,730) (2,546,730) Retained earnings..................................... 28,870,877 34,595,762 27,590,597 ----------- ------------ ------------ Total shareholders' equity.................. 42,246,991 47,523,705 40,518,540 ----------- ------------ ------------ Total liabilities and shareholders' equity.................................... $93,181,013 $104,691,062 $104,691,062 =========== ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. F-2 82 KRISPY KREME DOUGHNUT CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------- NINE MONTHS ENDED --------------------------- NOVEMBER 1, OCTOBER 31, 1998 1999 ------------ ------------ Total revenues.............................................. $133,190,030 $161,571,316 Operating expenses.......................................... 116,018,700 137,821,692 General and administrative expenses......................... 7,885,480 10,170,699 Depreciation and amortization expenses...................... 3,336,183 3,497,625 ------------ ------------ Income from operations...................................... 5,949,667 10,081,300 Interest income............................................. 113,761 263,058 Interest expense............................................ 1,162,574 1,110,472 ------------ ------------ Income before income taxes.................................. 4,900,854 9,233,886 Provision for income taxes.................................. 2,015,000 3,509,000 ------------ ------------ Net income.................................................. $ 2,885,854 $ 5,724,886 ============ ============ Basic earnings per share.................................... $ 7.31 $ 12.26 ============ ============ Diluted earnings per share.................................. $ 7.30 $ 12.11 ============ ============ Pro forma (Note 2): Basic earnings per share.................................. $ .37 $ .61 ============ ============ Diluted earnings per share................................ $ .36 $ .61 ============ ============ Supplemental (Note 2): Basic earnings per share.................................. $ .58 ============ Diluted earnings per share................................ $ .57 ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. F-3 83 - -------------------------------------------------------------------------------- KRISPY KREME DOUGHNUT CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------- NINE MONTHS ENDED -------------------------- NOVEMBER 1, OCTOBER 31, 1998 1999 ------------ ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net income.................................................. $ 2,885,854 $ 5,724,886 Items not requiring cash: Depreciation and amortization............................. 3,336,183 3,497,625 Deferred income taxes..................................... -- (1,551,850) Provision for store closings and restructuring............ -- 86,159 Change in assets and liabilities: Receivables............................................... (4,337,079) (5,759,070) Inventories............................................... (384,379) (130,481) Prepaid expenses.......................................... (860,238) 324,641 Income taxes, net......................................... 1,984,882 1,626,253 Accounts payable.......................................... 4,023,811 1,997,226 Accrued restructuring expenses............................ (136,404) (854,549) Accrued expenses.......................................... 2,248,956 2,620,506 Deferred compensation and other long-term obligations..... 845,750 (60,921) ------------ ----------- Net cash provided by operating activities......... 9,607,336 7,520,425 ------------ ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment.......................... (10,919,937) (7,850,360) Increase in other assets.................................... (759,415) (675,919) Decrease in other assets.................................... 1,477,390 342,047 Proceeds from sale of assets held for sale.................. -- 386,435 ------------ ----------- Net cash used for investing activities............ (10,201,962) (7,797,797) ------------ ----------- CASH FLOW FROM FINANCING ACTIVITIES: Repayment of long-term debt................................. (1,800,000) (1,800,000) Net borrowings from revolving line of credit................ 982,322 3,675,012 Proceeds from stock offering................................ 4,399,908 -- Cash dividends paid......................................... (1,179,562) (1,517,786) Issuance of notes receivable................................ (2,076,559) (674,111) Collection of notes receivable.............................. -- 225,940 ------------ ----------- Net cash provided by (used for) financing activities...................................... 326,109 (90,945) ------------ ----------- Net decrease in cash and cash equivalents................... (268,517) (368,317) Cash and cash equivalents at beginning of period............ 2,932,610 4,312,518 ------------ ----------- Cash and cash equivalents at end of period.................. $ 2,664,093 $ 3,944,201 ============ ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements. F-4 84 KRISPY KREME DOUGHNUT CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated balance sheet as of October 31, 1999, and the unaudited consolidated statements of operations and cash flows for the nine month periods ended November 1, 1998 and October 31, 1999, should be read in conjunction with the audited consolidated financial statements and accompanying footnotes of Krispy Kreme Doughnut Corporation (the Company) as of February 1, 1998, and January 31, 1999, and for each of the three years in the period ended January 31, 1999, included elsewhere herein. In the opinion of management, the accompanying unaudited consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the Company's interim results. Certain information and footnote disclosures required for complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to applicable rules and regulations; however, the Company believes that the disclosures herein when read with the aforementioned audited financial statements are adequate to make the information presented not misleading. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year. 2. EARNINGS PER SHARE HISTORICAL. Earnings per share data presented is computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which was issued in 1998. Basic earnings per share (EPS) is computed by dividing income available to common shareholders (net income) by the weighted-average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if stock options were exercised. The weighted average number of shares outstanding for basic EPS was 394,524 for the nine months ended November 1, 1998, and 467,011 for the nine months ended October 31, 1999. The calculation of diluted EPS in both nine month periods includes the assumed exercise of 91,550 stock options issued in August 1998. The weighted average number of shares used for the diluted earnings per share calculation for the nine months ended November 1, 1998, and October 31, 1999, was 395,487 and 472,888, respectively. PRO FORMA. On November 10, 1999, shareholders approved a corporate reorganization to create a holding company (Krispy Kreme Doughnuts, Inc.) to function as the publicly held parent of Krispy Kreme Doughnut Corporation and its subsidiaries. Krispy Kreme Doughnut Corporation and the holding company will enter into a plan of merger, expected to become effective just prior to the closing of the holding company's public offering of its common stock. As a result of the merger, the former shareholders of Krispy Kreme Doughnut Corporation will become shareholders of the holding company, with each of them receiving a number of holding company shares based on his or her percentage ownership of the shares of Krispy Kreme Doughnut Corporation and a cash payment of $15 per share to be paid from the proceeds of the offering. This merger will result in Krispy Kreme Doughnut Corporation becoming a wholly-owned subsidiary of the holding company. Pro forma basic and diluted earnings per share is calculated in the same manner as historical earnings per share after giving effect to the merger exchange ratio of 20-for-1. Shares used in pro forma basic and diluted earnings per share are 7,890,480 and 7,909,740, respectively for the nine months ended November 1, 1998 and 9,340,220 and 9,439,900, respectively for the nine months ended October 31, 1999. F-5 85 KRISPY KREME DOUGHNUT CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUPPLEMENTAL. Supplemental earnings per share adjusts pro forma earnings per share to reflect the assumed issuance of 528,592 holding company common shares to fund the cash payment to shareholders. The number of shares used in the calculation of supplemental basic and diluted earnings per share are 9,868,812 and 9,968,492, respectively. 3. BUSINESS SEGMENT INFORMATION The Company has three reportable business segments. The Company Store Operations segment is comprised of the operating activities of the 59 stores owned by the Company. These stores sell doughnuts and complementary products through both on-premises and off-premises sales. The majority of the ingredients and materials used by Company Store Operations is purchased from the Support Operations business segment. The Franchise Operations segment is comprised of the operating activities of the individual franchise business units which license qualified operators to conduct business under the Krispy Kreme name and also monitor the operations of these stores. Under the terms of the agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Krispy Kreme name. The Support Operations segment supplies mix, equipment and other items to both Company-owned and franchisee-owned stores. All intercompany transactions between the Support Operations business segment and Company-owned stores are eliminated in consolidation. Segment operating income is income before general corporate expenses and income taxes. 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.
--------------------------- NINE MONTHS ENDED --------------------------- NOVEMBER 1, OCTOBER 31, 1998 1999 ------------ ------------ REVENUES: Company Store Operations.................................... $108,172,655 $121,104,100 Franchise Operations........................................ 2,296,732 3,797,800 Support Operations.......................................... 80,033,293 104,132,062 Intercompany sales eliminations............................. (57,312,650) (67,462,646) ------------ ------------ Total revenues.................................... $133,190,030 $161,571,316 ============ ============ OPERATING INCOME: Company Store Operations.................................... $ 11,538,999 $ 14,900,096 Franchise Operations........................................ 322,623 952,781 Support Operations.......................................... 2,822,135 5,278,293 Unallocated general and administrative expenses............. (8,734,090) (11,049,870) ------------ ------------ Total operating income............................ $ 5,949,667 $ 10,081,300 ============ ============
F-6 86 KRISPY KREME DOUGHNUT CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
--------------------------- NINE MONTHS ENDED --------------------------- NOVEMBER 1, OCTOBER 31, 1998 1999 ------------ ------------ DEPRECIATION AND AMORTIZATION EXPENSES: Company Store Operations.................................... $ 2,275,810 $ 2,390,290 Franchise Operations........................................ 43,094 54,000 Support Operations.......................................... 168,669 174,164 Corporate administration.................................... 848,610 879,171 ------------ ------------ Total depreciation and amortization expenses...... $ 3,336,183 $ 3,497,625 ============ ============
4. RELATED PARTY TRANSACTIONS Total revenues includes $5,663,621 for the nine months ended November 1, 1998 and $8,634,646 for the nine months ended October 31, 1999 of sales to franchise doughnut stores owned by directors and an employee of the Company. Trade accounts receivable from these stores totaled $1,297,372 and $1,698,979 at January 31, 1999 and October 31, 1999, respectively. Total revenues also includes royalties from these stores of $387,582 for the nine months ended November 1, 1998 and $614,904 for the nine months ended October 31, 1999. Additionally, from time to time the Company extends credit to customers in the form of notes receivable. Interest is generally charged at the prime rate plus 1% and terms range from six months to ten years. Notes receivable from franchise doughnut stores owned by directors and an employee totaled $56,339 at January 31, 1999 and $22,181 at October 31, 1999. 5. RESTRUCTURING
------------------------------------- LEASE ACCRUED TOTAL LIABILITIES EXPENSES ACCRUAL ----------- ---------- ---------- Balance at January 31, 1999................................ 5,799,875 350,000 6,149,875 Additions.................................................. 722,593 -- 722,593 Reductions................................................. (781,001) (175,000) (956,001) ---------- ---------- ---------- Balance at October 31, 1999................................ $5,741,467 $ 175,000 $5,916,467 ========== ========== ==========
As of October 31, 1999, the Company reassessed certain provisions of its restructuring accrual. The Company determined that it was under accrued for losses associated with operating lease commitments related to double drive-through buildings by $722,593 and over accrued for certain other exit costs by $175,000. In addition, land included in Assets Held for Sale with a book value of $100,000 was sold in October 1999 for $386,435 resulting in a credit to restructuring expense. The Company increased the estimated net realizable value for another piece of land held for sale by $175,000. Together, these adjustments resulted in a net increase in restructuring expenses of $86,158 for the nine months ended October 31, 1999. This amount has been included in Operating Expenses of the Company Store Operations segment. Reductions in Lease Liabilities represent ongoing lease payments on remaining lease obligations. F-7 87 KRISPY KREME DOUGHNUT CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. STORE CLOSINGS AND IMPAIRMENT
----------- LEASE LIABILITIES ----------- Balance at January 31, 1999................................. $283,167 Reductions.................................................. (73,548) -------- Balance at October 31, 1999................................. $209,619 ========
Reductions in the accrual consist of ongoing lease payments on remaining lease obligations. 7. PRO FORMA BALANCE SHEET The pro forma balance sheet at October 31, 1999 reflects the accrual of the cash payment to shareholders to be paid from the proceeds of the offering as discussed in Note 2, "Pro Forma." F-8 88 KRISPY KREME DOUGHNUT CORPORATION REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Krispy Kreme Doughnut Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Krispy Kreme Doughnut Corporation and its subsidiaries (the Company) at February 1, 1998 and January 31, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Greensboro, North Carolina March 19, 1999 F-9 89 KRISPY KREME DOUGHNUT CORPORATION CONSOLIDATED BALANCE SHEETS
------------------------- FEBRUARY 1, JANUARY 31, 1998 1999 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 2,932,610 $ 4,312,518 Accounts receivable, less allowance for doubtful accounts of $373,388 (1998) and $975,000 (1999)....................... 11,260,986 13,775,436 Accounts receivable, affiliates............................. 727,123 1,297,372 Other receivables........................................... 198,163 535,309 Inventories................................................. 7,874,169 9,754,194 Prepaid expenses............................................ 1,277,338 1,528,617 Income taxes refundable..................................... 241,716 -- Deferred income taxes....................................... 1,280,113 2,120,288 Assets held for sale........................................ -- 325,000 ----------- ----------- Total current assets.............................. 25,792,218 33,648,734 Property and equipment, net................................. 51,546,773 53,575,399 Deferred income taxes....................................... 218,350 3,036,134 Other assets................................................ 3,905,803 2,920,746 ----------- ----------- Total assets...................................... $81,463,144 $93,181,013 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................ $ 6,821,253 $11,404,763 Dividends payable........................................... 1,179,562 1,517,786 Accrued salaries and wages.................................. 1,542,493 2,445,863 Accrued restructuring expenses.............................. 665,777 1,690,772 Accrued expenses............................................ 4,032,535 4,648,142 Current maturities of long-term debt........................ 2,400,000 2,400,000 Income taxes payable........................................ -- 1,154,637 ----------- ----------- Total current liabilities......................... 16,641,620 25,261,963 ----------- ----------- Compensation deferred (unpaid).............................. 6,434,653 792,204 Long-term debt.............................................. 18,470,180 18,620,409 Accrued restructuring expenses.............................. -- 4,742,270 Other long-term obligations................................. 1,651,293 1,517,176 ----------- ----------- Total long-term liabilities....................... 26,556,126 25,672,059 SHAREHOLDERS' EQUITY -- SUBJECT TO REDEMPTION: Common stock, $10 par value, 1,000,000 shares authorized; issued and outstanding -- 364,221 (1998) and 467,011 (1999).................................................... 3,642,210 4,670,110 Paid-in capital............................................. 1,101,437 10,804,563 Notes receivable, employees................................. (33,921) (2,098,559) Retained earnings........................................... 33,555,672 28,870,877 ----------- ----------- Total shareholders' equity........................ 38,265,398 42,246,991 ----------- ----------- Total liabilities and shareholders' equity........ $81,463,144 $93,181,013 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-10 90 KRISPY KREME DOUGHNUT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------ YEAR ENDED ------------------------------------------ FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ------------ ------------ ------------ Total revenues....................................... $132,614,004 $158,743,022 $180,880,485 Operating expenses................................... 116,657,907 140,206,728 159,940,594 General and administrative expenses.................. 7,630,802 9,530,172 10,897,994 Depreciation and amortization expenses............... 3,188,753 3,586,150 4,277,711 Provision for restructuring.......................... -- -- 9,466,312 ------------ ------------ ------------ Income (loss) from operations........................ 5,136,542 5,419,972 (3,702,126) Interest income...................................... 152,460 178,884 181,277 Interest expense..................................... 1,309,698 1,603,009 1,507,299 (Gain) loss on sale of property and equipment........ (66,384) (529,276) 250,861 ------------ ------------ ------------ Income (loss) before income taxes.................... 4,045,688 4,525,123 (5,279,009) Provision (benefit) for income taxes................. 1,619,001 1,811,000 (2,112,000) ------------ ------------ ------------ Net income (loss).................................... $ 2,426,687 $ 2,714,123 $ (3,167,009) ============ ============ ============ Basic and diluted earnings (loss) per share.......... $ 6.66 $ 7.45 $ (7.68) ============ ============ ============ Pro forma (Unaudited -- Note 1): Basic and diluted earnings (loss) per share........ $ .33 $ .37 $ (.38) ============ ============ ============ Supplemental (Unaudited -- Note 1): Basic and diluted loss per share................... (.36)
The accompanying notes are an integral part of these consolidated financial statements. F-11 91 KRISPY KREME DOUGHNUT CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------- COMMON PAID-IN UNEARNED NOTES RETAINED SHAREHOLDERS' STOCK CAPITAL COMPENSATION RECEIVABLE EARNINGS EQUITY ---------- ----------- ------------ ----------- ----------- ------------- Balance as of January 28, 1996...................... $3,642,210 $ 1,101,437 $(368,476) $ (109,540) $30,767,118 $35,032,749 ---------- ----------- --------- ----------- ----------- ----------- Net income for the year ended February 2, 1997.... -- -- -- -- 2,426,687 2,426,687 Cash dividends on common stock ($3.25 per share)... -- -- -- -- (1,172,694) (1,172,694) Compensation expense associated with the restricted stock plan..... -- -- 187,317 -- -- 187,317 Collections on notes receivable................ -- -- -- 41,980 -- 41,980 ---------- ----------- --------- ----------- ----------- ----------- Balance as of February 2, 1997...................... $3,642,210 $ 1,101,437 $(181,159) $ (67,560) $32,021,111 $36,516,039 ---------- ----------- --------- ----------- ----------- ----------- Net income for the year ended February 1, 1998.... -- -- -- -- 2,714,123 2,714,123 Cash dividends on common stock ($3.25 per share)... -- -- -- -- (1,179,562) (1,179,562) Compensation expense associated with the restricted stock plan..... -- -- 181,159 -- -- 181,159 Collections on notes receivable................ -- -- -- 33,639 -- 33,639 ---------- ----------- --------- ----------- ----------- ----------- Balance as of February 1, 1998...................... $3,642,210 $ 1,101,437 $ -- $ (33,921) $33,555,672 $38,265,398 ---------- ----------- --------- ----------- ----------- ----------- Net loss for the year ended January 31, 1999.......... -- -- -- -- (3,167,009) (3,167,009) Cash dividends on common stock ($3.25 per share)... -- -- -- -- (1,517,786) (1,517,786) Collections on notes receivable................ -- -- -- 33,921 -- 33,921 Conversion of Long-Term Incentive Plan shares to common stock.............. 589,720 5,522,138 -- -- -- 6,111,858 Sale of common stock........ 438,180 4,180,988 -- -- -- 4,619,168 Issuance of notes receivable................ -- -- -- (2,098,559) -- (2,098,559) ---------- ----------- --------- ----------- ----------- ----------- Balance as of January 31, 1999...................... $4,670,110 $10,804,563 $ -- $(2,098,559) $28,870,877 $42,246,991 ========== =========== ========= =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-12 92 KRISPY KREME DOUGHNUT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------- YEAR ENDED --------------------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ----------- ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ 2,426,687 $ 2,714,123 $(3,167,009) Items not requiring (providing) cash: Depreciation and amortization......................... 3,188,753 3,586,150 4,277,711 Deferred income taxes................................. 744,575 391,970 (3,657,959) Loss (gain) on disposal of property and equipment, net................................................ (66,384) (529,276) 250,861 Compensation deferred................................. 572,845 660,926 -- Provision for restructuring........................... -- -- 9,466,312 Provision for store closings and impairment........... -- -- 2,335,847 Other................................................. 209,454 795,325 -- Change in assets and liabilities: Receivables........................................... (3,895,297) (674,985) (3,421,845) Inventories........................................... (82,075) (1,034,436) (1,880,025) Prepaid expenses...................................... (527,589) 281,177 (251,279) Income taxes, net..................................... (571,196) 696,991 1,396,353 Accounts payable...................................... 1,001,234 617,977 4,583,510 Accrued restructuring expenses........................ (803,038) (11,317) -- Accrued expenses...................................... 796,138 (77,252) 1,008,198 Deferred compensation and other long-term obligations........................................ (341,814) (290,647) 741,702 ----------- ----------- ----------- Net cash provided by operating activities..... 2,652,293 7,126,726 11,682,377 ----------- ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment...................... (9,572,362) (6,707,579) (12,375,792) Proceeds from disposal of property and equipment........ 5,430,118 1,740,008 -- Assets held for sale.................................... 698,269 1,292,641 -- Increase in other assets................................ (185,631) (2,746,797) (841,143) Decrease in other assets................................ 203,154 525,342 1,389,269 ----------- ----------- ----------- Net cash used for investing activities:....... (3,426,452) (5,896,385) (11,827,666) ----------- ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Repayment of long-term debt............................. (2,199,964) (2,400,000) (2,400,000) Net borrowings from revolving line of credit............ 4,076,277 3,083,155 2,550,229 Proceeds from stock offering............................ -- -- 4,619,168 Cash dividends paid..................................... (1,159,051) (1,172,694) (1,179,562) Issuance of notes receivable............................ -- -- (2,098,559) Collection of notes receivable.......................... 41,980 33,639 33,921 ----------- ----------- ----------- Net cash provided by (used for) financing activities:................................. 759,242 (455,900) 1,525,197 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.... (14,917) 774,441 1,379,908 Cash and cash equivalents at beginning of year.......... 2,173,086 2,158,169 2,932,610 ----------- ----------- ----------- Cash and cash equivalents at end of year................ $ 2,158,169 $ 2,932,610 $ 4,312,518 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-13 93 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS. Krispy Kreme Doughnut Corporation (the Company) and its subsidiaries are engaged principally in the sale of doughnuts through Company-owned and franchised locations. The Company also produces and sells doughnut-making equipment and mix for use by the Company-owned and franchised stores. Additionally, the Company operates a commissary to distribute food products and supplies to Company-owned and franchised stores. The significant accounting policies followed by the Company in preparing the accompanying financial statements are as follows: BASIS OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. FISCAL YEAR. The Company's fiscal year is based on a fifty-two/fifty-three week year. The fiscal year ends on the Sunday closest to the last day in January. The year ended February 2, 1997 contained 53 weeks while the years ended February 1, 1998 and January 31, 1999 contained 52 weeks. CASH AND CASH EQUIVALENTS. The Company considers cash on hand, deposits in banks, and all highly liquid debt instruments with a maturity of three months or less at date of acquisition to be cash and cash equivalents. INVENTORIES. Inventories are recorded at the lower of average cost or market. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost less accumulated depreciation. Major renewals and betterments are charged to the property accounts while replacements, maintenance, and repairs which do not improve or extend the lives of the respective assets are expensed currently. Interest is capitalized on major capital expenditures during the period of construction. Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives: Buildings -- 15 to 35 years; Equipment -- 3 to 15 years; Leasehold improvements -- lesser of useful lives of assets or lease term. Assets acquired in the first half of the fiscal year are depreciated for a half year in the year of acquisition. Assets acquired in the second half of the fiscal year are not depreciated in the year of acquisition but are depreciated for a full year in the next fiscal year. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES. The Company uses the asset and liability method to account for income taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases for assets and liabilities. F-14 94 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EARNINGS PER SHARE. Historical: Earnings per share data presented are computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which was issued in 1998. Basic earnings per share (EPS) is computed by dividing income available to common shareholders (net income) by the weighted-average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if stock options were exercised. The weighted average number of shares outstanding for basic EPS was 364,221 in fiscal 1997 and fiscal 1998 and 412,459 in fiscal 1999. There were no stock options outstanding in fiscal 1997 or fiscal 1998. The calculation of diluted EPS in fiscal 1999 included the assumed exercise of 91,550 stock options issued during the year. This assumed exercise had an antidilutive effect on the earnings per share calculation thus diluted earnings per share equals basic earnings per share. Pro forma (Unaudited): On November 10, 1999, shareholders approved a corporate reorganization to create a holding company (Krispy Kreme Doughnuts, Inc.) to function as the publicly held parent of Krispy Kreme Doughnut Corporation and its subsidiaries. Krispy Kreme Doughnut Corporation and the holding company will enter into a plan of merger, expected to become effective just prior to the closing of the holding company's public offering of its common stock. As a result of the merger, the former shareholders of Krispy Kreme Doughnut Corporation will become shareholders of the holding company, with each of them receiving a number of holding company shares based on his or her percentage of ownership of the shares of Krispy Kreme Doughnut Corporation and a cash payment of $15.00 per share to be paid from the proceeds of the offering. This merger will result in Krispy Kreme Doughnut Corporation becoming a wholly-owned subsidiary of the holding company. Pro forma basic and diluted earnings per share is calculated in the same manner as historical earnings per share after giving effect to the merger exchange ratio of 20-for-1. Shares used in pro forma basic and diluted earnings per share are 7,284,420 for fiscal 1997 and fiscal 1998 and 8,249,180 for fiscal 1999. Supplemental (Unaudited): Supplemental earnings per share adjusts pro forma earnings per share to reflect the assumed issuance of 528,592 holding company common shares to fund the cash payment to shareholders. The number of shares used in the calculation of supplemental basic and diluted earnings per share is 8,777,772. FAIR VALUE OF FINANCIAL INSTRUMENTS. SFAS No. 107. "Disclosures about Fair Value of Financial Instruments," requires disclosure about the fair value of certain instruments. Cash, accounts receivable, accounts payable, accrued liabilities and variable rate debt are reflected in the financial statements at cost which approximates fair value because of the short-term maturity of these instruments. ADVERTISING COSTS. All costs associated with advertising and promoting products are expensed in the period incurred. STORE OPENING COSTS. Costs incurred to open either Company or franchise stores are expensed in the period incurred. F-15 95 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION. A summary of the revenue recognition policies for each segment of the Company (see Note 10) is as follows: - Company Store Operations revenue is derived from the sale of doughnuts and related items to on-premises and off-premises customers. Revenue is recognized at the time of sale for on-premises sales and at the time of delivery for off-premises sales. - Franchise Operations revenue is derived from: (1) development and franchise fees from the opening of new stores; and (2) royalties charged to franchisees based on sales. Development and franchise fees are charged for each new store and are recognized when the store is opened. The royalties recognized in each period are based on the sales in that period. - Support Operations revenue is derived from the sale of doughnut-making equipment and mix to Company-owned and franchised stores. Revenue is recognized at the time goods are shipped. COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income," requires that certain items such as foreign currency translation adjustments, unrealized gains and losses on certain investments in debt and equity securities and minimum pension liability adjustments be presented as separate components of shareholders' equity. SFAS 130 defines these as items of other comprehensive income and as such must be reported in a financial statement that is displayed with the same prominence as other financial statements. At January 31, 1999, the Company does not have any items of other comprehensive income to report. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," effective for years beginning after June 15, 2000, the Company's fiscal year 2002. SFAS 133 requires that all derivatives be recorded on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in the fair value of hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The adoption of FAS 133 is not expected to have a material impact on the financial statements of the Company. F-16 96 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. INVENTORIES The components of inventories are as follows:
---------------------------------------------------------------- DISTRIBUTION EQUIPMENT MIX COMPANY CENTER DEPARTMENT DEPARTMENT STORES TOTAL ------------ ---------- ---------- ---------- ---------- FEBRUARY 1, 1998 Raw materials....................... $ -- $2,596,311 $ 390,556 $ 773,061 $3,759,928 Work in progress.................... -- 119,026 -- -- 119,026 Finished goods...................... 487,496 461,002 12,190 -- 960,688 Purchased merchandise............... 2,516,266 -- -- 483,022 2,999,288 Manufacturing supplies.............. -- -- 35,239 -- 35,239 ---------- ---------- ---------- ---------- ---------- Totals.................... $3,003,762 $3,176,339 $ 437,985 $1,256,083 $7,874,169 ========== ========== ========== ========== ========== JANUARY 31, 1999 Raw materials....................... $ -- $2,749,910 $ 411,946 $1,115,388 $4,277,244 Work in progress.................... -- 45,898 -- -- 45,898 Finished goods...................... 723,854 1,280,802 21,395 -- 2,026,051 Purchased merchandise............... 2,843,402 -- -- 540,379 3,383,781 Manufacturing supplies.............. -- -- 21,220 -- 21,220 ---------- ---------- ---------- ---------- ---------- Totals.................... $3,567,256 $4,076,610 $ 454,561 $1,655,767 $9,754,194 ========== ========== ========== ========== ==========
3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
------------------------- FEBRUARY 1, JANUARY 31, 1998 1999 ----------- ----------- Land........................................................ $11,254,812 $11,128,569 Buildings................................................... 20,616,612 22,702,866 Machinery and equipment..................................... 35,687,400 40,236,973 Leasehold improvements...................................... 9,021,532 8,262,368 Construction in progress.................................... 1,600,966 22,993 ----------- ----------- 78,181,322 82,353,769 Less: accumulated depreciation.............................. 26,634,549 28,778,370 ----------- ----------- Property and equipment, net....................... $51,546,773 $53,575,399 =========== ===========
An analysis of the loss (gain) on disposal of property and equipment is as follows:
--------------------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ----------- ----------- ----------- Gain on sale of real estate................................ $ -- $(567,473) $ -- Other, net................................................. (66,384) 38,197 250,861 -------- --------- -------- $(66,384) $(529,276) $250,861 ======== ========= ========
F-17 97 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT On December 21, 1998, the Company amended and restated its Loan Agreement (the Agreement) with a bank. The new agreement provides a $28 million revolving line of credit and a $12 million term loan. The Agreement, which is unsecured, expires on July 10, 2002. REVOLVING LINE OF CREDIT. Under the terms of the Agreement, interest on the revolving line of credit is charged, at the Company's option, at either the Lender's Prime Rate less 110 basis points or at the one-month Interbank Rate plus 100 basis points. There is no interest, fee or other charge for the unadvanced portion of the line of credit. As of January 31, 1999, the amount outstanding under the revolving line of credit was $15,020,409 and the interest rate was 6.064%. A provision of the Agreement allows the Company to convert, prior to the expiration date of the Agreement, all or a portion of the outstanding principal balance of the revolving line of credit to a term loan for a period of 60, 84, or 120 months with interest at the Company's option of either a variable Prime Rate based method, a variable Interbank Rate based method, or a Swap Rate based method with a ceiling tied to the Prime Rate at the time of conversion. As of January 31, 1999, no amounts from the $28 million line of credit facility had been converted to a term loan. TERM LOAN. Interest on the term loan is computed on the same basis as the revolving line of credit except that the floor and ceiling rates are 5.5% and 8.125%, respectively (6.064% at January 31, 1999). Repayment of this loan began on July 20, 1996, in the amount of monthly principal payments of $200,000 plus interest; the final payment is due on June 20, 2001. The Term Loan may be prepaid without penalty or premium at any time. As of February 1, 1998 and January 31, 1999, the outstanding principal balance of the term loan was $8,400,000 and $6,000,000, respectively and the interest rate was 6.598% and 6.064%, respectively. At January 31, 1999, the annual maturities of the principal amounts of the term loan were:
----------- FISCAL YEAR ENDING IN AMOUNT - --------------------- ----------- 2000........................................................ $ 2,400,000 2001........................................................ 2,400,000 2002........................................................ 16,220,409 2003........................................................ -- 2004........................................................ -- ----------- $21,020,409 ===========
The Agreement contains provisions that, among other requirements, restrict capital expenditures, require the maintenance of certain financial ratios and restrict the payment of dividends. At January 31, 1999, the Company was in compliance with each of these covenants. Interest paid, net of amounts capitalized, was $1,183,000 in fiscal 1997, $1,482,000 in fiscal 1998, and $1,404,000 in fiscal 1999. The amended and restated Agreement which was entered into in December 1998 replaced a Loan Agreement with a bank which was scheduled to expire on July 20, 1999. The previous Loan Agreement was in the form of a $30 million line of credit facility and had term loan provisions similar to those described above for the amended and restated Agreement. The interest rate methods under the former Loan Agreement did not vary significantly from those prescribed in the amended and restated Agreement. F-18 98 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LEASE COMMITMENTS The Company conducts some of its operations from leased facilities and, additionally, leases certain equipment under operating leases. Generally, these have initial lease periods of 5 to 18 years and contain provisions for renewal options of 5 to 10 years. At January 31, 1999, future minimum annual rental commitments under noncancelable operating leases are as follows:
----------- FISCAL YEAR ENDING IN AMOUNT - --------------------- ----------- 2000........................................................ $ 6,410,000 2001........................................................ 6,275,000 2002........................................................ 5,781,000 2003........................................................ 4,749,000 2004........................................................ 3,186,000 Thereafter.................................................. 11,121,000 ----------- $37,522,000 ===========
Rental expense, net of rental income, totaled $3,772,000 in 1997, $4,912,000 in 1998 and $5,565,000 in 1999. 6. INCOME TAXES The components of the provision for federal and state income taxes are summarized as follows:
--------------------------------------- YEAR ENDED --------------------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ----------- ----------- ----------- Currently payable......................................... $ 874,425 $1,419,030 $ 1,545,959 Deferred.................................................. 744,575 391,970 (3,657,959) ---------- ---------- ----------- $1,619,000 $1,811,000 $(2,112,000) ========== ========== ===========
A reconciliation of the statutory federal income tax rate with the Company's effective rate is as follows:
--------------------------------------- YEAR ENDED --------------------------------------- FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ----------- ----------- ----------- Federal taxes at statutory rate........................... $1,375,534 $1,538,542 $(1,794,863) State taxes, net of federal benefit....................... 227,502 229,486 (440,220) Other..................................................... 15,964 42,972 123,083 ---------- ---------- ----------- $1,619,000 $1,811,000 $(2,112,000) ========== ========== ===========
Income tax payments, net of refunds, were $1,664,293 in fiscal 1997, $669,904 in fiscal 1998 and $239,341 in fiscal 1999. F-19 99 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net current and non-current components of deferred income taxes recognized in the balance sheet are as follows:
------------------------- FEBRUARY 1, JANUARY 31, 1998 1999 ----------- ----------- Net current assets.......................................... $1,280,113 $2,120,288 Net non-current assets...................................... 218,350 3,036,134 ---------- ---------- $1,498,463 $5,156,422 ========== ==========
The tax effects of the significant temporary differences which comprise the deferred tax assets and liabilities are as follows:
------------------------- FEBRUARY 1, JANUARY 31, 1998 1999 ----------- ----------- ASSETS Compensation deferred (unpaid).............................. $2,680,039 $ 470,731 Accrued group insurance..................................... 149,422 209,646 Other long-term obligations................................. 354,086 418,432 Accrued insurance........................................... 686,242 340,580 Accrued reorganization costs................................ 252,995 2,444,556 Unearned revenue............................................ 334,758 201,400 Accounts receivable......................................... 141,887 370,500 Inventory................................................... 210,866 229,202 Charitable contributions carryforward....................... -- 704,752 State NOL carryforwards..................................... -- 571,373 Other....................................................... -- 621,684 ---------- ---------- Gross deferred tax assets......................... 4,810,295 6,582,856 ---------- ---------- LIABILITIES Property and equipment...................................... 3,061,269 1,174,082 Prepaid VEBA contribution................................... -- 133,000 Prepaid expenses............................................ 250,563 119,352 ---------- ---------- Gross deferred tax liabilities.................... 3,311,832 1,426,434 ---------- ---------- Net asset......................................... $1,498,463 $5,156,422 ========== ==========
The Company has recorded a deferred tax asset reflecting the benefit of future deductible amounts. Realization of this asset is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. 7. EMPLOYEE BENEFITS PLANS The Company has a 401(k) savings plan, which provides that employees may contribute a portion of their salary to the plan on a tax deferred basis. The Company matches one-half of the first 2% and one-fourth of the next 4% of salary contributed by each employee. The Company's matching contributions approximated $350,000 in fiscal 1997, $419,000 in fiscal 1998 and $440,000 in fiscal 1999. F-20 100 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective May 1, 1994, the Company established the Retirement Income Plan for Key Employees of Krispy Kreme Doughnut Corporation (the Plan), a nonqualified noncontributory defined benefit pension plan. The benefits are based on years of service and average final compensation during the employees' career. The Plan at all times shall be entirely unfunded as such term is defined for purposes of the Employee Retirement Income Security Act (ERISA). The actuarial cost method used in determining the net periodic pension cost is the projected unit credit method. The following tables summarize the status of the Plan and the amounts recognized in the Balance Sheet:
------------------------- FEBRUARY 1, JANUARY 31, 1998 1999 ----------- ----------- CHANGE IN PROJECTED BENEFIT OBLIGATION a. Projected benefit obligation at beginning of year........ $ 451,677 $ 669,973 b. Service cost............................................. 130,251 152,469 c. Interest cost............................................ 33,876 46,891 d. Actuarial (gain) loss.................................... 54,169 (21,872) e. Benefits paid............................................ -- (13,452) f. Change in plan provisions................................ -- -- g. Projected benefit obligation at end of year.............. 669,973 834,009 CHANGE IN PLAN ASSETS a. Fair value of plan assets at beginning of year........... $ -- $ -- b. Actual return on plan assets............................. -- -- c. Employer contributions................................... -- 13,452 d. Benefits paid............................................ -- (13,452) e. Fair value of plan assets at end of year................. -- -- NET AMOUNT RECOGNIZED a. Funded status............................................ $(669,973) $(834,009) b. Unrecognized transition obligation (asset)............... -- -- c. Unrecognized prior service cost.......................... -- -- d. Unrecognized net loss.................................... 54,169.... 32,297 e. Contributions from measurement date to fiscal year end... -- -- f. Net amount recognized.................................... (615,804) (801,712) WEIGHTED-AVERAGE ASSUMPTIONS a. Weighted average assumed discount rate................... 7.00% 6.75% b. Weighted average expected long-term rate of return on plan assets............................................... N/A N/A c. Assumed rate of annual compensation increases............ 5.00% 5.00% NET PERIODIC PENSION COST a. Service cost............................................. $ 130,251 $ 152,469 b. Interest cost............................................ 33,876 46,891 c. Estimated return on plan assets.......................... -- -- d. Amortization of unrecognized transitional liability (asset)................................................... -- -- e. Amortization of prior service cost....................... -- -- f. Recognized net actuarial (gain) or loss.................. -- -- g. Total.................................................... 164,127 199,360
F-21 101 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
------------------------- FEBRUARY 1, JANUARY 31, 1998 1999 ----------- ----------- RECONCILIATION OF NET PENSION ASSET (LIABILITY) FOR FISCAL YEAR a. Prepaid (accrued) pension cost as of end of prior year... $(451,677) $(615,804) b. Contributions during the fiscal year..................... -- 13,452 c. Net periodic pension cost for the fiscal year............ 164,127 199,360 d. Prepaid (accrued) pension cost as of fiscal year end..... (615,804) (801,712)
8. INCENTIVE COMPENSATION The Company has an incentive compensation plan for officers, directors and management level employees. Incentive compensation amounted to $1,380,000 in fiscal 1997, $1,652,000 in fiscal 1998 and $2,300,000 in fiscal 1999. In addition, in fiscal 1997 and fiscal 1998, the Company had a Long-Term Incentive Plan (the Plan). Under the provisions of the Plan, a participant could elect to defer, for a period of not less than five years, from 0% to 100% of the bonus earned under the provisions of the incentive compensation plan described above. The deferred amount was converted to performance units based on the appropriate value (book value) of the Company's common stock as defined in the Plan. Upon completion of the deferral period, each participant's account would be distributed in accordance with the participant's election. The performance units granted under the Plan were credited with dividends in a manner identical to the common stock of the Company. The amount payable to a participant at the time benefit payments are due was equal in amount to the number of performance units credited to a participant's account multiplied by the current book value of the Company's common stock as defined in the Plan. Effective with fiscal year-end 1997, the right to defer additional incentive compensation under the provisions of the plan was temporarily suspended. Long-term incentive compensation amounted to $386,000 in fiscal 1997 and $480,000 in 1998. In fiscal 1999, participants still employed by the Company were given the option to convert their performance units earned under the Plan to common shares of the Company's common stock, subject to certain restrictions. Shares received through the conversion are subject to the provisions of the Stock Purchase Agreement dated July 1, 1982, as amended by the Amendment to Stock Purchase Agreement dated March 19, 1998 and the Addition to the Amendment to the Stock Purchase Agreement dated April 21, 1998 along with any other agreements which may be approved by the holders of common shares prior to the conversion. These shares have no voting rights until the earlier of July 31, 2008, or an initial public offering of the Company's common stock. The number of performance units converted was 58,972 at a conversion rate of $103.64 per performance unit for a total of $6,111,858 in common stock issued in connection with the conversion. Due to the Federal and State income tax consequences of the conversion incurred by each participant, the Company made a loan to each participant equal to their tax liability. These loans were executed via a 10-year promissory note (collateralized by the common stock) with a fixed interest rate of 6%. The amount of such loans outstanding at January 31, 1999, was $2,098,559 and has been recorded as a deduction from shareholders' equity. In November 1993 and April 1994, the Board of Directors authorized the issuance of 12,645 and 2,500 respectively, restricted stock awards in substitution for stock options previously granted to certain directors and officers of the Company. All unexercised stock options were canceled in F-22 102 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) substitution for restricted stock awards. Restricted stock plan participants are not entitled to receive cash dividends and voting rights on their shares until the lapse of restrictions. The Company made loans to each of the participants for the purchase of the restricted shares. Vesting of such awards occurs equally over a four to six year period from the date of grant and is subject to future service requirements. The difference between cash paid by the employee for the awarded shares and the market value of the shares as of the award date was charged as unearned compensation and is amortized over the four to six year service period. The unamortized, unearned compensation value is shown as a reduction of shareholders' equity in the accompanying consolidated balance sheet. Compensation expense under the plan for fiscal 1997, fiscal 1998 and fiscal 1999 was approximately $187,000, $181,000 and $0 respectively. 9. STOCK OPTION PLAN During fiscal 1999, the Company established the Krispy Kreme Doughnut Corporation 1998 Stock Option Plan (the Plan). Under the terms of the Plan, 95,650 shares of common stock of the Company were reserved for issuance to employees and Directors of the Company. Grants may be in the form of either incentive stock options or nonqualified stock options. During fiscal 1999, 91,550 options with a 10-year life were issued to employees and Directors at an exercise price of $103.64 per share which was the fair market value of the common stock at the date of grant. Options granted to employees under the Plan vest ratably over a three-year period commencing with the second anniversary of the grant date. Options granted to Directors under the Plan vest ratably over a three-year period commencing on the grant date of the options. The Financial Accounting Standards Board has adopted SFAS No. 123 "Accounting for Stock-Based Compensation," which permits, but does not require, the Company to utilize a fair-value based method of accounting for stock-based compensation. The Company has elected to continue use of the APB 25 accounting principles for its stock option plan and accordingly has recorded no compensation cost for grants of stock options. Had compensation cost for the Company's stock option plan been determined based on the estimated fair value at the grant dates for the awards made in 1999 consistent with the provisions of SFAS No. 123, the Company's net income and basic and diluted earnings per share would have been reduced by $117,512 and $.28, respectively. This proforma information reflects an estimated fair value of $9.86 for each stock option issued in fiscal 1999. This estimated fair value was computed using the Black-Scholes option pricing model with the following assumptions: the expected life for all options is seven years, the expected dividend is $3.25 per year, the expected volatility of all stock is zero and a risk-free interest rate of 4.8%. 10. BUSINESS SEGMENT INFORMATION The Company has three reportable business segments. The Company Store Operations segment is comprised of the operating activities of the 61 stores owned by the Company. These stores sell doughnuts and complementary products through both on-premises and off-premises sales. The majority of the ingredients and materials used by Company Store Operations is purchased from the Support Operations business segment. The Franchise Operations segment is comprised of the operating activities of the individual franchise business units which license qualified operators to conduct business under the Krispy Kreme name and also monitor the operations of these stores. Under the terms of the agreements, F-23 103 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the licensed operators pay royalties and fees to the Company in return for the use of the Krispy Kreme name. The Support Operations segment supplies mix, equipment and other items to both Company-owned and franchisee owned stores. All intercompany transactions between the Support Operations business segment and Company-owned stores are eliminated in consolidation. Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources among segments. Segment operating income is income before general corporate expenses and income taxes.
------------------------------------------ YEAR ENDED ------------------------------------------ FEBRUARY 2, FEBRUARY 1, JANUARY 31, 1997 1998 1999 ------------ ------------ ------------ REVENUES: Company Store Operations............................. $113,939,454 $132,826,003 $145,251,369 Franchise Operations................................. 1,709,245 2,285,256 3,236,456 Support Operations................................... 77,141,243 90,820,523 107,430,686 Intercompany sales eliminations...................... (60,175,938) (67,188,760) (75,038,026) ------------ ------------ ------------ Total revenues............................. $132,614,004 $158,743,022 $180,880,485 ============ ============ ============ OPERATING INCOME: Company Store Operations............................. $ 10,325,537 $ 13,236,186 $ 13,081,881 Franchise Operations................................. (23,067) (183,028) 448,032 Support Operations................................... 2,343,110 2,843,570 4,255,073 Unallocated general and administrative expenses...... (7,509,039) (10,476,756) (12,020,799) Provision for restructuring.......................... -- -- (9,466,312) ------------ ------------ ------------ Total operating income..................... $ 5,136,541 $ 5,419,972 $ (3,702,125) ============ ============ ============ DEPRECIATION AND AMORTIZATION EXPENSES: Company Store Operations............................. $ 2,958,768 $ 2,338,514 $ 2,872,869 Franchise Operations................................. 157,202 100,000 57,144 Support Operations................................... 194,546 201,051 224,892 Corporate administration............................. (121,763) 946,585 1,122,806 ------------ ------------ ------------ Total depreciation and amortization expenses................................. $ 3,188,753 $ 3,586,150 $ 4,277,711 ============ ============ ============
11. RELATED PARTY TRANSACTIONS Total revenues includes $3,458,192 in fiscal 1997, $4,304,382 in fiscal 1998 and $7,614,014 in fiscal 1999 of sales to franchise doughnut stores owned by directors and an employee of the Company. Trade accounts receivable from these stores totaled $727,123 and $1,297,372 at February 1, 1998 and January 31, 1999, respectively. Total revenues also includes royalties from these stores of $248,958 in fiscal 1997, $338,448 in fiscal 1998 and $525,228 in fiscal 1999. Additionally, from time to time the Company extends credit to customers in the form of notes receivable. Interest is generally charged at the Prime Rate plus 1% and terms range from 6 months to 10 years. Notes receivable due from franchise doughnut stores owned by directors and an employee totaled $108,838 at February 1, 1998 and $56,339 at January 31, 1999. F-24 104 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Certain members of the board of directors own 22 stores and are committed to open an additional 22 stores. Two officers of the Company are investors in groups that own three stores and are committed to open four additional stores. In December 1994, the Company implemented the Kingsmill Plan to provide franchise opportunities to corporate management and directors. Under the terms of the Kingsmill Plan, the Company makes franchise opportunities available to members of corporate management and provides financial assistance in the form of collateral repurchase agreements and guarantees of bank loans. At February 1, 1998 and January 31, 1999, the Company had guaranteed bank loans of $550,000 and $425,146, respectively, under the Kingsmill Plan. The Kingsmill Plan was suspended in fiscal 1999. In January 1998, the Company sold a market to a shareholder. The gain recognized on this sale was approximately $267,000. 12. COMMITMENTS AND CONTINGENCIES Under the terms of a stock purchase agreement dated July 1, 1984, the Company has agreed to purchase the outstanding stock of any deceased shareholder at a price equal to the book value of the stock as of the last day of the fiscal quarter immediately preceding death. The stock purchase agreement will terminate upon the closing of an initial public offering of the Company's stock. In order to assist certain associate and franchise operators in obtaining third-party financing, the Company has entered into collateral repurchase agreements involving both Company stock and doughnut-making equipment. The Company's contingent liability related to these agreements is approximately $5,146,000 at February 1, 1998 and $4,054,000 at January 31, 1999. Additionally, the Company has guaranteed certain loans to third-party financial institutions on behalf of associate and franchise operators. The Company's contingent liability related to these guarantees was approximately $2,683,000 at February 1, 1998 and $2,407,000 at January 31, 1999. The Company is engaged in various legal proceedings incidental to its normal business activities. In the opinion of management, the outcome of these matters is not expected to have a material effect on the Company's consolidated financial statements. Because the Company enters into long-term contracts with its suppliers, in the event that any of these relationships terminate unexpectedly, even where it has multiple suppliers for the same ingredient, the Company's ability to obtain adequate quantities of the same high quality ingredient at the same competitive price could be negatively impacted. 13. RESTRUCTURING
----------------------------------- LEASE ACCRUED TOTAL LIABILITIES EXPENSES ACCRUAL ----------- -------- ---------- Balance at February 1, 1998................................. $ 205,000 $100,000 $ 305,000 Additions................................................... 5,594,875 250,000 5,844,875 ---------- -------- ---------- Balance at January 31, 1999................................. $5,799,875 $350,000 $6,149,875 ========== ======== ==========
On January 13, 1999, the Board of Directors of the Company approved a restructuring plan for assets and operations included in the Company Store Operations segment determined either to be inconsistent with the Company's strategy or whose carrying value may not be fully recoverable. Of F-25 105 KRISPY KREME DOUGHNUT CORPORATION NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the total restructuring and impairment charge of $9.5 million, $7.8 million relates to the closing of five double drive-through stores and the write down of five other inactive double drive-through stores and sites including provisions to write down associated land, building and equipment costs to estimated net realizable value and to cover operating lease commitments associated with these stores. The Company is in the process of closing these double drive-though stores and there are no plans to open any new ones. An additional $700,000 relates to future lease payments on double drive-through buildings subleased to franchisees. Also included in the total charge is a $1.0 million write down of a facility that produces fried pies and honey buns. These products are not expected to be a core part of the Company's strategy going forward. Of the total charge, $5.6 million represents a charge for future cash outflows for lease payments on land and buildings while $3.6 million represents the write-down of land and the write-off of buildings and equipment. The remaining $250,000 represents the accrual of costs to remove double drive-through buildings from their leased locations. Land held for sale is carried at $325,000, the estimated net realizable value determined through review of current prices for comparable retail locations. After an income tax benefit of $3,786,525, this action reduced fiscal 1999 earnings by $5,679,787 or $12.16 per share. 14. STORE CLOSINGS AND IMPAIRMENT
----------- LEASE LIABILITIES ----------- Balance at January 31, 1999................................. $283,167
During the year, the Company recorded a charge of $2.3 million for store closings and impairment costs. The charge consists of $417,000 related to the write-off of unamortized leasehold improvements for two stores to be closed in the first quarter of fiscal 2000 and the accrual of $283,000 in remaining lease costs on a potential store site that will not be used. The remaining $1.6 million relates to the write-down of building and equipment of a facility that will remain open but whose carrying value was determined not to be fully recoverable. The fair market value of assets to be held and used was determined using a formula based on five times after-tax cash flow. This charge has been recorded in Operating Expenses of the Company Store Operations segment. F-26 106 KRISPY KREME DOUGHNUTS, INC. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Krispy Kreme Doughnuts, Inc. In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of Krispy Kreme Doughnuts, Inc. (the Company) at December 3, 1999, in conformity with generally accepted accounting principles. This financial statement is the responsibility of the Company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this statement in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Greensboro, North Carolina December 3, 1999 F-27 107 KRISPY KREME DOUGHNUTS, INC. BALANCE SHEET
----------- DECEMBER 3, 1999 ----------- ASSETS -- Cash.............................................. $1,000 =========== SHAREHOLDER'S EQUITY........................................ $1,000 ===========
NOTES TO BALANCE SHEET 1. ORGANIZATION AND PURPOSE Krispy Kreme Doughnuts, Inc. (the Company) was incorporated in North Carolina on December 2, 1999 as a wholly-owned subsidiary of Krispy Kreme Doughnut Corporation. Subject to a plan of merger approved by the shareholders on November 10, 1999, the shareholders of Krispy Kreme Doughnut Corporation will become shareholders of Krispy Kreme Doughnuts, Inc. Each shareholder will receive a number of shares of Krispy Kreme Doughnuts, Inc. based on his or her percentage ownership of the shares of Krispy Kreme Doughnut Corporation and a cash payment of $15.00 per share. As a result of this merger, Krispy Kreme Doughnut Corporation will become a wholly-owned subsidiary of Krispy Kreme Doughnuts, Inc. This plan of merger is expected to become effective just prior to the completion of a public offering of the Company's common stock. 2. SHAREHOLDER'S EQUITY The Company is authorized to issue 10 million shares of no par value preferred stock and 100 million shares of no par value common stock. Krispy Kreme Doughnut Corporation has invested $1,000 in exchange for shares of the Company's common stock. F-28 108 You may rely only on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in the prospectus. Neither the delivery of this prospectus nor sale of common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares in any circumstances under which the offer or solicitation is unlawful. TABLE OF CONTENTS
Page Prospectus Summary............... 1 Risk Factors..................... 5 Forward-Looking Statements....... 11 Use of Proceeds.................. 12 Dividend Policy.................. 13 Capitalization................... 14 Dilution......................... 15 Selected Financial Data.......... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 18 Business......................... 34 Management....................... 50 Principal Shareholders........... 59 Related Party Transactions....... 61 Description of Capital Stock..... 67 Shares Eligible for Future Sale........................... 71 Underwriting..................... 73 Legal Matters.................... 75 Experts.......................... 75 Where You Can Find More Information.................... 75 Index to the Financial Statements..................... F-1
Dealer Prospectus Delivery Obligation: Until , 2000 (25 days after the date of this prospectus) all dealers that buy, sell or trade in these shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. Dealers are also obligated to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. (KRISPY KREME LOGO) 3,000,000 Shares Common Stock Deutsche Banc Alex. Brown J.P. Morgan & Co. Dain Rauscher Wessels BB&T Capital Markets Prospectus , 2000 109 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of the fees and expenses (other than underwriting commissions and discounts) payable by Krispy Kreme Doughnuts, Inc. ("Krispy Kreme" or the "Company") in connection with this offering.
---------- Securities and Exchange Commission Registration Fee......... $ 19,734 National Association of Securities Dealers Inc. Registration Fee....................................................... 7,975 Nasdaq National Market Listing Fees......................... 95,000 Printing and Engraving Expenses............................. * Legal Fees and Expenses..................................... * Accounting Fees and Expenses................................ * Transfer Agent Fees and Expenses............................ * Miscellaneous............................................... * ---------- Total............................................. $1,200,000+ ==========
- --------------- * To be filed by amendment + Estimate ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Krispy Kreme's Articles of Incorporation and Bylaws provide that our directors and officers shall not be personally liable to us or our shareholders for monetary damages for breach of fiduciary duty as a director or officer to the fullest extent permitted by North Carolina law. Under Section 55-8-51 of the North Carolina Business Corporation Act, we may indemnify a present or former director if he conducted himself in good faith and reasonably believed, in the case of conduct in his official capacity, that his conduct was in Krispy Kreme's best interests. In all other cases, the director must have believed that his conduct was at least not opposed to our best interests. In the case of any criminal proceeding, the director must have had no reasonable cause to believe his conduct was unlawful. We may not indemnify a director in connection with a proceeding by or in the right of Krispy Kreme in which the director was adjudged liable to us or, in connection with any other proceeding, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. Under North Carolina law, we may indemnify our officers to the same extent as our directors and to such further extent as is consistent with public policy. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling Krispy Kreme pursuant to the foregoing provisions, or otherwise, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Krispy Kreme maintains directors' and officers' liability insurance against any actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty by any director or officer, excluding certain matters including fraudulent, dishonest or criminal acts or self-dealing. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of Krispy Kreme, its directors and executive officers and other persons for certain liabilities, including liabilities arising under the Securities Act of 1933. II-1 110 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In connection with a corporate reorganization in the form of a merger conducted in conjunction with this offering, Krispy Kreme Doughnuts, Inc. will issue 20 shares of its common stock, no par value, in exchange for each outstanding share of the common stock, par value $10.00 per share, of Krispy Kreme Doughnut Corporation. Krispy Kreme Doughnuts, Inc. expects to issue a total of 9,340,220 shares of its common stock in this exchange. The issuance will be a private placement exempt from registration under Section 4(2) of the Securities Act. Pursuant to the reorganization, Krispy Kreme Doughnut Corporation will become a wholly-owned subsidiary of Krispy Kreme Doughnuts, Inc. The shareholders of Krispy Kreme Doughnut Corporation approved this transaction at a special shareholders' meeting on November 10, 1999. It is anticipated that the reorganization will be effective concurrently with the effectiveness of this registration statement. The Agreement and Plan of Merger by and between Krispy Kreme Doughnut Corporation, Krispy Kreme Doughnuts, Inc. and KKDC Reorganization Corporation dated December 2, 1999 is filed with this registration statement as Exhibit 2.1. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES a. Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 1.1* -- Form of Underwriting Agreement 2.1+ -- Agreement and Plan of Merger among the Company, Krispy Kreme Doughnut Corporation and KKDC Reorganization Corporation dated December 2, 1999 3.1+ -- Articles of Incorporation of the Company 3.2+ -- Bylaws of the Company 4.1* -- Form of Certificate for Common Stock 5.1* -- Opinion of Kilpatrick Stockton, LLP, as to the legality of the securities being registered 10.1+ -- Amended and Restated Loan Agreement, dated December 21, 1998, between Krispy Kreme Doughnut Corporation and the subsidiaries thereof and Branch Banking and Trust Company 10.2+ -- Form of Associates License Agreement 10.3+ -- Form of Development Agreement 10.4+ -- Form of Franchise Agreement 10.5 -- Letter Agreement, dated April 12, 1994, between Krispy Kreme Doughnut Corporation and Mr. Scott A. Livengood 10.6 -- Letter Agreement, dated February 15, 1994, between Krispy Kreme Doughnut Corporation and Mr. Joseph A. McAleer, Jr. 10.7 -- Guaranty of Payment Agreement, dated September 18, 1998, by Krispy Kreme Doughnut Corporation for the benefit of Beattie F. Armstrong and Beattie F. Armstrong, Inc. 10.8 -- Collateral Repurchase Agreement, dated March 31, 1998 by and among Krispy Kreme Doughnut Corporation, the Bank of Blue Valley and Midwest Doughnuts, LLC 10.9 -- Guaranty by Krispy Kreme Doughnut Corporation, dated December 31, 1998, in favor of the Bank of Blue Valley with respect to the obligations of Midwest Doughnuts, LLC
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.10+ -- Collateral Repurchase Agreement, dated January 30, 1998, by and among Krispy Kreme Doughnut Corporation, Mackk, L.L.C. and Branch Banking and Trust Company 10.11+ -- Collateral Repurchase Agreement, dated January 30, 1998, by and among Mr. Joseph A. McAleer, Jr., Mackk, L.L.C., Krispy Kreme Doughnut Corporation and Branch Banking and Trust Company 10.12 -- Collateral Repurchase Agreement, dated January 2, 1998, by and among Mrs. Bonnie Silvey Vandegrift, Brevard Tennis and Athletic Club Incorporated, Krispy Kreme Doughnut Corporation and Branch Banking and Trust Company 10.13 -- Collateral Repurchase Agreement, dated October 15, 1997, by and among Krispy Kreme Doughnut Corporation, Midwest Doughnuts, LLC, and the Bank of Blue Valley 10.14* -- Guaranty by Krispy Kreme Doughnut Corporation, dated October 15, 1997, in favor of the Bank of Blue Valley with respect to the obligation of Midwest Doughnuts, LLC 10.15 -- Collateral Repurchase Agreement, dated October 22, 1996, by and among Robert L. McCoy, Gulf Florida Doughnut Corporation, Krispy Kreme Doughnut Corporation and Branch Banking and Trust Company 10.16+ -- Collateral Repurchase Agreement, dated May 29, 1996, among Krispy Kreme Doughnut Corporation, Midwest Doughnuts, LLC and The First National Bank of Olathe 10.17 -- Guaranty by Krispy Kreme Doughnut Corporation, dated May 29, 1996, in favor of the First National Bank of Olathe with respect to the obligations of Midwest Doughnuts, LLC 10.18 -- Collateral Repurchase Agreement, dated July 7, 1995 by and among Robert J. Simmons, Simac, Inc., Krispy Kreme Doughnut Corporation and First National Bank of Ohio 10.19 -- Collateral Repurchase Agreement, dated February 25, 1994, by and among Mr. William J. Dorgan, Mrs. Patricia M. Dorgan, Krispy Kreme Doughnut Corporation and Branch Banking and Trust Company 10.20 -- Promissory Note, dated March 13, 1997, of Midwest Doughnuts, LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties payable to the order of Krispy Kreme Doughnut Corporation 10.21* -- Promissory Note, dated March 13, 1997, of Midwest Doughnuts, LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties payable to the order of Krispy Kreme Doughnut Corporation 10.22 -- Trademark License Agreement, dated May 27, 1996, between HDN Development -- Corporation and Krispy Kreme Corporation 10.23 -- Stock Option Plan dated August 6, 1998 10.24 -- Long-Term Incentive Plan dated January 30, 1993 10.25 -- Form of Promissory Note relating to termination of Long-Term Incentive Plan 10.26 -- Form of Restricted Stock Purchase Agreement 10.27 -- Form of Promissory Note relating to restricted stock purchases 10.28 -- Employment Agreement dated August 10, 1999 between Krispy Kreme Doughnut Corporation and John N. McAleer 10.29 -- Employment Agreement dated August 10, 1999 between Krispy Kreme Doughnut Corporation and Scott A. Livengood
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.30 -- Employment Agreement dated August 10, 1999 between Krispy Kreme Doughnut Corporation and J. Paul Breitbach 10.31 -- Kingsmill Plan 21.1+ -- List of subsidiaries 23.1* -- Consent of Kilpatrick Stockton LLP (will be included in the opinion filed as Exhibit No. 5 to this Registration Statement) 23.2 -- Consent of PricewaterhouseCoopers LLP 24.1+ -- Powers of Attorney of certain officers and directors of the Company (included on the signature pages of this Registration Statement) 27.1 -- Financial Data Schedule
- --------------- * To be filed by amendment. + Previously filed. b. Financial Statement Schedules Schedule II -- Consolidated Valuation and Qualifying Accounts and Reserves of Krispy Kreme Doughnut Corporation ITEM 17. UNDERTAKINGS. Krispy Kreme hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Krispy Kreme pursuant to the provisions of our Articles of Incorporation and Bylaws or otherwise, Krispy Kreme has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of Krispy Kreme in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Krispy Kreme will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned undertakes that: 1. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by Krispy Kreme pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. 2. For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 113 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Krispy Kreme has duly caused this first pre-effective amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Winston-Salem, North Carolina, on February 18, 2000. KRISPY KREME DOUGHNUTS, INC. By: /s/ J. PAUL BREITBACH ------------------------------------ J. Paul Breitbach Executive Vice President, Finance, Administration and Support Operations Pursuant to the requirements of the Securities Act of 1933, this first pre-effective amendment to the registration statement has been signed on February 18, 2000, by the following persons in the capacities indicated.
SIGNATURE POSITION - --------- -------- * Chairman of the Board of Directors, - ------------------------------------------- President and Chief Executive Officer Scott A. Livengood (Principal Executive Officer) * Vice Chairman of the Board of Directors and - ------------------------------------------- Executive Vice President, Concept John N. McAleer Development /s/ J. PAUL BREITBACH Executive Vice President, Finance, - ------------------------------------------- Administration and Support Operations J. Paul Breitbach (Principal Financial and Accounting Officer) * Director - ------------------------------------------- Frank E. Guthrie * Director - ------------------------------------------- William T. Lynch * Director - ------------------------------------------- Joseph A. McAleer, Jr. * Director - ------------------------------------------- Robert L. McCoy * Director - ------------------------------------------- Robert J. Simmons
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SIGNATURE POSITION - --------- -------- * Director - ------------------------------------------- Steven D. Smith * Director - ------------------------------------------- Robert L. Strickland *By: /s/ RANDY S. CASSTEVENS - ------------------------------------------- as attorney-in-fact
II-6 115 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Krispy Kreme Doughnut Corporation: Our report on the consolidated financial statements of Krispy Kreme Doughnut Corporation and its subsidiaries is included herein. In connection with our audits of such financial statements, we have also audited the related financial statement schedule of Krispy Kreme Doughnut Corporation and subsidiaries. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PRICEWATERHOUSECOOPERS LLP Greensboro, North Carolina March 19, 1999 II-7 116 KRISPY KREME DOUGHNUT CORPORATION SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------------------------- ADDITIONS ADDITIONS CHARGED BALANCE AT CHARGED TO BALANCE AT BEGINNING TO OTHER END RESERVE FOR DOUBTFUL ACCOUNTS OF PERIOD OPERATIONS ACCOUNTS DEDUCTIONS(1) OF PERIOD - ----------------------------- ---------- ---------- ---------- ------------- ---------- For the year ended February 2, 1997......... $257,349 $ 144,000 $ -- $ 108,430 $292,919 ======== ========== ========== ========== ======== For the year ended February 1, 1998......... $292,919 $ 180,573 $ -- $ 100,104 $373,388 ======== ========== ========== ========== ======== For the year ended January 31, 1999......... $373,388 $2,101,099 $ -- $1,499,487 $975,000 ======== ========== ========== ========== ========
- --------------- (1) Amounts represent write-off of uncollectible receivable balances. II-8 EX-10.5 2 LETTER AGREEMENT 4/12/94 / SCOTT A. LIVENGOOD 1 EXHIBIT 10.5 April 12, 1994 Mr. Scott A. Livengood President Krispy Kreme Doughnut Corporation P O Box 83 Winston-Salem, NC 27102-0083 Dear Scott: The purpose of this letter is to confirm our commitment to you in the event of your retirement or resignation from full time employment with Krispy Kreme within a period of five years from the date hereof. In consideration of your valuable contributions to Krispy Kreme, we are pleased to make this commitment upon your retirement as a full time employee of Krispy Kreme and resignation from full time employment with Krispy Kreme. OPTION TO DEVELOP AREA We will enter into a development agreement with you for the franchise development of an area for markets with a potential for 10 or more stores: Development Period: A number of years determined by multiplying the number of doughnut shops to be developed (to be mutually agreed upon) by one Development Schedule: One doughnut shop per year. Territory: To be elected by you within one year of the date of this letter (excluding New York, Chicago, Los Angeles and San Francisco and any markets for which development rights are granted prior to your election and within such one year period.) Franchise Agreement: The franchise agreement and terms then being offered to new franchisees. 2 Mr. Scott A. Livengood April 12, 1994 Page 2 - ------------------- Financing: We will enter into a "pioneer" arrangement for the first Krispy Kreme Express similar to the current pioneer plan. This commitment was approved by the board of directors on April 12, 1994. Please indicate your agreement by signing below. KRISPY KREME DOUGHNUT CORPORATION /s/ J. A. McAleer, Jr. J. A. McAleer, Jr. Chairman of the Board and Chief Executive Officer Agreed to /s/ Scott A. Livengood Scott A. Livengood Dated: April 19, 1994 3 June 11, 1996 Mr. Scott A. Livengood President Krispy Kreme Doughnut Corporation P.O. Box 83 Winston-Salem, NC 27102 Dear Scott: The purpose of this letter is to confirm changes to a letter of commitment to you dated April 12, 1994. This original letter granted you the option to develop certain areas in the event of your retirement or resignation from full time employment with Krispy Kreme. Pursuant to a Board of Directors resolution dated April 25, 1996, the following changes are made to the attached letter: Territory Elected: You have elected Alamance, Durham and Orange Counties in the State of North Carolina; the entire state of Colorado. Development Period: 5 years from the date of the Board of Directors' resolution. You may begin to develop the territories while still employed at Krispy Kreme Doughnut Corporation, i.e., you do not have to wait until retirement or resignation. Franchise Agreement: The franchise agreement and terms then being offered to new franchisees. Other Arrangements: You are allowed to take advantage of the benefits as outlined in the "Kingsmill" agreement. Please indicate your agreement by signing below. Krispy Kreme Doughnut Corporation /s/ J. A. McAleer, Jr. J.A. McAleer, Jr. Chairman of the Board and Chief Executive Officer Agreed to: /s/ Scott A. Livengood Scott A. Livengood Dated: 7/22/96 EX-10.6 3 LETTER AGREEMENT 2/15/94 / JOSEPH A. MCALEER, JR. 1 Exhibit 10.6 February 15, 1994 Mr. J. A. McAleer, Jr. Chief Executive Officer Krispy Kreme Doughnut Corporation P O Box 83 Winston-Salem, NC 27102-0083 Dear Mac: The purpose of this letter is to confirm our commitment to you in the event of your retirement or resignation from full time employment with Krispy Kreme within a period of five years from the date hereof. BACKGROUND In 1986, during the period of your father's illness, you were managing your father's doughnut shop in Mobile, Alabama with the expectation that, at some point - upon your father's retirement, you would own as well as operate this franchise. At that time, our board requested that you move from Mobile to Winston-Salem to begin employment with Krispy Kreme Doughnut Corporation. You accepted this call which necessitated leaving your employment as manager of your father's Mobile doughnut shop and moving your family to North Carolina. Since that time, you have had a major role in leading our company through the management transition arising out of your father's retirement, building our new management team and leading the company in its growth strategy. In consideration of your valuable contributions to Krispy Kreme at considerable personal and family sacrifice, we are pleased to make this commitment upon your retirement as a full time employee of Krispy Kreme and resignation from full time employment with Krispy Kreme. OPTION TO ACQUIRE MOBILE OPERATION 1. You will have the option to purchase the company's Mobile operation upon the following terms and conditions: 2 Mr. J. A. McAleer, Jr. February 15, 1994 Page 2 - ------------------ Territory: Choctaw, Washington, Mobile, Clarke, Monroe, Conecuh and Baldwin (except that portion granted to Charles C. Scruggs III) counties, Alabama. Royalty: 3% and 1% Sales: Retail, special order, fund raising and wholesale. Assets Leased: Real estate, machinery, equipment, furniture, fixtures, signage, leasehold improvements and route vehicles used in Mobile operation. Lease Rate: Six percent (6%) of your gross sales Resignation/Retirement: Upon such retirement or resignation, all other company compensation, allowance and benefits shall cease. OPTION TO DEVELOP NEW ORLEANS AREA 2. We will enter into a mutually agreeable development agreement with you for the franchise development of the New Orleans area upon the following terms: Development Period: 10 years from the date you exercise your option to acquire the Mobile operation. Development Schedule: One doughnut shop per year. Territory: St. Bernard, Orleans, Plaquemines, Jefferson and St. Charles Parishes. Franchise Agreement: The franchise agreement and terms then being offered to new franchisees. Financing: We will enter into a "pioneer" arrangement for the first Krispy Kreme Express similar to the current pioneer plan. 3 Mr. J. A. McAleer, Jr. February 15, 1994 Page 3 - ------------------ This commitment was approved by the board of directors on February 10, 1994. Please indicate your agreement by signing below. KRISPY KREME DOUGHNUT CORPORATION /s/ Scott A. Livengood Scott A. Livengood President Agreed to /s/ J.A. McAleer, Jr. J. A. McAleer, Jr. Dated: 2/15/1994 4 June 11, 1996 Mr. J.A. McAleer, Jr. Chief Executive Officer Krispy Kreme Doughnut Corporation P.O. Box 83 Winston-Salem, NC 27102-0083 Dear Mac: The purpose of this letter is to confirm changes to a letter of commitment to you dated February 15, 1994. The original letter granted you the option to acquire the Mobile operation and the option to develop the New Orleans area. Pursuant to a Board of Directors resolution dated April 25, 1996, the following changes are made to the attached letter: Option to Acquire Mobile Operation The terms and conditions of the attached letter remain in force except for the lease rate. Pursuant to the Board of Directors' resolution, you may elect to lease the Mobile operation at the stipulated rate of 6%, or you may elect to purchase the operation with the purchase price being calculated according to the following formula: Amount paid for Mobile assets in May 1990 ($1,425,000) Inventory on hand (approximate - to be verified at date closing) Accounts receivable (approximate - to be verified at date of closing) Pro-rata share of taxes and licenses (approximate - to be verified at date of closing) Total Purchase Price The balance of the terms of the attached letter agreement with respect to the Mobile operation and with respect to the development of the New Orleans, Louisiana area shall remain unamended and in full force and effect. Please indicate your agreement by signing below. Krispy Kreme Doughnut Corporation /s/ Scott A. Livengood Scott A. Livengood President Agreed to: /s/ J. A. McAleer, Jr. J.A. McAleer, Jr. Dated: 7/22/96 5 This resolution was voted on approved by all of the Directors with the exception of Mr. Livengood. Mr. Livengood abstained as he is an interested party to the resolution. RESOLUTION RESOLVED, that Krispy Kreme Doughnut Corporation (the "Corporation") shall contribute, in a Section 118 transaction, all of the assets owned by the Corporation and utilized in connection with its Florence, Kentucky doughnut shop including, but not limited to, any interest it may have in the real property on which such store is operated, whether as tenant or otherwise, and any and all interest it may have in the doughnut store building and its design, to Thornton's Flav-O-Rich Bakery, Incorporated. The Corporation, to the extent necessary, further authorizes all actions to be taken by the Corporation or its subsidiaries pursuant to that certain memorandum to Mark Preston from Gary Tannenbaum dated April 10, 1996, a copy of which is attached hereto and incorporated by reference. The names of the corporations shall be as set forth in such memorandum or as may otherwise be established in accordance with applicable law. This resolution was approved by all of the Directors. RESOLUTION RESOLVED, that that certain letter agreement by and between the Corporation and Mr. J.A. McAleer, Jr. dated February 15, 1994 and accepted by Mr. McAleer on such date, a copy of which is attached hereto, is amended as follows: With respect to the Corporation's Mobile, Alabama operation, Mr. McAleer shall have the option to lease such operation pursuant to the terms set forth in such letter agreement or to purchase such operation. In the event Mr. McAleer elects to purchase such operation, the purchase price for the Mobile, Alabama operation shall be calculated according to the following formula: Amount paid for Mobile assets in May 1990 ($1,425,000) Inventory on hand (approximate - to be verified at date of closing) Accounts receivable (approximate - to be verified at date of closing) Pro-rata share of taxes and licenses (approximate - to be verified at date of closing) Total Purchase Price With respect to any election by Mr. McAleer to develop and/or acquire such Mobile, Alabama and New Orleans, Louisiana markets under the letter agreement (as amended in accordance with this Resolution), Mr. McAleer and the Corporation shall execute such standard agreements as are then executed between the Corporation and its franchisees; provided, however, that such agreements shall be amended to comply with the terms of the aforesaid letter agreement. The balance of the terms of said letter agreement with respect to the Mobile, Alabama operation, and with respect to the development of the New Orleans, Louisiana area, shall remain unamended and in full force and effect. This resolution was voted on and approved by all of the Directors with the exception of Mr. McAleer. Mr. McAleer abstained as he is an interested party to the resolution. EX-10.7 4 GUARANTY OF PAYMENT AGREEMENT 9/18/98 1 EXHIBIT 10.7 GUARANTY OF PAYMENT AGREEMENT THIS GUARANTY OF PAYMENT AGREEMENT ("Agreement") is entered into as of September 18, 1998, by KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation ("Guarantor"), for the benefit of BEATTIE F. ARMSTRONG, a resident of Macon, Georgia ("Armstrong"), and BEATTIE F. ARMSTRONG, INC., a Georgia corporation ("BFA"; BFA and Armstrong are sometimes collectively referred to as the "Lenders" and individually as a "Lender"). R E C I T A L S : A. S&P of Macon, Inc. ("S&P") has purchased substantially all of the assets of BFA pursuant to that certain Assets Purchase Agreement of even date (the "Purchase Agreement"), and BFA has financed the payment of the purchase price for such assets by accepting from S&P a promissory note (the "Assets Note") of even date in the principal amount of $300,000 (the "Assets Loan"). B. Pat Silvernail ("Silvernail") has purchased from Armstrong his License Agreement with Guaranty to operate as a Krispy Kreme(R) franchisee in Macon, Georgia and surrounding areas pursuant to the Purchase Agreement, and Armstrong has financed the payment of the purchase price for the License Agreement by accepting from Silvernail and his spouse (collectively, the "Silvernails") a promissory note (the "Franchise Note") of even date in the principal amount of $700,000 (the "Franchise Loan"). (The Silvernails and S&P are sometimes collectively referred to as the "Borrowers" and individually as a "Borrower"; the Assets Note and the Franchise Note are sometimes collectively referred to as the "Notes" and individually as a "Note"; and the Assets Loan and the Franchise Loan are sometimes collectively referred to as the "Loans" and individually as a "Loan"). C. Silvernail was a long-term employee of Guarantor prior to the consummation of the transactions described in the Purchase Agreement. Guarantor desires continuity in the Macon, Georgia market by way of a sale to an experienced operator like Silvernail, with an opportunity, in consideration of this Guaranty, to reclaim the Macon, Georgia operations in the event of a default by the Silvernails (or either of them) or S&P to Lender. Guarantor has a substantial interest in assisting Silvernail in acquiring the Krispy Kreme franchise subject to the Purchase Agreement, and Silvernail has caused the incorporation of S&P (and the Silvernails own all the issued and outstanding stock thereof) to acquire the operating assets of such franchise and to thereafter operate the same. D. Lender is unwilling to extend the Loans to the Silvernails and S&P without a guaranty thereof by Guarantor. As a material inducement to each Lender to make its respective Loan and accept the Note made payable to it or him, Guarantor has agreed to guaranty the payment and performance of each Loan as set forth below. 2 NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Guarantor agrees as follows: 1. Guaranty. Guarantor hereby unconditionally and irrevocably guarantees to each Lender the full and punctual payment of all past, present and future indebtedness, liabilities and obligations to each Lender of the Borrowers, or any of them, of any kind, nature or description whatsoever, when they become due and payable under each Note (the "Guaranteed Liabilities"), including, without limitation, the punctual payment and performance of all obligations of the Borrowers to pay the principal of and interest on the Notes, and all costs of collection therefor. As to Guarantor, the guarantee provided for in this Agreement is an absolute, unconditional, continuing guarantee of payment and not of collectibility and is in no way conditioned upon or limited by: (a) any attempt to collect from any Borrower; (b) any attempt to collect from, or the exercise of any rights and remedies against any person other than the Borrowers who may at any time now or hereafter be primarily or secondarily liable for any or all of the Guaranteed Liabilities, including without limitation any other guarantor and any other maker, endorser or surety of all of or a portion of the Guaranteed Liabilities or any person who is now or hereafter a party (collectively "Obligors") to any to the Notes or the Purchase Agreement (collectively with the Notes, the "Transaction Documents"); or (c) any resort or recourse to or against any security or collateral now or hereafter pledged, assigned, or granted to a Lender under the provisions of any instrument or agreement. If a Borrower fails to pay any of the Guaranteed Liabilities on which it is obligated, when they become due and payable, Guarantor shall pay such Guaranteed Liabilities on demand in immediately available funds, in lawful money of the United States of America. 2. Nature of Obligations. The obligations and liabilities of Guarantor under this Agreement are primary obligations of Guarantor, are continuing, absolute and unconditional, shall not be subject to any counterclaim, recoupment, set off, reduction or defense based upon any claim that Guarantor may have against a Borrower, are independent of any other guaranty or guaranties at any time in effect with respect to all or any part of the Guaranteed Liabilities, and may be enforced regardless of the existence of such other guaranty or guaranties. The obligations and liabilities of Guarantor under this Agreement shall not be affected, impaired or released by the invalidity or unenforceability of any or all of the Transaction Documents. Guarantor hereby consents that, at any time and from time to time, any Lender may, without in any manner affecting, impairing or releasing any or all of the obligations and liabilities of Guarantor under this Agreement, do any one or more of the following, all without notice to, or further consent of, Guarantor and with or without consideration: (a) renew, extend, change the time or terms for payment of the principal and interest on any of the Guaranteed Liabilities or any renewals or extensions, including, without limitation, either Note or any renewals or extensions; (b) extend and/or change the time or terms for performance of any other obligations, covenants or agreements under the Transaction Documents of a Borrower, or any other party to the Transaction Documents; (c) modify, compromise, substitute, release or otherwise deal with in any manner satisfactory to any Lender (i) any or all of the provisions of any or all of the Transaction Documents, (ii) any or all of the Guaranteed Liabilities, (iii) any or all of the obligations and liabilities 3 of Guarantor under this Agreement or under any and all transaction Documents to which Guarantor is a party or any or all property or other security given at any time as collateral by Guarantor without affecting, impairing or releasing any or all of the obligations and liabilities of Guarantor under this Agreement or under any or all of the Transaction Documents to which guarantor is a party, (iv) any or all of the Obligors or any or all other parties to any or all of the Transaction Documents, and (v) any or all property or other security now or hereafter serving as collateral for any or all of the Guaranteed Liabilities or other obligations under any or all of the Transaction Documents; (d) receive additional property or other security as collateral for any or all of the Guaranteed Liabilities or other obligations under any or all of the Transaction Documents; (e) delay to enforce any right, power, privilege or remedy conferred upon a Lender under the provisions of any of the Transaction Documents or under applicable laws; (f) grant consents or indulgences or take action or omit to take action under, or in respect of, any or all of the Transaction Documents, and (g) apply any payment received by a Lender of, or on account of, any of the Guaranteed Liabilities from a Borrower, or from any source other than Guarantor to the Guaranteed Liabilities in whatever order arid manner the Lenders elect, and any payment received by a Lender from Guarantor for or on account of this Agreement may be applied by such Lender to any of the Guaranteed Liabilities in whatever order and manner such Lender elects. 3. Waiver by Guarantor. Except as may be limited by the provisions of paragraph 16 of that certain Standby Agreement of even date by and among Guarantor, Armstrong, BFA, S&P and the Silvernails (the "Standby Agreement"), Guarantor unconditionally waives, to the extent permitted by applicable laws: (a) notice of the execution and delivery of the Transaction Documents; (b) notice of each Lender's acceptance of and reliance on this Agreement or the making of the Loans to the Borrowers or of the creation of any of the Guaranteed Liabilities; (c) presentment, demand, dishonor, protest, notice of non-payment, and notice of dishonor of the Guaranteed Liabilities, the Transaction Documents and any property or other security serving at any time as collateral under the Transaction Documents; (d) all notices required by statute, rule of law or otherwise to preserve any rights against Guarantor under this Agreement or under any of the Transaction Documents, including, without limitation, any demand, proof or notice of non-payment of any of the Guaranteed Liabilities by a Borrower and notice of any failure or default on the part of a Borrower to perform or comply with any term of any of the Transaction Documents to which such Borrower is a party; (e) any diligence in collecting the Guaranteed Liabilities or this Agreement or protecting or realizing upon any security; (f) any duty or obligation on the part of a Lender to ascertain the validity, extent. or nature of any security for the Guaranteed Liabilities or any insurance or other rights respecting such security, or the liability of any party primarily or secondarily liable for payment of the Guaranteed Liabilities or liable upon any security, or to take any steps or action to protect, information respecting, or otherwise follow in any manner, any such security, insurance or other rights; (g) any duty or obligation on the part of a Lender, required by statute, rule of law or otherwise, to proceed to collect payment of the Guaranteed Liabilities from, or to commence an action against, a Borrower or any other person, or to resort to any security or to any balance of any deposit account or credit on the books of a Lender in favor of a Borrower or any other person, despite any notice or request of Guarantor to do so; (h) any rights of Guarantor pursuant to N.C.G.S. ss. 26-7 or any similar or subsequent law; and (i) so long as any part of the Guaranteed Liabilities remains outstanding and for a period of 4 ninety-one (91) days after the payment in full thereof, any right to subrogation to a Lender's interest under any Transaction Documents and any right to subrogation, reimbursement, contribution, exoneration and indemnity against any property or other security serving at any time as collateral for any or all of the Guaranteed Liabilities or under any of the Transaction Documents. Notwithstanding any provision of this Agreement to the contrary. Guarantor irrevocably and absolutely waives any and all rights of subrogation, contribution, indemnification, reimbursement, exoneration or any similar rights against the Borrowers with respect to this Agreement and the payment or performance by Guarantor of any Guaranteed Liabilities, whether such rights arise under an express or implied contract or by operation of law, it being the intention of the parties that Guarantor shall not be deemed to be a creditor of a Borrower by reason of the existence of this Agreement and the payment or performance by Guarantor of any Guaranteed Liabilities so long as any part of the Guaranteed Liabilities remains outstanding and for a period of ninety-one (91) days after the payment in full thereof. This waiver is given to induce each Lender to extend credit to the Borrowers under the Transaction Documents. 4. Default. Except as may be limited by the provisions of paragraphs 2 and 3 of the Standby Agreement, the occurrence of any one or more of the. following events shall constitute an event of default ("Event of Default") under this Agreement: (a) the failure of Guarantor to pay to a Lender when due and payable any and all amounts payable by Guarantor to such Lender under the provisions of this Agreement; (b) the failure of Guarantor to perform or comply with any of the provisions of this Agreement; (c) the occurrence of an event of default under any of the Transaction Documents; (d) if Guarantor generally is unable to pay its debts as they mature; (e) the filing of any petition for relief under the Bankruptcy Code or any similar Federal or state statute by Guarantor; (f) if Guarantor is served with any petition for relief under the Bankruptcy Code or any similar Federal or state statute and such petition is not dismissed within sixty (60) days after the date on which Guarantor is served with such a petition; (g) any application for the appointment of a receiver or custodian for, the making of a general assignment for the benefit of creditors by, or the insolvency of Guarantor; or (h) the termination of existence, dissolution or liquidation of Guarantor. Whenever there is an Event of Default under this Agreement, each Lender may, at his or its option, declare an amount equal to any or all of the then unpaid balance of the Guaranteed Liabilities due to him or it to be immediately due and payable by Guarantor, and Guarantor shall on demand pay such unpaid balance to the accelerating Lender(s) in immediately available funds in lawful money of the United States of America. 5. Enforcement Expenses. Guarantor (a) agrees to pay reasonable attorneys' fees and costs of collection if any of the Guaranteed Liabilities are referred to an attorney at law for collection or the liability of Guarantor under this Agreement shall be enforced by an attorney at law, and (b) shall indemnify and hold harmless each Lender all-against any loss, liability, or expense, including reasonable attorneys' fees and disbursements and any other fees and disbursements, that may result from any failure of a Borrower to pay any of the Guaranteed Liabilities when due and payable or that may, be incurred by or on behalf of a Lender in enforcing any obligation of a Borrower to pay any of the Guaranteed Liabilities and any obligations and liabilities of Guarantor under this Agreement. For purposes of this paragraph, the term 5 "reasonable attorneys' fees" shall mean reasonable attorneys' fees incurred and computed on the basis of usual and customary hourly rates and not on the basis of any percentage of the Guaranteed Liabilities or any common law or statutory presumption. 6. Delay and Waiver by a Lender. No delay in the exercise of, or failure to exercise, any right, remedy or power accruing upon any default or failure of Guarantor in the performance of any obligation under this Agreement shall impair any such right, remedy or power or shall be construed to be a waiver by a Lender, but any such right, remedy or power may be exercised from time to time and as often as may be deemed by a Lender expedient. In order to entitle the Lenders to exercise any right, remedy or power reserved to them in this Agreement, it shall not be necessary to give any notice to Guarantor. If Guarantor should default in the performance of any obligation under this Agreement, and such default should thereafter be waived by a Lender, such waiver shall be limited to the waiving Lender and the particular default so waived. No waiver, amendment, release or modification of this Agreement shall be established by conduct, custom or course of dealing. 7. Notices and Communications. All notices and other communications under this Agreement shall be in writing and delivered in person or sent by certified or registered mail, postage prepaid and properly addressed as follows: To the Lenders: Beattie F. Armstrong 1538 Maplewood Drive Macon, GA 31210 To Guarantor: Krispy Kreme Doughnut Corporation 370 Knollwood Street, Suite 500 Winston-Salem, NC 27103 Attn: Stephen A. Johnson Any party may, from to time, change its address for the purpose of notices to that party by providing a notice as aforesaid specifying the new address for such a party. 8. Assignment. Each Lender may, without notice to or consent of Guarantor, sell, assign or transfer to any person or persons ail or any part of the Guaranteed Liabilities payable to it or him, and each such person or persons shall have the right to enforce this Agreement as fully as such Lender, provided that such Lender shall continue to have the unimpaired right to enforce this Agreement as to so much of the Guaranteed Liabilities that it or he has not sold, assigned or transferred. 6 9. Successors and Assigns. All covenants and agreements of Guarantor set forth in this Agreement shall bind Guarantor and its successors and assigns and shall inure to the benefit of, and be enforceable by, each Lender and their respective heirs, personal representatives, successors and assigns, including, without limitation, any holder of either Note or any or all of the Transaction Documents. 10. Reinstatement of Guaranteed Liabilities. Notwithstanding termination of this Agreement, to the extent that a Lender receives any payment on the Guaranteed Liabilities (whether from a Borrower, Guarantor or otherwise) or a Lender enforces any security interest or lien or exercises any right of setoff and such payments, or the proceeds of such enforcement or setoff or any part thereof, are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable principles, then to the extent of such recovery, the liability or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred and shall be Guaranteed Liabilities under this Agreement. 11. Miscellaneous. Neither this Agreement nor any term may be amended, waived, released or modified orally, but only by an instrument in writing, signed by the party against which the enforcement of the amendment, waiver, release or modification is sought. Whenever used in this Agreement, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine or neuter gender shall include all genders. Whenever used in this Agreement, the word "person" or "persons" shall mean and include a corporation, an association, a partnership, a limited liability company, an organization, a business, an individual, a government or political subdivision or agency, or an estate or trust. This Agreement shall in all respects be deemed to be made in, and governed by, construed and enforced in accordance with the laws of North Carolina. Each Lender shall have the right: to grant participations in the Guaranteed Liabilities to others at any time and from time to time, and either Lender may divulge to any such participant or potential participant all information, reports, financial statements and documents obtained in connection with this Agreement, any of the Transaction Documents or otherwise. If any term of this Agreement or any obligation under this Agreement shall be held to be invalid, illegal or unenforceable, the remainder of this Agreement and any other application of such term shall not be affected. The paragraph and section headings of this Agreement have been inserted for convenience only and shall not modify, define, limit or expand the express provisions. This Agreement may be executed in duplicate originals or in several counterparts, each of which shall be deemed an original but all of which together shall constitute one instrument, and it shall not be necessary to produce or account for more than one such duplicate original or counterpart. . This Agreement, together with the other Transaction Documents, contains the entire agreement and understanding of the parties. Furthermore, no course of dealing between the parties, no usage of trade and no parcel or extrinsic evidence shall be used to supplement or modify any terms of this Agreement; nor are there any conditions to the complete effectiveness of this Agreement. Guarantor has adequate means to obtain from each Borrower on a continuing basis information concerning their financial condition and Guarantor is not relying on either Lender to provide such information) (including, but not limited to, 7 information respecting any changes in the business or financial condition of a Borrower) either now or in the future. No Lender shall have a duty to notify Guarantor of any such information. [NEXT PAGE IS SIGNATURE PAGE] 8 SEPARATE SIGNATURE PAGE TO GUARANTY OF PAYMENT AGREEMENT BY KRISPY KREME DOUGHNUT CORPORATION ("Guarantor") FOR THE BENEFIT OF BEATTIE F. ARMSTRONG and BEATTIE F. ARMSTRONG, INC. ("Lender") IN WITNESS WHEREOF, Guarantor has signed, sealed and delivered this Agreement as of the day and year written above. GUARANTOR: KRISPY KREME DOUGHNUT CORPORATION By: /s/ J. Paul Breitbach Name: J. Paul Breitbach Title: Exec. Vice President ATTEST: /s/ Stephen A. Johnson Asst. Secretary [AFFIX CORPORATE SEAL] ________________________________________________________________________________ NORTH CAROLINA ) ) FORSYTH COUNTY ) I, Jane Bryant, a Notary Public of said Davidson County and State, certify that Stephen A. Johnson personally came before me this day and acknowledged that he is the Assistant Secretary of KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation, and that by authority duly given and as the act of the Corporation, the foregoing instrument was signed in its name by its President, sealed with its corporate seal and attested by Stephen A. Johnson as its Assistant Secretary, for and on behalf of such Corporation. WITNESS my hand and Notarial Seal, or Stamp, this 24th day of September, 1998. /s/ Jane R. Bryant Notary Public My Commission Expires: October 27, 2001. NOTARIAL SEAL/STAMP: EX-10.8 5 COLLATERAL REPURCHASE AGREEMENT DATED 3/31/98 1 EXHIBIT 10.8 COLLATERAL REPURCHASE AGREEMENT THIS COLLATERAL REPURCHASE AGREEMENT (the "Agreement") is made and entered into this 31st day of March, 1998 by and among KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation, with its principal office and place of business at 370 Knollwood Street, Suite 500, Winston-Salem, North Carolina, 27103 ("Krispy Kreme"), MIDWEST DOUGHNUTS, L.L.C., a North Carolina limited liability company (the "Borrower") and BANK OF BLUE VALLEY (the "Bank"). R E C I T A L S : 1. The Borrower has requested a loan from the Bank to finance the purchase of certain equipment, signage, furniture and fixtures for use at the Krispy Kreme Doughnut Shop to be established by Borrower at 8703 West 63rd Street, Merriam, Kansas. 2. The Bank has agreed to lend to Borrower Seven Hundred Sixty-Five Thousand and 00/100 Dollars ($765,000) secured in part by a security interest in the Equipment (as defined below) (the "Bank Loan") as evidenced by the Note (as defined below); and 3. Therefore, the parties desire to enter into this Agreement. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto do agree as follows: 1. A copy of the Note is attached hereto as EXHIBIT A and incorporated herein by reference (the "Note"). 2. Bank shall provide Krispy Kreme with a copy of any notice to Borrower declaring a default under the Note and demanding payment in full and a copy of any notice to Borrower after which Bank will exercise its remedies under the Note. Such copies shall be sent to Krispy Kreme within three (3) business days of the sending of the same to Borrower. 3. In the event of a default under the Note, as long as Bank has fully complied with the terms of this Agreement, Bank shall have the right, but not the obligation, to demand by notice to Krispy Kreme (the "Notification") that Krispy Kreme repurchase the Equipment at a price equal to the lesser of (i) Three Hundred Thirty-Five Thousand and 00/100 Dollars ($335,000.00) or (ii) the unpaid balance of the applicable portion of the Bank Loan (the "Unpaid Balance"). Such lesser amount is sometimes herein referred to as the "Purchase Price." The parties acknowledge that the Bank Loan is for Borrower's entire project for the construction, equipping and fixturing of a Krispy Kreme 2 Doughnut Shop and includes, but is not limited to, the purchase of the Equipment. Consequently, the unpaid Bank Loan balance will be prorated in relationship to the amount of the Loan for the purchase of the Equipment to determine the Unpaid Balance as such term is used in this Agreement. For example, purchase price of the Equipment is $335,000 and the Bank Loan is $765,000, then the Unpaid Balance, for purposes of this Agreement, shall be equal to 43.7% of the actual unpaid balance of the Bank Loan at the time of the Notification. 4. The parties acknowledge and agree that any default by Borrower under the Note or any other documents related to the Bank Loan, whether or not waived by the Bank, shall, at the option of Krispy Kreme, constitute a default under the Franchise Agreement, Development Agreement and any and all other agreements between Borrower and Krispy Kreme. 5. The liability of Krispy Kreme hereunder shall be subject to, and conditioned upon, full and complete compliance by Bank with the following: (a) Bank shall obtain and perfect a first priority security interest in the Equipment (the "Security Interest") and shall continuously maintain such perfected Security Interest from the moment Borrower acquires any interest in the Equipment. All filings and indicia of such Security Interest shall state that they are subject to the terms of this Agreement. (b) Bank shall notify Krispy Kreme of each advance under the Bank Loan for any purchase of Equipment not from Krispy Kreme within thirty (30) days after such advance is made and Krispy Kreme's obligations to Bank hereunder shall be reduced by the amount of any advances for which Krispy Kreme does not receive such notice. (c) The Security Interest shall be perfected separate and apart from any other security interest of Bank in and to any and all other property of Borrower. (d) Any transfer of the Security Interest or any interest therein to any other party shall provide that it is subject to the terms of this Agreement and the transferee thereof shall enter into an agreement with Krispy Kreme agreeing to abide by the terms hereof. (e) Bank shall not release the Security Interest in the Equipment nor shall Bank take any action, or fail to take any action, which action or failure to act will compromise or diminish the Security Interest in any way. Provided, however, Bank may release the Security Interest in portions of the Equipment if Bank, at Bank's election, either (i) releases Krispy Kreme from liability under this Agreement or (ii) determines that Borrower reasonably desires to replace the Equipment with new or different equipment (the "New Equipment") of value and function comparable to that in which the Security Interest is to be released and 2 3 ensures that the New Equipment is obtained by Borrower prior to such release and that the Security Interest applies to such New Equipment as a first priority Security Interest. Upon such replacement, the New Equipment shall be deemed to be "Equipment" under this Agreement. Bank shall provide notice to Krispy Kreme of any such release and shall provide Krispy Kreme with a list of the New Equipment and evidence that the Security Interest applies thereto. 6. Upon election by Bank to require repurchase of the Equipment by Krispy Kreme hereunder, Bank shall assign and transfer the Security Interest together with an interest in the Note equal to the Purchase Price to Krispy Kreme or such entity as Krispy Kreme may designate in writing. Borrower shall transfer all of its right, title and interest in the Equipment to Krispy Kreme at the same time. The Security Interest is agreed by the parties to also secure all of Borrower's obligations under this Agreement and Borrower hereby grants to Bank and to Krispy Kreme a security interest (which is agreed to be a part of the Security Interest) in the Equipment to secure Borrower's obligations under this Agreement. In no event shall the Security Interest be permitted to merge with ownership of the Equipment. 7. Except as permitted under subparagraph 5(e) hereof, Borrower shall not sell or transfer, and bank shall not consent to the sale or transfer, whether by gift or with or without consideration, of all or any part of the Equipment. Bank shall not sell or transfer the Equipment or any portion thereof through exercise of its rights under the Bank Loan and any documents executed in connection therewith, or otherwise, without first giving Krispy Kreme the option to purchase the Equipment in an amount equal to the Purchase Price. bank shall provide notice to Krispy Kreme of its proposed transfer and thirty (30) days in which to exercise its right to purchase said Equipment. At the time Krispy Kreme purchases the Equipment, Bank shall also transfer the Security Interest as provided under Paragraph 6 above. In no event shall the Security Interest be permitted to merge with ownership of the Equipment. 8. As used herein, the term Equipment shall mean all furniture, fixtures, equipment, doughnut making equipment and signage purchased by Borrower and reasonably necessary for the operation of a Krispy Kreme Doughnut Shop to be located at 8703 West 63rd Street, Merriam, Kansas, and as to which the Security Interest is effective. Krispy Kreme must approve the purchase of each item of Equipment. 9. Borrower consents and agrees to the terms of this Agreement and agrees to transfer the Equipment to Krispy Kreme immediately and at the same time as Krispy Kreme makes a payment of the Purchase Price to Bank or at the time Krispy Kreme elects to purchase the Equipment under Paragraph 7 hereof or as otherwise provided herein. Any such transfer shall be free and clear of all liens, claims or interests other than the Security Interest. In no event shall the Security Interest be permitted to merge with ownership of the Equipment. 3 4 10. A partial list of the Equipment is attached as EXHIBIT B hereto and incorporated herein by reference. The parties agree to amend such list as each item of Equipment is purchased, upon the completion of the purchase of the Equipment, and again upon the purchase of any New Equipment. No New Equipment shall be considered a part of the Equipment until added to this EXHIBIT B. 11. All notices required or desired to be sent hereunder shall be sent by certified mail, return receipt requested, postage prepaid, or by a recognized overnight courier such as Airborne Express, FedEx, etc. and shall be effective on receipt. Any party may change the address for notices to it by notice sent in accordance herewith. Notices shall be sent the parties hereto at their respective addresses set forth below (or at such address may be changed as permitted herein): IF TO KRISPY KREME: Krispy Kreme Doughnut Corporation By Mail: P.O. Box 83 Winston-Salem, NC 27102-0083 Attention: Stephen A. Johnson By Overnight: 370 Knollwood Street Suite 500 Winston-Salem, NC 27103 Attention: Stephen A. Johnson IF TO BORROWER: MIDWEST DOUGHNUTS, L.L.C. 620 Staffordshire Road Winston-Salem, NC 27104 Attention: Philip R.S. Waugh, Jr. IF TO BANK: Bank of Blue Valley By Mail: P.O. Box 26128 Overland Park, KS 66225 Attention: Lanny Drummond By Overnight: 11935 Riley Overland Park, KS 66225 Attention: Lanny Drummond 12. No failure of Bank to provide Krispy Kreme with a copy of any notice sent to Borrower shall relieve Krispy Kreme of its liability hereunder. 13. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and to the successors and assigns of Bank and Krispy Kreme. Borrower shall not have any right to assign this Agreement or any interest herein without the prior written consent of Bank and Krispy Kreme. Bank and Krispy Kreme shall each provide the other with a copy of any assignment of this Agreement. Any such assignment by Bank may be whole or partial, shall only be to a holder of an interest in the Note, and shall contain an agreement by the assignee to abide by the terms hereof. No assignment 4 5 hereof by Krispy Kreme shall relieve it of its obligations hereunder without Bank's consent to such release. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective the day and year first above written. KRISPY KREME DOUGHNUT CORPORATION By: /s/ Scott A. Livengood Printed Name: Scott A. Livengood Printed Title: President BORROWER: MIDWEST DOUGHNUTS, L.L.C. By: /s/ Jimmy B. Strickland Jimmy B. Strickland, Managing Member BANK: BANK OF BLUE VALLEY By: /s/ Lanny Drummond Printed Name: Lanny Drummond Printed Title: Vice President 5 EX-10.9 6 GUARANTY DATED 12/31/98 1 EXHIBIT 10.9 GUARANTY BY CORPORATION ________________________________, _______________ (City) (State) December 31, 1998 _________________________________________________ For good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, and to induce Bank of Blue Valley (herein, with its participants, successors and assigns, called "Lender"), at its option, at any time or from time to time to make loans or extend other accommodations to or for the account of Midwest Doughnuts, L.L.C. the ______ evidenced by the Note comprising the Indebtedness (herein called "Borrower") or to engage in any other transactions with Borrower, the Undersigned hereby absolutely and unconditionally guarantees to the Lender the full and prompt payment when due, whether at maturity or earlier by reason of acceleration or otherwise, of the debts, liabilities and obligations described as follows: A. If this [X] is checked, the Undersigned guarantees to Lender the payment and performance of the debt, liability or obligation of Borrower to Lender evidenced by or arising out of the following: promissory note dated December 31, 1998 in the amount of $765,000 and any extensions, renewals or replacements thereof (hereinafter referred to as the "Indebtedness"). B. If this [ ] is checked, the Undersigned guarantees to Lender the payment and performance of each and every debt, liability and obligation of every type and description which Borrower may now or at any time hereafter owe to Lender (whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several, or joint and several; all such debts, liabilities and obligations being hereinafter collectively referred to as the "Indebtedness"). Without limitation, this guaranty includes the following described debt(s):______________________________ The term, "Indebtedness" as used in this guaranty shall not include any obligations entered into between Borrower and Lender after the date hereof (including any extensions, renewals, or replacements of such obligations). The Undersigned further acknowledges and agrees with Lender that: 1. No act or thing need occur to establish the liability of the Undersigned hereunder, and no act or thing, except full payment and discharge of all Indebtedness, shall in any way exonerate the Undersigned or modify, reduce, limit or release the liability of the Undersigned hereunder. 2. This is an absolute, unconditional and continuing guaranty of payment of the Indebtedness and shall continue to be in force and be binding upon the Undersigned, whether or not all Indebtedness is paid in full, until this guaranty is revoked by written notice actually received by the Lender, and such revocation shall not be effective as to Indebtedness existing or committed for at the time of actual receipt of such notice by the Lender, or as to any renewals, extensions and refinancings thereof. The Undersigned represents and warrants to the Lender that the Undersigned has a direct and substantial economic interest in Borrower and expects to derive substantial benefits therefrom and from any loans and financial accommodations resulting in the creation of Indebtedness guaranteed hereby, and that this guaranty is given for a corporate purpose. The Undersigned agrees to rely exclusively on the right to revoke this guaranty prospectively as to future transactions, by written notice actually received by Lender if at any time, in the opinion of the directors or officers of the Undersigned, the corporate benefits then being received by the Undersigned in connection with this guaranty are not sufficient to warrant the continuance of this guaranty as to future Indebtedness. Accordingly, so long as this guaranty is not revoked prospectively in accordance with this guaranty, the Lender may rely conclusively on a continuing warranty, hereby made, that the Undersigned continues to be benefited by this guaranty and the Lender shall have no duty to inquire into or confirm the receipt of any such benefits, and this guaranty shall be effective and enforceable by the Lender without regard to the receipt, nature or value of any such benefits. 3. If the Undersigned shall be dissolved or shall be or become insolvent (however defined) or revoke this guaranty, then the Lender shall have the right to declare immediately due and payable, and the Undersigned will forthwith pay to the Lender, the full amount of all Indebtedness, whether due and payable or unmatured. If the Undersigned voluntarily commences or there is commenced involuntarily against the Undersigned a case under the United States Bankruptcy Code, the full amount of all Indebtedness, whether due and payable or unmatured, shall be immediately due and payable without demand or notice thereof. 4. The liability of the Undersigned hereunder shall be limited to a principal amount of $205,000.00 of the Indebtedness (inclusive of attorney's fees, collection of costs and enforcement expenses) (if unlimited or if no amount is stated, the Undersigned shall be liable for all Indebtedness, without any limitation as to amount), plus accrued interest thereon. Indebtedness may be created and continued in any amount, whether or not in excess of such principal amount, without affecting or impairing the liability of the Undersigned hereunder. The Lender may apply any sums received by or available to the Lender on account of the Indebtedness from Borrower or any other person (except the Undersigned), from their properties, out of any collateral security or from any other source to payment of the excess. Such application of receipts shall not reduce, affect or impair the liability of the Undersigned hereunder. If the liability of the Undersigned is limited to a stated amount pursuant to this paragraph 4, any payment made by the Undersigned under this guaranty shall be effective to reduce or discharge such liability only if accompanied by a written transmittal document, received by the Lender, advising the Lender that such payment is made under this guaranty for such purpose. 5. The Undersigned will pay or reimburse the Lender for all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with the protection, defense or enforcement of this guaranty in any litigation or bankruptcy or insolvency proceedings. This guaranty includes the additional provisions on page 2 hereof, all of which are made a part hereof. This guaranty is [X] unsecured; [ ] secured by a mortgage or security agreement dated ______________________; [ ] secured by ________________________________________________________________. IN WITNESS WHEREOF, this guaranty has been duly executed by the Undersigned the day and year first above written. By acceptance of this guaranty, and notwithstanding anything contained herein to the contrary, Lender agrees that it shall not amend, extend, renew, or replace the Indebtedness in any manner which extends the final payment date thereof, increases the interest rate thereunder or increases the amount of the regularly scheduled payments thereunder, or permits the delay of any regularly scheduled payment due thereunder for more than sixty (60) days, without the prior written consent of the Undersigned. Any such amendment, renewal or replacement made without the prior written consent of the Undersigned shall not be binding on the Undersigned. The Undersigned agrees that variations in the interest rate in accordance with the variable rate feature of the above referenced Note shall not he in violation of the foregoing. ____________________________________ Krispy Kreme Doughnut Corporation __________________________________(Title) _________________________________________ "Undersigned" shall refer to all entities who sign this guaranty, individually and jointly. 2 ADDITIONAL PROVISIONS 6. Whether or not any existing relationship between the Undersigned and Borrower has been changed, or,. ended and whether or not this guaranty has been revoked, the Lender may, but shall not be obligated to, enter Into transactions resulting in the creation or continuance of Indebtedness, without any consent or approval by the Undersigned and without any notice to the Undersigned. The liability of the Undersigned shall not be affected or impaired by any of the following acts or things (which the Lender Is expressly authorized to do, omit or suffer from time to time, both before and after revocation of this guaranty, without notice to or approval by the Undersigned): (I) any acceptance of collateral security, guarantors, accommodation parties or sureties for any or all Indebtedness; (ii) any one or more extensions or renewals of Indebtedness (whether or not for longer than the original period) or any modification of the interest rates, maturities or other contractual terms applicable to any Indebtedness; (iii) any waiver adjustment, forbearance, compromise or Indulgence granted to Borrower, any delay or lack of diligence in the enforcement of Indebtedness, or any failure to Institute proceedings, file a claim, give any required notices or otherwise protect any Indebtedness; (iv) any full or partial release of, settlement with, or agreement not to sue, Borrower or any other guarantor or other person liable in respect of any Indebtedness; (v) any discharge of any evidence of Indebtedness or the acceptance of any Instrument in renewal thereof or substitution therefor; (vi) any failure to obtain collateral security (including rights of setoff) for Indebtedness, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, Insure, or enforce any collateral security; or any release, modification, substitution, discharge, impairment, deterioration, waste, or loss of any collateral security; (vii) any foreclosure or enforcement of any collateral security; (viii) any transfer of any Indebtedness or any evidence thereof; (ix) any order of application of any payments or credits upon Indebtedness; (x) any election by the Lender under ss. 1111(b)(2) of the United States Bankruptcy Code. 7. The Undersigned waives any and all defenses, claims and discharges of Borrower or any other obligor, pertaining to Indebtedness, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, the Undersigned will not assert, plead or enforce against the Lender any defense of waiver, release, estoppel, statute of limitations, res judicata, statute of frauds, fraud, forgery, incapacity, minority, usury, illegality or unenforceability which may be available to Borrower or any other person liable in respect of any Indebtedness, or any setoff available against the Lender to Borrower or any such other person, whether or not on account of a rated transaction. The Undersigned expressly agrees that the Undersigned shall be and remain liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure of any mortgage or security interest securing Indebtedness, whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. The undersigned shall remain obligated, to the fullest extent permitted by law, to pay such amounts as though Borrower's obligations had not been discharged. 8. The Undersigned further agree(s) that the Undersigned shall be and remain obligated to pay Indebtedness even though any other person obligated to pay Indebtedness, Including Borrower, has such obligation discharged in bankruptcy or otherwise discharged by law. 'Indebtedness' shall Include post-bankruptcy petition Interest and attorneys' fees and any other amounts which Borrower is discharged from paying or which do not accrue to Indebtedness due to Borrower's discharge, and Undersigned shall remain obligated to pay such amounts as fully as if Borrower's obligations had not been discharged. 9. If any payment applied by the Lender to Indebtedness Is thereafter set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, Insolvency or reorganization of Borrower or any other obligor), the Indebtedness to which such payment was applied shall for the purposes of this guaranty be deemed to have continued in existence, notwithstanding such application, and this guaranty shall be enforceable as to such Indebtedness as fully as if such application had never been made. 10. Until payment of the above-referenced Note is made in full, the Undersigned will subordinate to any claim of Lender against Borrower any claim, remedy or other right which the Undersigned may now have or hereafter acquire against Borrower or any other person obligated to pay Indebtedness arising out of the creation or performance of the Undersigned's obligation under this guaranty, Including, without limitation, any right of subrogation, contribution, reimbursement, indemnification, exoneration or any right to participate in any claim or remedy the Undersigned may have against the Borrower, collateral, or other party obligated for Borrower's debt, whether or not such claim, remedy, or right arises In equity, or under contract, statute or common law. 11. The Undersigned waives presentment, demand for payment, notice of dishonor or nonpayment, and protest any instrument evidencing Indebtedness. The Lender shall not be required first to resort for payment of the indebtedness to Borrower or other persons or their properties, or first to enforce, realize upon or exhaust any collateral security for Indebtedness, before enforcing this guaranty. 12. The liability of the Undersigned under this guaranty Is In addition to and shall be cumulative with all other liabilities of the Undersigned to the Lender as guarantor or otherwise, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. 13. The Undersigned represents and warrants to the Lender that (i) the Undersigned Is a corporation duly organized and existing In good standing and has full power and authority to make and deliver this guaranty; (ii) the execution, delivery and performance of this guaranty by the Undersigned have been duly authorized by all necessary action of Its directors and shareholders and do not and will not violate the provisions of, or constitute a default under, any presently applicable law or its articles of Incorporation or by-laws or any agreement presently binding on It; (iii) this guaranty has been duly executed and delivered by the authorized officers of the Undersigned and constitutes its lawful, binding and legally enforceable obligation (subject to the United States Bankruptcy Code and other similar laws generally affecting the enforcement of creditors' rights); and (iv) the authorization, execution, delivery and performance of this guaranty do not require notification to, registration with, or consent or approval by, any federal, state or local regulatory body or administrative agency. 14. This guaranty shall be effective upon delivery to the Lender, without further act, condition or acceptance by the Lender, shall be binding upon the Undersigned and the successors and assigns of the Undersigned and shall inure to the benefit of the Lender and its participants, successors and assigns. Any invalidity or unenforceability of any provision or application of this guaranty shall not affect other lawful provisions and application hereof, and to this and the provisions of this guaranty are declared to be severable. Except as allowed by the terms herein, this guaranty may not be waived, modified, amended, terminated, released or otherwise changed except by a writing signed by the Undersigned and the Lender. This guaranty shall be governed by the laws of the State in which it is executed. The Undersigned waives notice of the Lender's acceptance hereof. EX-10.12 7 COLLATERAL REPURCHASE AGREEMENT DATED 1/2/98 1 EXHIBIT 10.12 COLLATERAL REPURCHASE AGREEMENT THIS COLLATERAL REPURCHASE AGREEMENT, made as of the 2nd day of January, 1998, by and among BONNIE SILVEY VANDEGRIFT, a resident of Transylvania County, North Carolina, and BREVARD TENNIS AND ATHLETIC CLUB, INCORPORATED, a North Carolina corporation (collectively, the "Borrower"); KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation (the "Company"); and BRANCH BANKING AND TRUST COMPANY, a national banking institution ("BB&T"). R E C I T A L S : A. BB&T has on this date extended credit to the Borrower in the aggregate principal sum of Three Hundred Twenty-Six Thousand and no/100 Dollars ($326,000.00) (the "Indebtedness"), evidenced by a Promissory Note of even date herewith executed and delivered by the Borrower to BB&T. B. The Indebtedness is secured, in part, by a pledge by Bonnie Silvey Vandegrift ("Pledgor") of all of the common voting stock of the Company owned by Pledgor (the "Pledged Stock"), pursuant to a pledge agreement of even date herewith executed by and between Pledgor and BB&T (the "Pledge Agreement,"); the Pledge Agreement, and all other documents, instruments and agreements executed to evidence, create or secure the Indebtedness are herein called the "Loan Documents"). C. The Pledged Stock is subject to a stock purchase agreement dated July 1, 1984 executed by and among the Company and its shareholders (as it may be amended) (the "Stock Purchase Agreement"), which Stock Purchase Agreement has been consented and agreed to by Pledgor. D. In order to induce BB&T to make the loans giving rise to the Indebtedness, the Company has agreed to purchase all or part of the Pledged Stock in the event of a default under the Note or any of the Loan Documents in accordance with the terms of this Agreement. E. BB&T has required the execution and delivery of this Agreement by the parties hereto as a condition to making the loans comprising the Indebtedness. NOW, THEREFORE, in consideration of the premises and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Election by BB&T to Cause the Company to Purchase the Pledged Stock. Upon a default under the Note or any of the Loan Documents (hereinafter referred to as a "Default"), BB&T may give notice to the Company and the Borrower, requiring the Company to purchase, and the Pledgor to sell, the Pledged Stock in the following manner and upon the 2 following terms. The notice shall specify whether the purchase is to be made (a) from the Pledgor prior to the commencement of proceedings by BB&T to exercise its rights and remedies as a secured party against the Pledged Stock, or (b) at a private sale ("Private Sale") conducted pursuant to the terms of the Pledged Agreement and applicable law. For purposes of determining the time as of which such purchase price is to be determined, the Pledgor and BB&T agree that such notice shall constitute written notice of a proposed transfer, disposition or sale of its Pledged Stock under paragraph 2(a) of the Stock Purchase Agreement. At the Closing (as defined in Paragraph 3 hereof), the Company shall pay to BB&T and not to the Borrower or Pledgor, in United States dollars and in immediately available funds, a purchase price determined in accordance with the Stock Purchase Agreement. If the purchase price of the Pledged Stock is greater than the then outstanding Indebtedness (including accrued but unpaid interest and all other sums owed by Borrower to BB&T pursuant to the terms of the Note and the Loan Documents), then the Company shall be required to purchase hereunder only so much of the Pledged Stock as is necessary to pay in full the Indebtedness. In consideration of the purchase price received by BB&T, the Pledgor shall transfer title to the Pledged Stock (or so much therefor as shall be purchased) to the Company or in the event the sale is at a Private Sale, BB&T shall deliver to Company the certificates evidencing the Pledged Stock (or so much thereof as shall be purchased) together with stock powers executed in blank by the Pledgor. In either case, BB&T shall release its security interest in the Pledged Stock purchased by the Company upon receipt of the purchase price. The Borrower and the Company hereby acknowledge that the Pledged Stock is subject to the terms and provisions of the Stock Purchase. Agreement which provides, in part, an option to purchase the Pledged Stock in favor of the Company and each of its shareholders in the event Pledgor desires to transfer, sell or dispose of all or any portion of the Pledged Stock. Accordingly, and given the difficulty of obtaining a reasonable price for the Pledged Stock at a public sale or auction and the difficulty of selling the Pledged Stock at a public sale or auction in compliance with the Stock Purchase Agreement and applicable federal and state securities laws, the Company, the Pledgor and the Borrower specifically agree that a Private Sale at which the Company shall purchase any or all of the Pledged Stock pursuant to the terms of this Agreement shall have been conducted in a commercially reasonable manner, and, to the extent permitted by applicable law, the Company, the Pledgor and the Borrower hereby waive any claim or defense to any such sale arising under Section 9504(3) of the Uniform Commercial Code as in effect in the applicable jurisdiction. 2. Other Purchasers. In the event of a default under any of the Loan Documents, BB&T agrees not to purchase all or any part of the Pledged Stock or allow any other person (other than the Company) to do so, without the prior written consent of the Company, unless the Company shall, within thirty (30) days after BB&T's request for performance hereunder, fail, refuse or be unable to perform its obligations hereunder. 3. The Closing. If purchase of the Pledged Stock is to be made from the Pledgor, or the Borrower, as the case may be, the Closing shall take place at a time and place selected by BB&T within fifteen (15) days after the date of BB&T's notice to the Company and the Borrower requiring that the Company purchase the Pledged Stock. If purchase of the Pledged Stock is to take place pursuant to a Private Sale, Closing shall take place at a time and in the manner as provided for by applicable law or in the Pledge Agreement, as the case may be, or as 2 3 may be provided for in any notice given by BB&T pursuant thereto for the Private Sale provided, however, that the Closing and delivery of the Pledged Stock purchased by the Company shall occur at the principal office of BB&T in Winston-Salem, North Carolina, at no expense to BB&T. 4. Surplus. If all proceeds ever received by BB&T, either before or after the Closing, from any sale or other disposition of any collateral, or part therefor, for the Indebtedness, or the exercise of any other remedy pursuant to the Note or any of the Loan Documents, together with the aggregate purchase price actually received by BB&T for the Pledged Stock to be purchased pursuant to this Agreement, shall exceed the aggregate amount of the Indebtedness, interest thereon, the costs and expenses incurred or other sums thereunder owed by the Borrower to BB&T pursuant to any of the Note or the Loan Documents, and the costs and expenses incurred in the enforcement of the Borrower's obligations under this Agreement, including reasonable attorneys' fees, the amount of such excess shall be remitted to or for the account of the Borrower, subject however, to the rights and claims of others having a prior interest in or a lien upon any such proceeds. 5. Assignment by Borrower. Borrower hereby assigns all of its right, title and interest in and to this Agreement to BB&T as collateral security for the Indebtedness and agrees to execute and deliver Uniform Commercial Code Financing Statements with respect thereto as BB&T may request. 6. Continuing Obligations. The obligations of the Company under this Agreement shall be continuing, and the Company agrees that its obligations hereunder shall not be modified, diminished, extinguished or released by reason that the whole or any part of any security or collateral for the Indebtedness now or hereafter held may be exchanged, compromised, impaired, released, or surrendered from time to time, that the time or place of payment of any Indebtedness or of any security therefor may be exchanged or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part, that the Borrower may be granted indulgences generally, that any of the provisions of any note or other instrument evidencing any debt of the Borrower or any security therefor, including, without limitation, the Note and the Loan Documents, may be modified or waived, or that any party liable for the payment thereof (including but not limited to any guarantor, surety or endorser) may be granted indulgences or released, all of which are hereby expressly consented to by the Company, provided, however, that the original principal amount of the Note may not be increased nor may additional amounts be advanced or readvanced under the Note. Neither the death, disability, bankruptcy, or insolvency of any one or more of the Borrower or any guarantor, surety or endorser shall affect the continuing obligation of the Company. No claim need be asserted against the personal representative, guardian, custodian, trustee, debtor in bankruptcy, or receiver of any deceased, incompetent, bankrupt or insolvent borrower, guarantor, surety or endorser. Any deposit balance to the credit of the Borrower or any other party liable for the payment of the Indebtedness or liable upon any security therefor may be released, in whole or in part, at, before and/or after the stated, extended or accelerated maturity of any Indebtedness. All of the foregoing may be done without notice to or further assent by the Company, which shall remain bound hereon notwithstanding any such exchange, compromise, surrender, extension, renewal, acceleration, modification, 3 4 indulgence or release. The Company expressly waives notice of acceptance of this Agreement and of all extensions of credit to the Borrower, presentment and demand for payment of the Indebtedness, protest and any notice of dishonor or of default to the Company or to any other party with respect to any of the Indebtedness or with respect to any security or collateral therefor and all other notices to which the Company might otherwise be entitled. The obligations of the Company under this Agreement shall be direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Borrower or any other person or foreclosure of any security interest or liens available to BB&T, its successors, endorsees or assigns, the Company hereby waiving any rights to require that any action be brought against the Borrower or any other person or to require that resort be had to any security or to any balance of any deposit account or credit on the books of BB&T in favor of the Borrower or any other person, and the Company hereby waiving any rights of the Company pursuant to North Carolina General Statutes Section 26-7 or any similar or subsequent law. If the Indebtedness is partially paid through the election of BB&T, its successors, endorsees or assigns, to pursue any of the remedies mentioned herein, in the Note, or in the Loan Document or if such Indebtedness is otherwise partially paid, the Company shall nevertheless remain fully liable and obligated under and pursuant to the terms of this Agreement. The Borrower and BB&T agree to provide the Company with copies of all Loan Documents and modifications thereof. 7. No Credit; Waiver of Defenses. The Company shall not be entitled to provide for the payment of the purchase price either for the Pledged Stock (or any part thereof) by the issuance of credit or credits to or for the account of the Borrower, the Pledgor or either of them. Nor shall any portion of any purchase price for the Pledged Stock be subject to offset, reduction or diminution by reason of any disputed or undisputed claim, suit or demand which the Company may have against the Borrower, the Pledgor or either of them, or by reason of any disputed or undisputed unpaid accounts or liabilities of or amounts otherwise owed by the Borrower, the Pledgor or either of them to the Company. Nothing herein shall prohibit the Company from purchasing the Pledged Stock over and above the amounts necessary to satisfy the Borrower's obligations to BB&T and applying the proceeds thereof to any obligation of the Borrower to the Company. 8. Notification of Stock Purchase Agreement. Nothing herein shall prevent or restrict the Company and the Pledgor from amending or terminating the Stock Purchase Agreement (and the Company and Pledgor shall have the right to amend and/or terminate the Stock Purchase Agreement) provided that, in the event of the termination or modification of the Stock Purchase Agreement, the Company and the Pledgor shall remain obligated to comply with Paragraph 1 above as if the Stock Purchase Agreement remained in force (unmodified) as it is as of the date hereof. 9. Choice of Law. The parties hereby acknowledge and agree that this Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. 10. Modification of Collateral Repurchase Agreement. This Agreement may not be changed, amended or modified orally or by implication but only by a written instrument signed by each of the parties hereto, and no obligation of the Company or the Borrower or the 4 5 Pledgor shall be released, waived or modified by BB&T or any officer or agent of BB&T except by a writing signed by a duly authorized officer of BB&T and bearing the seal of BB&T. This Agreement shall be irrevocable by the Company, the Borrower and the Pledgor until the Indebtedness has been completely repaid and all other obligations and undertakings of the Borrower under, or by reason of, or pursuant to the Note or any of the Loan Documents have been completely performed and satisfied. 11. Notices. Any and all notices or demands permitted or required to be made under this Agreement shall be in writing, signed by the party giving such notice or demand, and shall be delivered personally or by a nationally recognized courier service or sent by registered or certified United States mail, postage prepaid, to the other party(ies) at the addressees) set forth below, or at such other address as may have been designated in writing. The effective date of such notice or demand shall be date of personal service or the date on which the notice or demand is deposited in the mails. The address of the Borrower is: Bonnie Silvey Vandegrift 5 Robin Circle Brevard, NC 28712 Brevard Tennis and Athletic Club, Inc. P.O. Box 1520 Brevard, NC 28712 The address of the Company is: Krispy Kreme Doughnut Corporation 370 Knollwood Street, Suite 500 Winston-Salem, NC 27103 Attn: Stephen A. Johnson The address of BB&T is: Branch Banking and Trust Company Post Office Box 15008 Winston-Salem, NC 27113 Attn: Adam D. Jackson 12. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but taken together shall constitute but one Agreement. 13. Benefit. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 14. Termination of Existing Collateral Repurchase Agreements. This Agreement shall replace previously executed Collateral Repurchase Agreements dated May 25, 1994 and September 28, 1995, which are hereby terminated. 5 6 IN WITNESS WHEREOF, the parties have either hereunto set his hand and seal or caused this Agreement to be executed as of the day and year first above written. /s/ Bonnie Silvey Vandergrift (SEAL) BREVARD TENNIS AND ATHLETIC CLUB, INC. By: /s/ Bonnie Silvey Vandergrift President ATTEST: /s/ Michael A. Vandergrift Secretary (CORPORATE SEAL) KRISPY KREME DOUGHNUT CORPORATION By: Randy S. Casstevens Title: VP-Finance ATTEST: /s/ Stephen A. Johnson Assistant Secretary (CORPORATE SEAL) BRANCH BANKING AND TRUST COMPANY By: /s/ Adam D. Jackson Banking Officer 6 EX-10.13 8 COLLATERAL REPURCHASE AGREEMENT DATED 10/15/97 1 EXHIBIT 10.13 COLLATERAL REPURCHASE AGREEMENT THIS COLLATERAL REPURCHASE AGREEMENT (the "Agreement") is made and entered into this 15th day of October, 1997 by and among KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation, with its principal office and place of business at 370 Knollwood Street, Suite 500, Winston-Salem, North Carolina, 27103 ("Krispy Kreme"), MIDWEST DOUGHNUTS, L.L.C., a North Carolina limited liability company (the "Borrower") and BANK OF BLUE VALLEY (the "Bank"). R E C I T A L S : 1. The Borrower has requested a loan from the Bank to finance the purchase of certain equipment, signage, furniture and fixtures for use at the Krispy Kreme Doughnut Shop to be established by Borrower at Indian Creek Shopping Center, Overland Park, Kansas. 2. The Bank has agreed to lend to Borrower Seven Hundred Sixty-Five Thousand and 00/100 Dollars ($765,000) secured in part by a security interest in the Equipment (as defined below) (the "Bank Loan") as evidenced by the Note (as defined below); and 3. Therefore, the parties desire to enter into this Agreement. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto do agree as follows: 1. A copy of the Note is attached hereto as EXHIBIT A and incorporated herein by reference (the "Note"). 2. Bank shall provide Krispy Kreme with a copy of any notice to Borrower declaring a default under the Note and demanding payment in full and a copy of any notice to Borrower after which Bank will exercise its remedies under the Note. Such copies shall be sent to Krispy Kreme within three (3) business days of the sending of the same to Borrower. 3. In the event of a default under the Note, as long as Bank has fully complied with the terms of this Agreement, Bank shall have the right, but not the obligation, to demand by notice to Krispy Kreme (the "Notification") that Krispy Kreme repurchase the Equipment at a price equal to the lesser of (i) Two Hundred Five Thousand and 00/100 Dollars ($205,000.00) or (ii) the unpaid balance of the applicable portion of the Bank Loan (the "Unpaid Balance"). Such lesser amount is sometimes herein referred to as the "Purchase Price." The parties acknowledge that the Bank Loan is for Borrower's entire project for the construction, equipping and fixturing of a Krispy Kreme Doughnut 2 Shop and includes, but is not limited to, the purchase of the Equipment. Consequently, the unpaid Bank Loan balance will be prorated in relationship to the amount of the Loan for the purchase of the Equipment to determine the Unpaid Balance as such term is used in this Agreement. For example, purchase price of the Equipment is $205,000 and the Bank Loan is $765,000, then the Unpaid Balance, for purposes of this Agreement, shall be equal to 26.8% of the actual unpaid balance of the Bank Loan at the time of the Notification. 4. The parties acknowledge and agree that any default by Borrower under the Note or any other documents related to the Bank Loan, whether or not waived by the Bank, shall, at the option of Krispy Kreme, constitute a default under the Franchise Agreement, Development Agreement and any and all other agreements between Borrower and Krispy Kreme. 5. The liability of Krispy Kreme hereunder shall be subject to, and conditioned upon, full and complete compliance by Bank with the following: (a) Bank shall obtain and perfect a first priority security interest in the Equipment (the "Security Interest") and shall continuously maintain such perfected Security Interest from the moment Borrower acquires any interest in the Equipment. All filings and indicia of such Security Interest shall state that they are subject to the terms of this Agreement. (b) Bank shall notify Krispy Kreme of each advance under the Bank Loan for any purchase of Equipment not from Krispy Kreme within thirty (30) days after such advance is made and Krispy Kreme's obligations to Bank hereunder shall be reduced by the amount of any advances for which Krispy Kreme does not receive such notice. (c) The Security Interest shall be perfected separate and apart from any other security interest of Bank in and to any and all other property of Borrower. (d) Any transfer of the Security Interest or any interest therein to any other party shall provide that it is subject to the terms of this Agreement and the transferee thereof shall enter into an agreement with Krispy Kreme agreeing to abide by the terms hereof. (e) Bank shall not release the Security Interest in the Equipment nor shall Bank take any action, or fail to take any action, which action or failure to act will compromise or diminish the Security Interest in any way. Provided, however, Bank may release the Security Interest in portions of the Equipment if Bank, at Bank's election, either (i) releases Krispy Kreme from liability under this Agreement or (ii) determines that Borrower reasonably desires to replace the Equipment with new or different equipment (the "New Equipment") of value and function comparable to that in which the Security Interest is to be released and 2 3 ensures that the New Equipment is obtained by Borrower prior to such release and that the Security Interest applies to such New Equipment as a first priority Security Interest. Upon such replacement, the New Equipment shall be deemed to be "Equipment" under this Agreement. Bank shall provide notice to Krispy Kreme of any such release and shall provide Krispy Kreme with a list of the New Equipment and evidence that the Security Interest applies thereto. 6. Upon election by Bank to require repurchase of the Equipment by Krispy Kreme hereunder, Bank shall assign and transfer the Security Interest together with an interest in the Note equal to the Purchase Price to Krispy Kreme or such entity as Krispy Kreme may designate in writing. Borrower shall transfer all of its right, title and interest in the Equipment to Krispy Kreme at the same time. The Security Interest is agreed by the parties to also secure all of Borrower's obligations under this Agreement and Borrower hereby grants to Bank and to Krispy Kreme a security interest (which is agreed to be a part of the Security Interest) in the Equipment to secure Borrower's obligations under this Agreement. In no event shall the Security Interest be permitted to merge with ownership of the Equipment. 7. Except as permitted under subparagraph 5(e) hereof, Borrower shall not sell or transfer, and bank shall not consent to the sale or transfer, whether by gift or with or without consideration, of all or any part of the Equipment. Bank shall not sell or transfer the Equipment or any portion thereof through exercise of its rights under the Bank Loan and any documents executed in connection therewith, or otherwise, without first giving Krispy Kreme the option to purchase the Equipment in an amount equal to the Purchase Price. bank shall provide notice to Krispy Kreme of its proposed transfer and thirty (30) days in which to exercise its right to purchase said Equipment. At the time Krispy Kreme purchases the Equipment, Bank shall also transfer the Security Interest as provided under Paragraph 6 above. In no event shall the Security Interest be permitted to merge with ownership of the Equipment. 8. As used herein, the term Equipment shall mean all furniture, fixtures, equipment, doughnut making equipment and signage purchased by Borrower and reasonably necessary for the operation of a Krispy Kreme Doughnut Shop to be located at Indian Creek Shopping Center, Overland Park, Kansas, and as to which the Security Interest is effective. Krispy Kreme must approve the purchase of each item of Equipment. 9. Borrower consents and agrees to the terms of this Agreement and agrees to transfer the Equipment to Krispy Kreme immediately and at the same time as Krispy Kreme makes a payment of the Purchase Price to Bank or at the time Krispy Kreme elects to purchase the Equipment under Paragraph 7 hereof or as otherwise provided herein. Any such transfer shall be free and clear of all liens, claims or interests other than the Security Interest. In no event shall the Security Interest be permitted to merge with ownership of the Equipment. 3 4 10. A partial list of the Equipment is attached as EXHIBIT B hereto and incorporated herein by reference. The parties agree to amend such list as each item of Equipment is purchased, upon the completion of the purchase of the Equipment, and again upon the purchase of any New Equipment. No New Equipment shall be considered a part of the Equipment until added to this EXHIBIT B. 11. All notices required or desired to be sent hereunder shall be sent by certified mail, return receipt requested, postage prepaid, or by a recognized overnight courier such as Airborne Express, FedEx, etc. and shall be effective on receipt. Any party may change the address for notices to it by notice sent in accordance herewith. Notices shall be sent the parties hereto at their respective addresses set forth below (or at such address may be changed as permitted herein): IF TO KRISPY KREME: Krispy Kreme Doughnut Corporation By Mail: P.O. Box 83 Winston-Salem, NC 27102-0083 Attention: Stephen A. Johnson By Overnight: 370 Knollwood Street Suite 500 Winston-Salem, NC 27103 Attention: Stephen A. Johnson IF TO BORROWER: MIDWEST DOUGHNUTS, L.L.C. 620 Staffordshire Road Winston-Salem, NC 27104 Attention: Philip R.S. Waugh, Jr. IF TO BANK: Bank of Blue Valley By Mail: P.O. Box 26128 Overland Park, KS 66225 Attention: Lanny Drummond By Overnight: 11935 Riley Overland Park, KS 66225 Attention: Lanny Drummond 12. No failure of Bank to provide Krispy Kreme with a copy of any notice sent to Borrower shall relieve Krispy Kreme of its liability hereunder. 13. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and to the successors and assigns of Bank and Krispy Kreme. Borrower shall not have any right to assign this Agreement or any interest herein without the prior written consent of Bank and Krispy Kreme. Bank and Krispy Kreme shall each provide the other with a copy of any assignment of this Agreement. Any such assignment by Bank may be whole or partial, shall only be to a holder of an interest in the Note, and shall contain an agreement by the assignee to abide by the terms hereof. No assignment 4 5 hereof by Krispy Kreme shall relieve it of its obligations hereunder without Bank's consent to such release. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective the day and year first above written. KRISPY KREME DOUGHNUT CORPORATION By: /s/ Scott A. Livengood Printed Name: Scott A. Livengood Printed Title: President BORROWER: MIDWEST DOUGHNUTS, L.L.C. By: /s/ Jimmy B. Strickland Jimmy B. Strickland, Managing Member BANK: BANK OF BLUE VALLEY By: /s/ Lanny Drummond Printed Name: Lanny Drummond Printed Title: Vice President 5 EX-10.15 9 COLLATERAL REPURCHASE AGREEMENT DATED 10/22/96 1 EXHIBIT 10.15 COLLATERAL REPURCHASE AGREEMENT THIS COLLATERAL REPURCHASE AGREEMENT, made as of the 22nd day of October, 1996, by and among ROBERT L. McCOY, a resident of Tampa, Florida; Gulf Florida Doughnut Corp d/b/a Krispy Kreme Doughnut Co. (collectively, the "Borrower"); KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation (the "Company"); and BRANCH BANKING AND TRUST COMPANY, a national banking institution ("BB&T"). R E C I T A L S : A. BB&T has on this date extended credit to the Borrower in the aggregate principal sum of One Hundred Eighty Thousand and no/100 Dollars ($180,000.00) (the "Indebtedness"), evidenced by a Promissory Note of even date herewith executed and delivered by the Borrower to BB&T. B. The Indebtedness is secured, in part, by a pledge by Robert L. McCoy ("Pledgor") of all of the common voting stock of the Company owned by Pledgor (the "Pledged Stock"), pursuant to a pledge agreement of even date herewith executed by and between Pledgor and BB&T (the "Pledge Agreement," and all other documents, instruments and agreements executed to evidence, create or secure the Indebtedness are herein called the "Loan Documents"). C. The Pledged Stock is subject to a stock purchase agreement (the "Stock Purchase Agreement"), dated July 1, 1984 executed by and among the Company and its shareholders (as it may be amended), which Stock Purchase Agreement has been consented and agreed to by Pledgor. D. In order to induce BB&T to make the loans giving rise to the Indebtedness, the Company has agreed to purchase all or part of the Pledged Stock in the event of a default under the Note or any of the Loan Documents in accordance with the terms of this Agreement. E. BB&T has required the execution and delivery of this Agreement by the parties hereto as a condition to making the loans comprising the Indebtedness. NOW, THEREFORE, in consideration of the premises and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Election by BB&T to Cause the Company to Purchase the Pledged Stock. Upon a default under the Note or any of the Loan Documents (hereinafter referred to as a "Default"), BB&T may give notice to the Company and the Borrower, requiring the Company to purchase, and the Pledgor to sell, the Pledged Stock in the following manner and upon the following terms. The notice shall specify whether the purchase is to be made (a) from the Pledgor prior to the commencement of proceedings by BB&T to exercise its rights and remedies 2 as a secured party against the Pledged Stock, or (b) at a private sale ("Private Sale") conducted pursuant to the terms of the Pledged Agreement and applicable law. For purposes of determining the time as of which such purchase price is to be determined, the Pledgor and BB&T agree that such notice shall constitute written notice of a proposed transfer, disposition or sale of its Pledged Stock under paragraph 2(a) of the Stock Purchase Agreement. At the Closing (as defined in paragraph 3 hereof), the Company shall pay to BB&T and not to the Borrower or Pledgor, in United States dollars and in immediately available funds, a purchase price determined in accordance with the Stock Purchase Agreement. If the purchase price of the Pledged Stock is greater than the then outstanding Indebtedness (including accrued but unpaid interest and all other sums owed by Borrower to BB&T pursuant to the terms of the Note and the Loan Documents), then the Company shall be required to purchase hereunder only so much of the Pledged Stock as is necessary to pay in full the Indebtedness. In consideration of the purchase price received by BB&T, the Pledgor shall transfer title to the Pledged Stock (or so much there for as shall be purchased) to the Company or in the event the sale is at a Private Sale, BB&T shall deliver to Company the certificates evidencing the Pledged Stock (or so much thereof as shall be purchased) together with stock powers executed in blank by the Pledgor. In either case, BB&T shall release its security interest in the Pledged Stock purchased by the Company upon receipt of the purchase price. The Borrower and the Company hereby acknowledge that the Pledged Stock is subject to the terms and provisions of the Stock Purchase. Agreement which provides, in part, an option to purchase the Pledged Stock in favor of the Company and each of its shareholders in the event Pledgor desires to transfer, sell or dispose of all or any portion of the Pledged Stock. Accordingly, and given the difficulty of obtaining a reasonable price for the Pledged Stock at a public sale or auction and the difficulty of selling the Pledged Stock at a public sale or auction in compliance with the Stock Purchase Agreement and applicable federal and state securities laws, the Company, the Pledgor and the Borrower specifically agree that a Private Sale at which the Company shall purchase any or all of the Pledged Stock pursuant to the terms of this Agreement shall have been conducted in a commercially reasonable manner, and, to the extent permitted by applicable law, the Company, the Pledgor and the Borrower hereby waive any claim or defense to any such sale arising under Section 9504(3) of the Uniform Commercial Code as in effect in the applicable jurisdiction. 2. Other Purchasers. In the event of a default under any of the Loan Documents, BB&T agrees not to purchase all or any part of the Pledged Stock or allow any other person (other than the Company) to do so, without the prior written consent of the Company, unless the Company shall, within thirty (30) days after BB&T's request for performance hereunder, fail, refuse or be unable to perform its obligations hereunder. 3. The Closing. If purchase of the Pledged Stock is to be made from the Pledgor, or the Borrower, as the case may be, the Closing shall take place at a time and place selected by BB&T within fifteen (15) days after the date of BB&T's notice to the Company and the Borrower requiring that the Company purchase the Pledged Stock. If purchase of the Pledged Stock is to take place pursuant to a Private Sale, Closing shall take place at a time and in the manner as provided for by applicable law or in the Pledge Agreement, as the case may be, or as may be provided for in any notice given by BB&T pursuant thereto for the Private Sale provided, however, that the Closing and delivery of the Pledged Stock purchased by the Company shall 2 3 occur at the principal office of BB&T in Winston-Salem, North Carolina, at no expense to BB&T. 4. Surplus. If all proceeds ever received by BB&T, either before or after the Closing, from any sale or other disposition of any collateral, or part therefor, for the Indebted ness, or the exercise of any other remedy pursuant to the Note or any of the Loan Documents, together with the aggregate purchase price actually received by BB&T for the Pledged Stock to be purchased pursuant to this Agreement, shall exceed the aggregate amount of the Indebtedness, interest thereon, the costs and expenses incurred or other sums thereunder owed by the Borrower to BB&T pursuant to any of the Note or the Loan Documents, and the costs and expenses incurred in the enforcement of the Borrower's obligations under this Agreement, including reasonable attorneys' fees, the amount of such excess shall be remitted to or for the account of the Borrower, subject however, to the rights and claims of others having a prior interest in or a lien upon any such proceeds. 5. Assignment by Borrower. Borrower hereby assigns all of its right, title and interest in and to this Agreement to BB&T as collateral security for the Indebtedness and agrees to execute and deliver Uniform Commercial Code Financing Statements with respect thereto as BB&T may request. 6. Continuing Obligations. The obligations of the Company under this Agreement shall be continuing, and the Company agrees that its obligations hereunder shall not be modified, diminished, extinguished or released by reason that the whole or any part of any security or collateral for the Indebtedness now or hereafter held may be exchanged, compromised, impaired, released, or surrendered from time to time, that the time or place of payment of any Indebtedness or of any security therefor may be exchanged or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part, that the Borrower may be granted indulgences generally, that any of the provisions of any note or other instrument evidencing any debt of the Borrower or any security therefor, including, without limitation, the Note and the Loan Documents, may be modified or waived, or that any party liable for the payment thereof (including but not limited to any guarantor, surety or endorser) may be granted indulgences or released, all of which are hereby expressly consented to by the Company, provided, however, that the original principal amount of the Note may not be increased nor may additional amounts be advanced or readvanced under the Note. Neither the death, disability, bankruptcy, or insolvency of any one or more of the Borrower or any guarantor, surety or endorser shall affect the continuing obligation of the Company. No claim need be asserted against the personal representative, guardian, custodian, trustee, debtor in bankruptcy, or receiver of any deceased, incompetent, bankrupt or insolvent borrower, guarantor, surety or endorser. Any deposit balance to the credit of the Borrower or any other party liable for the payment of the Indebtedness or liable upon any security therefor may be released, in whole or in part, at, before and/or after the stated, extended or accelerated maturity of any Indebtedness. All of the foregoing may be done without notice to or further assent by the Company, which shall remain bound hereon notwithstanding any such exchange, compromise, surrender, extension, renewal, acceleration, modification, indulgence or release. The Company expressly waives notice of acceptance of this Agreement and of all extensions of credit to the Borrower, presentment and demand for payment of the 3 4 Indebtedness, protest and any notice of dishonor or of default to the Company or to any other party with respect to any of the Indebtedness or with respect to any security or collateral therefor and all other notices to which the Company might otherwise be entitled. The obligations of the Company under this Agreement shall be direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Borrower or any other person or foreclosure of any security interest or liens available to BB&T, it successors, endorsees or assigns, the Company hereby waiving any rights to require that any action be brought against the Borrower or any other person or to require that resort be had to any security or to any balance of any deposit account or credit on the books of BB&T in favor of the Borrower or any other person, and the Company hereby waiving any rights of the Company pursuant to North Carolina General Statutes Section 26-7 or any similar or subsequent law. If the Indebtedness is partially paid through the election of BB&T, its successors, endorsees or assigns, to pursue any of the remedies mentioned herein, in the Note, or in the Loan Document or if such Indebtedness is otherwise partially paid, the Company shall nevertheless remain fully liable and obligated under and pursuant to the terms of this Agreement. The Borrower and BB&T agree to provide the Company with copies of all Loan Documents and modifications thereof. 7. No Credit; Waiver of Defenses. The Company shall not be entitled to provide for the payment of the purchase price either for the Pledged Stock (or any part thereof) by the issuance of credit or credits to or for the account of the Borrower, the Pledgor or either of them. Nor shall any portion of any purchase price for the Pledged Stock be subject to offset, reduction or diminution by reason of any disputed or undisputed claim, suit or demand which the Company may have against the Borrower, the Pledgor or either of them, or by reason of any disputed or undisputed unpaid accounts or liabilities of or amounts otherwise owed by the Borrower, the Pledgor or either of them to the Company. Nothing herein shall prohibit the Company from purchasing the Pledged Stock over and above the amounts necessary to satisfy the Borrower's obligations to BB&T and applying the proceeds thereof to any obligation of the Borrower to the Company. 8. Notification of Stock Purchase Agreement. Nothing herein shall prevent or restrict the Company and the Pledgor from amending or terminating the Stock Purchase Agreement provided that, in the event of the termination or modification of the Stock Purchase Agreement, the Company and the Pledgor shall remain obligated to comply with paragraph 1 above as if the Stock Purchase Agreement remained in force (unmodified) as it is as of the date hereof. 9. Choice of Law. The parties hereby acknowledge and agree that this Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. 10. Modification of Collateral Repurchase Agreement. This Agreement may not be changed, amended or modified orally or by implication but only by a written instrument signed by each of the parties hereto, and no obligation of the Company or the Borrower or the Pledgor shall be released, waived or modified by BB&T or any officer or agent of BB&T except by a writing signed by a duly authorized officer of BB&T and bearing the seal of BB&T. This Agreement shall be irrevocable by the Company, the Borrower and the Pledgor until the Indebt- 4 5 edness has been completely repaid and all other obligations and undertakings of the Borrower under, or by reason of, or pursuant to the Note or any of the Loan Documents have been completely performed and satisfied. 11. Notices. Any and all notices or demands permitted or required to be made under this Agreement shall be in writing, signed by the party giving such notice or demand, and shall be delivered personally or by a nationally recognized courier service or sent by registered or certified United States mail, postage prepaid, to the other party(ies) at the addressees) set forth below, or at such other address as may have been designated in writing. The effective date of such notice or demand shall be date of personal service or the date on which the notice or demand is deposited in the mails. The address of the Borrower is: Robert L. McCoy 4810 Culbreath Isles Road Tampa, FL 33629 Gulf Florida Doughnut Corp. d/b/a Krispy Kreme Doughnut Co. 8425 N. Florida Avenue Tampa, FL 33604 The address of the Company is: Krispy Kreme Doughnut Corporation 1814 Ivy Avenue Winston-Salem, NC 27105 Attn: John L. Barber The address of BB&T is: Branch Banking and Trust Company Post Office Box 15008 Winston-Salem, NC 27113-5008 Attn: Christopher Verwoerdt 12. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but taken together shall constitute but one Agreement. 13. Benefit. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. 5 6 IN WITNESS WHEREOF, the parties have either hereunto set his hand and seal or caused this Agreement to be executed as of the day and year first above written. /s/ Robert L. McCoy GULF FLORIDA DOUGHNUT CORP. d/b/a KRISPY KREME DOUGHNUT CORP. By: /s/ Robert L. McCoy President Attest: /s/ Donna C. Hollingsworth Secretary (CORPORATE SEAL) KRISPY KREME DOUGHNUT CORPORATION By: /s/ J.A. McAleer, Jr. Chairman of the Board and Chief Executive Officer Attest: /s/ Randy S. Casstevens Secretary (CORPORATE SEAL) BRANCH BANK AND TRUST COMPANY By: /s/ Christopher E. Verwoerdt Asst. Vice President Attest: /s/ _______________________ Asst. Secretary (CORPORATE SEAL) 6 7 CONSENT AND AGREEMENT FOR VALUE RECEIVED, the undersigned, who is a party to the Stock Purchase Agreement (the "Stock Purchase Agreement") referred to and described in the foregoing Collateral Repurchase Agreement (the "Collateral Repurchase Agreement"), hereby acknowledges and consents to the Collateral Repurchase Agreement. The undersigned hereby agrees that, (a) in the event of any default by Borrower under the terms of any documents evidencing, securing or otherwise relating to the Note (as defined in the Collateral Repurchase Agreement), Branch Bank and Trust Company (the "Bank") shall of Borrower's right, title interest under the Stock Purchase Agreement, and that, (b) in the event of any default by Borrower under the terms of any documents evidencing, securing or otherwise relating to the Note, the undersigned shall continue its performance under the Stock Purchase Agreement on behalf of the Bank, and that (c) the undersigned may modify or terminate the Stock Purchase Agreement only in accordance with the terms of the Collateral Repurchase Agreement of even date herewith by and among the Bank, the undersigned and the Borrower, or otherwise upon the prior written consent of the Bank, and that (d) the undersigned is not a party to any other agreements intended as a substitute for or modification or amendment of the Stock Purchase Agreement (except for the Collateral Repurchase Agreement), true, complete and correct copies of which are attached hereto. WITNESS the hand and seal of the undersigned, as of the day and year set forth. KRISPY KREME DOUGHNUT CORPORATION By: /s/ J.A. McAleer, Jr. Chairman of the Board and Chief Executive Officer 10/31/96 Date Signed Attest: /s/ Randy S. Casstevens Secretary (CORPORATE SEAL) 7 EX-10.17 10 GUARANTY DATED 5/29/96 1 EXHIBIT 10.17 GUARANTY BY CORPORATION _________________________, ______________ (City) (State) For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce THE FIRST NATIONAL BANK OF OLATHE (herein, with its participants, successors and assigns, called 'Lender'), at its option, at any time to make a loan to MIDWEST-DOUGHNUTS, L.L.C. (herein called 'Borrower"), the Undersigned hereby absolutely and unconditionally guarantees to the Lender the full and prompt payment when due, whether at maturity or earlier by reason of acceleration or otherwise, of the debts, liabilities and obligations described as follows: A. If this ___ is checked, the Undersigned guarantees to Lender the payment and performance of the debt, liability or obligation of Borrower to Lender evidenced by or arising out of the following: that certain note from Borrower to Lender in the original principal amount of $____________, a copy of which is attached hereto and incorporated herein by reference, and any extensions, renewals or replacements thereof (hereinafter referred to as the "Indebtedness'). The term, "Indebtedness" as used in this guaranty shall not include any obligations entered into between Borrower and Lender after the date hereof (including any extensions, renewals, or replacements of such obligations). The Undersigned further acknowledges and agrees with Lender that: 1. No act or thing need occur to establish the liability of the Undersigned hereunder, and no act or thing, except full payment and discharge of all Indebtedness, shall in any way exonerate the Undersigned or modify, reduce, limit or release the liability of the Undersigned hereunder. 2. This is an absolute, unconditional and continuing guaranty of payment of the Indebtedness and shall continue to be in force and be binding upon the Undersigned, whether or not all Indebtedness is paid in full, until this guaranty is revoked by written notice actually received by the Lender, and such revocation shall not be effective as to Indebtedness existing or 2 committed for at the time of actual receipt of such notice by the Lender, or as to any renewals, extensions and refinancings thereof. The Undersigned represents and warrants to the Lender that the Undersigned has a direct and substantial economic interest in Borrower and expects to derive substantial benefits therefrom and from any loans and financial accommodations resulting in the creation of Indebtedness guaranteed hereby, and that this guaranty is given for a corporate purpose. The Undersigned agrees to rely exclusively on the right to revoke this guaranty prospectively as to future transactions, by written notice actually received by Lender if at any time, in the opinion of the directors or officers of the Undersigned, the corporate benefits then being received by the Undersigned in connection with this guaranty are not sufficient to warrant the continuance of this guaranty as to future Indebtedness. Accordingly, so long as this guaranty is not revoked prospectively in accordance with this guaranty, the Lender may rely conclusively on a continuing warranty, hereby made, that the Undersigned continues to be benefited by this guaranty and the Lender shall have no duty to inquire into or confirm the receipt of any such benefits, and this guaranty shall be effective and enforceable by the Lender without regard to the receipt, nature or value of any such benefits. 3. If the Undersigned shall be dissolved or shall be or become insolvent (however defined) or revoke this guaranty, then the Lender shall have the right to declare immediately due and payable, and the Undersigned will forthwith pay to the Lender, the full amount of all Indebtedness, whether due and payable or unmatured. If the Undersigned voluntarily commences or there is commenced involuntarily against the Undersigned a case under the United States Bankruptcy Code, the full amount of all Indebtedness, whether due and payable or unmatured, shall be immediately due and payable without demand or notice thereof. 4. The liability of the Undersigned hereunder shall be limited to a principal amount of the Indebtedness (if unlimited or if no amount is stated, the Undersigned shall be liable for all Indebtedness, without any limitation as to amount), plus accrued interest thereon and all attorneys' fees, collection costs and enforcement expenses actually incurred and referable thereto. 5. The Undersigned will pay or reimburse the Lender for all costs and expenses (including reasonable attorneys' fees and legal expenses actually incurred by the Lender in 3 connection with the protection, defense or enforcement of this guaranty in any litigation or bankruptcy or insolvency proceedings. This guaranty includes the additional provisions on page 2 hereof and of the Addendum hereto, all of which are made a part hereof. This guaranty is __ unsecured; __ secured by a mortgage or security agreement dated ___________________; __ secured by_____________________________. IN WITNESS WHEREOF, this guaranty has been duly executed by the Undersigned the day and year first above written. THIS INSTRUMENT WILL BE CONSTRUED UNDER THE LAWS OF THE STATE OF KANSAS. KRISPY KREME DOUGHNUT CORPORATION By: ________________________________ Title: _________________________ By: ________________________________ "Undersigned" shall refer to all entities who sign this guaranty, individually and jointly. 4 ADDITIONAL PROVISIONS 6. Whether or not any existing relationship between the Undersigned and Borrower has been changed or ended and whether or not this guaranty has been revoked, the Lender may, but shall not be obligated to, enter into transactions resulting in the creation or continuance of Indebtedness, without any consent or approval by the Undersigned and without any notice to the Undersigned. The liability of the Undersigned shall not be affected or impaired by any of the following acts or things (which the Lender is expressly authorized to do, omit or suffer from time to time, both before and after revocation of this guaranty, without notice to or approval by the Undersigned): (i) any acceptance of collateral security, guarantors, accommodation parties or sureties for any or all Indebtedness; (ii) any one or more extensions or renewals of Indebtedness (whether or not for longer than the original period) or any modification of the interest rates, maturities or other contractual terms applicable to any Indebtedness; (iii) any waiver adjustment, forbearance, compromise or indulgence other than a release of liability granted to Borrower, any delay or lack of diligence in the enforcement of Indebtedness, or any failure to institute proceedings, file a claim, give any required notices or otherwise protect any Indebtedness; (iv) any full or partial release of, settlement with, or agreement not to sue, Borrower--or any other guarantor or other person liable in respect of any Indebtedness; (v) any failure to obtain collateral security (including rights of setoff) for Indebtedness, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, insure, or enforce any collateral security; or any release, modification, substitution, discharge, impairment, deterioration, waste, or loss of any collateral security; (vi) any foreclosure or enforcement of any, collateral security; (vii) any transfer of any Indebtedness or any evidence thereof; (viii) any order of application of any payments or credits upon Indebtedness; (x) any election by the Lender under ss. 1111(b)(2) of the United States Bankruptcy Code. 7. The Undersigned waives any and all defenses, claims and discharges of Borrower, or any other obligor, pertaining to Indebtedness, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, the Undersigned will not assert, plead or enforce against the Lender any defense of waiver, release, estoppel, statute of limitations, res judicata, statute of frauds, fraud, forgery, incapacity, minority, usury, illegality or 5 unenforceability which may be available to Borrower or any other person liable in respect of any Indebtedness, or any setoff available against the Lender to Borrower or any such other person, whether or not on account of a related transaction other than a release of liability of Borrower. The Undersigned expressly agrees that the Undersigned shall be and remain liable, to the fullest extent permitted by applicable law, for any deficiency remaining after foreclosure of any mortgage or security interest securing Indebtedness, whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. The undersigned shall remain obligated, to the fullest extent permitted by law, to pay such amounts as though Borrower's obligations had not been so discharged. 8. The Undersigned further agree(s) that the Undersigned shall be and remain obligated to pay Indebtedness even though any other person obligated to pay Indebtedness, including Borrower, has such obligation discharged in bankruptcy or otherwise discharged by law. "Indebtedness' shall include post-bankruptcy petition interest and attorneys' fees actually incurred and any other amounts which Borrower is discharged from paying or which do not accrue to Indebtedness due to Borrower's discharge, and Undersigned shall remain obligated to pay such amounts as fully as if Borrower's obligations had not been discharged. 9. If any payment applied by the Lender to Indebtedness is thereafter set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of Borrower or any other obligor), the Indebtedness to which such payment was applied shall for the purposes of this guaranty be deemed to have continued in existence, notwithstanding such application, and this guaranty shall be enforceable as to such Indebtedness as fully as if such application had never been made. 10. The Undersigned waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing Indebtedness. The Lender shall not be required first to resort for payment of the Indebtedness to Borrower or other persons or their properties, or first to enforce, realize upon or exhaust any collateral security for Indebtedness, before enforcing this guaranty. 11. The liability of the Undersigned under this guaranty is in addition to and shall be cumulative with all other liabilities of the Undersigned to the Lender as guarantor or otherwise, 6 without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. 12. The Undersigned represents and warrants to the Lender that (i) the Undersigned is a corporation duly organized and existing in good standing and has full power and authority to make and deliver this guaranty; (ii) the execution, delivery and performance of this guaranty by the Undersigned have been duly authorized by all necessary action of its directors and shareholders and do not and will not violate the provisions of, or constitute a default under, any presently applicable law or its articles of incorporation or by-laws or any agreement presently binding on it; (iii) this guaranty has been duly executed and delivered by the authorized officers of the Undersigned and constitutes its lawful, binding and legally enforceable obligation (subject to the United States Bankruptcy Code and other similar laws generally affecting the enforcement of creditors' rights); and (iv) the authorization, execution, delivery and performance of this guaranty do not require notification to, registration with, or consent or approval by, any federal, North Carolina state or North Carolina local regulatory body or administrative agency. 13. This guaranty shall be effective upon delivery to the Lender, without further act, condition or acceptance by the Lender, shall be binding upon the Undersigned and the successors and assigns of the Undersigned and shall inure to the benefit of the Lender and its participants, successors and assigns. Any invalidity or unenforceability of any provision or application of thus guaranty shall not affect other lawful provisions and application hereof, and to this end the provisions of this guaranty are declared to be severable. Except s allowed by the terms herein, this guaranty may not be waived, modified, amended, terminated, released or otherwise changed except by a writing signed by the Undersigned and the Lender. This guaranty shall be governed by the laws of the State in which it is executed. The Undersigned waives notice of the Lender's acceptance hereof. 7 ADDENDUM TO GUARANTY BY CORPORATION FROM KRISPY KREME DOUGHNUT CORPORATION TO THE FIRST NATIONAL BANK OF OLATHE as Lender AND MID-WEST DOUGHNUTS, L.L.C. as Borrower THIS ADDENDUM (this "Addendum") is made to the above-described Guaranty. In the event of any conflict between this Addendum and the terms of the Guaranty, the terms of this Addendum shall control. The Guaranty is amended as follows: 1. This Guaranty shall extend only to the principal and interest of the note constituting the Indebtedness and other items described in this Guaranty only to the extent they relate to said note. Lender agrees to provide the undersigned with a copy of any notice of default or demand to Borrower related to Indebtedness at the same time it provides the same to Borrower, and a copy of any amendments or modifications or extensions to the note or other agreements entered into with respect to the Indebtedness, at the following address: Krispy Kreme Doughnut Corporation P.O. Box 83 Winston-Salem, NC 27102-0083 ATTENTION: Stephen A. Johnson 2. No modification of the Indebtedness shall be made which increases the principal or interest thereunder or extends the time for payment thereof without the prior written consent of the undersigned. 3. The Maximum liability of the Undersigned Krispy Kreme Doughnut Corporation under this Guaranty, including, but not limited to, all principal, interest and all other costs, expenses and obligations of any and every nature, shall not exceed $300,000.00. EX-10.18 11 COLLATERAL REPURCHASE AGREEMENT DATED 7/7/95 1 EXHIBIT 10.18 COLLATERAL REPURCHASE AGREEMENT THIS COLLATERAL REPURCHASE AGREEMENT (the "Agreement") is made this the 7th day of July, 1995 by and among KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation, with its principal office and place of business at 1814 Ivy Avenue, Winston-Salem, NC 27105 ("Krispy Kreme"); ROBERT J. SIMMONS (the "Associate") of Union Town, OH, whose business address is 354 South Maple Street, Akron, OH 44302; SIMAC, INC. (the "Borrower"), an Ohio corporation, whose address is the same as that of the Associate; and FIRST NATIONAL BANK OF OHIO (the "Bank") whose address is 106 South Main Street, Akron, Ohio 44308. RECITALS: 1. Krispy Kreme and the Associate entered into an Associate's License Agreement and Addendum thereto dated July 11, 1993( the "License Agreement") for Krispy Kreme Doughnut Shops in Akron and Cuyahoga Falls, Ohio; 2. In connection with the License Agreement, the Associate purchased from Krispy Kreme the retail furniture and fixtures, machinery, equipment and signage listed in Schedule A attached hereto (the "Equipment") for a new doughnut store at 6907 Pearl Road, Middleburg Heights, OH; 3. The Bank has loaned to the Borrower $340,000 secured by a security interest in the Equipment (the "Bank Loan") in the event of the Borrower's Default on the Bank Loan; and 4. Therefore, the parties desire to enter into this Agreement. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties do hereby agree as follows: A. Default. In the event of a Default by the Borrower on the Bank Loan, the Bank shall notify Krispy Kreme and the Borrower thereof in writing (the "Notification") within thirty (30) days of the occurrence of the Default, in which case Krispy Kreme shall have the first option to purchase, and if exercised shall purchase the Equipment within forty (40) days from receipt of the Notification. In such event, the Associate shall deliver to Krispy Kreme, and Krispy Kreme shall repurchase from Associate, all of the Equipment at the price which shall be the lessor of (i) the Balance Due under the Bank Loan or (ii) a purchase price of $340,000 through the date of June 27, 1995 and thereafter at a purchase price equal to the difference between (a) $340,000 (which is the cost thereof) less an amount determined as follows: 2 (b) $5,666.67 on July 27, 1995 and an additional $5,667.67 on the 27th of each month thereafter through June 27, 2000. The effective date of such Notification shall be the date as of which such purchase price is determined. At the closing of such purchase, Krispy Kreme shall pay to the Bank such pur chase price in United States dollars and in immediately available funds. At such closing, the Bank shall transfer title to and release its security interest in the repurchased Equipment. In such event, Krispy Kreme, at its sole discretion, may terminate the License Agreement. B. The Closing. The purchase of the Equipment shall take place within 40 days of such Notification at the offices of the Bank at 106 South Main Street, Akron, Ohio 44308. Any surplus in such purchase price shall be remitted to or for the account of the Borrower. C. Rights of Krispy Kreme. Nothing herein shall prevent or restrict Krispy Kreme from exercising any of its rights and privileges including, without limitation, the right of amendment or termination, under and pursuant to the License Agreement provided that, in such an event, Krispy Kreme shall either (i) remain obligated to repurchase the Equipment as if the License Agreement had not been so amended or terminated or its rights and privileges had not been exercised thereunder; or (ii) repurchase the Equipment and pay to the Bank the lesser of the purchase price therefor or balance due on the Bank Loans. D. Definitions. As used herein, the terms or phrases set forth below are defined as follows: (i) "Default" has the same meaning as it does in documentation pertaining to the Bank Loan (ii) "Balance Due under the Bank Loan" shall mean unpaid principal and interest and fees and expenses due under the documentation pertaining to the Bank Loan. E. Term. The term of this Agreement shall be a period commencing on the date hereof and expiring June 27, 2000. F. Miscellaneous. The parties hereby acknowledge and agree that this Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. This Agreement may not be changed, amended or modified orally or by implication but only by written agreement signed by each of the parties hereto and no obligation of Krispy Kreme or the Borrower shall be released, waived, or modified by the Bank or any officer or agent of the Bank 2 3 except by a writing signed by duly authorized officer or agent of the Bank. Any and all notices or demands permitted or required to be made under this Agreement shall be made in writing, signed by the party giving the notice or demand, and shall be delivered personally or by a nationally recognized courier service or sent by registered or certified United States mail, postage prepaid, to the other parties at the addresses set forth above or at such other address as may have been designated in writing. The effective date of such notice or demand shall be the date of delivery or the date on which notice or demand is deposited in the mail. This Agreement shall be binding upon and shall insure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. IN WITNESS WHEREOF, Krispy Kreme, the Bank, and Simac, Inc. have caused this Agreement to be executed on their behalf and the Associate has hereunto set his hand and seal as of the day and year set forth above. KRISPY KREME DOUGHNUT CORPORATION by: /s/ John L. Barber John L. Barber General Counsel and Secretary /s/ Robert J. Simmons (SEAL) Robert J. Simmons SIMAC, INC. by: /s/ Robert J. Simmons Robert J. Simmons, President FIRST NATIONAL BANK OF OHIO by: /s/ Nicholas V. Browning Nicholas V. Browning Vice President 3 4 KRISPY KREME DOUGHNUT CORPORATION BOB SIMMONS - COLLATERAL BUY-BACK ON EQUIPMENT AMORTIZATION SCHEDULE Reference Date Reducing Amount Balance - --------- ---- --------------- ------- Beginning Balance $340,000 1 27-Jul-95 5,667.67 $334,332 2 27-Aug-95 5,667.67 328,665 3 27-Sep-95 5,667.67 322,997 4 27-Oct-95 5,667.67 317,329 5 27-Nov-95 5,667.67 311,662 6 27-Dec-95 5,667.67 305,994 7 27-Jan-96 5,667.67 300,326 8 27-Feb-96 5,667.67 294,659 9 27-Mar-96 5,667.67 288,991 10 27-Apr-96 5,667.67 283,323 11 27-May-96 5,667.67 277,656 12 27-Jun-96 5,667.67 271,988 13 27-Jul-96 5,667.67 266,320 14 27-Aug-96 5,667.67 260,653 15 27-Sep-96 5,667.67 254,985 16 27-Oct-96 5,667.67 249,317 17 27-Nov-96 5,667.67 243,650 18 27-Dec-96 5,667.67 237,982 19 27-Jan-97 5,667.67 232,314 20 27-Feb-97 5,667.67 226,647 21 27-Mar-97 5,667.67 220,979 22 27-Apr-97 5,667.67 215,311 23 27-May-97 5,667.67 209,644 24 27-Jun-97 5,667.67 203,976 25 27-Jul-97 5,667.67 198,308 26 27-Aug-97 5,667.67 192,641 27 27-Sep-97 5,667.67 186,973 28 27-Oct-97 5,667.67 181,305 29 27-Nov-97 5,667.67 175,638 30 27-Dec-97 5,667.67 169,970 31 27-Jan-98 5,667.67 164,302 32 27-Feb-98 5,667.67 158,635 33 27-Mar-98 5,667.67 152,967 34 27-Apr-98 5,667.67 147,299 35 27-May-98 5,667.67 141,632 36 27-Jun-98 5,667.67 135,964 37 27-Jul-98 5,667.67 130,296 38 27-Aug-98 5,667.67 124,629 39 27-Sep-98 5,667.67 118,961 40 27-Oct-98 5,667.67 113,293 41 27-Nov-98 5,667.67 107,626 42 27-Dec-98 5,667.67 101,958 43 27-Jan-99 5,667.67 96,290 44 27-Feb-99 5,667.67 90,623 45 27-Mar-99 5,667.67 84,955 46 27-Apr-99 5,667.67 79,287 47 27-May-99 5,667.67 73,620 48 27-Jun-99 5,667.67 67,952 49 27-Jul-99 5,667.67 62,284 50 27-Aug-99 5,667.67 56,616 51 27-Sep-99 5,667.67 50,949 52 27-Oct-99 5,667.67 45,281 53 27-Nov-99 5,667.67 39,613 54 27-Dec-99 5,667.67 33,946 55 27-Jan-00 5,667.67 28,278 56 27-Feb-00 5,667.67 22,610 57 27-Mar-00 5,667.67 16,943 58 27-Apr-00 5,667.67 11,275 59 27-May-00 5,667.67 5,607 60 27-Jun-00 5,667.67 (60) 4 EX-10.19 12 COLLATERAL REPURCHASE AGREEMENT DATED 2/25/94 1 EXHIBIT 10.19 COLLATERAL REPURCHASE AGREEMENT THIS COLLATERAL REPURCHASE AGREEMENT, made as of the 25th day of February, 1994 by and among WILLIAM J. DORGAN and wife, PATRICIA M. DORGAN, residents of Harrison County, Mississippi (collectively, the "Borrower"); KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation (the "Company"); and SOUTHERN NATIONAL BANK OF NORTH CAROLINA, a national banking institution ("SNB"); R E C I T A L S : A. SNB has on this date extended credit to the Borrower in the aggregate principal sum of One Million One Hundred Fifty Thousand and No/100 Dollars ($1,150,000.00) (the "Indebtedness"), evidenced by (i) a Promissory Note of even date executed and delivered by the Borrower to SNB in the principal sum of Two Hundred Seventy Five Thousand and No/100 Dollars ($275,000.00) (the "First Note"), and (ii) a Promissory Note of even date executed and delivered by the Borrower to SNB in the principal sum of Eight Hundred Seventy Five Thousand and No/100 Dollars ($875,000.00) (the "Second Note"; the First Note and the Second Note are sometimes collectively referred to herein as the "Notes"). B. The Indebtedness is secured, in part, by (i) a security interest in favor of SNB in all of the machinery, equipment, furniture, fixtures, signage and vehicles used by William J. Dorgan (the "Associate") in his Krispy Kreme franchise operations in Biloxi and Gulfport, Mississippi pursuant to Security Agreement of even date herewith executed by and between the Borrower and SNB (the "Security Agreement"); and (ii) a pledge by Patricia M. Dorgan ("Pledgor") of all of the common voting stock of the Company owned by Pledgor (the "Pledged Stock"), pursuant to a Pledge Agreement of even date herewith executed by and between Pledgor and SNB and consented to by the Associate (the "Pledge Agreement"; the Pledge Agreement, the Security Agreement and all other documents, instruments and agreements executed to evidence, create or secure the Indebtedness are herein called the "Loan Documents"). C. The Company and the Associate on this date have entered into the Amended and Restated Equipment Repurchase Agreement and Amendment to Associate's License Agreement pursuant to which the Company has agreed upon termination of the Associate's License Agreement and Addendum thereto dated February 25, 1992 between the Company and the Associate (as it may be amended) (the "License Agreement") to purchase from the Associate all of his machinery, equipment, furniture, fixtures, signage, vehicles and inventory (the "Equipment") for a cash purchase price of $350,000.00. D. The Pledged Stock is subject to a Stock Purchase Agreement dated July 1, 1984 executed by and among the Company and its shareholders (as it may be amended) (the "Stock Purchase Agreement"), which Stock Purchase Agreement has been consented and agreed to by Pledgor. 2 E. In order to induce SNB to make the loans giving rise to the Indebtedness, the Company has agreed to purchase all or part of the Pledged Stock and/or the Equipment in the event of a default under the First Note, the Second Note, or any of the Loan Documents in accordance with the terms of this Agreement. F. SNB has required the execution and delivery of this Agreement by the parties hereto as a condition to making the loans comprising the Indebtedness. NOW, THEREFORE, in consideration of the premises and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Election by SNB to Cause the Company to Purchase the Pledged Stock. Upon a default under the First Note, the Second Note or any of the Loan Documents (hereinafter referred to as a "Default"), SNB may give notice to the Company and the Borrower, requiring the Company to purchase, and the Pledgor to sell, the Pledged Stock in the following manner and upon the following terms. The notice shall specify whether the purchase is to be made (a) from the Pledgor prior to the commencement of proceedings by SNB to exercise its rights and remedies as a secured party against the Pledged Stock, or (b) at a private sale ("Private Sale") conducted pursuant to the terms of the Pledge Agreement and applicable law. For purposes of determining the time as of which such purchase price is to be determined, the Pledgor and SNB agree that such notice shall constitute written notice of a proposed transfer, disposition or sale of its Pledged Stock under paragraph 2(a) of the Stock Purchase Agreement. At the Closing (as defined in paragraph 3 hereof), the Company shall pay to SNB and not to the Borrower or Pledgor, in United States dollars and in immediately available funds, a purchase price determined in accordance with the Stock Purchase Agreement. If the purchase price of the Pledged Stock is greater than the then outstanding Indebtedness (including accrued but unpaid interest and all other sums owed by Borrower to SNB pursuant to the terms of the Notes and the Loan Documents), then the Company shall be required to purchase hereunder only so much of the Pledged Stock as is necessary to pay in full the Indebtedness. In consideration of the purchase price received by SNB, the Pledgor shall transfer title to the Pledged Stock (or so much therefor as shall be purchased) to the Company or in the event the sale is at a Private Sale, SNB shall deliver to the Company the certificates evidencing the Pledged Stock (or so much thereof as shall be purchased) together with stock powers executed in blank by the Pledgor. In either case, SNB shall release its security interest in the Pledged Stock purchased by the Company upon receipt of the purchase price. The Borrower and the Company hereby acknowledge that the Pledged Stock is subject to the terms and provisions of the Stock Purchase Agreement which provides an option to purchase the Pledged Stock in favor of the Company and each of its shareholders in the event Pledgor desires to transfer, sell or dispose of all or any portion of the Pledged Stock. Accordingly, and given the difficulty of obtaining a reasonable price for the Pledged Stock at a public sale or auction and the difficulty of selling the Pledged Stock at a public sale or auction in compliance with the Stock Purchase Agreement and applicable federal and state securities laws the Company, the Pledgor and the Borrower specifically agree that a Private Sale at which the Company shall purchase any or all of the Pledged Stock pursuant to the terms of this Agreement shall have been conducted in a commercially reasonable manner, and, to the extent permitted by 2 3 applicable law, the Company, the Pledgor and the Borrower hereby waive any claim or defense to any such sale arising under Section 9-504(3) of the Uniform Commercial Code as in effect in the applicable jurisdiction. 2. Election by SNB to Cause Company to Purchase the Equipment. Upon a Default, SNB, by notice to the Company and the Borrower, may give notice to the Associate and to the Company requiring the Company to purchase (and Associate to sell) the Equipment in the following manner and upon the following terms. The notice shall specify whether the purchase is to be made (a) from the Associate prior to the commencement of proceedings by SNB to exercise its rights and remedies as a secured party against the Equipment, or (b) at a Private Sale conducted pursuant to the terms of the Loan Documents and applicable law. At the Closing, the Company shall pay to SNB and not to the Associate or the Borrower, in United States dollars and in immediately available funds, a purchase price determined in accordance with the Equipment Repurchase Agreement. In the event the purchase price of the Equipment is greater than the then outstanding Indebtedness (including accrued but unpaid interest and all other sums owed to SNB pursuant to the terms of the Notes and the Loan Documents), then the Company shall be required to purchase hereunder only so much of the Equipment as is necessary to pay in full the Indebtedness. In such event an equitable, ratable portion of the Purchase Price for all Equipment shall be paid for that portion of the Equipment which is purchased. In consideration of the purchase price received by SNB, the Borrower shall transfer title to the Equipment (or so much thereof as shall be purchased) to the Company or in the event the sale is at a Private Sale, SNB shall cause title to the Equipment purchased by the Company to be transferred to the Company "as is" and without representation or warranty of any kind whatsoever. In either case, SNB shall release its security interest in the Equipment purchased by the Company upon receipt of the purchase price. The Company and the Borrower each agree that the Equipment is special purpose Equipment and that a Private Sale at which the Company purchases the Equipment pursuant to this Agreement shall have been conducted in a commercially reasonable manner, and, to the extent permitted by applicable law, the Company and the Borrower hereby waive any claim or defense to any such sale arising under Section 9-504(3) of the Uniform Commercial Code as in effect in the applicable jurisdiction. The Company and the Borrower acknowledge that the Equipment is subject to the Equipment Repurchase Agreement which sets forth the purchase price for the Equipment agreed upon by the Borrower and the Company. 3. Other Purchasers. In the event of a default under any of the Loan Documents, SNB agrees not to purchase all or any part of the Pledged Stock or the Equipment or allow any other person (other than the Company) to do so, without the prior written consent of the Company, unless the Company shall, within thirty (30) days after SNB's request for performance hereunder, fail, refuse or be unable to perform its obligations hereunder. 4. The Closing. If purchase of the Pledged Stock and/or the Equipment is to be made from the Pledgor, the Associate and/or the Borrower, as the case may be, the Closing shall take place at a time and place selected by SNB within fifteen (15) days after the date of SNB's notice to the Company and the Borrower requiring that the Company purchase the Pledged Stock and/or the Equipment. If purchase of the Pledged Stock and/or the Equipment is to take place pursuant to a Private Sale, Closing shall take place at a time and in the manner as provided for by 3 4 applicable law or in the Pledge Agreement and/or the Security Agreement, as the case may be, or as may be provided for in any notice given by SNB pursuant thereto for the Private Sale provided, however, that the Closing and delivery of the Pledged Stock purchased by the Company shall occur at the principal office of SNB in Winston-Salem, North Carolina, at no expense to SNB and the Closing and delivery of the Equipment purchased by the Company shall occur at the premises of the Borrower where the Equipment is located. 5. Surplus. If all proceeds ever received by SNB, either before or after the Closing, from any sale or other disposition of any collateral, or part therefor, for the Indebtedness, or the exercise of any other remedy pursuant to the Notes or any of the Loan Documents, together with the aggregate purchase price actually received by SNB for the Pledged Stock and the Equipment to be purchased pursuant to this Agreement, shall exceed the aggregate amount of the Indebtedness, interest thereon, the costs and expenses incurred or other sums thereunder owed by the Borrower to SNB pursuant to any of the Notes or the Loan Documents, and the costs and expenses incurred in the enforcement of the Borrower's obligations under this Agreement, including reasonable attorneys' fees, the amount of such excess shall be remitted to or for the account of the Borrower, subject however, to the rights and claims of others having a prior interest in or a lien upon any such proceeds. 6. Assignment by Borrower. Borrower hereby assigns all of its right, title and interest in and to this Agreement to SNB as collateral security for the Indebtedness and agrees to execute and deliver Uniform Commercial Code Financing Statements with respect thereto as SNB may request. 7. Continuing Obligations. The obligations of the Company under this Agreement shall be continuing, and the Company agrees that its obligations hereunder shall not be modified, diminished, extinguished or released by reason that the whole or any part of any security or collateral for the Indebtedness now or hereafter held may be exchanged, compromised, impaired, released, or surrendered from time to time, that the time or place of payment of any Indebtedness or of any security therefor may be exchanged or extended, in whole or in part, to a time certain or otherwise, and may be renewed or accelerated, in whole or in part, that the Borrower may be granted indulgences generally, that any of the provisions of any note or other instrument evidencing any debt of the Borrower or any security therefor, including, without limitation, the Notes and the Loan Documents, may be modified or waived, or that any party liable for the payment thereof (including but not limited to any guarantor, surety or endorser) may be granted indulgences or released, all of which are hereby expressly consented to by the Company. Neither the death, disability, bankruptcy, or insolvency of any one or more of the Borrower or any guarantor, surety or endorser shall affect the continuing obligation of the Company. No claim need be asserted against the personal representative, guardian, custodian, trustee, debtor in bankruptcy, or receiver of any deceased, incompetent, bankrupt or insolvent borrower, guarantor, surety or endorser. Any deposit balance to the credit of the Borrower or any other party liable for the payment of the Indebtedness or liable upon any security therefor may be released, in whole or in part, at, before and/or after the stated, extended or accelerated maturity of any Indebtedness. All of the foregoing may be done without notice to or further assent by the Company, which shall remain bound hereon notwithstanding any such exchange, compromise, surrender, extension, 4 5 renewal, acceleration, modification, indulgence or release. The Company expressly waives notice of acceptance of this Agreement and of all extensions of credit to the Borrower, presentment and demand for payment of the Indebtedness, protest and any notice of dishonor or of default to the Company or to any other party with respect to any of the Indebtedness or with respect to any security or collateral therefor and all other notices to which the Company might otherwise be entitled. The obligations of the Company under this Agreement shall be direct and immediate and not conditional or contingent upon either the pursuit of any remedies against the Borrower or any other person or foreclosure of any security interest or liens available to SNB, its successors, endorsees or assigns, the Company hereby waiving any rights to require that any action be brought against the Borrower or any other person or to require that resort be had to any security or to any balance of any deposit account or credit on the books of SNB in favor of the Borrower or any other person, and the Company hereby waiving any rights of the Company pursuant to North Carolina General Statutes Section 26-7 or any similar or subsequent law. If the Indebtedness is partially paid through the election of SNB, its successors, endorsees or assigns, to pursue any of the remedies mentioned herein, in the Notes, or in the Loan Documents or if such Indebtedness is otherwise partially paid, the Company shall nevertheless remain fully liable and obligated under and pursuant to the terms of this Agreement. The Borrower and SNB agree to provide the Company with copies of all Loan Documents and modifications thereof. 8. No Credit; Waiver of Defenses. The Company shall not be entitled to provide for the payment of the purchase price either for the Pledged Stock or the Equipment (or any part thereof) by the issuance of credit or credits to or for the account of the Borrower, the Pledgor or either of them. Nor shall any portion of any purchase price either for the Pledged Stock or the Equipment be subject to offset, reduction or diminution by reason of any disputed or undisputed claim, suit or demand which the Company may have against the Borrower, the Pledgor or either of them, or by reason of any disputed or undisputed unpaid accounts or liabilities of or amounts otherwise owed by the Borrower, the Pledgor or either of them to the Company. Nor shall the Company assert any claims or defenses against payment or be afforded any reduction of any purchase price for the Equipment by reason of the condition of the Equipment or by reason of any failure by the Borrower to maintain or repair the Equipment or by reason of the manner in which the Borrower has utilized or employed the Equipment in the operation of Borrower's business. Nothing herein shall prohibit the Company from purchasing the Pledged Stock or Equipment over and above the amounts necessary to satisfy the Borrower's obligations to SNB and applying the proceeds thereof to any obligation of the Borrower to the Company. 9. Nothing herein shall prevent or restrict (a) the Company from exercising any of its rights and privileges, including, without limitation, the right of termination, under and as set forth in the Associate's License Agreement or (b) the Company and the Pledgor and/or the Associate from amending or terminating the Stock Purchase Agreement or the Associate's License Agreement provided that, (i) upon the termination of the Associate's License Agreement, the Company and the Associate shall give written notice of such termination to SNB and shall comply with the provisions of 5 6 paragraph 2 above as if SNB had given the notice referred to therein unless SNB notifies the Company and the Borrower to the contrary; (ii) in the event of the termination or modification of the Stock Purchase Agreement, the Company and the Pledgor shall remain obligated to comply with paragraph I above as if the Stock Purchase Agreement remained in force (unmodified) as it is as of the date hereof; (iii) in the event of the modification of the Associate's License Agreement, the Company and the Associate shall remain obligated to comply with paragraph 2 above as if the Associate's License Agreement remained in force (unmodified) as it is as of the date hereof; (iv) in no event shall the purchase price of the Pledged Stock be less than the purchase price for such Pledged Stock as determined in accordance with the Stock Purchase Agreement as it exists on the date hereof, and (v) in no event shall the purchase price of the Equipment be less than the purchase price for such Equipment as determined in accordance with the Equipment Repurchase Agreement as it exists on the date hereof. 10. Choice of Law. The parties hereby acknowledge and agree that this Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. 11. Modification. This Agreement may not be changed, amended or modified orally or by implication but only by a written instrument signed by each of the parties hereto, and no obligation of the Company or the Borrower or the Pledgor shall be released, waived or modified by SNB or any officer or agent of SNB except by a writing signed by a duly authorized officer of SNB and bearing the seal of SNB. This Agreement shall be irrevocable by the Company, the Borrower and the Pledgor until the Indebtedness has been completely repaid and all other obligations and undertakings of the Borrower under, or by reason of, or pursuant to the Notes or any of the Loan Documents have been completely performed and satisfied. 12. Notices. Any and all notices or demands permitted or required to be made under this Agreement shall be in writing, signed by the party giving such notice or demand, and shall be delivered personally or sent by registered or certified United States mail, postage prepaid, to the other party(ies) at the addressees) set forth below, or at such other address as may have been designated in writing. The effective date of such notice or demand shall be date of personal service or the date on which the notice or demand is deposited in the mails. The address of the Borrower is: William J. Dorgan Patricia M. Dorgan 2 Palmer Place Gulfport, Mississippi 39501 The address of the Company is: Krispy Kreme Doughnut Corporation 1814 Ivy Avenue Winston-Salem, North Carolina 27105 Attn: John L. Barber 6 7 The address of SNB is: Southern National Bank of North Carolina Post Office Box 15008 Winston-Salem, North Carolina 27150 Attn: Jeff T. Clark 13. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but taken together shall constitute but one Agreement. 14. Benefit. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns. IN WITNESS WHEREOF, the parties have signed and sealed this Agreement as of the day and year first above written. /s/ William J. Dorgan (SEAL) William J. Dorgan /s/ Patricia M. Dorgan (SEAL) Patricia M. Dorgan KRISPY KREME DOUGHNUT CORPORATION By: /s/ J. A. McAleer, Jr. J. A. McAleer, Jr., Chairman of the Board and Chief Executive Officer ATTEST: /s/ John L. Barber John L. Barber, Secretary [CORPORATE SEAL] 7 8 SOUTHERN NATIONAL BANK OF NORTH CAROLINA By: /s/ Jeff T. Clark Jeff T. Clark, Vice President ATTEST: /s/ Melvin S. ________ _______________________ Asst. Secretary [CORPORATE SEAL] 8 EX-10.20 13 PROMISSORY NOTE DATED 3/13/97 1 EXHIBIT 10.20 SATISFACTION: The Debt evidenced by this Note has been satisfied in full this _______ day of _____________, 19__ Signed: __________________________ PROMISSORY NOTE Winston-Salem, NC $65,705.72 MARCH 13, 1997 FOR VALUE RECEIVED the undersigned, jointly and severally, promise to pay to KRISPY KREME DOUGHNUTS COMPANY or order, the principal sum of SIXTY-FIVE THOUSAND SEVEN HUNDRED FIVE AND 72/100 DOLLARS ($65,705.72) with interest from March 13, 1997, at a rate per annum equal to nine and one-fourth percent (9.25%) on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the office of KRISPY KREME DOUGHNUTS COMPANY, P O BOX 83, WINSTON-SALEM, NORTH CAROLINA 27102-0083 (ATTENTION: RANDY S. CASSTEVENS) or at such place as the legal holder hereof may designate in writing and, at Payee's election, via electronic funds transfer pursuant to the Authorization Agreement to Initiate Debits / Credits of even date herewith. It is understood and agreed that additional amounts may be advanced by the holder hereof as provided in the instruments, if any, securing this Note and such advances will be added to the principal of this Note and will accrue interest at the above specified rate of interest from the date of advance until paid. The principal and interest shall be due and payable in thirty-five (35) equal consecutive monthly payments of principal and interest in the amount of $2,097.08 each to be paid on the 13th day of each month during the term hereof, the first such payment shall be due and payable on April 13, 1997 with a final payment of all unpaid principal and all accrued and unpaid interest herein due on March 13, 2000. Maker anticipates that on or before April 2, 1997 it will make a lump sum payment greater than a standard monthly payment due hereunder. In the event such lump sum payment is greater than $5,000.00, then Payee agrees to recalculate the schedule of payments so that equal payments of principal and interest shall be made in a manner causing this Note to be paid in full upon the thirty-fifth (35th) payment after such lump sum payment. Payee shall not directly draft Maker's bank account prior to May 13, 1997. If not sooner paid, the entire remaining indebtedness (including, but not limited to, all unpaid principal and all accrued and unpaid interest and all other sums due hereunder) shall be due and payable on MARCH 13, 2000. If payable in installments, each such installment shall, unless otherwise provided, be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal. Unless otherwise provided, this Note may be prepaid in full or in part at any time without penalty or premium. Partial prepayments shall be applied to installments due in reverse order of their maturity. In the event of (a) default in payment of any installment of principal or interest hereof or under any other note from Maker to Payee as the same becomes due and such default is not cured within ten (10) days from the due date, or (b) default under the terms of any instrument securing this Note, and such default is not cured within fifteen (15) days after written notice to maker, then in either such event the holder may without further notice, declare the remainder of the principal sum, together with all interest accrued thereon and the prepayment premium, if any, at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The unpaid principal of this Note and any part thereof, accrued interest and all other sums due under this Note and the Deed of Trust, if any, shall bear interest at the rate provided for above after default until paid. All parties to this Note, including maker and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other sums due under this Note and the Deed of Trust notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the maker, principal, surety, guarantor and endorsers of this Note hereby agree to pay to the holder reasonable attorneys fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and any instrument securing this Note shall be cumulative and may be pursued singly, successively, or together against the property described in any Deed of Trust or any other instrument securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release or such rights or remedies or the right to exercise any of them at another time. This Note is to be governed and construed in accordance with the laws of the State of North Carolina. This Note is given for money owed. To further secure this Note, Maker(s) grants Payee a first priority security interest under the UCC in all machinery, equipment, furniture and fixtures owned by Maker(s) and/or in which Maker(s) has any interest now or hereafter located at 4242 South Noland Road, Independence, Missouri, and agrees to execute such further instruments, security agreements and financing statements as Payee may from time to time request to evidence and/or perfect such security interest. In the event such security interest ever constitutes a lower than first priority security interest, Payee may declare this Note in default and no cure period for such default shall exist. Any default hereunder shall constitute a default under that certain Franchise Agreement by and between Krispy Kreme Doughnut Corporation and Midwest Doughnuts, L.L.C. dated May 29, 1996 (the "Franchise Agreement") and any default under the Franchise Agreement shall constitute a default under this Note. IN TESTIMONY WHEREOF, EACH CORPORATE MAKER HAS CAUSED THIS IN TESTIMONY WHEREOF, EACH INDIVIDUAL MAKER HAS SET HIS HAND TO INSTRUMENT TO BE EXECUTED AS ITS CORPORATE NAME BY ITS MEMBER, THIS INSTRUMENT AND ADOPTED HIS SEAL THE WORK "SEAL" APPEARING ATTESTED BY ITS MEMBER, AND ITS CORPORATE SEAL TO BE HERETO AFFIXED, BESIDE THE DAY AND YEAR FIRST ABOVE WRITTEN. BY ORDER OF ITS BOARD OF DIRECTORS FIRST DULY GIVEN, THE DAY AND YEAR FIRST ABOVE WRITTEN. IN TESTIMONY WHEREOF, EACH INDIVIDUAL MAKER HAS SET HIS HAND TO THIS INSTRUMENT AND ADOPTED HIS SEAL THE WORK "SEAL" APPEARING BESIDE THE DAY AND YEAR FIRST ABOVE WRITTEN. MIDWEST DOUGHNUTS, L.L.C. /S/ PHILIP R.S. WAUGH, JR. (SEAL) PHILIP R.S. WAUGH, JR. /S/ ROBERT E.L. HODGES (SEAL) BY: /S/ PHILIP R.S. WAUGH, JR. ROBERT E.L. HODGES PHILIP R. S. WAUGH, JR., MEMBER /S/ JIMMY B. STRICKLAND (SEAL) ATTEST: /S/ ROBERT E.L. HODGES JIMMY B. STRICKLAND ROBERT E.L. HODGES, SECRETARY (Corporate Seal) EX-10.22 14 TRADEMARK LICENSE AGREEMENT DATED 5/27/96 1 EXHIBIT 10.22 TRADEMARK LICENSE AGREEMENT This Agreement, effective as of the 27th day of May, 1996, is made between HDN Development Corporation, a Delaware corporation with offices in Florence, Kentucky ("HDN"), and Krispy Kreme Doughnut Corporation, a North Carolina corporation with offices in Winston-Salem, North Carolina ("Krispy Kreme"). RECITALS WHEREAS, HDN is the owner of all right, title and interest in and to those certain trademarks, trade names and service marks, and all related registrations and applications for registration, as more particularly identified on Exhibit A which is attached hereto and made a part hereof (collectively, the "Trademarks"). WHEREAS, Krispy Kreme desires to acquire the right to use the Trademarks: (i) at all of its retail locations; (ii) at the locations in which it distributes the Licensed Products; (iii) as part of its corporate name; and (iv) in connection with its business of manufacturing, packaging, selling, marketing, and distributing the Licensed Products under the Trademarks in the Territory, and to franchise or sub-license the right to do the same to franchisees, sublicensees, affiliates and subsidiaries of Krispy Kreme; WHEREAS, HDN is willing to authorize and license Krispy Kreme such rights under the Trademarks. NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are acknowledged by the parties, HDN and Krispy Kreme, intending to be legally bound, agree as follows: ARTICLE I - DEFINITIONS 1.1 "Trademarks" shall mean all those certain registered and unregistered trade names, trademarks, service marks, and all related registrations and applications for registration, identified on Exhibit A hereto, and any future trade names, trademarks and service marks added to the scope of this Agreement by the mutual agreement of the parties. 1.2 "Licensed Products" shall mean all services and products of Krispy Kreme delivered under the Trademarks, including but not limited to fresh and frozen doughnuts, fried pies, honeybuns, bagels, muffins, sweet rolls, all products sold at Krispy Kreme retail locations and such other products as the parties shall agree from time to time. 2 1.3 "Territory" shall mean the world. 1.4 "Affiliate" or "Subsidiary" - shall mean any entity in which Krispy Kreme owns at least a majority of the voting control of such entity. 1.5 "Franchisee" or "Sublicensee" - shall mean any entity in which Krispy Kreme does not own a majority of the voting control of such entity to whom Krispy Kreme grants a franchise or sublicense of the Trademarks. ARTICLE II - GRANT OF LICENSE 2.1 HDN grants Krispy Kreme the non-exclusive, non-assignable right and license to use the Trademarks in Krispy Kreme's corporate name and in connection with the manufacture, packaging, sale, marketing, and distribution of the Licensed Products within the Territory. 2.2 HDN further authorizes Krispy Kreme to grant appropriate sublicenses hereunder to Affiliates or Subsidiaries, all subject to the terms and conditions hereinafter stated. 2.3 HDN further authorizes Krispy Kreme to franchise and sublicense the Trademarks to Franchisees and Sublicensees, all subject to the terms and conditions hereinafter stated. This authorization is conditioned, however, upon such Franchisee or Sublicensee paying to HDN a Franchise Fee as provided in Section 7.2 hereunder. HDN reserves the right to disallow any Franchise or Sublicense of the Trademarks within 30 days of HDN receiving notice of the grant of such Franchise or Sublicense. 2.4 It is the intent of the parties to this Agreement to permit Krispy Kreme to utilize the Trademarks at such retail locations as it may operate, or, in the case of Franchisees or Sublicensees of Krispy Kreme, at such locations as may be operated by such Franchisees or Sublicensees, and at the locations in which Krispy Kreme distributes the Licensed Products. Additionally, the parties intend that Krispy Kreme will utilize the Trademarks at non-retail locations for the limited purposes of labeling, packaging, advertisement and for use in its corporate name. ARTICLE III - QUALITY CONTROL 3.1 HDN shall have the right to exercise quality control over Krispy Kreme's use of the Trademarks and Licensed Products to a degree reasonably necessary to maintain the validity of the Trademarks and to protect the goodwill associated therewith. HDN recognizes and approves the quality of Krispy Kreme products 2 3 heretofore sold by Krispy Kreme under the trademarks now termed the Trademarks in the territory now termed the Territory. 3.2 Krispy Kreme shall use the Trademarks on or in connection only with those Licensed Products that conform to the specifications and standards of quality which HDN prescribes. HDN adopts as said standards of quality those standards embodied in said products sold heretofore by Krispy Kreme, and Krispy Kreme will not deviate materially from those standards without prior written approval from HDN. 3.3 In order to verify compliance with Paragraph 3.2 hereof, HDN may from time to time require Krispy Kreme to submit samples of Licensed Products, packaging and promotional materials therefor, and other items bearing the Trademarks, and HDN, or its delegate, may inspect the Licensed Products, packaging, or promotional materials on Krispy Kreme's premises during business hours, upon forty-eight (48) hours advance notice. 3.4 In order to further verify compliance with Paragraph 3.2 hereof, Krispy Kreme shall be required to submit to HDN a quarterly progress report summary and information concerning the number of customer complaints. The report submitted to HDN (which will accompany the quarterly progress report summary) shall be in a form substantially similar to the form attached as Exhibit B to this Agreement, and shall be submitted to HDN no later than thirty (30) days after the last day of each fiscal quarter of Krispy Kreme. 3.5 Krispy Kreme shall use its best efforts to ensure that the Licensed Products, and packaging or promotional materials therefor, comply with all applicable ordinances, laws, and statutes governing the manufacture, packaging, promotion, and sale of such products. ARTICLE IV - USE OF THE TRADEMARKS 4.1 Krispy Kreme shall use its best efforts to promote and extend demand for the Licensed Products sold under the Trademarks in the Territory. 4.2 Krispy Kreme recognizes the great value and goodwill associated with the Trademarks and acknowledges HDN's ownership in same. Krispy Kreme is a related company as defined in Section 45 of the Trademark Act of the United States, 15 U.S.C. ss. 1127, and Krispy Kreme's use of the Trademarks inures to the benefit of HDN for all purposes including trademark registration. Krispy Kreme shall not, however: (a) challenge the validity of the Trademarks or any registration therefor; 3 4 (b) contest the fact that its rights under this Agreement are solely those of a licensee; (c) attempt to register any of the Trademarks in its own name; (d) use the Trademarks in any manner that would jeopardize HDN's rights in the Trademarks; or (e) knowingly do any act that would invalidate or be likely to invalidate the HDN's trademark registrations. 4.3 Krispy Kreme shall affix as a trademark registration notice to the Licensed Products, and on the packaging, advertising, promotional items used in conjunction with the Licensed Products, the symbol 0 for registered trademarks and TM for unregistered trademarks. 4.4 Krispy Kreme may not combine the Trademarks with any other marks, names or symbols unless it obtains HDN's prior written consent. 4.5 Krispy Kreme may not make any significant change in the presentation of the Trademarks as affixed to the Licensed Products, or used on packaging or promotional materials, unless it obtains HDN's prior written consent. 4.6 HDN shall be responsible for trademark registration and maintenance. Krispy Kreme shall cooperate with HDN and shall execute any documents reasonably required by HDN or supply HDN with any samples or other materials reasonably necessary to maintain the Trademarks. 4.7 Krispy Kreme is authorized to use the Trademarks in connection with the advertisement of its products and services in any manner it deems appropriate, including without limitation use of the Trademarks on apparel, print media, radio and television. This authorization is conditioned, however, on such advertising complying with all applicable local, state and federal laws. Also, if sales of advertising products are made by Krispy Kreme, such sales will be included with the calculation of the Royalty under Section 7.1 of this Agreement. ARTICLE V - TRADEMARK ENFORCEMENT 5.1 In the event that Krispy Kreme learns of any infringement or unauthorized use of any of the Trademarks, it shall promptly notify HDN. HDN has the right to transmit notices of infringement to or bring infringement actions against infringing parties. If requested to do so, Krispy Kreme shall cooperate with and assist HDN in any such action, including joining the action as a party if necessary, at HDN's expense. Any award, or portion of an award, recovered by HDN in any such 4 5 action or proceeding commenced by HDN shall belong solely to HDN after recovery by both parties of their respective actual out-of-pocket costs. 5.2 If HDN determines not to bring any such action, Krispy Kreme may then bring such action in its own name at its own expense provided it obtains the consent of HDN, which consent shall not be unreasonably withheld. If requested to do so, HDN shall cooperate with Krispy Kreme in any such action, including joining the action as a party if necessary, at Krispy Kreme's expense. Any award, or portion of an award, recovered by Krispy Kreme in any such action or proceeding commenced by Krispy Kreme shall belong solely to Krispy Kreme after recovery by both parties of their respective actual out-of-pocket costs. 5.3 In the event a third party institutes an infringement action against Krispy Kreme for its use of the Trademarks as provided in this Agreement, Krispy Kreme shall promptly notify HDN of such suit in writing. HDN shall defend, at its own expense, any such action, and Krispy Kreme shall cooperate in such defense as reasonably requested by HDN, at HDN's expense. HDN shall pay all judgments and settlements resulting from such suits. Any award received by HDN in such an action shall belong solely to HDN. 5.4 HDN and Krispy Kreme shall keep one another informed of the status of , and their respective activities regarding, any litigation concerning the Trademarks. Krispy Kreme may not enter into a settlement or consent judgment involving the trademarks, however, unless it obtains HDN's prior written consent. ARTICLE VI - INDEMNITY 6.1 Krispy Kreme shall indemnify and hold harmless HDN and its affiliated entities and their respective officers, employees, and agents, from any and all claims, suits, damages, attorney's fees, costs, and expenses arising from Krispy Kreme's performance and activities under this Agreement, whenever and however asserted and established. 6.2 HDN shall indemnify and hold harmless Krispy Kreme and its affiliated entities and their respective officers, employees, and agents, from any and all claims, suits, damages, attorney's fees, costs, and expenses arising from any claim by any other person, firm or corporation of either a superior right in and to the Licensed Products or any feature thereof or infringement action arising out of the manufacture and sale of the Licensed Products by Krispy Kreme. 5 6 ARTICLE VII - ROYALTY 7.1 In consideration of the rights granted herein, Krispy Kreme shall pay to HDN a royalty equivalent to a percentage of all sales of the Licensed Products sold by Krispy Kreme, such percentage currently being two percent (2%) (the "Royalty"). 7.2 In consideration of the right to Franchise or Sublicense the Trademarks hereunder, Krispy Kreme shall require, as an integral part of any such Franchise or Sublicense of the Trademarks, that all royalty fees payable to Krispy Kreme as a result of such Franchise or Sublicense shall be payable to HDN (the "Franchise Fees"). Krispy Kreme shall guaranty and shall ultimately be responsible for payment of all Franchise Fees. 7.3 Unless agreed to the contrary, Krispy Kreme shall calculate the Royalty and Franchise Fees payable to HDN on the last day of each fiscal quarter of Krispy Kreme occurring during the term of this Agreement, and shall pay or cause to have paid to HDN such Royalty and Franchise Fees within thirty days of the last day of each fiscal quarter occurring during the term of this Agreement. Notwithstanding the foregoing, the Royalty and Franchise Fees shall be deemed to accrue from day to day. Simultaneous with submission of the Royalty and Franchise Fees, Krispy Kreme shall deliver to HDN a detailed report of the Royalty and Franchise Fees payable for the quarter. 7.4 HDN shall have the right to assess interest on any Royalty or Franchise Fee due and remaining unpaid in the manner and on the date stipulated for payment hereunder at a rate of two percent (2%) per annum above the average prime rate as reported in The Wall Street Journal for the period of default, such interest being compounded at the end of each fiscal year. 7.5 Krispy Kreme shall maintain complete and accurate records showing in detail the net sales of the Licensed Products. HDN, or its duly authorized representative, is entitled to inspect Krispy Kreme's records at all reasonable times. 7.6 HDN shall pay to Krispy Kreme a fee equal to twenty-five percent (25%) of all collected Franchise Fees in consideration for materials, marketing and know-how provided by Krispy Kreme to Franchisees or Sublicensees, and for effort expended by Krispy Kreme in increasing demand for products sold under the Trademarks pursuant to Franchise and Sublicense arrangements. This fee shall be paid to Krispy Kreme within ten days following payment of the Franchisee Fee to HDN. ARTICLE VIII - TERM AND TERMINATION 8.1 This Agreement will remain in force and effect for a period of one year from the effective date of this agreement, and shall renew automatically for successive 6 7 yearly periods until either party provides written notice to terminate the Agreement within sixty (80) days before the expiration of the then current term. 8.2 In the event either party commits a material breach of this Agreement, the other party may, upon written notice, terminate the Agreement; provided, however, that the Agreement will not be terminated if the breaching party cures the breach within thirty (30) days of receipt of said notice (the "Cure Period"). Further, if the breaching party is unable to cure its breach within the Cure Period for reasons of force majeure, or because of actions or omissions of the non-breaching party, the breaching party shall have up to an additional thirty (30) days in which to cure, so long as the Agreement has not expired. 8.3 Notwithstanding anything to the contrary in Paragraph 8.2, either party may, by written notice to the other party, terminate this Agreement if any of the following events occur: (a) the other party goes into liquidation other than a voluntary liquidation for the purpose of reorganization; (b) the other party ceases to carry on business; (c) the other party or a significant part of its business, assets, ownership, management, or right of disposition are confiscated, requisitioned, nationalized, expropriated, or in any other manner acquired without consent of the other party or its shareholders, as the case may be, by or on behalf of or under any law or at the instance of any Government de jure or de facto. ARTICLE IX - MISCELLANEOUS 9.1 This Agreement contains the entire understanding between the parties. 9.2 This Agreement may be amended, modified, or supplemented, and any provision hereof waived, only by a written agreement of the parties hereto. 9.3 Krispy Kreme is not an agent of HDN, and nothing in this Agreement places the parties in a relationship as partners or joint venturers. 9.4 Any waiver of a breach by either party is not a waiver of any subsequent or other breach. 9.5 This Agreement is governed by the laws of the .Commonwealth of Kentucky, without respect to the conflict of laws provisions thereof. 7 8 9.6 The parties will attempt in good faith to resolve any dispute arising under this Agreement through negotiation Failing resolution through negotiation within thirty (30) days, the parties will submit the dispute for mediation in the Commonwealth of Kentucky under the CPR Institute for Dispute Resolution (CPR) Model Procedure for Mediation of Business Disputes or, in the case of a trademark or unfair competition dispute, under the CPR Institute for Dispute Resolution/ International Trademark Association (CPR/INTA) Model Procedure for Mediation of Trademark and Unfair Competition Disputes. If the mediation fails to produce a resolution within thirty (30) days, the parties will submit the dispute for binding arbitration in Kentucky under the CPR Model Rules for Non-Administered Arbitration of Business Disputes or the CPR/INTA Model Rules for Non-Administered Arbitration of Trademark and Unfair Competition. A judgment upon such an arbitration award may be entered in any Kentucky court having competent jurisdiction, or application may be made to an appropriate Kentucky court for a judicial acceptance of the award and an order of enforcement, as the party seeking to enforce such award may accept. The Commonwealth of Kentucky shall have full jurisdiction to prescribe, adjudicate and enforce each matter with respect to this Agreement and Krispy Kreme hereby voluntarily submits to the jurisdiction of the Kentucky court system. The agreements of the parties contained in this Paragraph have been made in exchange for mutual consideration and such agreements are irrevocable. 9.7 Notices are received when delivered in person, sent by overnight courier, or mailed by certified mail to: HDN: HDN DEVELOPMENT CORPORATION c/o Tucci & Tannenbaum Suite 206 Three Mill Road Wilmington, Delaware 19806 Krispy Kreme: KRISPY KREME DOUGHNUT CORPORATION c/o Mark T. Preston 1814 Ivy Avenue Winston-Salem, NC 27102 9.8 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 9.9 This Agreement may be executed in counterparts, each of which when so executed and delivered shall constitute a complete and original instrument but all of which together shall constitute one and the same agreement, and it shall not be necessary when making proof of this Agreement or any counterpart thereof to account for any other counterpart. 8 9 [THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK] [SIGNATURES ONLY TO FOLLOW] 9 10 IN WITNESS WHEREOF each of the undersigned represents that he is authorized to bind his company to the terms of this Agreement, signed to be effective this 27th day of May, 1996: HDN DEVELOPMENT CORPORATION By: /s/ Mark T. Preston Name: Mark T. Preston Title: President KRISPY KREME DOUGHNUT CORPORATION By: /s/ Randy S. Casstevens Name: Randy S. Casstevens Title: VP-Finance 10 11 EXHIBIT A TO LICENSE AGREEMENT [SEE ATTACHED IDENTIFICATION OF TRADEMARKS] 11 12 EXHIBIT A TO LICENSE AGREEMENT IDENTIFICATION OF U.S. REGISTERED TRADEMARKS Trademark Registration Number - --------- ------------------- EARLY MORN 1,454,537 EARLY MORN 1,366,921 HOT DOUGHNUTS NOW 1,973,398 HOT DOUGHNUTS NOW and Design 1,719,628 KING OF AMERICA'S DOUGHNUTS 945,871 KK (and Design) 967,682 KK (Walking K's logo w/circle) 939,105 KK and Design 622,399 KRISPY CRULLERS 1,894,237 KRISPY DELIGHT 1,723,019 KRISPY DIPPERS 1,798,838 KRISPY JUNIORS 1,776,001 KRISPY KNIBBLES 1,663,032 KRISPY KREME 967,683 KRISPY KREME 967,684 KRISPY KREME 995,291 KRISPY KREME 938,245 KRISPY KREME 961,976 12 13 Trademark Registration Number - --------- ------------------- KRISPY KREME (Stylized) 1,001,792 KRISPY KREME (Stylized) 539,165 KRISPY KREME (Stylized) 961,975 KRISPY KREME and Design 1,068,228 KRISPY KREME and Design 1,907,245 KRISPY KREME and Design 1,066,864 KRISPY KREME in Bowtie Design 1,683,112 KRISPY-ETTES 1,617,814 THORNTON'S 1,316,008 YOU KNOW BY THE GLOW 1,840,750 IDENTIFICATION OF U.S. TRADEMARK APPLICATIONS Trademark Serial Number - --------- ------------- HOT DOUGHNUTS NOW 75/022,750 KK (and Design) 75,022,751 KRISPY KREME 75,022,752 KRISPY KREME 75,022,753 KRISPY KREME 74/734,791 KRISPY KREME DOUGHNUTS 75/022,754 13 14 IDENTIFICATION OF FOREIGN TRADEMARK REGISTRATIONS AND APPLICATIONS Trademark Registration/Serial Number Jurisdiction - --------- -------------------------- ------------ KRISPY KREME (Stylized) 417,435 Switzerland KRISPY KREME 448,289 Canada KRISPY KREME 06690/1993 Denmark KRISPY KREME 395 15 768.4 Germany KRISPY KREME 190552 France KRISPY KREME 89311 Israel KRISPY KREME RM93C/003400 Italy KRISPY KREME 106782/1993 Japan KRISPY KREME 158,578 Ireland KRISPY KREME 11788.797 Spain KRISPY KREME 1551084 U.K. KRISPY KREME and Design 152 017 Austria KRISPY KREME (Device) 667633 Australia KRISPY KREME 96-14382 South Korea KRISPY KREME DOUGHNUTS and Design 538,038 Benelux KRISPY KREME DOUGHNUTS and Design 458,880 Mexico KRISPY KREME DOUGHNUTS (Device) 93 5338 Norway KRISPY KREME DOUGHNUTS 266,235 Sweden 14 15 IDENTIFICATION OF STATE TRADEMARK REGISTRATIONS Trademark Registration Number Jurisdiction - --------- ------------------- ------------ EARLY MORN DOUGHNUTS Tennessee KRISPY KREME DOUGHNUTS Tennessee KRISPY KREME 677 North Carolina IDENTIFICATION OF UNREGISTERED TRADEMARKS Trademark Products - --------- -------- Race to Daytona Sweepstakes Doughnuts with Davey At Your House Sweepstakes Red-E-Made Products of the Nashville, TN fresh bakery division of Rich Products Corporation, acquired by Krispy Kreme Doughnut Corporation on July 6, 19898. Early Morn Fried pies, honey buns, and dunkin' sticks America's Favorite Doughnuts, fried pies, honey buns and dunkin' sticks Thornton's the Donut King [trademark] Thornton's Flav-O-Rich [tradename] 15 16 EXHIBIT B TO LICENSE AGREEMENT [FORM OF QUALITY CONTROL STANDARDS REPORT] 16 17 QUALITY CONTROL STANDARDS REPORT THIS QUALITY CONTROL STANDARDS REPORT (the "Report") is given by Krispy Kreme Doughnut Corporation (the "Licensee") to HDN Corporation (the 'Licensor") pursuant to Section 3.4 of the License Agreement made effective as of May 27, 1996, by and between HDN Development Corporation and the Licensee (the "License Agreement"). The Licensee does hereby certify to the Licensor that the Standards were being substantially maintained with respect to each of the Services and Products for the Quarter ended __________________, _____ (the "Report Period"). Licensee further certifies that it has received less than _________ customer complaints for the Report Period. A progress report summary for the Report Period is attached hereto. Except as otherwise set forth herein, capitalized terms as used herein have the same meaning as set forth in the License Agreement. IN WITNESS WHEREOF, the Licensee has caused this Quality Control Standards Report to be executed on its behalf by one of its officers and delivered to the Licensor this the _____ day of ___________________, ______. KRISPY KREME DOUGHNUT CORPORATION By ________________________________ Name ______________________________ Title _____________________________ 17 EX-10.23 15 STOCK OPTION PLAN DATED 8/6/98 1 EXHIBIT 10.23 ________________________________________________________________________________ KRISPY KREME DOUGHNUT CORPORATION 1998 STOCK OPTION PLAN EFFECTIVE AS OF AUGUST 6, 1998 ________________________________________________________________________________ 2 TABLE OF CONTENTS ARTICLE 1 - GENERAL PROVISIONS.................................................1 1.1 Purpose......................................................1 1.2 Types of Awards..............................................1 1.3 Effective Date...............................................1 ARTICLE 2 - DEFINITIONS........................................................1 2.1 Act..........................................................1 2.2 Agreement....................................................1 2.3 Board........................................................1 2.4 Code.........................................................2 2.5 Committee....................................................2 2.6 Corporation..................................................2 2.7 Disability...................................................2 2.8 Effective Date...............................................2 2.9 Eligible Participant.........................................2 2.10 Fair Market Value............................................2 2.11 Incentive Stock Option.......................................2 2.12 Non-Employee Director........................................2 2.13 Nonqualified Stock Option....................................2 2.14 Option Grant Date............................................2 2.15 Parent Corporation...........................................3 2.16 Participant..................................................3 2.17 Plan.........................................................3 2.18 Retirement...................................................3 2.19 Stock........................................................3 2.20 Stock Option.................................................3 2.21 Subsidiary Corporation.......................................3 2.22 Termination of Employment....................................3 ARTICLE 3 - ADMINISTRATION.....................................................4 3.1 Committee....................................................4 3.2 Action by Committee..........................................4 3.3 Authority of Committee.......................................4 3.4 Decisions Binding............................................5 3.5 Written Agreement............................................5 3.6 Securities Law Restrictions..................................5 3.7 Rights as Shareholder........................................6 3.8 Change in Capital Structure..................................6 3.9 Indemnification of Committee.................................7 3.10 Adjustment to Stock Option Terms.............................7 3.11 Cancellation of Stock Options................................7 i 3 ARTICLE 4 - SHARES SUBJECT TO THE PLAN.........................................8 4.1 Number of Shares.............................................8 4.2 Lapsed Awards................................................8 4.3 Stock Distributed............................................8 ARTICLE 5 - INCENTIVE STOCK OPTIONS............................................8 5.1 Compliance With Code.........................................8 5.2 Available Shares.............................................8 5.3 Incentive Stock Option Terms.................................8 5.4 Repurchase of Incentive Stock Options........................9 5.5 Individual Dollar Limitation.................................9 ARTICLE 6 - NONQUALIFIED STOCK OPTIONS.........................................9 6.1 Grants.......................................................9 6.2 Available Shares.............................................9 6.3 Exercise Price..............................................10 6.4 Nonqualified Stock Option Terms.............................10 ARTICLE 7 - INCIDENTS OF STOCK OPTIONS........................................10 7.1 Terms and Conditions........................................10 7.2 Restrictions on Transfer....................................10 7.3 Form of Payment.............................................11 7.4 Stock Purchase Agreement....................................11 7.5 Dividends...................................................12 7.6 Death or Disability.........................................12 7.7 Retirement..................................................12 7.8 Replacement Stock Option Grants.............................12 ARTICLE 8 - AMENDMENT AND TERMINATION.........................................12 8.1 Amendment or Termination of Plan............................12 8.2 Effect of Amendment or Termination of Plan..................13 ARTICLE 9 - MISCELLANEOUS PROVISIONS..........................................13 9.1 No Right to Employment......................................13 9.2 Tax Withholding.............................................14 9.3 Subject to Federal and State Laws...........................14 9.4 Successors and Assigns......................................15 9.5 Governing Law...............................................15 9.6 Unfunded Status of Plan.....................................15 9.7 Notice of Section 83(b) Election............................15 9.8 Severability of Plan........................................15 9.9 Additional Provisions.......................................15 9.10 Resolution of Controversy...................................15 ii 4 KRISPY KREME DOUGHNUT CORPORATION 1998 STOCK OPTION PLAN ARTICLE 1 - GENERAL PROVISIONS 1.1 PURPOSE. The Plan is designed, for the benefit of the Corporation, to attract and retain for the Corporation employees and directors of exceptional ability; to motivate such individuals through added incentives to make a maximum contribution to greater profitability; to develop and maintain a highly competent management team; and to be competitive with other companies with respect to equity compensation. 1.2 TYPES OF AWARDS. Awards under the Plan may be made to Participants in the form of (i) Incentive Stock Options; and/or (ii) Nonqualified Stock Options. 1.3 EFFECTIVE DATE. The Plan shall be effective as of August 6, 1998. (a) Notwithstanding any other provision of this Plan, any Stock Option granted to a Participant prior to the date on which the shareholders of the Corporation approve the Plan (which approval must be obtained within the 12-month period before the Effective Date or the 12-month period after the Effective Date in order for Incentive Stock Options to be granted under the Plan) shall be conditioned upon and subject to such shareholder approval to the extent required by Section 16(b) of the Act or Section 422 of the Code. (b) If an Incentive Stock Option is granted prior to the date on which such shareholder approval is obtained, and such approval is obtained after the end of the 12-month period beginning on the Effective Date, such Incentive Stock Option shall be deemed a Nonqualified Stock Option granted pursuant to Article 5. ARTICLE 2 - DEFINITIONS Except where the context otherwise indicates, the following definitions apply: 2.1 "Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. All citations to sections of the Act or rules thereunder are to such sections or rules as they may from time to time be amended or renumbered. 2.2 "Agreement" means the written agreement evidencing a Stock Option granted to a Participant under the Plan. 2.3 "Board" means the Board of Directors of Krispy Kreme Doughnut Corporation. 5 2.4 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered. 2.5 "Committee" means the committee consisting of two or more members appointed by the Board to administer this Plan pursuant to Article 3 or for such limited purposes as may be provided by the Board. To the extent required by Rule 16b-3 under the Act, the Committee shall consist of individuals who are Non-Employee Directors. The Board shall function as the Committee at any time the Committee is not otherwise constituted. 2.6 "Corporation" means Krispy Kreme Doughnut Corporation, a North Carolina corporation, and its successors and assigns. The term "Corporation" shall include any Parent Corporation and any Subsidiary Corporation. With respect to all purposes of the Plan, including, but not limited to, the establishment, amendment, termination, operation and administration of the Plan, Krispy Kreme Doughnut Corporation shall be authorized to act on behalf of all other entities included within the definition of Corporation. 2.7 "Disability" means a condition resulting in the Participant commencing full disability benefits under the Employer's program of long-term disability insurance. 2.8 "Effective Date" shall mean August 6, 1998. 2.9 "Eligible Participant" means any employee of the Corporation, as shall be determined by the Committee, as well as any other person, including directors and consultants whose participation in the Plan the Committee determines is in the best interest of the Corporation, subject to limitations as may be provided by the Code, the Act or the Committee. 2.10 "Fair Market Value" shall be the value of a share of stock, as determined by the Committee in its sole discretion from time to time. The determination of Fair Market Value in connection with an Incentive Stock Option shall be made by the Committee in accordance with Section 422 of the Code and the rules and regulations thereunder. 2.11 "Incentive Stock Option" means a Stock Option granted under Article 4 of the Plan, and as defined in Section 422 of the Code. 2.12 "Non-Employee Director" shall have the meaning set forth in Rule 16b-3 under the Act. 2.13 "Nonqualified Stock Option" means a Stock Option granted under Article 5 of the Plan. 2.14 "Option Grant Date" means, as to any Stock Option, the latest of: (a) the date on which the Committee grants the Stock Option by authorizing the officers of the Corporation to enter into an Agreement with the Participant for a specified number of options at a specified exercise price; 2 6 (b) the date the Participant receiving the Stock Option becomes an employee of the Corporation, to the extent employment status is a condition of the grant or a requirement of the Code or the Act; or (c) such other date (later than the dates described in (i) and (ii) above) as the Committee may designate. 2.15 "Parent Corporation" means any corporation (other than Krispy Kreme Doughnut Corporation) in an unbroken chain of corporations ending with Krispy Kreme Doughnut Corporation if, at the time of the granting of the option, each of the corporations other than Krispy Kreme Doughnut Corporation owns stock possessing 50 percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.16 "Participant" means an Eligible Participant to whom a Stock Option has been granted and who has entered into an Agreement evidencing the Stock Option. 2.17 "Plan" means the Krispy Kreme Doughnut Corporation 1998 Stock Option Plan, as amended from time to time. 2.18 "Retirement" shall mean the Participant's Termination of Employment at a time when (i) for an employee, the sum of the Participant's age and years of employment with the Corporation equals or exceeds 65, and (ii) for a Participant who is a Non-Employee Director, the Non-Employee Director is deemed to be in good standing, as determined by the Committee in its sole discretion. 2.19 "Stock" means shares of common stock of Krispy Kreme Doughnut Corporation, as may be adjusted pursuant to the provisions of Section 3.9. 2.20 "Stock Option" means an Incentive Stock Option granted under Article 4 or a Nonqualified Stock Option granted under Article 5 herein. 2.21 "Subsidiary Corporation" means any corporation (other than Krispy Kreme Doughnut Corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.22 "Termination of Employment" with respect to an employee means the discontinuance of employment of a Participant with the Corporation for any reason. The determination of whether a Participant has discontinued employment shall be made by the Committee in its discretion. "Termination of Employment" with respect to a Non-Employee Director means the discontinuance of the Non-Employee Director's service as a member of the Board. In 3 7 determining whether a Termination of Employment has occurred, the Committee may provide that service as a consultant or service with a business enterprise in which the Corporation has a significant ownership interest or which is a franchisee of the Corporation shall be treated as employment with the Corporation. The Committee shall have the discretion, exercisable either at the time the Stock Option is granted or at the time the Participant terminates employment, to establish as a provision applicable to the exercise of one or more Stock Options that during the limited period of exercisability following Termination of Employment, the Stock Option may be exercised not only with respect to the number of shares of Stock for which it is exercisable at the time of the Termination of Employment but also with respect to one or more subsequent installments for which the Stock Option would have become exercisable had the Termination of Employment not occurred. ARTICLE 3 - ADMINISTRATION 3.1 COMMITTEE. This Plan shall be administered by the Committee. At any time that the officers and directors of the Corporation are subject to Section 16 of the Act, a Committee member who is not a Non-Employee Director shall not be able to participate in any decision made by the Committee to the extent proscribed by Rule 16b-3 under the Act. The Committee, in its discretion, may delegate to one or more of its members such of its powers as it deems appropriate. The Committee also may limit the power of any member to the extent necessary to comply with Rule 16b-3 under the Act or any other law. Members of the Committee shall be appointed originally, and as vacancies occur, by the Board, to serve at the pleasure of the Board. The Board may serve as the Committee if by the terms of the Plan all Board members are otherwise eligible to serve on the Committee. 3.2 ACTION BY COMMITTEE. The Committee shall meet at such times and places as it determines. A majority of its members shall constitute a quorum, and the decision of a majority of those present at any meeting at which a quorum is present shall constitute the decision of the Committee. A memorandum signed by all of its members shall constitute the decision of the Committee without necessity, in such event, for holding an actual meeting. 3.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power, authority and discretion to: (a) designate Participants; (b) determine the type or types of Stock Options to be granted to each Participant; (c) determine the number of Stock Options to be granted and the number of shares of Stock to which a Stock Option will relate; 4 8 (d) determine the terms and conditions of any Stock Option granted under the Plan, including, but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Stock Option, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of a Stock, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines; (e) accelerate the vesting or lapse of restrictions of any outstanding Stock Option, based in each case on such considerations as the Committee in its sole discretion determines; (f) determine whether, to what extent, and under what circumstances a Stock Option may be settled in, or the exercise price of a Stock Option may be paid in, cash, Stock, other Stock Options, or other property, or a Stock Option may be cancelled, forfeited, or surrendered; (g) prescribe the form of each Stock Option Agreement, which need not be identical for each Participant; (h) decide all other matters that must be determined in connection with a Stock Option; (i) establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; (j) make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan; and (k) amend the Plan or any Stock Option Agreement as provided in Article 8. 3.4 DECISIONS BINDING. The Committee's interpretation of the Plan, any Stock Options granted under the Plan, any Stock Option Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. 3.5 WRITTEN AGREEMENT. Each Stock Option granted under the Plan shall be evidenced by a written Agreement. Each Agreement shall be subject to and incorporate, by reference or otherwise, the applicable terms and conditions of the Plan, and any other terms and conditions, not inconsistent with the Plan, required by the Committee. 3.6 SECURITIES LAW RESTRICTIONS. All certificates for shares of Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange or national quotation system upon which the Stock is then listed and any applicable federal or state laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate 5 9 reference to such restrictions. In making such determination, the Committee may rely upon an opinion of counsel for the Corporation. The Committee may require each person purchasing shares of Stock pursuant to a Stock Option granted under the Plan to represent to and agree with the Corporation in writing that he is acquiring the shares of Stock without a view to distribution thereof. The certificates for such shares of Stock may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. 3.7 RIGHTS AS SHAREHOLDER. Except as provided otherwise in the Plan or in an Agreement, no Participant awarded a Stock Option shall have any right as a shareholder with respect to any shares of Stock covered by his or her Stock Option prior to the date of issuance to him or her of a certificate or certificates for such shares of Stock. 3.8 CHANGE IN CAPITAL STRUCTURE. If any reorganization, recapitalization, reclassification, stock split-up, stock dividend, or consolidation of shares of Stock, merger or consolidation of the Corporation or sale or other disposition by the Corporation of all or a portion of its assets, any other change in the Corporation's corporate structure, or any distribution to shareholders other than a cash dividend results in the outstanding shares of Stock, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares of Stock or other securities of the Corporation, or for shares of Stock or other securities of any other corporation; or new, different or additional shares or other securities of the Corporation or of any other corporation being received by the holders of outstanding shares of Stock, then equitable adjustments shall be made by the Committee in: (a) the limitation of the aggregate number of shares of Stock that may be awarded as set forth in Section 3.5 of the Plan; (b) the number and class of Stock that may be subject to a Stock Option, and which have not been issued or transferred under an outstanding Stock Option; (c) the purchase price to be paid per share of Stock under outstanding Stock Options; and (d) the terms, conditions or restrictions of any Stock Option and Agreement, including the price payable for the acquisition of Stock; provided, however, that all adjustments made as the result of the foregoing in respect of each Incentive Stock Option shall be made so that such Stock Option shall continue to be an Incentive Stock Option, as defined in Section 422 of the Code, unless the Committee has stated its intent in writing to treat such Stock Option instead as a Nonqualified Stock Option. 6 10 3.9 INDEMNIFICATION OF COMMITTEE. In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Corporation against reasonable expenses, including attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Stock Option granted hereunder, and against all amounts paid by them in settlement thereof, provided such settlement is approved by independent legal counsel selected by the Corporation, or paid by them in satisfaction of a judgment or settlement in any such action, suit or proceeding, except as to matters as to which the Committee member has been negligent or engaged in misconduct in the performance of his duties; provided, that within 60 days after institution of any such action, suit or proceeding, a Committee member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. 3.10 ADJUSTMENT TO STOCK OPTION TERMS. The Committee shall be authorized to make adjustments in performance based criteria or in the other terms and conditions of Stock Options in recognition of unusual or nonrecurring events affecting the Corporation or its financial statements or changes in applicable laws, regulations or accounting principles. Unless otherwise required by applicable law, rule or regulation, such adjustments will not be considered to result in the grant of a new Stock Option. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Agreement in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Corporation shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Stock Options under the Plan as it shall deem appropriate to assume the outstanding awards, rights and obligations. 3.11 CANCELLATION OF STOCK OPTIONS. If the Committee determines that egregious circumstances exist which have been caused by the Participant, the Committee shall have the full power and authority to cancel or suspend any Stock Option granted to such Participant. In particular, but without limitation, all outstanding Stock Options granted to any Participant may be canceled if (a) the Participant, without the consent of the Committee, while employed by the Corporation or after termination of such employment, becomes associated with, employed by, renders services to, or owns any interest in, other than any insubstantial interest, as determined by the Committee, any business that is in competition with the Corporation or with any business in which the Corporation has a substantial interest as determined by the Committee; (b) the Participant is terminated for cause as determined by the Committee in its discretion; or (c) the Corporation voluntarily or involuntarily files for and obtains relief under the United States Bankruptcy Code or any similar state law for the protection of creditors. 7 11 ARTICLE 4 - SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. The aggregate number of shares of Stock which are available for Stock Options under the Plan shall be Ninety-Five Thousand Six Hundred Fifty (95,650) shares, subject to adjustment as provided in Section 3.8. 4.2 LAPSED AWARDS. To the extent that a Stock Option is cancelled, terminates, expires or lapses for any reason, any shares of Stock subject to the Stock Option will again be available for the grant of a Stock Option under the Plan. 4.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to a Stock Option may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market. ARTICLE 5 - INCENTIVE STOCK OPTIONS 5.1 COMPLIANCE WITH CODE Each provision of this Article 5 and of each Incentive Stock Option granted hereunder shall be construed in accordance with the provisions of Section 422 of the Code, and any provision hereof that cannot be so construed shall be disregarded. 5.2 AVAILABLE SHARES All or any portion of the shares of Stock authorized for issuance pursuant to Section 4.1 herein shall be available for issuance pursuant to Incentive Stock Options granted hereunder. 5.3 INCENTIVE STOCK OPTION TERMS. Incentive Stock Options shall be granted only to Eligible Participants who are in the active employment of the Corporation, each of whom may be granted one or more such Incentive Stock Options for a reason related to his employment at such time or times determined by the Committee following the Effective Date until August 5, 2008, subject to the following conditions: (a) The Incentive Stock Option price per share of Stock shall be set in the corresponding Agreement, but shall not be less than 100% of the Fair Market Value of the Stock on the Option Grant Date. However, if the Optionee owns more than 10% of the outstanding Stock (as determined pursuant to Section 424(d) of the Code) on the Option Grant Date, the Incentive Stock Option price per share shall not be less than 110% of the Fair Market Value of the Stock on the Option Grant Date. (b) Subject to any conditions upon exercise that the Committee may specify in the corresponding Agreement, the Incentive Stock Option may be exercised in whole or in part within ten years from the Option Grant Date (within five years if the Optionee owns more than 10% of the Stock on the Option Grant Date), or such shorter period as may be specified by the Committee in the Agreement; provided, that, in any event, the Incentive Stock Option shall lapse and cease to be exercisable 8 12 upon a Termination of Employment or within such period following a Termination of Employment as shall have been specified in the Agreement, which period shall not exceed 90 days unless: (i) employment shall have terminated as a result of death or Disability, in which event such period shall not exceed one year after the date of death or Disability; or (ii) death shall have occurred following a Termination of Employment and while the Incentive Stock Option was still exercisable, in which event such period shall not exceed one year after the date of death; provided, further, that such period following a Termination of Employment shall in no event extend the original exercise period of the Incentive Stock Option. (c) The Committee may adopt any other terms and conditions which it determines should be imposed for the Incentive Stock Option to qualify under Section 422 of the Code, as well as any other terms and conditions not inconsistent with this Article 5 as determined by the Committee. 5.4 REPURCHASE OF INCENTIVE STOCK OPTIONS. The Committee may at any time offer to buy out for a payment in cash, Stock or other consideration an Incentive Stock Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. 5.5 INDIVIDUAL DOLLAR LIMITATION. To the extent the aggregate Fair Market Value, determined as of the Option Grant Date, of the shares of Stock with respect to which Incentive Stock Options (determined without regard to this subsection) are first exercisable during any calendar year by any Eligible Participant exceeds $100,000, or any Incentive Stock Options fail to qualify under Section 422 of the Code, such Incentive Stock Options shall be treated as Nonqualified Stock Options granted under Article 5. ARTICLE 6 - NONQUALIFIED STOCK OPTIONS 6.1 GRANTS. One or more Stock Options may be granted as Nonqualified Stock Options to Eligible Participants to purchase shares of Stock at such time or times determined by the Committee, subject to the terms and conditions set forth in this Article 6. 6.2 AVAILABLE SHARES. All or any portion of the shares of Stock authorized for issuance pursuant to Section 4.1 herein shall be available for issuance pursuant to Nonqualified Stock Options granted hereunder. 9 13 6.3 EXERCISE PRICE. The Nonqualified Stock Option price per share of Stock shall be established in the Agreement and may be less than 100% of the Fair Market Value at the time of the grant, or at such later date as the Committee shall determine. 6.4 NONQUALIFIED STOCK OPTION TERMS. The Nonqualified Stock Option may be exercised within such period, and subject to such restrictions as may be specified by the Committee in the corresponding Agreement or otherwise; provided, that, in any event, the Nonqualified Stock Option shall lapse and cease to be exercisable upon a Termination of Employment or within such period following a Termination of Employment as shall have been specified in the Agreement, which period shall not exceed 90 days unless: (a) employment shall have terminated as a result of death or Disability, in which event such period shall not exceed one year after the date of death or Disability; or (b) death shall have occurred following a Termination of Employment and while the Nonqualified Stock Option was still exercisable, in which event such period shall not exceed one year after the date of death; (c) employment shall have terminated as a result of Retirement; or (d) such provision is adjusted by the Committee; provided, further, that such period following a Termination of Employment shall in no event extend the original exercise period of the Nonqualified Stock Option. The Nonqualified Stock Option Agreement may include any other terms and conditions not inconsistent with this Article 6 or in Article 7, as determined by the Committee. ARTICLE 7 - INCIDENTS OF STOCK OPTIONS 7.1 TERMS AND CONDITIONS. Each Stock Option shall be granted subject to such terms and conditions, if any, not inconsistent with this Plan, as shall be determined by the Committee, including any provisions as to continued employment as consideration for the grant or exercise of such Stock Option and any provisions which may be advisable to comply with applicable laws, regulations or rulings of any governmental authority. 7.2 RESTRICTIONS ON TRANSFER A Stock Option shall not be transferable by the Participant other than by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the Participant only by him or, in the event of his death or Disability, by his guardian, legal representative, executor, legatee, heir or distributee of the estate of the Participant. For so long as the Stock Purchase Agreement remains in effect, a Participant may bequest a Stock Option only to, or in trust for the benefit of, his spouse, children, or grandchildren. Notwithstanding any language herein or in any Agreement to the contrary, the Committee may (but need not) permit other transfers 10 14 where the Committee concludes that such transferability (i) does not result in accelerated taxation, (ii) does not cause any Option intended to be an incentive stock option to fail to be described in Code ss. 422(b), and (iii) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable Stock Options. Except as provided herein, in any Agreement, or otherwise provided by the Committee, no Stock Option shall be transferable. If any Participant makes such a transfer in violation hereof, any obligation of the Corporation with respect to such Stock Option shall forthwith terminate. 7.3 FORM OF PAYMENT. Subject to limitations set forth in the corresponding Agreement, the Participant may exercise a Stock Option and purchase Stock by: (a) personal check; (b) surrender of shares of Stock that either (i) are being purchased pursuant to the exercise of a Stock Option such that the Participant pays the Stock Option price by directing the Corporation to withhold from the shares of Stock that would otherwise be issued upon exercise of the Stock Option the number of shares having a Fair Market Value on the exercise date equal to the Option price; (ii) have been owned by Participant for more than 180 days (unless the Committee permits a Participant to exercise an Option by pyramiding, in which event the 180 days holding period shall not apply) and have been "paid for" within the meaning of SEC Rule 144 (and, if such shares were purchased from the Corporation by use of a promissory note, such note has been fully paid with respect to such shares); or (iii) were obtained by Participant in the public market; (c) with the consent of the Committee, by tender of a full recourse promissory note having such terms as may be approved by the Committee, bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code, and being secured by such collateral as the Committee deems appropriate; provided, further, that the portion of the purchase price equal to the par value of the Stock, if any, must be paid in cash if required by state law; or (d) with the consent of the Committee, by waiver of compensation due or accrued to Participant for services rendered and/or for goods delivered. Any such payment terms must comply with any applicable requirements under Rule 16b-3 of the Act. 7.4 STOCK PURCHASE AGREEMENT A Participant who exercises a Stock Option shall be deemed to be a party to the Stock Purchase Agreement, as amended, among the Corporation and its shareholders, originally effective July 1, 1984, and shall be subject to all provisions of such Stock Purchase Agreement. The Committee may place additional restrictions on the transfer of Stock purchased by a Participant under a Stock Option. 11 15 Similarly, the Committee may require a Participant to enter into the Voting Agreement originally dated August 26, 1998 as a condition for the Participant's exercise of a Stock Option. 7.5 DIVIDENDS. No cash dividends shall be paid on shares of Stock subject to unexercised Stock Options. 7.6 DEATH OR DISABILITY. In the event of Disability or death, the Committee, with the consent of the Participant or his legal representative, may authorize payment, in cash or in Stock, or partly in cash and partly in Stock, as the Committee may direct, of an amount equal to the difference at the time between the Fair Market Value of the Stock subject to a Stock Option and the option price in consideration of the surrender of the Stock Option. 7.7 RETIREMENT. If a Participant's Termination of Employment is on account of Retirement, the Participant shall retain any Stock Option previously granted to him until the expiration of the term of the Stock Option, determined without regard to the Termination of Employment, so long as the Participant does not engage in competition with the Corporation, as determined by the Committee, in its sole discretion. 7.8 REPLACEMENT STOCK OPTION GRANTS. The Committee may permit the voluntary surrender of all or a portion of any Stock Option granted under the Plan to be conditioned upon the granting to the Participant of a new Stock Option for the same or a different number of shares of Stock as the Stock Option surrendered, or may require such surrender as a condition precedent to a grant of a new Stock Option to such Participant. Subject to the provisions of the Plan, and except as otherwise agreed by the Participant, such new Stock Option shall be exercisable at the same price as the surrendered Stock Option and during such period and on such other terms and conditions as are specified by the Committee at the time the new Stock Option is granted. Upon surrender, the Stock Options surrendered shall be canceled and the shares of Stock previously subject to them shall be available for the grant of other Stock Options. For purposes of determining the number of Stock Options issued pursuant to the Plan, new Stock Options offered in consideration for Stock Options to be surrendered shall not be considered as issued until such Stock Options are surrendered unless otherwise required by law. ARTICLE 8 - AMENDMENT AND TERMINATION 8.1 AMENDMENT OR TERMINATION OF PLAN. Upon recommendation of the Committee or otherwise, the Board may amend or terminate the Plan at any time and from time to time. To the extent required by Rule 16b-3 under the Act (if the officers and directors of the Corporation are subject to Section 16 of the Act) and/or to the extent required by Code section 422, no amendment, without approval by the Corporation's shareholders, shall: (a) alter the group of persons eligible to participate in the Plan; 12 16 (b) increase the maximum number of shares of Stock available for issuance pursuant to Stock Options granted under the Plan; (c) limit or restrict the powers of the Committee with respect to the administration of this Plan; (d) change the definition of an Eligible Participant for the purpose of an Incentive Stock Option or increase the limit or the value of shares of Stock for which an Eligible Participant may be granted an Incentive Stock Option; (e) materially increase the benefits accruing to Participants under this Plan; (f) materially modify the requirements as to eligibility for participation in this Plan; or (g) change any of the provisions of this Article 8. The Committee shall be entitled to create, amend or delete appendices to this Plan as specified herein. 8.2 EFFECT OF AMENDMENT OR TERMINATION OF PLAN. No amendment to or discontinuance of this Plan or any provision thereof by the Board or the shareholders of the Corporation shall, without the written consent of the Participant, adversely affect, as shall be determined by the Committee, any Stock Option theretofore granted to such Participant under this Plan; provided, however, the Committee retains the right and power to: (a) annul any Stock Option if the Participant is terminated for cause as determined by the Committee in its discretion; (b) provide for the forfeiture of shares of Stock or other gain under an Stock Option as determined by the Committee for competing against the Corporation; (c) convert any outstanding Incentive Stock Option to a Nonqualified Stock Option; and (d) cancel or terminate any and all Stock Options in connection with any proceeding under the United States Bankruptcy Code or any similar proceeding under state law for the protection of creditors. ARTICLE 9 - MISCELLANEOUS PROVISIONS 9.1 NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Stock Option granted hereunder shall confer upon any Participant any right to continue in the employ of the Corporation, or to serve as a director or consultant thereof, or interfere in any way with the right of the Corporation to terminate his or her employment or relationship at any time. Unless 13 17 specifically provided otherwise, no Stock Option granted under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Corporation for the benefit of its employees unless the Corporation shall determine otherwise. No Participant shall have any claim to a Stock Option until it is actually granted under the Plan. To the extent that any person acquires a right to receive payments from the Corporation under the Plan, such right shall, except as otherwise provided by the Committee, be no greater than the right of an unsecured general creditor of the Corporation. All payments to be made hereunder shall be paid from the general funds of the Corporation, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts, except as provided otherwise by the Committee. 9.2 TAX WITHHOLDING. The Corporation may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes which the Corporation is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Stock Option or the exercise thereof, including, but not limited to, the withholding of payment of all or any portion of such Stock Option or another Stock Option under this Plan until the Participant reimburses the Corporation for the amount the Corporation is required to withhold with respect to such taxes, or canceling any portion of such Stock Option or another Stock Option under this Plan in an amount sufficient to reimburse itself for the amount it is required to so withhold, or selling any property contingently credited by the Corporation for the purpose of paying such Stock Option or another Stock Option under this Plan, in order to withhold or reimburse itself for the amount it is required to so withhold. If the Corporation is required to pay, or desires to pay, an amount with respect to income and employment tax withholding obligations in connection with exercise of a Nonqualified Stock Option, and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, the Committee, subject to such rules as it may adopt, shall permit the Participant to satisfy the obligation, in whole or in part, by making an irrevocable election that a portion of the total Fair Market Value of the shares of Stock subject to the Nonqualified Stock Option and/or the Incentive Stock Option, be paid in the form of cash in lieu of the issuance of Stock and that such cash payment be applied to the satisfaction of the withholding obligations. The amount to be withheld shall not exceed the statutory minimum federal and state income and employment tax liability arising from the Stock Option exercise transaction. Notwithstanding any other provision of the Plan, any election under this Section 9.2 is required to satisfy any applicable requirements under Rule 16b-3 of the Act. 9.3 SUBJECT TO FEDERAL AND STATE LAWS. The Plan and the grant of Stock Options shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any United States government or regulatory agency as may be required. Any provision herein relating to compliance with Rule 16b-3 under the Act shall not be applicable with respect to participation in the Plan by Participants who are not subject to Section 16(b) of the Act. 14 18 9.4 SUCCESSORS AND ASSIGNS. The terms of the Plan shall be binding upon the Participant, the Corporation, and their successors and assigns. 9.5 GOVERNING LAW. This Plan and all actions taken hereunder shall be governed by the laws of the State of North Carolina, without respect to the principles of the choice of law or the conflicts of laws. 9.6 UNFUNDED STATUS OF PLAN The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Corporation, nothing contained herein shall give any such Participant any rights that are greater than those of a general unsecured creditor of the Corporation. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver shares of Stock or payments in lieu of or with respect to Stock Options hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected Participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. 9.7 NOTICE OF SECTION 83(b) ELECTION. Each Participant exercising a Stock Option hereunder agrees to give the Committee prompt written notice of any election made by such Participant under Section 83(b) of the Code, or any similar provision thereof. 9.8 SEVERABILITY OF PLAN. If any provision of this Plan or an Agreement is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Agreement, it shall be stricken and the remainder of the Plan or the Agreement shall remain in full force and effect. 9.9 ADDITIONAL PROVISIONS The Committee may incorporate additional or alternative provisions for this Plan with respect to residents of one or more individual states to the extent necessary or desirable under state securities laws. Such provisions shall be set out in one or more appendices hereto which may be amended or deleted by the Committee from time to time. 9.10 RESOLUTION OF CONTROVERSY Any controversy between the Corporation and the Participant (including any person claiming any interest in the Plan through the Participant) arising out of or under the Plan, the Options and/or any Agreement, including the construction or application of any term, provision or condition of the Plan and/or an Agreement (a "Controversy"), shall, on the written request of either party delivered to the other, be submitted to non-binding mediation by an independent mediator selected by the mutual consent of the parties to such Controversy or, if the parties cannot agree, as selected by the Plan Administrator in its discretion. Following the determination of the mediator with regard to such Controversy, a party to such Controversy who intends to appeal such 15 19 determination may do so, on the written request of such party delivered to the other, but only by submitting such Controversy to binding arbitration. Mediation shall comply with and be governed by the rules prescribed by the independent mediator. Arbitration shall comply with and be governed by the provisions of the American Arbitration Association. The cost of mediation and arbitration (defined to include only (i) the cost of the mediator(s) and arbitrator(s), (ii) the parties' reasonable attorney fees and (iii) the parties' reasonable direct, out-of-pocket expenses incurred in connection with such proceedings) shall be borne by the losing party or, if the mediator(s) or arbitrator(s) determines otherwise, in such proportions as the mediator(s) or arbitrator(s) so determines. Such mediation and arbitration proceeding(s) shall take place in the county of the Corporation's principal business office. IN WITNESS WHEREOF, this document is executed effective as of August 6, 1998. KRISPY KREME DOUGHNUT CORPORATION By: /s/ Scott A. Livengood President ATTEST: (Corporate Seal) /s/ Randy Casstevens Secretary EX-10.24 16 LONG-TERM INCENTIVE PLAN DATED 1/30/93 1 EXHIBIT 10.24 DIRECTORS' LONG-TERM INCENTIVE PLAN OF KRISPY KREME DOUGHNUT CORPORATION * * * * * * * * * * * * * * * * Adopted February 10, 1993 Effective January 30, 1993 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS 2 ARTICLE II PARTICIPATION 3 ARTICLE III DEFERRED COMPENSATION 3 Section A. Amount of Deferred Compensation 3 Section B. Election to Defer Compensation 4 ARTICLE IV CREDITING OF PHANTOM SHARE UNITS 4 Section A. Crediting of Phantom Share Units 4 Section B. Additions to Deferred Amounts 5 Section C. Valuation of Units 6 ARTICLE V DISTRIBUTION OF BENEFITS 6 Section A. Normal Distribution of Benefits 6 Section B. Distribution Upon Death 7 Section C. Distribution Upon Termination of Directorship 8 Section D. Distribution Upon Financial Emergency 9 Section E. Withholding From Distributions 9 ARTICLE VI MISCELLANEOUS 10 Section A. Nonassignability 10 Section B. Sale, Public Offering, Merger or ESOP 10 Section C. Scope of DLTIP 13 Section D. Vesting 13 Section E. Term 13 Section F. Administration and Interpretation 13 Section G. Funding of Benefits/General Creditor Status 15 Section H. Governing Law 15 3 DIRECTORS' LONG-TERM INCENTIVE PLAN OF KRISPY KREME DOUGHNUT CORPORATION THIS DIRECTORS' LONG-TERM INCENTIVE PLAN OF KRISPY KREME DOUGHNUT CORPORATION is adopted this the 10th day of February, 1993, effective as of the 30th day of January, 1993, by Krispy Kreme Doughnut Corporation, a North Carolina corporation with its principal office and place of business in Winston-Salem, Forsyth County, North Carolina for the benefit of the Participants. W I T N E S S E T H: WHEREAS, as members of the board of directors of Krispy Kreme, the Participants receive an annual stipend for their services; and WHEREAS, beginning with the Stipend earned during and for the fiscal year ending January 28, 1994, Krispy Kreme desires to provide Participants with the opportunity to defer the receipt of all or part of their Stipend, with the Deferred Amount to be credited on its books in Phantom Share Units in accordance with the terms of the DLTIP; and WHEREAS, Krispy Kreme intends that the DLTIP be considered an unfunded arrangement maintained to provide deferred compensation benefits to those directors of Krispy Kreme who receive a stipend for their services as such. NOW, THEREFORE, the DIRECTORS' LONG-TERM INCENTIVE PLAN OF KRISPY KREME DOUGHNUT CORPORATION is hereby adopted to read as follows: 4 ARTICLE I For the purposes of the DLTIP, the following terms shall have the meanings shown below: DEFINITIONS Account(s): the account(s) on the books and records of the Company to which are credited each Participant's Deferred Amount, Units, the value of the Units and other adjustments thereto under the DLTIP. Board: the Board of Directors of Krispy Kreme Doughnut Corporation. Company: Krispy Kreme Doughnut Corporation DLTIP: the Directors' Long-Term Incentive Plan of Krispy Kreme Doughnut Corporation. Deferred Amount: the amount of any Stipend deferred by a Participant pursuant to Article III of the DLTIP. Krispy Kreme: Krispy Kreme Doughnut Corporation Market Value: the current market price per share at which the stock is being traded in the event of a public offering of the stock [See Article VI B(2)] 5 Participants: the members of the board of directors of Krispy Kreme who receive a Stipend for their services as such and who may participate in the DLTIP. Service Year: the fiscal year. Stipend: the amount of compensation that a Participant receives for his services as a member of the Board of Directors of Krispy Kreme from time to time. Stock: the issued and outstanding $10.00 Par Value Common Stock of the Company (as it subsequently may be split or reclassified). Stock Purchase Agreement: the Stock Purchase Agreement dated July 1, 1984 by and among Krispy Kreme and its shareholders (as it may be amended from time to time). Units: phantom share units as described in Article IV (sometimes referred to as "Phantom Share Units"). ARTICLE II PARTICIPATION Prior to the beginning of each of the Company's fiscal years for which the DLTIP is in effect, the Board shall communicate to the Participants their right to Participate in the DLTIP. Participants for the first fiscal year of the DLTIP (fiscal year ending January 28, 1994) were notified of their participation for such year on the date of the adoption of the DLTIP. Such Participants shall be set forth on Schedules Al through A5 respectively. 6 ARTICLE III DEFERRED COMPENSATION Section A. Amount of Deferred Compensation. Commencing with the fiscal year ending January 28, 1994, and continuing through the earlier of the date on which (1) a Participant's directorship terminates for any reason; (2) the Participant ceases to be eligible under the terms of the DLTIP; or (3) the DLTIP ceases to be in effect pursuant to Article VI, Section E, a Participant may elect to defer all or any portion of any Stipend that the Company may pay to him or her for each fiscal year. The Participants Deferred Amount shall be credited to the Participant's Account as of the date or dates any Stipend would, but for such deferral, be payable to the Participant which, for each Service Year, is currently payable in one lump sum in advance on or about February 1. Section B. Election to Defer Compensation. A Participant may elect to defer a portion of the Stipend earned during the fiscal year ending January 28, 1994 (until a date not later than the Participant's attainment of age 70) by filing a written Election of Deferral with the Company within 90 days of the date the DLTIP is adopted by the Company. A Participants initial Election of Deferral shall continue in effect pursuant to the terms thereof for Deferred Amounts for subsequent fiscal years unless and until the Participant files with the Company a Notice of Discontinuance or a new Election of Deferral specifying a different amount of, and/or method of payment of, Deferred Amounts. Each Election of Deferral filed subsequently to the initial Election of Deferral shall similarly continue in effect until the Participant files a Notice of Discontinuance or a new Election of Deferral. With respect to fiscal years beginning January 28, 1994, any new Election of Deferral or Notice of Discontinuance must be filed at least 15 days prior to the commencement of a fiscal Year to be effective for the Stipend earned during that fiscal year; provided however, if Participant is not a director on the first day of a fiscal year and becomes a director during the fiscal Year, such Election must be filed within 45 days after he or she becomes a director. Once a Notice of Discontinuance is filed with the Company, a aid thereafter unless and until he or she has properly filed a new Election of Deferral. 7 The form of the Election of Deferral and Notice of Discontinuance are attached hereto as Exhibits 1 and 2 respectively. ARTICLE IV CREDITING OF PHANTOM SHARE UNITS Section A. Crediting of Phantom Share Units. Krispy Kreme shall establish Accounts on its books for each Participant to record the Deferred Amount credited to each Participant, as well as any adjustments as provided in this Article. A separate Account shall be established for each fiscal year in which a Participant elects to defer a portion of his or her Stipend pursuant to Article III. The time of Crediting of the Deferred Amounts is more Particularly set forth in Article III Section A. With respect to each fiscal year, the Deferred Amount credited to a Participant's Account shall be converted into Units by dividing the Deferred Amount by the value of Krispy Kreme Stock, as described more particularly as follows: The number of Units credited to the Participant's Account shall equal the Deferred Amount divided by an amount equal to the average of the of the value of the Company's Stock under the Stock Purchase Agreement as of the end of the last five fiscal years (prior to the fiscal year for which the Deferred Amount was earned), or, if the DLTIP has not been in existence five years or the Participant has not been a director for five years, the average of the value of the Company's Stock under the Stock Purchase Agreement for fiscal years ending after the later of January 29, 1993, or the initial date of the Participant's directorship and following. For example, for a Stipend payable for fiscal year ending January 26, 1996, the number of Units shall equal the Deferred Amount divided by the average of the value of the Company's Stock under the Stock Purchase Agreement as of the end of the fiscal years ended January 29, 1993, January 28, 1994 and January 27, 1995. For another example, for a Stipend payable for the fiscal year ending January 28, 1994, the number of Units shall equal the Deferred Amount divided by the value of the Company's Stock under the Stock Purchase Agreement as of the end of the fiscal year ending January 29, 1993. 8 Credit shall be given to Accounts for fractional Units. Section B. Additions to Deferred Amounts. Krispy Kreme will credit all Units in a Participant's Accounts with additions thereon from and after the dates Deferred Amounts are credited to a Participant's Accounts. Except as otherwise specifically provided herein, such additions shall accrue commencing on the date an Account first has a positive balance and shall continue up to the date all amounts credited to the Account have been distributed to the Participant, except as otherwise provided in the DLTIP. Additions shall be calculated at a rate computed in whole or fractional Units, as more particularly described below. (1) Each time a dividend is paid on Krispy Kreme's Stock, there shall be credited to each Participant's Accounts an amount equal to the product of the number of Units previously credited to the Accounts, as of the record date of such dividend, times the amount of the dividend per share of Krispy Kreme's Stock. The amount credited to a Participant's Accounts pursuant to the preceding sentence shall then be converted into Units by dividing the amount so credited by the value of Stock in the same manner as set forth in Section A above as if the dividend credit were a Stipend. (2) After the close of each Fiscal Year, Krispy Kreme's certified public accountants shall determine during their regular annual audit of the Company's books the value of Krispy Kreme Stock pursuant to the Stock Purchase Agreement for the most recently ended fiscal year. Based on such determination, the value of the Units in-a each of a Participant's Accounts as of the end of the most recently ended fiscal year shall be recalculated by multiplying the number of Units credited to such Participant's Accounts as of the end of such fiscal year times the value of the Units as determined by the accounting firm. (3) The number of Units in each of a Participant's Accounts shall be adjusted (as though each Unit were a share of Krispy Kreme Stock) to reflect stock dividends 9 or stock splits of Krispy Kreme Stock or any other adjustment or recapitalization affecting the number of shares of Krispy Kreme Stock outstanding. Section C. Valuation of Units. As indicated above,, the number of Units awarded under the Plan and the value of those Units shall be determined based on the book value of the Company's Stock, as determined pursuant to the Stock Purchase Agreement. The Company reserves the right, however, to revise the method used to determine the value of Units; provided, however, that any change in the method of valuation must be identical to the method of valuation used for determining the value of the actual shares of the Company's Stock. ARTICLE V DISTRIBUTION OF BENEFITS Section A. Normal Distribution of Benefits. As part of the Election of Deferral made pursuant to Article III, a Participant shall make a separate election regarding how and when Deferred Amounts credited to his or her Account shall be distributed to him. The Participant may elect one of the following options: (1) a lump sum payment made no earlier than the fifth anniversary of the crediting of. the Deferred Amount; (2) five consecutive annual installments commencing no earlier than the fifth anniversary of the crediting of the Deferred Amount; and (3) ten consecutive annual installments commencing no earlier than the fifth anniversary of the crediting of the Deferred Amount. The time of Crediting of the Deferred Amounts is more Particularly set forth in Article III Section A. With respect to each installment payment, the amount of such payment shall be determined by dividing the value of the Account by the number of payments remaining 10 (including the installment for which the calculation is being made). At the time of each installment payment the value of the Account shall be determined by multiplying the number of Units in the Participant's Account by the value of the Stock as of the end of the most recently ended fiscal quarter, as determined under the Stock Purchase Agreement. At the time of such a payment, the number of Units in the Account shall be reduced by a number equal to the result of dividing the total number of Units remaining in the Account by the number of remaining payments (including the installment for which the calculation is being made). Regardless of the method of payment elected by the Participant, distributions must commence no later than within a reasonable time following the end of the fiscal year in which a Participant attains age 70. Section B. Distribution Upon Death. If a Participant dies prior to the distribution of all amounts credited to his or her Accounts, the value of his or her Accounts shall be recalculated by multiplying the number of Units then credited to each of his or her Accounts by the value of the Stock, as determined under the Stock Purchase Agreement, as of the most recently ended fiscal quarter preceding his or her death. Upon the death of a Participant, there shall be no further credits (or debits) to his or her Accounts on account of dividends or increases (or decreases) in the value of Krispy Kreme Stock. Notwithstanding the provisions of a Participant's Election of Deferral made pursuant to Article III, the amounts credited to his or her Accounts after such recalculation shall be distributed to the Participant's designated beneficiary in a lump sum at a time determined by the Company in its sole discretion, but no later than one year after the date of the Participant's death. Notwithstanding the preceding paragraph, the Company may in its sole discretion distribute the amounts credited to a Participant's Accounts in installment payments over a period not to exceed five years, the amount of such installment payments to be calculated in accordance with Article V, Section A above. Simple interest shall be credited annually to the Participant's Accounts from the date of death until the date installment payments are completed at the prime rate of the Company's primary bank. 11 The portion of any Stipend awarded after a Participants death which the Participant had elected to defer under the DLTIP shall be paid in a lump sum at the time that the Stipend would have been paid had the Election of Deferral not been made. See Article III Section A. Each Participant may designate a person or persons, including a corporation, unincorporated association or trust, as the beneficiary of his or her Accounts under the DLTIP. Such designation must be in writing, signed by the Participant and delivered to the Company prior to his or her death. A Participant may from time to time revoke or change any such beneficiary designation. Such revocation or change must have been made in writing, signed by the Participant and delivered to the Company prior to his or her death. The designation of beneficiary last delivered to Krispy Kreme according to its records shall control. If there is no unrevoked designation on file with the Company at the time of a participant's death or if the Participant's designated beneficiary shall have predeceased the Participant or ceased to exist prior to the Participant's death, the Participant's Accounts shall be distributed to his or her estate. The form of a Beneficiary Designation is attached hereto as Exhibit 3. Section C. Distribution Upon Termination of Directorship. Upon termination of a Participant' s directorship for any reason other than death, the value of his or her Accounts shall be recalculated by multiplying the number of Units credited to his or her Accounts by the value of the Stock as of the end of the most recently ended fiscal quarter, as determined under the Stock Purchase Agreement. Thereafter, there shall be no further credits (or debits) to his or her Accounts on account of dividends or increases (or decreases) in the value of Krispy Kreme Stock. Regardless of the provisions of a Participant's Election of Deferral made pursuant to Article III, the amounts credited to his or her Accounts pursuant to such recalculation shall be distributed to him or her in a lump sum cash payment at a time determined by the Company in its sole discretion, but no later than six months after the termination of the Participant's directorship. 12 Notwithstanding the preceding paragraph, the Company may in its sole discretion distribute the amounts credited to a Participant's Accounts in installment payments over a period not to exceed five years, the amount of such installment payments to be calculated in accordance with Article V., Section A above. Simple interest shall be credited annually to the Participant's Accounts from the time his or her directorship terminates until the date installment payments are completed at the prime rate of the Company's primary bank. There shall be no dividend credits or other increases in the value of a Participant's Accounts following his or her termination of directorship. Section D. Distribution Upon Financial Emergency. If a Participant establishes, to the satisfaction of the Company, that he or she is confronted by a severe financial. hardship, the Company, in its sole discretion, may alter the timing or manner of payment of Deferred Amounts in the manner and subject to the conditions set forth hereafter: (1) A severe financial hardship will be deemed to exist only if it arises out of an emergency caused by circumstances or events which are beyond the control of the Participant. A severe financial hardship will be deemed to have occurred in the event of the Participant's impending bankruptcy, serious illness of the Participant or a dependent of the Participant, or such other circumstances or events as may be determined by the Company to affect severely the financial affairs of the Participant or his or her immediate family. (2) In the event that the Company determines that the Participant is confronted by a severe financial hardship, the Company may provide that all or a portion of the amounts previously deferred by the Participant may be paid immediately in a lump sum cash payment, or provide that all or a portion of the installments payable over a period of time may be paid immediately in a lump sum cash payment, or provide such other payment schedule as the Company deems appropriate under the circumstances. 13 (3) In no event shall any distribution made by the Company under this Subsection be in excess of the amount necessary to alleviate the Participant's severe financial hardship. (4) The Company's decision in passing on the severe financial hardship of the . Participant, and the manner in which, if at all, the payment of deferred amounts shall be altered or modified shall be final, conclusive, and not subject to appeal. (5) For purposes of this Subsection, the term "Participant" shall include the Participant, his or her designated beneficiary or beneficiaries, his or her estate, or any other person claiming through the Participant under this Plan as the case may be. Section E. Withholding From Distributions. When Krispy Kreme distributes amounts credited to the Account of a Participant, Krispy Kreme has the right to deduct therefrom (1) necessary amounts to provide for withholding of required federal and state income taxes, F.I.C.A. tax, and other taxes, if any, due on the payment; and (2),any amounts the Participant may owe the Company. If a distribution is to be made in a form other than cash pursuant to Article VI, Section B(3), a Participant may direct Krispy Kreme to satisfy its withholding obligation either by reducing the amount of the distribution or in any other manner satisfactory to the Company. ARTICLE VI MISCELLANEOUS Section A. Nonassignability. The payments provided for in this DLTIP to the Participant or to his or her designated beneficiary are personal to him or her. Neither the Participant nor his or her designated beneficiary shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder. 14 Such amounts shall not be subject to seizure by any creditor of any Participant or beneficiary, by a proceeding at law or in equity, nor transferable by operation of law in the event of the bankruptcy, insolvency or death of the Participant or his or her designated beneficiary. Any such attempted assignment or transfer shall be void and shall terminate the Participant's rights under the Plan. Section B. Sale, Public Offering, Merger or ESOP. (1) Except as provided in Article VI Section B (3) below, if the majority of the Stock of the Company is sold for cash, whether pursuant to a sale of Stock, tender offer or merger, the value of the Units in a Participant's Accounts shall be revalued as of the effective date of such transaction by multiplying the number of Units in each Account as of the day prior to the effective date of such transaction by the consideration paid in such transaction per share of Stock. The balance of each Participants Accounts after such recalculation (less the required withholding, if any) shall be distributed in full in a lump sum to the Participants within sixty (60) days thereafter. (2) If there is a public offering of the Stock of Krispy Kreme, there shall be no immediate change in the valuation of a Participant's Accounts. On the first anniversary date of the public offering, however, a Participant's Accounts shall be revalued by multiplying the number of Units in the Participants Accounts as of the date of the public offering times the sum of (a) the value of each Unit immediately prior to the public offering, plus (b) one-third of the difference between the Market Value at such anniversary immediately prior to the public offering. On the second anniversary date of the public offering, a Participant's Accounts shall be revalued by multiplying the number of Units in the Participant's Accounts as of the public offering date times the sum of (a) the value of each Unit immediately prior to the public offering, plus (b) two-thirds of the difference between the Market Value at such anniversary and the value of a Unit immediately prior to the 15 public offering. On the third anniversary date of the public offering, a Participant's Accounts shall be revalued by multiplying the number of Units in the Participant's Accounts as of the public offering date times the Market Value at such anniversary. Thereafter, the value of the Participant's Accounts shall be at all times be determined by multiplying the number of Units in the Accounts by the Market Value of the Stock. Notwithstanding the above, the valuation of all Units paid out on account of (a) the cessation of the Participants directorship; or (b) death shall be determined by multiplying the number of Units for which payment is made by the Market Value as of the date of distribution. If (a) a Participant is scheduled to receive a distribution from the Plan after the date of the public offering but prior to the date on which all Units credited under the Plan are first valued based solely on the Market Value of the Company's Stock (third anniversary of public offering) pursuant to an Election of Deferral made pursuant to Article III, and (b) the Participant is a director of the Company on the date of the public offering, the Participant may elect to defer the payment of all amounts scheduled to be distributed to him or her -until the third anniversary date of the public offering. Any amounts so deferred shall be distributed upon the occurrence of the third anniversary date of the public offering revalued by multiplying the number of Units in the Participant's Accounts times the Market Value as of the date of distribution. Notwithstanding any of the above, the Board shall have discretion to accelerate the date upon which the value of a Participant's Accounts is based on the publicly traded price of the Company's Stock. At all times following a public offering, the Participant's Accounts shall continue to be credited with dividends pursuant to the terms of the DLTIP. The DLTIP 16 shall be amended following a public offering to provide for a method of awarding Units based on a market valuation of the Stock, as opposed to the valuation method in effect prior to the public offering. (3) In the event of a merger or similar transaction in which any securities of the acquiring entity (or an affiliate thereof) are to be issued to shareholders of Krispy Kreme in exchange for their Stock, then (a) the Units in each of a Participant's Accounts shall be revalued prior to the record date for such merger or other transaction by multiplying the number of Units therein times tae value of the Stock under the Stock Purchase Agreement as of the end of the most recently ended fiscal quarter, and (b) the Units shall be converted into Stock on the basis of one share of Stock for one Unit so that the Participant shall be shareholder of record for such transaction and have the right to receive securities or other consideration in such transaction in the same fashion as other shareholders of Krispy Kreme. Certificates for Stock shall be issued in the name of the Participant. Fractional Units shall not be issued and the value thereof shall be paid to the Participant in cash. (c) Thereafter, the successor entity to Krispy Kreme shall at its discretion (1) terminate the DLTIP and immediately pay out all Accounts hereunder; (2) freeze the DLTIP so that no additional Deferred Amounts are credited to any Participant, but the remaining provisions of the DLTIP remain in effect; or (3) continue the DLTIP in all respects. If the successor entity elects to freeze or continue the DLTIP, each Participant shall have the right to request and receive a distribution of his or her Accounts by so electing prior to the date oil which the events described in this Section 17 B(3) occur. The amount of any such distribution shall be computed in accordance with subsections (a) and (b) of this Section. (4) If Krispy Kreme establishes an Employee Stock Ownership Plan ("ESOP"), the valuation of all Units under the DLTIP for all purposes after the adoption of tae. ESOP shall be made using the appraised value of the Stock under the ESOP. Section C. Scope of DLTIP. This DLTIP describes only the deferral of Stipend payments to be main to a Participant and the eventual payment thereof. It is not intended to and does not relate to any other benefits to which a Participant may be entitled. Nothing in this DLTIP shall be deemed to constitute a contract on behalf of Krispy Kreme to retain a Participant for a definite length of time, as a director, or at a definite rate of compensation, and agreements by the parties as to those matters, if any, shall be covered by other contracts or arrangements. Section D. Vesting. A Participant shall always be fully vested in all Deferred Amounts, dividends and other amounts credited to his or her Accounts. Section E. Term. The DLTIP shall be applicable to the Stipends for fiscal years beginning with the fiscal year ending January 28, 1994; provided, however, that the Board may terminate the DLTIP at any time. If the DLTIP is terminated,, all amounts credited to a Participant's Accounts under Article IV shall be paid at the time and in the manner designated by the Participant or otherwise provided hereunder. In such event, the provisions of Article IV including, but not limited to, Article IV, Section B(l) (with respect to dividends) and Article IV, Section B(2) (with respect to the recalculation of the value of the Units) shall continue to apply to all amounts credited to each Account until paid. Section F. Administration and Interpretation. A Committee appointed by the Board of Directors (the "Committee") shall administer the Plan in all respects. The Committee has absolute and complete discretion to interpret the terms of the Plan, to determine each 18 Participant's eligibility for benefits under the Plan, and to determine the amount of benefits due under the Plan. (1) Claims. A person who believes that he or she is being denied a benefit to which he or she is entitled under the Plan (hereinafter referred to as "Claimant") may file a written request for such benefit with the Committee,, setting forth his or her claim. The request must be addressed to the Committee at the Company's principal place of business. (2) Claim Decision. Upon receipt of a claim, the Committee shall advise the claimant that a reply will be forthcoming within 90 days and shall in fact, deliver such reply within such period. The Committee may, however, extend the reply period for an additional 90 days for reasonable cause. If the claim is denied in whole or in part, the Committee shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth: (a) The specific reason or reasons for such denial; (b) The specific reference to pertinent Provisions of this Plan on which such denial is based; (c) A description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (d) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and 19 (e) The time limits for requesting a review under subsection c. and for review under subsection d. hereof (3) Request for Review. Within 60 days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Company review the determination of the Committee. Such request must be addressed to the Company, at its then principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Company. If the Claimant does not request a review of the Committee's determination by the Company within such 60 day period, he or she shall be barred and estopped from challenging the Committee's determination. (4) Review of Decision. Within 60 days after the Company's receipt of a request for review, it will review the Committee's determination. After considering all materials presented by the Claimant, the Company will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Plan on which the decision is based. If special circumstances require that the 60 day time period be extended, the Company will so notify the Claimant and will render the decision as soon as possible, but no later than 120 days after receipt of the request for review. Section G. Funding of Benefits/General Creditor Status. The amounts credited to each Participant's accounts shall not be held in any trust or separate fund that would cause the Plan to be considered "funded" for purposes of ERISA. Such amounts shall not be secured by any specific assets of the Company nor shall any specific assets of Krispy Kreme be designated as allocated to the satisfaction of its obligations to any Participant hereunder. Each Participant's 20 right to receive payment for amounts credited to his or her Accounts shall be those of a general creditor of the Company. Section H. Governing Law. This DLTIP shall be construed in accordance with and governed by the laws of the State of North Carolina. IN WITNESS WHEREOF, the Company has cause the DLTIP to be executed in its name and behalf by its duly authorized representative as of the date written above. KRISPY KREME DOUGHNUT CORPORATION By: /s/ Scott A. Livengood Scott A. Livengood, President ATTEST: /s/ John L. Barber John L. Barber, Assistant Secretary 21 Schedule Al Participants Fiscal Year Ending January 28, 1994 Name: Robert J. Simmons Steven D. Smith Note: Elbert N. Herring is a participant in the Employees Long Term Incentive Plan 22 Schedule A2 Participants Fiscal Year Ending January 27, 1995 23 Schedule A3 Participants Fiscal Year Ending January 26, 1996 24 Schedule A4 Participants Fiscal Year Ending January 31,1997 25 Schedule A5 Participants Fiscal Year Ending January 30, 1998 26 EXHIBIT 1 ELECTION OF DEFERRAL UNDER DIRECTORS' LONG-TERM INCENTIVE PLAN OF KRISPY KREME DOUGHNUT CORPORATION ____________________________________ I hereby make the following elections under the Long-Term Incentive Plan with respect to my Stipend commencing with the Stipend for the fiscal year ending January ___,199__. I understand that such elections shall remain in effect unless and until a new Election of Deferral or Notice of Discontinuance is properly filed. Any new Election of Deferral or Notice of Discontinuance shall have no effect on amounts previously deferred under the Plan. I. Deferred Compensation Election I elect to defer ____% of my Stipend under the Directors' Long-Term Incentive Plan in excess of $__________, to be paid out as follows: [ ] Lump sum payable on _________________ of the _______ year following Stipend is credited to my Account*; [ ] Five consecutive annual installments commencing ______*; or [ ] Ten consecutive annual installments commencing ______*. No payment shall be made earlier than the fifth anniversary of the crediting of the portion of the Stipend so deferred to my Account; PROVIDED, HOWEVER, distributions must commence no later than within a reasonable time following the end of the fiscal year in which a Participant attains age 70. *The Stipend so deferred is credited to my Account at the time the Stipend would have been paid to me had it not been deferred which, for each Service Year, is currently payable in one lump sum in advance on or shortly before the annual meeting of shareholders on which such Service Year begins. II. Lump Sum Cash Payment I elect to receive ______________% or $____________ of my Stipend commencing with the Stipend for the fiscal year ending January ____, 199__ in cash, to be paid in one lump sum payment at the normal time for the payment of the Stipend. PARTICIPANT _______________________(SEAL) __________________ Date Receipt by Krispy Kreme Doughnut Corporation Acknowledged By: ____________________________ __________________ Date 27 EXHIBIT 2 NOTICE OF DISCONTINUANCE OF ELECTION OF DEFERRAL UNDER DIRECTORS' LONG-TERM INCENTIVE PLAN OF KRISPY KREME DOUGHNUT CORPORATION ____________________________________ I do hereby revoke my Election of Deferral dated __________, 199___. I understand that 100 % of any Stipend paid to me for fiscal years beginning after this revocation shall be paid to me in cash at the normal time for payment of the Stipend under the Company's directors compensation policy. This the ____ day of _________________, 199___. PARTICIPANT ___________________________________ Receipt on behalf of Krispy Kreme Doughnut Corporation acknowledged By _____________________________ Title __________________________ Dated _______ day of ________________, 199____ 28 EXHIBIT 3 BENEFICIARY DESIGNATION UNDER DIRECTORS' LONG-TERM INCENTIVE PLAN OF KRISPY KREME DOUGHNUT CORPORATION ____________________________________ If I die prior to receiving all of amounts credited to my Accounts under the Directors' Long-Term Incentive Plan and any future amendments or restatements thereof or successor plans thereto (the "DLTIP"), I hereby designate the following primary beneficiary as recipient of such benefits: Relation to Name Address Participant ---- ------- ----------- ________________________ _________________________ _________________________ ________________________ _________________________ _________________________ In the event the above-named primary beneficiary fails to survive me or otherwise ceases to exist prior to the date of my death, I hereby designate the following contingent beneficiary as recipient of such benefits: Relation to Name Address Participant ---- ------- ----------- ________________________ _________________________ _________________________ ________________________ _________________________ _________________________ I do hereby revoke all previous beneficiary designations made under the DLTIP and I understand that the above designations are revocable by me at any time prior to my death. This Beneficiary Designation is not valid until delivered to and acknowledged by Krispy Kreme Doughnut Corporation. ___________________________________ ______________________________(SEAL) Date Participant WITNESSED BY: ___________________________________ Receipt by Krispy Kreme Doughnut Corporation Acknowledged By: _______________________________ Dated: _____ day of _______________, 19__. EX-10.25 17 FORM OF PROMISSORY NOTE/LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.25 SATISFACTION: The Debt evidenced by this Note has been satisfied in full this _______ day of _____________, 19__ Signed: __________________________ PROMISSORY NOTE AND SECURITY AGREEMENT Winston-Salem, NC $"AMOUNT" AUGUST 31, 1998 FOR VALUE RECEIVED the undersigned promises to pay to KRISPY KREME DOUGHNUT CORPORATION or order, the principal sum of "PAYMENT" and 00/100 DOLLARS ($"AMOUNT") with interest from the date hereof at the rate of six percent (6%) per annum on the unpaid balance until paid or until default, both principal and interest payable in lawful money of the United States of America, at the office of KRISPY KREME DOUGHNUT CORPORATION, P O BOX 83, WINSTON-SALEM, NORTH CAROLINA 27102-0083 (ATTENTION: RANDY S. CASSTEVENS) or at such place as the legal holder hereof may designate in writing. The principal and interest shall be due and payable in 10 equal consecutive annual payments of principal and interest in the amount of $"ANNUAL" each, such installments to be paid on AUGUST 31 of each year during the term hereof, the first such payment being due and payable on AUGUST 31, 1999 with a final payment of all unpaid principal and all accrued and unpaid interest herein due and payable on AUGUST 31, 2008. Payee has advanced Maker $"M_1stPay" of the total principal owed hereunder on the date hereof and Maker acknowledges receipt thereof. An additional amount of $"M_2ndPay" shall be advanced by Payee to maker on or before February 26, 1999. If not sooner paid, the entire remaining indebtedness (including, but not limited to, all unpaid principal and all accrued and unpaid interest and all other sums due hereunder) shall be due and payable on AUGUST 31, 2008. Notwithstanding the foregoing, in the event the undersigned for any reason ceases to be a full-time employee of Krispy Kreme Doughnut Corporation, Payee may declare all sums due under this Note to be immediately due and payable. If payable in installments, each such installment shall, unless otherwise provided, be applied first to payment of interest then accrued and due on the unpaid principal balance, with the remainder applied to the unpaid principal. Unless otherwise provided, this Note may be prepaid in full or in part at any time without penalty or premium. Partial prepayments shall be applied to installments due in reverse order of their maturity. In the event of (a) default in payment of any installment of principal or interest hereof or under any other note from Maker to Payee as the same becomes due and such default is not cured within ten (10) days from the due date, or (b) default under the terms of any instrument securing this Note, or under the terms of the security agreement made in, and/or security interest given under, this Note and such default is not cured within fifteen (15) days after written notice to Maker, then in either such event the holder may without further notice, declare the remainder of the principal sum, together with all interest accrued thereon at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The unpaid principal of this Note and any part thereof, accrued interest and all other sums due under this Note and any instrument securing this Note shall bear interest at the rate of twelve percent (12%) per annum after default until paid. 2 In the event this Note is not paid when due (whether on the due date set forth above or on such earlier date as provided upon default or the happening of other events set forth in this Note) then Payee shall have the right to exercise all rights granted under this Note to it and shall have the following additional rights as well: (i) the right to treat such non-payment as an offer to sell the shares to a third party under subparagraph 2(a) of the Stock Purchase Agreement by and between Payee and its shareholders dated July 1, 1984, as amended, (the terms of which are incorporated herein by reference) and the consequent right to purchase the Shares (as defined below) under the terms of said Agreement and (ii) the right to deduct from the proceeds of such sale to Payee all amounts owed under this Note, paying to Maker only the balance of the proceeds of such sale remaining after payment of all sums due under this Note and all expenses incurred by Payee in connection with such sale. In the event the Stock Purchase Agreement is no longer in effect at the time Payee exercises such rights, then, between Maker and Payee, Payee shall retain the right under subparagraph 2(a) of the Stock Purchase Agreement to purchase such Shares as if Maker had determined to sell such Shares to a third party and the purchase price shall be the average of the closing price on the five (5) trading days preceding the purchase by Payee, or, if shares of Krispy Kreme Doughnut Corporation are not then publicly traded, then the purchase price shall be the then most recent appraised value of the class of shares of Krispy Kreme Doughnut Corporation of which the Shares are a part. All parties to this Note, including maker and any sureties, endorsers, or guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other sums due under this Note and any instrument securing this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them. Upon default the holder of this Note may employ an attorney to enforce the holder's rights and remedies and the maker, principal, surety, guarantor and endorsers of this Note hereby agree to pay to the holder reasonable attorneys fees not exceeding a sum equal to fifteen percent (15%) of the outstanding balance owing on said Note, plus all other reasonable expenses incurred by the holder in exercising any of the holder's rights and remedies upon default. The rights and remedies of the holder as provided in this Note and any instrument securing this Note shall be cumulative and may be pursued singly, successively, or together against the property described herein and/or in any instrument securing this Note or any other funds, property or security held by the holder for payment or security, in the sole discretion of the holder. The failure to exercise any such right or remedy shall not be a waiver or release or such rights or remedies or the right to exercise any of them at another time. This Note is to be governed and construed in accordance with the laws of the State of North Carolina. As used herein, the term "Note" shall include the security agreement contained herein. This Note is given for money owed. To further secure this Note, Maker(s) grants Payee a first priority security interest under Chapter 25 of the North Carolina General Statutes (the "UCC") in those shares of Krispy Kreme Doughnut Corporation represented by certificate number "Cert" together with all certificates, shares, options, rights or other distributions issued as an addition to, in substitution or in exchange for, or on account of, any such shares, and all proceeds of the foregoing, now or hereafter owned or acquired by Maker (the "Shares") and agrees that such certificate or other documents representing the Shares shall remain in the possession of Payee until this Note is paid in full. Payee shall have all rights of a secured party applicable under the UCC and under this Note, such rights being cumulative. The undersigned agrees not to transfer or convey (by sale, gift, devise or otherwise), grant a security interest in, pledge or otherwise encumber the Shares or any interest therein without the prior written consent of the Payee, which consent Payee may grant or withhold in its sole discretion. In addition to, and not in limitation of the foregoing, in the event of any attempted transfer, pledge or encumbrance of the Shares or any interest therein, whether or not consented to by Payee (and whether by sale, gift, 3 devise or otherwise), Payee may declare all sums due under this Note immediately due and payable. The Shares shall bear a legend in form satisfactory to Payee stating they are subject to this Note and Security Agreement. The undersigned agrees to execute such further instruments, security agreements and financing statements, and to take such other actions, as Payee may from time to time request to evidence and/or perfect such security interest. In the event such security interest ever constitutes a lower than first priority security interest, Payee may declare this Note in default and no cure period for such default shall exist unless required by applicable law, in which event such cure period shall be the minimum required by applicable law. In the event that during the term of this Note, any additional shares, options, or warrants issued in connection with the Shares shall be issued to the Maker, such additional shares, option or warrants shall be immediately assigned and delivered to Payee, endorsed in blank, to be held under the terms of this Note in the same manner as the Shares. Furthermore, Maker agrees to execute and deliver to Payee any necessary endorsement and/or appropriate stock power duly executed in blank to be held by Payee and to be used to effect Payee's rights under this Note. Upon the occurrence and during the continuance of any event of default, any and all dividends and distributions paid or payable in respect of the Shares shall be delivered to Payee, together with any necessary endorsement and/or appropriate stock powers duly executed in blank, to be (i) if cash, applied against amounts owing by Maker under this Note and (ii) if not cash, held by Payee in the same manner as the Shares, subject to Payee's rights and remedies as provided herein. The Maker hereby irrevocably appoints Payee and any officer thereof the Maker's Attorney In Fact, with full power of substitution for and on behalf and in the name of Maker, during the existence and continuance of any default, in the Payee's sole discretion, to take any action and to execute any instrument which the Payee may deem necessary or advisable to accomplish the purposes of this Note, including, without limitation, the right to sell the Shares or exercise any and all of its rights and remedies under this Note and applicable law. This Power of Attorney is a Power coupled with an interest and shall be irrevocable and is conferred on the Payee solely to protect, preserve and realize on its security interest in the Shares. This Power of Attorney shall be durable. IN TESTIMONY WHEREOF, THE MAKER HAS SET HIS HAND TO THIS INSTRUMENT AND ADOPTED AS HIS SEAL THE WORD "SEAL" APPEARING BESIDE HIS SIGNATURE THE DAY AND YEAR FIRST ABOVE WRITTEN. ____________________________________________ (SEAL) "FIRSTNAME" "LASTNAME" EX-10.26 18 FORM OF RESTRICTED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.26 RESTRICTED STOCK PURCHASE AGREEMENT THIS RESTRICTED STOCK PURCHASE AGREEMENT (the "Agreement"), made as of the __th day of ________, 1993 by and between KRISPY KREME DOUGHNUT CORPORATION (the "Company") and __________ (the "Participant"). For valuable consideration, receipt of which is acknowledged, the parties agree as follows: 1. Purchase of Shares. The Participant subscribes for and, upon acceptance by the Company, shall purchase, subject to the terms and conditions set forth in this Agreement, ___ shares (the "Shares") of common stock ("common stock"), $10.00 par value, of the Company at a purchase price of $10.00 per share. The aggregate purchase price of the Shares shall be paid by the Participant by check, payable to the order of the Company, or such other method as may be acceptable to the Company. Upon the Company's receipt of payment for the Shares, the Company shall issue to the Participant one or more certificates in the name of the Participant for that number of Shares purchased by the Participant. The Participant agrees that the Shares shall (a) be subject to the Repurchase Option set forth in Section 2 of this Agreement and the restrictions on transfer set forth in Section 4 of this Agreement; (b) be considered issued when they are no longer subject to the Repurchase Option (but shall not be considered issued so long as they are subject to the Repurchase Option); and (c) shall not be entitled to vote or receive dividends or other distributions on common stock while subject to the Repurchase Option. 2 2. Repurchase Option. (a) If the Participant ceases to be employed by the Company or ceases to be a member of the board of directors (as is applicable) by the Company for any reason other than death or disability prior to any of the dates set forth on Schedule A, the Company shall have the right and Option (the "Repurchase Option") to Purchase any or all of the Shares subject to the Repurchase Option prior to such date as more particularly set forth on Schedule A from the Participant at the same price as the Participant paid for the Shares. (b) For Purposes of this Agreement, employment with the Company shall include employment with a parent or subsidiary of the Company. 3. Exercise of Repurchase Option and Closing. (a) Upon the termination of the employment of the Participant or the cessation of his directorship [as referred to in subsection 2 (a) above], the Repurchase Option shall be deemed to be automatically exercised by the Company unless the Company delivers or mails written notice of nonelection of exercise of the Repurchase Option within 30 days thereafter in accordance with section 14. (b) Unless the Company gives such written notice of nonelection within 30 days after the termination of the employment of the Participant or the cessation of his directorship [as referred to in subsection 2 (a) above], the Participant shall tender to the Company at its principal offices the certificate or certificates representing such number of Shares that the Company has elected to purchase, duly endorsed in blank by the Participant or with duly endorsed stock powers attached, all in form suitable for the transfer 2 3 of the Shares of the Company. Upon its receipt of these Shares, the Company shall deliver or mail to the Participant a check in the amount of the aggregate Option Price. (c) After the date(s) set forth in Schedule A with respect to the number of Shares set opposite such date or after such Shares are otherwise not subject to the Repurchase Option pursuant to subsection 3 (c) above, such Shares shall then be subject to all of the terms and provisions of the Stock Purchase Agreement by and between the Company and its shareholders dated July 1, 1984 (the "Stock Purchase Agreement") and all the restrictions on transfer set forth therein as if the Participant and the Company had executed such agreement. The termination of such Participant's employment or directorship shall be deemed to constitute written notice of a proposed transfer, disposition or sale thereof under subsection 2 (a) of such Stock Purchase Agreement. (d) The purchase price for such Shares may be payable, at the discretion of the Company, in cancellation of all or a portion of any outstanding indebtedness of the Participant to the Company, or in cash (by check), or both. (e) If, at any time, prior to the exercise of the Repurchase Option under sub section 3 (a) above, the common stock of the Company is acquired through merger, acquisitions consolidation, purchase, tender offer or otherwise (the "Acquisition"), the Participant shall be paid by the Company a sum of money determined by multiplying the cash price per share (or monetary equivalent thereof) received by the holders of the common stock times the number of shares then subject to the Repurchase Option. Such payment shall be made upon the Closing of the Acquisition. 3 4 4. Restrictions on Transfer. (a) Except as otherwise provided in subsection 4(b), the Participant shall not, during the term of the Repurchase Option, sell, assign, transfer, pledge, hypothecate, or otherwise dispose of, by operation of law or otherwise (collectively "transfer"), any of the Shares, or any interest therein, unless the Shares are no longer subject to the Repurchase Option. (b) Notwithstanding the foregoing, the Participant may transfer Shares to or for the benefit of any spouse, child or grandchild, or to a trust for their benefit, provided that those Shares shall remain subject to this Agreement, including without limitation the restrictions on transfer set forth in this Section 4 and the Repurchase Option, and the permitted transferee shall, as a condition to the transfer, deliver to the Company a written instruction confirming that the transferee shall be bound by all of the terms and conditions of this Agreement. 5. Effect of Prohibited Transfer. The Company shall not be required: (a) To transfer on its books any of the Shares that shall have been sold or transferred in violation of any of the provisions set forth in this Agreement; or (b) To treat as owner of those Shares or to pay dividend to any transferee to whom any of those Shares shall have been sold or transferred in violation of any of the provisions set forth in this Agreement. 6. Restricted Legend. All certificates representing Shares shall have affixed thereto legends in substantially the following form, in addition to any other legends that may be required under federal or state securities laws: 4 5 (a) "The shares of stock represented by this certificate are subject to restrictions on transfer and an option to purchase set forth in a Restricted Stock Purchase Agreement between the corporation and the registered owner of this certificate (or his predecessor in interest). This Agreement is available for inspection without charge at the office of the Secretary of the Corporation"; and (b) The same legend as required by the Stock Purchase Agreement. 7. Investment Representations. The Participant represents, warrants, and covenants as follows: (a) The Participant is purchasing the Shares for his own account for investment only, and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act of 1933 (the "Securities Act"), or any rule or regulation under the Securities Act. (b) He has had an opportunity he deems adequate to obtain from representatives of the Company the information necessary to permit him to evaluate the merits and risks of his investment in the Company. (c) He has sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Shares and to make an informed investment decision with respect to that purchase. (d) He can afford a complete loss of the value of the Shares and is able to bear the economic risk of holding the Shares for an indefinite period. (e) He understands that: 5 6 (i) The Shares cannot be sold, transferred, or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available; and (ii) The Company has no obligation or current intention to register the Shares under the Securities Act. (f) A legend substantially in the following form will be placed on the certificate representing the Shares: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred or otherwise disposed of in the absence of an effective registration statement under the Act or an opinion of counsel satisfactory to the corporation to the effect that registration is not required." 8. Adjustments. If from time to time during the term of the Repurchase Option, there is any stock split, stock dividend, stock distribution, or other reclassification of the common stock of the Company, or any merger, consolidation, or sale of substantially all of the assets of the Company, any and all new, substituted, or additional securities to which the Participant is entitled by reason of his ownership of the Shares shall be subject immediately to all of the terms and conditions of this Agreement (and be included as "Shares"), and other provisions of this Agreement in the same manner and to the same extent as the Shares, and the option price shall be adjusted appropriately. 9. Withholding Taxes. (a) The Participant acknowledges and agrees that the Company has the right to deduct from payments of any kind otherwise due to the Participant any 6 7 federal, state or local taxes of any kind required by law to be withheld with respect to the purchase of the Shares by the Participant. (b) If the Participant elects, in accordance with Section 83(b) of the Internal Revenue Code of 1954, as amended, to recognize ordinary income in the year of acquisition of the Shares, the Company will require at the time of that election an additional payment for withholding tax purposes based on the difference, if any, between the purchase price for the Shares and the fair market value of the Shares as of the day immediately preceding the date of the purchase of the Shares by the Employee. 10. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law. 11. Waiver. Any provision contained in this Agreement may be waived, either generally or in any particular instance, by the Board of Directors of the Company. 12. Binding Effect. This Agreement shall be binding upon, and inure to the benefit of, the Company and the Participant and their respective heirs, executors, administrators, legal representatives, successors, and assigns, subject to the restrictions on transfer set forth in Section 4 of this Agreement. 13. No Rights to Employment. Nothing contained in this Agreement shall be construed as giving the Participant any right to be retained, in any position, as an employee and/or director of the Company for any definite period of time. 14. Notice. All notices required or permitted hereunder shall be in writing and deemed effectively given upon personal delivery or upon deposit in the United States Post 7 8 Office, by registered or certified mail, postage prepaid, addressed to the other party at the address shown beneath his or its respective signature to this Agreement, or at such other address or addresses as either party shall designate to the other in accordance with this Section 14. 15. Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine, or neuter forms. The singular form of nouns and pronouns shall include the plural, and the plural form of nouns and pronouns shall include the singular. 16. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings relating to the subject matter of this Agreement. 17. Amendment. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Participant. 18. Governing Law. This Agreement shall be construed, interpreted, and enforced in accordance with the laws of North Carolina. IN WITNESS WHEREOF, the Participant has executed this Agreement as of the day and year first above written and the Company has caused it to be executed by one of its duly authorized officers. COMPANY KRISPY KREME DOUGHNUT CORPORATION By: _________________________ Scott A. Livengood, President P O Box 83 Winston-Salem, NC 27102-0083 8 9 PARTICIPANT 9 EX-10.27 19 FORM OF PROMISSORY NOTE/RESTRICTED STOCK PURCHASES 1 EXHIBIT 10.27 NOTE Winston-Salem, North Carolina November 17, 1993 FOR VALUE RECEIVED, the undersigned (hereinafter referred to as the "Debtor") promises to pay to the order of KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation ("Krispy Kreme"), at its offices at 1814 Ivy Avenue, Winston-Salem, North Carolina, or at such other places as the holder of this Note may designate, in lawful money of the United States of America and in immediately available funds the principal sum of ______________________________________________________________________________ with interest upon unpaid principal from the date hereof payable on each interest at the rate of five percent (5%) per annum. This note shall bear interest at the maximum legal rate after maturity. Principal payments due under this Note shall be payable in annual installments as follows: Interest in arrears shall be payable at the same time as the principal payments. The Debtor shall be entitled to prepay any amounts of the principal at any time outstanding, but any such prepayment shall be applied to the payments then due in inverse order of maturity. The Debtor waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note. Failure of the holder to exercise any right hereunder shall not constitute a waiver of the right to later exercise same. The Debtor agrees to pay to the holder of this Note all costs and expenses, including, without limitation, court costs and attorneys' fees and expenses, as are 2 incidental to the enforcement of any of the provisions hereof and the collection of the indebtedness evidenced hereby. The granting, without notice, of any extension of time for the payment of any sum or sums due hereunder shall in no way release or discharge the liability of the Debtor, any endorsers, or any guarantors. If any payment on this Note becomes due and payable on a Saturday, Sunday or other day on which commercial banks in the State of North Carolina are authorized or required by law to close, the maturity thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If the Debtor fails to make any payments of principal or interest on the due date, whether by acceleration or otherwise, the balance of this Note will bear interest, at the option of Krispy Kreme or the holder thereof, at the highest rate then allowed by law. Payment of this Note is unsecured. Whenever in this Note there is a reference made to either Krispy Kreme or the Debtor, such reference shall be deemed to include a reference to the successors and assigns or heirs, executors and administrators, as the case may be, of said parties. The provisions of this Note shall be binding upon, and shall inure to the benefit of, said successors and assigns, or heirs, executors or administrators, as applicable. If this Note is referred to an attorney for collection, the Debtor agrees to pay all of Krispy Kreme's costs of collection, including reasonable attorneys' fees. This Note shall be governed as to validity, enforcement, interpretation, construction, effect and in all other respects in accordance with the laws and decisions of the State of North 2 3 Carolina. Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such or the provisions of this Note. IN WITNESS WHEREOF, the Debtor has executed this note on the day and year set forth above. 3 EX-10.28 20 EMPLOYMENT AGREEMENT / JOHN N. MCALEER 1 EXHIBIT 10.28 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (THE "AGREEMENT") is made effective this 10th day of August, 1999, by and between KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation (the "Company"), and JOHN N. MCALEER (the "Executive"). RECITAL The Executive is currently serving as Executive Vice President, Concept and Brand Development of the Company and the parties have negotiated this Agreement in consideration of the Executive's valuable services and leadership. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties do hereby agree as follow: 1. EFFECTIVE DATE. This Agreement shall be effective upon, and from and after, the date set forth above. 2. DEFINITIONS. As used herein, the following terms shall have the following meanings: (a) "Disability" shall mean the Executive becoming disabled and unable to continue his employment with the Company as defined in the Company's then applicable disability policy for the Senior Management of the Company. (b) "Discharge" shall mean the termination by the Company of the Executive's employment during the Period of Employment for any reason other than (i) Good Cause, (ii) death of the Executive, (iii) Disability of the Executive, or (iv) Retirement of the Executive. (c) "Expiration Date" means the date that the Period of Employment (as it may have been extended) expires. (d) "Good Cause" has its meaning as defined in Section 6 hereof. (e) "Period of Employment" shall be for a term of three years beginning August 10, 1999 and ending August 10, 2002; provided, however, that commencing August 10, 2000, the Executive's Period of Employment shall automatically be extended for successive one-year periods each year as of August 10 of each year unless the Company gives Executive written notice of nonextension on or before that date. 2 (f) "Retirement" shall mean a time when the sum of the Executive's age and employment with the Company equals or exceeds 65. (g) "Senior Management" shall mean the senior executive management of the Company currently consisting of the chief executive officer, the president, and the executive vice presidents. (h) "Stock Option Plan" shall mean the Krispy Kreme Doughnut Corporation 1998 Stock Option Plan. (i) "Termination Date" shall mean: (i) If the Executive's employment is terminated by reason of death, the Executive's date of death; (ii) If the Executive's employment is terminated by reason of Retirement, the date of his Retirement; (iii) If the Executive's employment is terminated by reason of Disability, the date of his Disability; (iv) If the Executive's employment is terminated for Good Cause, the date specified in the written notice of termination given by the Company pursuant to Section 6(a); (v) If the Executive's employment is terminated by reason of a Discharge, the effective date of Discharge; (vi) If the Executive's employment is terminated by reason of non-extension of the Period of Employment, the Expiration Date; and (vii) If the Executive voluntarily terminates his employment as permitted by Section 6(b), the effective date of his termination of employment. 3. EMPLOYMENT; PERIOD OF EMPLOYMENT. The Company hereby employs the Executive, and the Executive hereby accepts employment by the Company, for the Period of Employment, in the position and with the duties and responsibilities set forth in Section 4, upon the terms and subject to the conditions of this Agreement. 2 3 4. POSITION, DUTIES AND RESPONSIBILITIES. During the Period of Employment, the executive shall (a) serve as Executive Vice President, Concept and Brand Development of the Company and its subsidiaries or in such other senior management position as may be assigned to him by mutual agreement with the Board of Directors. The Executive shall be employed hereunder in Forsyth County, North Carolina and he shall not be required to relocate his residence or principal office to any place outside Forsyth County, North Carolina without his consent; and (b) devote his best efforts to the furtherance of the interest of the Company and the performance of his duties hereunder and agrees not to engage in any competition whatsoever, either directly or indirectly, with the Company or any of its subsidiaries or affiliates. The Executive shall be allowed holiday and vacation periods, leaves for periods of illness or incapacity and personal leaves in accordance with the Company's regular practices for members of Senior Management. 5. COMPENSATION, COMPENSATION PLANS AND BENEFITS. During the Period of Employment, the Executive shall be compensated as follows: (a) He shall receive an annual base salary equal to his current annual base salary, with annual increases in accordance with the Company's regular practices for members of Senior Management. In addition, he shall receive non-incentive compensation (including automobile allowance) at his current monthly rate. Such compensation shall be paid in accordance with the Company's regular schedule for payment of salaried employees. (b) He shall receive such other bonuses as are afforded the Company's Senior Management and be eligible to participate in all of the Company's executive compensation plans provided to members of Senior Management of the Company from time to time. (c) He shall be entitled to participate in and receive other employee benefits, which may include, but are not limited to, benefits under any life health, accident, disability, medical, dental and hospitalization insurance plans, use of a Company automobile or an automobile allowance, and other perquisites and benefits, as are provided to members of Senior Management of the Company from time to time. (d) He shall be entitled to be reimbursed for the reasonable and necessary out-of-pocket expenses, including entertainment, travel and similar items, incurred by him in performing his duties hereunder upon presentation of such documentation thereof as the Company may normally and customarily require of the members of Senior Management. 3 4 (e) The Company agrees to pay the Executive's dues and assessments for membership in Forsyth Country Club and the Piedmont Club. 6. TERMINATION OF EMPLOYMENT. During the Period of Employment: (a) Termination for Good Cause. (i) The Company may terminate the Executive's employment for Good Cause. Termination of employment shall be deemed to have been for Good Cause if (i) the Executive habitually neglects or refuses to do his duties and fails to cure such neglect within ten (10) days after having received written notice of same from the Company or (ii) the Executive commits (a) acts constituting a felony or (b) acts of gross negligence or willful misconduct to the material detriment of the Company. (ii) Termination by the Company for Good Cause may be made only by written notice of termination from the Company to the Executive that has been specifically approved in advance by the Board of Directors. Such notice shall set forth all acts constituting such neglect or refusal to do duties or gross negligence or willful misconduct as is applicable. (b) Voluntary Termination. The Executive may voluntarily terminate his employment with the Company upon 30 days prior written notice. (c) Termination by Reason of Death, Disability, or Retirement. The employment of the Executive shall be terminated by death, Disability or Retirement of the Executive. 7. EFFECT OF TERMINATION. (a) If the Executive's employment is terminated by reason of death, Retirement or voluntary termination of employment, the Company shall pay the Executive (or his estate in the case of his death) his base salary, non-incentive compensation (including automobile allowance), bonuses and benefits as provided in Section 5 through the Termination Date and (in the case of his death) a death benefit of $5,000. Any payments and benefits due to the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested if the Executive's employment is terminated by reason of death or Retirement. 4 5 (b) If the Executive's employment is terminated by reason of Disability, the Company shall pay the Executive his base salary, non-incentive compensation, bonuses and benefits for a period of six months following the date of Disability. Thereafter, this Agreement terminates and the Executive shall receive those benefits payable to him under the applicable disability insurance plan provided by the Company. Any payments and benefits due to the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Executive's termination of employment by reason of Disability. (c) In the event of the Executive's Discharge by the Company, (i) the Company shall pay the Executive A. his then current annual base salary and non-incentive compensation (including automobile allowance) and provide the Executive with his then current benefits (as provided in Section 5) through the Expiration Date pursuant to Section 2(e); and B. within thirty (30) days from the Termination Date (1) a lump sum equal to Executive's then current monthly base salary amount multiplied by the number of months between the month of Discharge and the preceding August, and (2) a lump sum amount equal to the sum of adding three times the Executive's bonus calculated at 50% of his annualized base salary for the then current fiscal year, discounted at the rate of six percent (6%) per annum. The latter payment is full and final satisfaction of all the Company's obligations for bonus and/or other incentive payments. (ii) Any payments and benefits due to executive under the employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Termination Date. (d) In the event of the Company's nonextension of the Employment Period, (i) the Company shall pay the Executive A. his then current annual base salary and non-incentive compensation (including automobile allowance) and provide the 5 6 Executive with his then current benefits (as provided in Section 5) through the Expiration Date, pursuant to Section 2(e); B. within thirty (30) days from the Termination Date, (1) a lump sum equal to Executive's then current annual base salary, and (2) a lump sum amount equal to three times the Executive's bonus calculated at 50% of his base salary for the then current fiscal year discounted at the rate of six percent (6%) per annum. The latter payment is full and final satisfaction of all the Company's obligations for bonus and/or other incentive payments. (ii) Any payments and benefits due to Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Expiration Date. Provided, however, that within sixty (60) days of the date of notification by the Company to the Executive of its intention not to extend the Period of Employment, the Executive may, at his option, elect to have the non-extension treated as a Discharge with an effective date thirty (30) days after the Executive's notification to the Company of his election. (e) In the event of the Executive's Termination For Cause by the Company, the Company shall pay the Executive his then current base salary and non-incentive compensation (including automobile allowance) and provide the Executive with his then current benefits (as provided in Section 5) through the Termination Date. Any payments and benefits due the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs. (f) In the event the Executive's employment is terminated by reason of Discharge or nonextension of the Employment Period, the Executive may, at his option, elect to receive a lump sum amount equal to the base salary and non-incentive compensation due, discounted at a rate of six percent (6%) per annum. (h) In the event the Executive's employment is terminated by reason of Discharge, the Company shall furnish the Executive, for a period of six (6) months subsequent to the Termination Date, outplacement services, reasonable office space, and secretarial assistance. (h) If any of the payments provided for in this Agreement, together with any other payments which the Executive has the right to receive from the Company or 6 7 any corporation which is a member of an "affiliated group" as defined in Section 1504(a) of the Code (without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute an "excess parachute payment" as defined in Section 280G(b)(1) of the Code as it presently exists, such that any portion of such payments are subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalty with respect to such excise tax (such excise tax, together with any such interest or penalty, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (an "Excise Tax Restoration Payment"). The amount of the Excise Tax Restoration Payment shall be the amount necessary to fund the payment by the Executive of any Excise Tax on the total payments, as well as all income taxes imposed on the Excise Tax Restoration Payment, any excise tax imposed on the Excise Tax Restoration Payment, and any interest or penalties imposed with respect to taxes on the Excise Tax Restoration Payment or any Excise Tax. 8. Termination For Good Reason. In the event of a "Change in Control" of the Company (as hereinafter defined), the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following events during the twelve (12) months immediately preceding or following the effective date of a Change in Control of the Company: (a) a material change in the scope of the Executive's assigned duties and responsibilities from those in effect immediately prior to a Change in Control of the Company or the assignment of duties or responsibilities that are inconsistent with the Executive's status in the Company; (b) a reduction by the Company in the Executive's base salary or incentive compensation as in effect on the date of a Change in Control; (c) the Company's requirement that the Executive be based anywhere other than the Company's office in Forsyth County, North Carolina, at which he was based prior to the Change in Control of the Company; or (d) the failure by the Company to continue to provide the Executive with benefits substantially similar to those specified in Section 5 of this Agreement. For purposes of Section 8(c) above, the Company shall be deemed to have required the Executive to be based somewhere other than the Company's office at which he was based prior to the Change in Control if the Executive is required to spend more than two days per week on a regular basis at a business location not within 50 miles of the Executive's primary business location as of the effective date of a Change in Control. If the Executive terminates his employment for Good Reason, this shall be treated as the Discharge of the Executive by the Company. Accordingly, the Company shall pay the amounts and provide the benefits to the Executive specified in Section 7 above, applicable in the event of 7 8 Discharge. The Executive shall not be obligated in any way to mitigate the Company's obligations to him under this Section 8 and any amounts earned by the Executive subsequent to his termination of employment shall not serve as an offset to the payments due him by the Company under this Section. For purposes of this Agreement, a "Change in Control" means the date on which the earlier of the following events occur: (a) the acquisition by any entity, person or group of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 30% of the outstanding capital stock of the Company entitled to vote for the election of directors ("Voting Stock"); (b) the merger or consolidation of the Company with one or more corporations as a result of which the holders of outstanding Voting Stock of the Company immediately prior to such a merger or consolidation hold less than 60% of the Voting Stock of the surviving or resulting corporation; (c) the transfer of substantially all of the property of the Company other than to an entity of which the Company owns at least 80% of the Voting Stock; or (d) the election to the Board of Directors of the Company of three or more directors during any twelve month period without the recommendation or approval of the incumbent Board of Directors of the Company. Upon a Change in Control, as defined above in this Section 8, all outstanding stock options shall become 100% vested and immediately exercisable, regardless of whether the Executive terminates employment or not. If the Executive terminates employment with Good Reason within twelve (12) months of a Change in Control, to the extent permitted by law, the Company shall continue the medical, disability and life insurance benefits which Executive was receiving at the time of termination for a period of 36 months after termination of employment or, if earlier, until Executive has commenced employment elsewhere and becomes eligible for participation in the medical, disability and life insurance programs, if any, of his successor employer. Coverage under Employer's medical, disability and life insurance programs shall cease with respect to each such program as Executive becomes eligible for the medical, disability and life insurance programs, if any, of his successor employer. 9. CONFIDENTIALITY. During the Period of Employment and following termination for any reason, the Executive covenants and agrees that he will not divulge any trade secrets or other confidential information pertaining to the business of the Company. It is understood that the term "trade secrets" as used in this Agreement is deemed to include any information which gives the Company a material and substantial advantage over its competitors but that such term does not include knowledge, skills or information which is otherwise publicly disclosed. 8 9 10. NON-COMPETITION. In the event of Termination For Good Cause, or Voluntary Termination of the Executive, the Executive agrees that for a period of two years following the Termination Date, Executive shall not directly or indirectly, personally or with other employees, agents or otherwise, or on behalf of any other person, firm, or corporation, engage in the business of making and selling doughnuts and complementary products (a) within a 100 mile radius of any place of business of the Company (including franchised operations) or of any place where the Company (or one of its franchised operations) has done business since the Effective Date of this Agreement, (b) in any county where the Company is doing business or has done business since the Effective Date, or (c) in any state where the Company is doing business or has done business since the Effective Date. Notwithstanding the above, ownership by Executive of an interest in any licensed franchisee of the Company shall not be deemed to be in violation of this Section 10. In the event of an actual or threatened breach of this provision, the Company shall be entitled to an injunction restraining Executive from such action and the Company shall not be prohibited in obtaining such equitable relief or from pursuing any other available remedies for such breach or threatened breach, including recovery of damages from Executive. 11. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, their heirs, personal representatives, successors and assigns. (b) The Company shall require any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used herein, "Company" shall mean the Company as defined in the preamble to this Agreement and any successor to its business or assets which executes and delivers (or is required to execute and deliver) the agreement provided for in this Section 11(b), or which otherwise becomes bound by the terms and provisions of this Agreement or by operation of law. 12. ARBITRATION. Except as hereinafter provided, any controversy or claim arising out of or relating to this Agreement of any alleged breach thereof shall be settled by arbitration in the City of Winston-Salem, North Carolina in accordance with the rules then obtaining of the American Arbitration Association and any judgment upon any award, which may include an 9 10 award of damages, may be entered in the highest State or Federal court having jurisdiction. Nothing contained herein shall in any way deprive the Company of its claim to obtain an injunction or other equitable relief arising out of the Executive's breach of the provisions of Paragraphs 9 and 10 of this Agreement. In the event of the termination of Executive's employment, Executive's sole remedy shall be arbitration as herein provided and any award of damages shall be limited to recovery of lost compensation and benefits provided for in this Agreement. 12. NOTICES. For the purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: John N. McAleer 435 Westover Avenue Winston-Salem, NC 27104 IF TO THE COMPANY: Krispy Kreme Doughnut Corporation P.O. Box 83 Winston-Salem, NC 27102-0083 (for mail) 370 Knollwood Suite 500 Winston-Salem, NC 27103 (for delivery) Attn: Randy S. Casstevens, Corporate Secretary 13. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Carolina. 14. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of other provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 15. SEPARABILITY. The invalidity or lack of enforceability of a provision of this Agreement shall not affect the validity of any other provision hereof, which shall remain in full force and effect. 10 11 16. WITHHOLDING OF TAXES. The Company may withhold from any benefits payable under this Agreement all federal, state and other taxes as shall be required pursuant to any law or governmental regulation or ruling. 17. SURVIVAL. The provisions of Sections 9 and 10 of the Agreement shall survive the termination of this Agreement and shall continue for the terms set forth in Sections 9 and 10. 18. CAPTIONS. Captions to the sections of this Agreement are inserted solely for the convenience of the parties, are not a part of this Agreement, and in no way define, limit, extend or describe the scope hereof or the intent of any of the provisions. 19. NON-ASSIGNABILITY. This Agreement is personal in nature and neither and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by will or by the laws of descent or distribution. In the event of any attempted assignment or transfer contrary to this section, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and delivered under its seal pursuant to the specific authorization of its board of directors and the Executive has hereunto set his hand and seal on the day and year first above written. KRISPY KREME DOUGHNUT CORPORATION By: /s/ Scott A. Livengood Scott A. Livengood, CEO and President [CORPORATE SEAL] EXECUTIVE /s/ John N. McAleer (Seal) John N. McAleer 11 EX-10.29 21 EMPLOYMENT AGREEMENT / SCOTT A. LIVENGOOD 1 EXHIBIT 10.29 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (THE "AGREEMENT") is made effective this 10th day of August, 1999, by and between KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation (the "Company"), and SCOTT A. LIVENGOOD (the "Executive"). RECITAL The Executive is currently serving as President of the Company and the parties have negotiated this Agreement in consideration of the Executive's valuable services and leadership. This Agreement supersedes the Employment Agreement entered into between the parties on January 7, 1994. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties do hereby agree as follow: 1. EFFECTIVE DATE. This Agreement shall be effective upon, and from and after, the date set forth above. 2. DEFINITIONS. As used herein, the following terms shall have the following meanings: (a) "Disability" shall mean the Executive becoming disabled and unable to continue his employment with the Company as defined in the Company's then applicable disability policy for the Senior Management of the Company. (b) "Discharge" shall mean the termination by the Company of the Executive's employment during the Period of Employment for any reason other than (i) Good Cause, (ii) death of the Executive, (iii) Disability of the Executive, or (iv) Retirement of the Executive. (c) "Expiration Date" means the date that the Period of Employment (as it may have been extended) expires. (d) "Good Cause" has its meaning as defined in Section 6 hereof. (e) "Period of Employment" shall be for a term of three years beginning August 10, 1999 and ending August 10, 2002; provided, however, that commencing August 10, 2000, the Executive's Period of Employment shall automatically be extended for successive one-year periods each year as of August 10 of each year unless the Company gives Executive written notice of nonextension on or before that date. 2 (f) "Retirement" shall mean a time when the sum of the Executive's age and employment with the Company equals or exceeds 65. (g) "Senior Management" shall mean the senior executive management of the Company currently consisting of the chief executive officer, the president, and the executive vice presidents. (h) "Stock Option Plan" shall mean the Krispy Kreme Doughnut Corporation 1998 Stock Option Plan. (i) "Termination Date" shall mean: (i) If the Executive's employment is terminated by reason of death, the Executive's date of death; (ii) If the Executive's employment is terminated by reason of Retirement, the date of his Retirement; (iii) If the Executive's employment is terminated by reason of Disability, the date of his Disability; (iv) If the Executive's employment is terminated for Good Cause, the date specified in the written notice of termination given by the Company pursuant to Section 6(a); (v) If the Executive's employment is terminated by reason of a Discharge, the effective date of Discharge; (vi) If the Executive's employment is terminated by reason of non-extension of the Period of Employment, the Expiration Date; and (vii) If the Executive voluntarily terminates his employment as permitted by Section 6(b), the effective date of his termination of employment. 3. EMPLOYMENT; PERIOD OF EMPLOYMENT. The Company hereby employs the Executive, and the Executive hereby accepts employment by the Company, for the Period of Employment, in the position and with the duties and responsibilities set forth in Section 4, upon the terms and subject to the conditions of this Agreement. 2 3 4. POSITION, DUTIES AND RESPONSIBILITIES. During the Period of Employment, the executive shall (a) serve as President and Chief Executive Officer of the Company and its subsidiaries or in such other senior management position as may be assigned to him by mutual agreement with the Board of Directors. The Executive shall be employed hereunder in Forsyth County, North Carolina and he shall not be required to relocate his residence or principal office to any place outside Forsyth County, North Carolina without his consent; and (b) devote his best efforts to the furtherance of the interest of the Company and the performance of his duties hereunder and agrees not to engage in any competition whatsoever, either directly or indirectly, with the Company or any of its subsidiaries or affiliates. The Executive shall be allowed holiday and vacation periods, leaves for periods of illness or incapacity and personal leaves in accordance with the Company's regular practices for members of Senior Management. 5. COMPENSATION, COMPENSATION PLANS AND BENEFITS. During the Period of Employment, the Executive shall be compensated as follows: (a) He shall receive an annual base salary equal to his current annual base salary, with annual increases in accordance with the Company's regular practices for members of Senior Management. In addition, he shall receive non-incentive compensation (including automobile allowance) at his current monthly rate. Such compensation shall be paid in accordance with the Company's regular schedule for payment of salaried employees. (b) He shall receive such other bonuses as are afforded the Company's Senior Management and be eligible to participate in all of the Company's executive compensation plans provided to members of Senior Management of the Company from time to time. (c) He shall be entitled to participate in and receive other employee benefits, which may include, but are not limited to, benefits under any life health, accident, disability, medical, dental and hospitalization insurance plans, use of a Company automobile or an automobile allowance, and other perquisites and benefits, as are provided to members of Senior Management of the Company from time to time. (d) He shall be entitled to be reimbursed for the reasonable and necessary out-of-pocket expenses, including entertainment, travel and similar items, incurred by him in performing his duties hereunder upon presentation of such documentation thereof as the Company may normally and customarily require of the members of Senior Management. 3 4 (e) The Company agrees to pay the Executive's dues and assessments for membership in Forsyth Country Club and the Piedmont Club. 6. TERMINATION OF EMPLOYMENT. During the Period of Employment: (a) Termination for Good Cause. (i) The Company may terminate the Executive's employment for Good Cause. Termination of employment shall be deemed to have been for Good Cause if (i) the Executive habitually neglects or refuses to do his duties and fails to cure such neglect within ten (10) days after having received written notice of same from the Company or (ii) the Executive commits (a) acts constituting a felony or (b) acts of gross negligence or willful misconduct to the material detriment of the Company. (ii) Termination by the Company for Good Cause may be made only by written notice of termination from the Company to the Executive that has been specifically approved in advance by the Board of Directors. Such notice shall set forth all acts constituting such neglect or refusal to do duties or gross negligence or willful misconduct as is applicable. (b) Voluntary Termination. The Executive may voluntarily terminate his employment with the Company upon 30 days prior written notice. (c) Termination by Reason of Death, Disability, or Retirement. The employment of the Executive shall be terminated by death, Disability or Retirement of the Executive. 7. EFFECT OF TERMINATION. (a) If the Executive's employment is terminated by reason of death, Retirement or voluntary termination of employment, the Company shall pay the Executive (or his estate in the case of his death) his base salary, non-incentive compensation (including automobile allowance), bonuses and benefits as provided in Section 5 through the Termination Date and (in the case of his death) a death benefit of $5,000. Any payments and benefits due to the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested if the Executive's employment is terminated by reason of death or Retirement. 4 5 (b) If the Executive's employment is terminated by reason of Disability, the Company shall pay the Executive his base salary, non-incentive compensation, bonuses and benefits for a period of six months following the date of Disability. Thereafter, this Agreement terminates and the Executive shall receive those benefits payable to him under the applicable disability insurance plan provided by the Company. Any payments and benefits due to the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Executive's termination of employment by reason of Disability. (c) In the event of the Executive's Discharge by the Company, (i) the Company shall pay the Executive A. his then current annual base salary and non-incentive compensation (including automobile allowance) and provide the Executive with his then current benefits (as provided in Section 5) through the Expiration Date pursuant to Section 2(e); and B. within thirty (30) days from the Termination Date (1) a lump sum equal to Executive's then current monthly base salary amount multiplied by the number of months between the month of Discharge and the preceding August, and (2) a lump sum amount equal to the sum of adding three times the Executive's bonus calculated at 50% of his annualized base salary for the then current fiscal year, discounted at the rate of six percent (6%) per annum. The latter payment is full and final satisfaction of all the Company's obligations for bonus and/or other incentive payments. (ii) Any payments and benefits due to executive under the employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Termination Date. (d) In the event of the Company's nonextension of the Employment Period, (i) the Company shall pay the Executive A. his then current annual base salary and non-incentive compensation (including automobile allowance) and provide the 5 6 Executive with his then current benefits (as provided in Section 5) through the Expiration Date, pursuant to Section 2(e); B. within thirty (30) days from the Termination Date, (1) a lump sum equal to Executive's then current annual base salary, and (2) a lump sum amount equal to three times the Executive's bonus calculated at 50% of his base salary for the then current fiscal year discounted at the rate of six percent (6%) per annum. The latter payment is full and final satisfaction of all the Company's obligations for bonus and/or other incentive payments. (ii) Any payments and benefits due to Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Expiration Date. Provided, however, that within sixty (60) days of the date of notification by the Company to the Executive of its intention not to extend the Period of Employment, the Executive may, at his option, elect to have the non-extension treated as a Discharge with an effective date thirty (30) days after the Executive's notification to the Company of his election. (e) In the event of the Executive's Termination For Cause by the Company, the Company shall pay the Executive his then current base salary and non-incentive compensation (including automobile allowance) and provide the Executive with his then current benefits (as provided in Section 5) through the Termination Date. Any payments and benefits due the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs. (f) In the event the Executive's employment is terminated by reason of Discharge or nonextension of the Employment Period, the Executive may, at his option, elect to receive a lump sum amount equal to the base salary and non-incentive compensation due, discounted at a rate of six percent (6%) per annum. (g) In the event the Executive's employment is terminated by reason of Discharge, the Company shall furnish the Executive, for a period of six (6) months subsequent to the Termination Date, outplacement services, reasonable office space, and secretarial assistance. (h) If any of the payments provided for in this Agreement, together with any other payments which the Executive has the right to receive from the Company or 6 7 any corporation which is a member of an "affiliated group" as defined in Section 1504(a) of the Code (without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute an "excess parachute payment" as defined in Section 280G(b)(1) of the Code as it presently exists, such that any portion of such payments are subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalty with respect to such excise tax (such excise tax, together with any such interest or penalty, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (an "Excise Tax Restoration Payment"). The amount of the Excise Tax Restoration Payment shall be the amount necessary to fund the payment by the Executive of any Excise Tax on the total payments, as well as all income taxes imposed on the Excise Tax Restoration Payment, any excise tax imposed on the Excise Tax Restoration Payment, and any interest or penalties imposed with respect to taxes on the Excise Tax Restoration Payment or any Excise Tax. 8. Termination For Good Reason. In the event of a "Change in Control" of the Company (as hereinafter defined), the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following events during the twelve (12) months immediately preceding or following the effective date of a Change in Control of the Company: (a) a material change in the scope of the Executive's assigned duties and responsibilities from those in effect immediately prior to a Change in Control of the Company or the assignment of duties or responsibilities that are inconsistent with the Executive's status in the Company; (b) a reduction by the Company in the Executive's base salary or incentive compensation as in effect on the date of a Change in Control; (c) the Company's requirement that the Executive be based anywhere other than the Company's office in Forsyth County, North Carolina, at which he was based prior to the Change in Control of the Company; or (d) the failure by the Company to continue to provide the Executive with benefits substantially similar to those specified in Section 5 of this Agreement. For purposes of Section 8(c) above, the Company shall be deemed to have required the Executive to be based somewhere other than the Company's office at which he was based prior to the Change in Control if the Executive is required to spend more than two days per week on a regular basis at a business location not within 50 miles of the Executive's primary business location as of the effective date of a Change in Control. If the Executive terminates his employment for Good Reason, this shall be treated as the Discharge of the Executive by the Company. Accordingly, the Company shall pay the amounts and provide the benefits to the Executive specified in Section 7 above, applicable in the event of 7 8 Discharge. The Executive shall not be obligated in any way to mitigate the Company's obligations to him under this Section 8 and any amounts earned by the Executive subsequent to his termination of employment shall not serve as an offset to the payments due him by the Company under this Section. For purposes of this Agreement, a "Change in Control" means the date on which the earlier of the following events occur: (a) the acquisition by any entity, person or group of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 30% of the outstanding capital stock of the Company entitled to vote for the election of directors ("Voting Stock"); (b) the merger or consolidation of the Company with one or more corporations as a result of which the holders of outstanding Voting Stock of the Company immediately prior to such a merger or consolidation hold less than 60% of the Voting Stock of the surviving or resulting corporation; (c) the transfer of substantially all of the property of the Company other than to an entity of which the Company owns at least 80% of the Voting Stock; or (d) the election to the Board of Directors of the Company of three or more directors during any twelve (12) month period without the recommendation or approval of the incumbent Board of Directors of the Company. Upon a Change in Control, as defined above in this Section 8, all outstanding stock options shall become 100% vested and immediately exercisable, regardless of whether the Executive terminates employment or not. If the Executive terminates employment with Good Reason within twelve (12) months of a Change in Control, to the extent permitted by law, the Company shall continue the medical, disability and life insurance benefits which Executive was receiving at the time of termination for a period of 36 months after termination of employment or, if earlier, until Executive has commenced employment elsewhere and becomes eligible for participation in the medical, disability and life insurance programs, if any, of his successor employer. Coverage under Employer's medical, disability and life insurance programs shall cease with respect to each such program as Executive becomes eligible for the medical, disability and life insurance programs, if any, of his successor employer. 9. CONFIDENTIALITY. During the Period of Employment and following termination for any reason, the Executive covenants and agrees that he will not divulge any trade secrets or other confidential information pertaining to the business of the Company. It is understood that the term "trade secrets" as used in this Agreement is deemed to include any information which gives the Company a material and substantial advantage over its competitors but that such term does not include knowledge, skills or information which is otherwise publicly disclosed. 8 9 10. NON-COMPETITION. In the event of Termination For Good Cause, or Voluntary Termination of the Executive, the Executive agrees that for a period of two years following the Termination Date, Executive shall not directly or indirectly, personally or with other employees, agents or otherwise, or on behalf of any other person, firm, or corporation, engage in the business of making and selling doughnuts and complementary products (a) within a 100 mile radius of any place of business of the Company (including franchised operations) or of any place where the Company (or one of its franchised operations) has done business since the Effective Date of this Agreement, (b) in any county where the Company is doing business or has done business since the Effective Date, or (c) in any state where the Company is doing business or has done business since the Effective Date. Notwithstanding the above, ownership by Executive of an interest in any licensed franchisee of the Company shall not be deemed to be in violation of this Section 10. In the event of an actual or threatened breach of this provision, the Company shall be entitled to an injunction restraining Executive from such action and the Company shall not be prohibited in obtaining such equitable relief or from pursuing any other available remedies for such breach or threatened breach, including recovery of damages from Executive. 11. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, their heirs, personal representatives, successors and assigns. (b) The Company shall require any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used herein, "Company" shall mean the Company as defined in the preamble to this Agreement and any successor to its business or assets which executes and delivers (or is required to execute and deliver) the agreement provided for in this Section 11(b), or which otherwise becomes bound by the terms and provisions of this Agreement or by operation of law. 12. ARBITRATION. Except as hereinafter provided, any controversy or claim arising out of or relating to this Agreement of any alleged breach thereof shall be settled by arbitration in the City of Winston-Salem, North Carolina in accordance with the rules then obtaining of the American Arbitration Association and any judgment upon any award, which may include an 9 10 award of damages, may be entered in the highest State or Federal court having jurisdiction. Nothing contained herein shall in any way deprive the Company of its claim to obtain an injunction or other equitable relief arising out of the Executive's breach of the provisions of Paragraphs 9 and 10 of this Agreement. In the event of the termination of Executive's employment, Executive's sole remedy shall be arbitration as herein provided and any award of damages shall be limited to recovery of lost compensation and benefits provided for in this Agreement. 13. NOTICES. For the purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: Scott A. Livengood 605 Spring Tree Court Winston-Salem, NC 27104 IF TO THE COMPANY: Krispy Kreme Doughnut Corporation P.O. Box 83 Winston-Salem, NC 27102-0083 (for mail) 370 Knollwood Suite 500 Winston-Salem, NC 27103 (for delivery) Attn: Randy S. Casstevens, Corporate Secretary 14. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Carolina. 15. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of other provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 16. SEPARABILITY. The invalidity or lack of enforceability of a provision of this Agreement shall not affect the validity of any other provision hereof, which shall remain in full force and effect. 10 11 17. WITHHOLDING OF TAXES. The Company may withhold from any benefits payable under this Agreement all federal, state and other taxes as shall be required pursuant to any law or governmental regulation or ruling. 18. SURVIVAL. The provisions of Sections 9 and 10 of the Agreement shall survive the termination of this Agreement and shall continue for the terms set forth in Sections 9 and 10. 19. CAPTIONS. Captions to the sections of this Agreement are inserted solely for the convenience of the parties, are not a part of this Agreement, and in no way define, limit, extend or describe the scope hereof or the intent of any of the provisions. 20. NON-ASSIGNABILITY. This Agreement is personal in nature and neither and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by will or by the laws of descent or distribution. In the event of any attempted assignment or transfer contrary to this section, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and delivered under its seal pursuant to the specific authorization of its board of directors and the Executive has hereunto set his hand and seal effective the day and year first above written. KRISPY KREME DOUGHNUT CORPORATION By: /s/ J. Paul Breitbach J. Paul Breitbach, Executive Vice President [CORPORATE SEAL] EXECUTIVE /s/ Scott A. Livengood (Seal) Scott A. Livengood 11 EX-10.30 22 EMPLOYMENT AGREEMENT / J. PAUL BREITBACH 1 EXHIBIT 10.30 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (THE "AGREEMENT") is made effective this 10th day of August, 1999, by and between KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation (the "Company"), and J. PAUL BREITBACH (the "Executive"). RECITAL The Executive is currently serving as Executive Vice President of the Company and the parties have negotiated this Agreement in consideration of the Executive's valuable services and leadership. This Agreement supersedes the Employment Agreement entered into between the parties on ________________. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties do hereby agree as follow: 1. EFFECTIVE DATE. This Agreement shall be effective upon, and from and after, the date set forth above. 2. DEFINITIONS. As used herein, the following terms shall have the following meanings: (a) "Disability" shall mean the Executive becoming disabled and unable to continue his employment with the Company as defined in the Company's then applicable disability policy for the Senior Management of the Company. (b) "Discharge" shall mean the termination by the Company of the Executive's employment during the Period of Employment for any reason other than (i) Good Cause, (ii) death of the Executive, (iii) Disability of the Executive, or (iv) Retirement of the Executive. (c) "Expiration Date" means the date that the Period of Employment (as it may have been extended) expires. (d) "Good Cause" has its meaning as defined in Section 6 hereof. (e) "Period of Employment" shall be for a term of two years beginning August 10, 1999 and ending August 10, 2001; provided, however, that commencing August 10, 2000, the Executive's Period of Employment shall automatically be extended for successive one-year periods each year as of August 10 of each year unless the Company gives Executive written notice of nonextension on or before that date. 2 (f) "Retirement" shall mean a time when the sum of the Executive's age and employment with the Company equals or exceeds 65. (g) "Senior Management" shall mean the senior executive management of the Company currently consisting of the chief executive officer, the president, and the executive vice presidents. (h) "Stock Option Plan" shall mean the Krispy Kreme Doughnut Corporation 1998 Stock Option Plan. (i) "Termination Date" shall mean: (i) If the Executive's employment is terminated by reason of death, the Executive's date of death; (ii) If the Executive's employment is terminated by reason of Retirement, the date of his Retirement; (iii) If the Executive's employment is terminated by reason of Disability, the date of his Disability; (iv) If the Executive's employment is terminated for Good Cause, the date specified in the written notice of termination given by the Company pursuant to Section 6(a); (v) If the Executive's employment is terminated by reason of a Discharge, the effective date of Discharge; (vi) If the Executive's employment is terminated by reason of non-extension of the Period of Employment, the Expiration Date; and (vii) If the Executive voluntarily terminates his employment as permitted by Section 6(b), the effective date of his termination of employment. 3. EMPLOYMENT; PERIOD OF EMPLOYMENT. The Company hereby employs the Executive, and the Executive hereby accepts employment by the Company, for the Period of Employment, in the position and with the duties and responsibilities set forth in Section 4, upon the terms and subject to the conditions of this Agreement. 2 3 4. POSITION, DUTIES AND RESPONSIBILITIES. During the Period of Employment, the executive shall (a) serve as Executive Vice President of the Company and its subsidiaries or in such other senior management position as may be assigned to him by mutual agreement with the Board of Directors. The Executive shall be employed hereunder in Forsyth County, North Carolina and he shall not be required to relocate his residence or principal office to any place outside Forsyth County, North Carolina without his consent; and (b) devote his best efforts to the furtherance of the interest of the Company and the performance of his duties hereunder and agrees not to engage in any competition whatsoever, either directly or indirectly, with the Company or any of its subsidiaries or affiliates. The Executive shall be allowed holiday and vacation periods, leaves for periods of illness or incapacity and personal leaves in accordance with the Company's regular practices for members of Senior Management. 5. COMPENSATION, COMPENSATION PLANS AND BENEFITS. During the Period of Employment, the Executive shall be compensated as follows: (a) He shall receive an annual base salary equal to his current annual base salary, with annual increases in accordance with the Company's regular practices for members of Senior Management. In addition, he shall receive non-incentive compensation (including automobile allowance) at his current monthly rate. Such compensation shall be paid in accordance with the Company's regular schedule for payment of salaried employees. (b) He shall receive such other bonuses as are afforded the Company's Senior Management and be eligible to participate in all of the Company's executive compensation plans provided to members of Senior Management of the Company from time to time. (c) He shall be entitled to participate in and receive other employee benefits, which may include, but are not limited to, benefits under any life health, accident, disability, medical, dental and hospitalization insurance plans, use of a Company automobile or an automobile allowance, and other perquisites and benefits, as are provided to members of Senior Management of the Company from time to time. (d) He shall be entitled to be reimbursed for the reasonable and necessary out-of-pocket expenses, including entertainment, travel and similar items, incurred by him in performing his duties hereunder upon presentation of such documentation thereof as the Company may normally and customarily require of the members of Senior Management. 3 4 (e) The Company agrees to pay the Executive's dues and assessments for membership in Forsyth Country Club and the Piedmont Club. 6. TERMINATION OF EMPLOYMENT. During the Period of Employment: (a) Termination for Good Cause. (i) The Company may terminate the Executive's employment for Good Cause. Termination of employment shall be deemed to have been for Good Cause if (i) the Executive habitually neglects or refuses to do his duties and fails to cure such neglect within ten (10) days after having received written notice of same from the Company or (ii) the Executive commits (a) acts constituting a felony or (b) acts of gross negligence or willful misconduct to the material detriment of the Company. (ii) Termination by the Company for Good Cause may be made only by written notice of termination from the Company to the Executive that has been specifically approved in advance by the Board of Directors. Such notice shall set forth all acts constituting such neglect or refusal to do duties or gross negligence or willful misconduct as is applicable. (b) Voluntary Termination. The Executive may voluntarily terminate his employment with the Company upon 30 days prior written notice. (c) Termination by Reason of Death, Disability, or Retirement. The employment of the Executive shall be terminated by death, Disability or Retirement of the Executive. 7. EFFECT OF TERMINATION. (a) If the Executive's employment is terminated by reason of death, Retirement or voluntary termination of employment, the Company shall pay the Executive (or his estate in the case of his death) his base salary, non-incentive compensation (including automobile allowance), bonuses and benefits as provided in Section 5 through the Termination Date and (in the case of his death) a death benefit of $5,000. Any payments and benefits due to the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested if the Executive's employment is terminated by reason of death or Retirement. 4 5 (b) If the Executive's employment is terminated by reason of Disability, the Company shall pay the Executive his base salary, non-incentive compensation, bonuses and benefits for a period of six months following the date of Disability. Thereafter, this Agreement terminates and the Executive shall receive those benefits payable to him under the applicable disability insurance plan provided by the Company. Any payments and benefits due to the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Executive's termination of employment by reason of Disability. (c) In the event of the Executive's Discharge by the Company, (i) the Company shall pay the Executive A. his then current annual base salary and non-incentive compensation (including automobile allowance) and provide the Executive with his then current benefits (as provided in Section 5) through the Expiration Date pursuant to Section 2(e); and B. within thirty (30) days from the Termination Date (1) a lump sum equal to Executive's then current monthly base salary amount multiplied by the number of months between the month of Discharge and the following August, and (2) a lump sum amount equal to the sum of adding three times the Executive's bonus calculated at 50% of his annualized base salary for the then current fiscal year, discounted at the rate of six percent (6%) per annum. The latter payment is full and final satisfaction of all the Company's obligations for bonus and/or other incentive payments. (ii) Any payments and benefits due to executive under the employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Termination Date. (d) In the event of the Company's nonextension of the Employment Period, (i) the Company shall pay the Executive A. his then current annual base salary and non-incentive compensation (including automobile allowance) and provide the 5 6 Executive with his then current benefits (as provided in Section 5) through the Expiration Date, pursuant to Section 2(e); B. within thirty (30) days from the Termination Date, (1) a lump sum equal to Executive's then current annual base salary, and (2) a lump sum amount equal to three times the Executive's bonus calculated at 50% of his base salary for the then current fiscal year discounted at the rate of six percent (6%) per annum. The latter payment is full and final satisfaction of all the Company's obligations for bonus and/or other incentive payments. (ii) Any payments and benefits due to Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs; provided, however, that all options held by the Executive under the Stock Option Plan shall become 100% vested as of the Expiration Date. Provided, however, that within sixty (60) days of the date of notification by the Company to the Executive of its intention not to extend the Period of Employment, the Executive may, at his option, elect to have the non-extension treated as a Discharge with an effective date thirty (30) days after the Executive's notification to the Company of his election. (e) In the event of the Executive's Termination For Cause by the Company, the Company shall pay the Executive his then current base salary and non-incentive compensation (including automobile allowance) and provide the Executive with his then current benefits (as provided in Section 5) through the Termination Date. Any payments and benefits due the Executive under employee benefit plans and programs of the Company, including the Stock Option Plan, shall be determined in accordance with the terms of such benefit plans and programs. (f) In the event the Executive's employment is terminated by reason of Discharge or nonextension of the Employment Period, the Executive may, at his option, elect to receive a lump sum amount equal to the base salary and non-incentive compensation due, discounted at a rate of six percent (6%) per annum. (g) In the event the Executive's employment is terminated by reason of Discharge, the Company shall furnish the Executive, for a period of six (6) months subsequent to the Termination Date, outplacement services, reasonable office space, and secretarial assistance. (h) If any of the payments provided for in this Agreement, together with any other payments which the Executive has the right to receive from the Company or 6 7 any corporation which is a member of an "affiliated group" as defined in Section 1504(a) of the Code (without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute an "excess parachute payment" as defined in Section 280G(b)(1) of the Code as it presently exists, such that any portion of such payments are subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalty with respect to such excise tax (such excise tax, together with any such interest or penalty, are collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (an "Excise Tax Restoration Payment"). The amount of the Excise Tax Restoration Payment shall be the amount necessary to fund the payment by the Executive of any Excise Tax on the total payments, as well as all income taxes imposed on the Excise Tax Restoration Payment, any excise tax imposed on the Excise Tax Restoration Payment, and any interest or penalties imposed with respect to taxes on the Excise Tax Restoration Payment or any Excise Tax. 8. Termination For Good Reason. In the event of a "Change in Control" of the Company (as hereinafter defined), the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following events during the twelve (12) months immediately preceding or following the effective date of a Change in Control of the Company: (a) a material change in the scope of the Executive's assigned duties and responsibilities from those in effect immediately prior to a Change in Control of the Company or the assignment of duties or responsibilities that are inconsistent with the Executive's status in the Company; (b) a reduction by the Company in the Executive's base salary or incentive compensation as in effect on the date of a Change in Control; (c) the Company's requirement that the Executive be based anywhere other than the Company's office in Forsyth County, North Carolina, at which he was based prior to the Change in Control of the Company; or (d) the failure by the Company to continue to provide the Executive with benefits substantially similar to those specified in Section 5 of this Agreement. For purposes of Section 8(c) above, the Company shall be deemed to have required the Executive to be based somewhere other than the Company's office at which he was based prior to the Change in Control if the Executive is required to spend more than two days per week on a regular basis at a business location not within 50 miles of the Executive's primary business location as of the effective date of a Change in Control. If the Executive terminates his employment for Good Reason, this shall be treated as the Discharge of the Executive by the Company. Accordingly, the Company shall pay the amounts and provide the benefits to the Executive specified in Section 7 above, applicable in the event of 7 8 Discharge. The Executive shall not be obligated in any way to mitigate the Company's obligations to him under this Section 8 and any amounts earned by the Executive subsequent to his termination of employment shall not serve as an offset to the payments due him by the Company under this Section. For purposes of this Agreement, a "Change in Control" means the date on which the earlier of the following events occur: (a) the acquisition by any entity, person or group of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 30% of the outstanding capital stock of the Company entitled to vote for the election of directors ("Voting Stock"); (b) the merger or consolidation of the Company with one or more corporations as a result of which the holders of outstanding Voting Stock of the Company immediately prior to such a merger or consolidation hold less than 60% of the Voting Stock of the surviving or resulting corporation; (c) the transfer of substantially all of the property of the Company other than to an entity of which the Company owns at least 80% of the Voting Stock; or (d) the election to the Board of Directors of the Company of three or more directors during any twelve month period without the recommendation or approval of the incumbent Board of Directors of the Company. Upon a Change in Control, as defined above in this Section 8, all outstanding stock options shall become 100% vested and immediately exercisable, regardless of whether the Executive terminates employment or not. If the Executive terminates employment with Good Reason within twelve (12) months of a Change in Control, to the extent permitted by law, the Company shall continue the medical, disability and life insurance benefits which Executive was receiving at the time of termination for a period of 36 months after termination of employment or, if earlier, until Executive has commenced employment elsewhere and becomes eligible for participation in the medical, disability and life insurance programs, if any, of his successor employer. Coverage under Employer's medical, disability and life insurance programs shall cease with respect to each such program as Executive becomes eligible for the medical, disability and life insurance programs, if any, of his successor employer. 9. CONFIDENTIALITY. During the Period of Employment and following termination for any reason, the Executive covenants and agrees that he will not divulge any trade secrets or other confidential information pertaining to the business of the Company. It is understood that the term "trade secrets" as used in this Agreement is deemed to include any information which gives the Company a material and substantial advantage over its competitors but that such term does not include knowledge, skills or information which is otherwise publicly disclosed. 8 9 10. NON-COMPETITION. In the event of Termination For Good Cause, or Voluntary Termination of the Executive, the Executive agrees that for a period of two years following the Termination Date, Executive shall not directly or indirectly, personally or with other employees, agents or otherwise, or on behalf of any other person, firm, or corporation, engage in the business of making and selling doughnuts and complementary products (a) within a 100 mile radius of any place of business of the Company (including franchised operations) or of any place where the Company (or one of its franchised operations) has done business since the Effective Date of this Agreement, (b) in any county where the Company is doing business or has done business since the Effective Date, or (c) in any state where the Company is doing business or has done business since the Effective Date. Notwithstanding the above, ownership by Executive of an interest in any licensed franchisee of the Company shall not be deemed to be in violation of this Section 10. In the event of an actual or threatened breach of this provision, the Company shall be entitled to an injunction restraining Executive from such action and the Company shall not be prohibited in obtaining such equitable relief or from pursuing any other available remedies for such breach or threatened breach, including recovery of damages from Executive. 11. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, their heirs, personal representatives, successors and assigns. (b) The Company shall require any successor (whether direct or indirect and whether by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used herein, "Company" shall mean the Company as defined in the preamble to this Agreement and any successor to its business or assets which executes and delivers (or is required to execute and deliver) the agreement provided for in this Section 10(b), or which otherwise becomes bound by the terms and provisions of this Agreement or by operation of law. 12. ARBITRATION. Except as hereinafter provided, any controversy or claim arising out of or relating to this Agreement of any alleged breach thereof shall be settled by arbitration in the City of Winston-Salem, North Carolina in accordance with the rules then obtaining of the American Arbitration Association and any judgment upon any award, which may include an 9 10 award of damages, may be entered in the highest State or Federal court having jurisdiction. Nothing contained herein shall in any way deprive the Company of its claim to obtain an injunction or other equitable relief arising out of the Executive's breach of the provisions of Paragraphs 9 and 10 of this Agreement. In the event of the termination of Executive's employment, Executive's sole remedy shall be arbitration as herein provided and any award of damages shall be limited to recovery of lost compensation and benefits provided for in this Agreement. 13. NOTICES. For the purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: IF TO THE EXECUTIVE: J. Paul Breitbach 320 Buckingham Road Winston-Salem, NC 27104 IF TO THE COMPANY: Krispy Kreme Doughnut Corporation P.O. Box 83 Winston-Salem, NC 27102-0083 (for mail) 370 Knollwood Suite 500 Winston-Salem, NC 27103 (for delivery) Attn: Randy S. Casstevens, Corporate Secretary 14. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Carolina. 15. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of other provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 16. SEPARABILITY. The invalidity or lack of enforceability of a provision of this Agreement shall not affect the validity of any other provision hereof, which shall remain in full force and effect. 10 11 17. WITHHOLDING OF TAXES. The Company may withhold from any benefits payable under this Agreement all federal, state and other taxes as shall be required pursuant to any law or governmental regulation or ruling. 18. SURVIVAL. The provisions of Sections 8 and 9 of the Agreement shall survive the termination of this Agreement and shall continue for the terms set forth in Sections 8 and 9. 19. CAPTIONS. Captions to the sections of this Agreement are inserted solely for the convenience of the parties, are not a part of this Agreement, and in no way define, limit, extend or describe the scope hereof or the intent of any of the provisions. 20. NON-ASSIGNABILITY. This Agreement is personal in nature and neither and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder. Without limiting the foregoing, the Executive's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by will or by the laws of descent or distribution. In the event of any attempted assignment or transfer contrary to this section, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and delivered under its seal pursuant to the specific authorization of its board of directors and the Executive has hereunto set his hand and seal effective the day and year first above written. KRISPY KREME DOUGHNUT CORPORATION By: /s/ Scott A. Livengood Scott A. Livengood, CEO and President [CORPORATE SEAL] EXECUTIVE /s/ J. Paul Breitbach (Seal) J. Paul Breitbach 11 EX-10.31 23 KINGSMILL PLAN 1 EXHIBIT 10.31 PLAN TO PROVIDE FRANCHISE OPPORTUNITIES FOR CORPORATE MANAGEMENT OCTOBER 3, 1994 I. Plan Beginning December 1, 1994, corporate management shall have the opportunity to apply for, qualify for and receive a grant of a franchise(s) for one or more Krispy Kreme store(s) in open territories. II. Purpose of the Plan The purpose of the plan is to provide opportunities for eligible and qualifying corporate management to obtain a franchise(s) for one or more Krispy Kreme stores thereby allowing those who have made substantial contributions to Krispy Kreme's success to share and participate in the growth of the Company. III. Benefits of the Plan to the Company The benefits to the company are as follows: 1. the plan serves to attract, retain and motivate quality employees; 2. the plan provides the greatest likelihood of successful store expansion due to the knowledge and experience of the plan participant; 3. the plan expedites and enhances the development of the company's franchise program and store expansion program; 2 4. the plan gives our successful corporate management an additional opportunity to grow in their career at Krispy Kreme; and 5. The plan will add to a sense of ownership, opportunity and entrepreneurship which is vital to achieving the company's commitment to exceeding shareholders and customer expectations. IV. Conditions of the Plan A. Eligibility: Members of corporate management who - are participants in the ELTIP - meet franchise applicant qualifications which are set forth on Exhibit A. These qualifications include - business plan for developing the market which meets company standards and - financial resources/bank commitment for full market development which meets company standards - are employed in good standing - have a trained and capable replacement (if leaving company) B. Available franchise areas: Any qualifying area in the United States except for territories of existing associates and company markets. For available territories, see the list set forth on Exhibit B. The list is subject to change from time to time. Areas must meet the 2 3 Company's requirements for population density, which currently is 100,000 households within a metropolitan statistical area. Any exceptions must have corporate approval. C. Investor Groups: Applicants may qualify by forming an investor group provided that the applicant will have at least a 20% equity interest (40% for two participants in the same investor group and 50% for three or more participants). D. Franchise Agreement: Corporate management will sign the same franchise agreement which has been developed for new franchisees which includes the prevailing franchise fee, royalty and advertising fee. E. Awarding of Markets: Markets will be awarded on a "first come, first serve" basis to qualifying applicants. Applicants must be ready to develop market immediately. Markets . will not be held or reserved - no right of first refusal. V. Financing by Krispy Kreme Krispy Kreme will guarantee conventional financing for any number of store(s) per applicant. The types of guarantees are as follows: Equipment Buy Back - - upon default, buy back of production equipment, other equipment, signage, furniture and fixtures at a price equal to purchase price declining with the amortization of the bank loan to 50% of purchase price 3 4 ELTIP Guarantee - - guarantee equal to amount of balance in ELTIP accounts - ELTIP Article VF provides: "when KK distributes amounts credited to the Account of a Participant, KK has the right to deduct therefrom . . . any amounts the Participant may owe the Company." Other Guarantee of Loan - - corporate guarantee of bank loan in an additional amount sufficient to enable him/ her to obtain financing for 100% of the cost of the store (within the parameters set forth in Item VII of the franchise offering circular). - If participant can qualify for conventional bank financing (with equipment buy back and ELTIP guarantees). - There will be no fee for the guarantee for the first 15 months. Thereafter, the participant shall pay Krispy Kreme a fee of the two percent (2%) per annum of the amount guaranteed until Participant's lender releases Krispy Kreme from the guarantee (unless the ratio of cash flow to debt from the Store is less than 1.25 to 1.00 primarily due to the Store's location). The plan and related guarantees will require approval of Southern National Bank, the company's lender. The participant will be required to sign an Accommodation Agreement under which he/ she agrees to repay the company if its performs under the guarantee. 4 5 VI. Other Conditions - - Production equipment is subject to availability. - - Employees of Krispy Kreme who participate must continue to devote full time and best efforts to current job. If a plan participant's employment with Krispy Kreme Doughnut Corporation is terminated for cause, the company has the right to terminate the Franchise Agreement and all rights granted therein. Each store must have a full time manager who has successfully completed the training school. All sales of equipment, signage packages and modular building, as well as mix and distribution center products will be made at standard prices and on standard terms. VII. Application Procedure Begin accepting applications on December 1, 1994. Applications must be accompanied by - business plan - financial statements * * * * * * * * * * * * * * * * * * * * * This Plan may be changed at any time due to availability of production equipment the financial condition of the company, demand and other factors. It is for an indefinite term but subject to termination at any time by the Board of Directors. 5 6 Exhibit A Franchise Fee: $20,000 Development Fee: $10,000 (Credited against Franchise Fee) Royalty: 4.5% Advertising: 4% (broken down as follows) - Marketing and Promotional Fund: Up to a maximum of 3% of Gross Sales. - Local Advertising: 4% of Gross sales less the percent of gross sales contributed to the Marketing and Promotional Fund. Estimate per store total investment: Low - high range of $640,000 - $813,000 (Includes build ing cost but is exclusive of land and site costs) to develop one outlet. These costs include the franchise fee, $50,000 - $85,000 in working capital, grand opening advertising/promotion and initial inventory. Applicants should demonstrate, in addition to any other items the Company feels are relevant, the following to the Company's satisfaction: 1. They possess food service operating experience; 2. They possess or have the proven ability to, raise capital sufficient to fund their development commitment; 3. They have familiarity with the market proposed for development; 4. They possess the ability to timely and diligently fulfill all obligations of the Company's development and franchise agreement; 5. They are not contractually or legally prohibited from fully performing their obligations, in a timely and diligent manner, under the Company's area development and franchise agreements and 6. They are honest and creditworthy; possess sound reputation and integrity, and have no prior criminal records. For more information: Details about the franchise are made available at a personal meeting with the Krispy Kreme Franchise Department at which time prospects receive the Krispy Kreme Uniform Offering Circular and discuss their franchise opportunities. 7 PLAN TO PROVIDE FRANCHISE OPPORTUNITIES FOR ASSOCIATE OPERATORS OCTOBER 3, 1994 I. Plan Beginning December 1, 1994, associate operators shall have the opportunity to apply for, qualify for and receive a grant of a franchise(s) for one or more Krispy Kreme store(s) in open territories. II. Purpose of the Plan The purpose of the plan is to provide opportunities for eligible and qualifying associate operators to obtain a franchise(s) for one or more Krispy Kreme stores thereby allowing those who have made substantial contributions to Krispy Kreme's success to share and participate in the growth of the Company. III. Benefits of the Plan to the Company The benefits to the company are as follows: 1. the plan gives associates the opportunity to grow both inside and outside their existing markets and give family members opportunities; 2. the plan provides the greatest likelihood of successful store expansion due to the knowledge and experience of the plan participants; 3. the plan expedites and enhances the development of the company's franchise program and store expansion program; 8 4. the plan gives our successful associate operators an additional opportunity to grow in their career at Krispy Kreme; and 5. The plan will add to a sense of ownership, opportunity and entrepreneurship which is vital to achieving the company's commitment to exceeding shareholders and customer expectations. IV. Conditions of the Plan A Eligibility: Associate operators outside their existing territories A. OUTSIDE EXISTING MARKET - who have already fully penetrated their existing markets on the basis of one store per 100,000 households B. BOTH INSIDE AND OUTSIDE - are in, and have had a history of, good financial standing with the company - accounts receivable under 60 days - financial statements submitted timely - royalties timely paid - have a history of operating within company standards - operations sanitation - safety - product quality 2 9 - meets franchise applicant qualifications which are set forth on Exhibit A. These qualifications include - business plan for developing the market which meets company standards and - financial resources/bank commitment for full market development which meets company standards B. Available franchise areas: Any qualifying area in-the United States except for terri tories of existing associates and company markets. For available territories, see the list set forth on Exhibit B. This list is subject to change from time to time. Areas must meet the Company's requirements for population density, which currently is 100,000 house holds within a metropolitan statistical area. Any exceptions must have corporate approval. C. Investor Groups: Applicants may qualify by forming an investor group provided that the applicant will have at least a 20% equity interest (40% for two participants in the same investor group and 50% for three or more participants). D. Franchise Agreement: For stores outside their area, associate operators will sign the same franchise agreement which has been developed for new franchisees which includes the prevailing franchise fee, royalty and advertising fee. 3 10 E. Awarding of Markets: Markets will be awarded on a "first come, first serve" basis to qualifying applicants. Applicants must be ready to develop market immediately. Markets will not be held or reserved - no right of first refusal. V. Financing by Krispy Kreme Krispy Kreme will guarantee conventional financing for any number of store(s) per applicant. The types of guarantees are as follows: Equipment Buy Back - - upon default, buy back of production equipment, other equipment, signage, furniture and fixtures at a price equal to purchase price declining with the amortization of the bank loan to 50% of purchase price Stock Pledge - - pledge of stock with a buy back of stock, upon default, at- then book value (or price) under stock purchase agreement Other Guarantee of Loan - - corporate guarantee of bank loan in an additional amount sufficient to enable him/ her to obtain financing for 100% of the cost of the store (within the parameters set forth in Item VII of the franchise offering circular). - If participant can qualify for conventional bank financing (with equipment buy back and pledge of stock guaranteed). - There will be no fee for the guarantee for the first 15 months. Thereafter, the participant shall pay Krispy Kreme a fee of the two percent (2%) per 4 11 annum of the amount guaranteed until Participant's lender releases Krispy Kreme from the guarantee (unless the ratio of cash flow to debt from the Store is less than 1.25 to 1.00 primarily due to the Store's location). The plan and related guarantees will require approval of Southern National Bank, the company's lender. The participant will be required to sign an Accommodation Agreement under which he/ she agrees to repay the company if it performs under the guarantee. VI. Other Conditions - - Production equipment is subject availability. - - Each store must have a full time manager -who has successfully completed the training school. - - Associates who participate must fully develop their existing markets. - - All sales of equipment, signage packages and modular building, as well as mix and distribution center products will be made at standard prices and on standard terms. VII. Application Procedure Begin accepting applications on December 1, 1994. Applications must be accompanied by - business plan - financial statements * * * * * * * * * * * * * * * * * * * * * * * * * * * This Plan may be changed at any time due to availability of production equipment the financial condition of the company, demand and other factors. It is for an indefinite term but subject to termination at any time by the Board of Directors. 5 12 Exhibit A Franchise Fee: $20,000 Development Fee: $10,000 (Credited against Franchise Fee) Royalty: 4.5% Advertising: 4% (broken down as follows) - Marketing and Promotional Fund: Up to a maximum of 3% of Gross Sales. - Local Advertising: 4% of Gross sales less the percent of gross sales contributed to the Marketing and Promotional Fund. Estimate per store total investment: Low - high range of $640,000 - $813,000 (Includes build ing cost but is exclusive of land and site costs) to develop one outlet. These costs include the franchise fee, $50,000 - $85,000 in working capital, grand opening advertising/promotion and initial inventory. Applicants should demonstrate, in addition to any other items the Company feels are relevant, the following to the Company's satisfaction: 1. They possess food service operating experience; 2. They possess or have the proven ability to raise capital sufficient to fund their development commitment; 3. They have familiarity with the market proposed for development; 4. They possess the ability to timely and diligently fulfill all obligations of the Company's development and franchise agreement; 5. They are not contractually or legally prohibited from fully performing their obligations, in a timely and diligent manner, under the Company's area development and franchise agreements and 6. They are honest and creditworthy; possess sound reputation and integrity, and have no prior criminal records. For more information: Details about the franchise are made available at a personal meeting with the Krispy Kreme Franchise Department at which time prospects receive the Krispy Kreme Uniform Offering Circular and discuss their franchise opportunities. 13 PLAN TO PROVIDE FRANCHISE OPPORTUNITIES FOR STORE MANAGERS OCTOBER 3, 1994 I. Plan Beginning December 1, 1994, qualifying store managers shall have the opportunity to apply for, qualify for and receive a grant of a franchise(s) for one or more Krispy Kreme store(s) in open territories. II. Purpose of the Plan The purpose of the plan is to provide opportunities for eligible and qualifying store managers to obtain a franchise(s) for one or more Krispy Kreme stores thereby allowing those who have made substantial contributions to Krispy Kreme's success to share and participate in the growth of the Company. III. Benefits of the Plan to the Company The benefits to the company are as follows: 1. the plan serves to attract, retain and motivate quality employees; 2. the plan provides the greatest likelihood of successful store expansion due to the knowledge and experience of the store managers; 3. the plan expedites and enhances the development of the company's franchise program and store expansion program; 14 4. the plan gives our successful store managers an additional opportunity to grow in their career at Krispy Kreme; and 5. The plan will add to a sense of ownership, opportunity and entrepreneurship which is vital to achieving the company's commitment to exceeding shareholders and customer expectations. IV. Conditions of the Plan A. Eligibility: Company store managers who: - have a track record of superior store performance in accordance with the standards set forth in mission statement as evaluated and determined by corporate management - must be employed as a manager for at least five years - must have a trained and capable replacement - meets franchise applicant qualifications which are set forth on Exhibit A. These qualifications include - business plan for developing the market which meets company standards and - financial resources/bank commitment for full market development which meets company standards B. Available franchise areas: Any qualifying area in the United States except for territories of existing associates and company markets. For available territories, see the list set forth 2 15 on Exhibit B. The list is subject to change from time to time. Areas must meet the Company's requirements for population density, which currently is 100,000 households within a metropolitan statistical area. Any exceptions must have corporate approval. C. Investor Groups: Applicants may qualify by forming an investor group provided that the applicant will have at least a 20% equity interest (40% for two participants in the same investor group and 50% for three or more participants). D. Franchise Agreement: The store managers will sign the same franchise agreement which has been developed for new franchisees which includes the prevailing franchise fee, royalty and advertising fee. E. Awarding of Markets: Markets will be awarded on a "first come, first serve" basis to qualifying applicants. Applicants must be ready to develop market immediately. Markets will not be held or reserved - no right of first refusal. V. Financing by Krispy Kreme Except for the tenure guarantee, Krispy Kreme will guarantee conventional financing for any number of store(s) per applicant. The types of guarantees are as follows: Equipment Buy Back - - upon default, buy back of production equipment, other equipment, signage, furniture and fixtures at a price equal to purchase price declining with the amortization of the bank loan to 50% of purchase price 3 16 Tenure Guarantee - - guarantee an amount equal to $50,000 x number of years employed as a store manager (maximum $500,000) - one time only (one store only) The plan and related guarantees will require approval of Southern National Bank, the company's lender. The participant will be required to sign an Accommodation Agreement under which he/ she agrees to repay the company if it performs under the guarantee. VI. Other Conditions - - Production equipment is subject to availability. - - The plan participant must successfully complete the Manager Training Program. - - All sales of equipment, signage packages and modular building, as well as mix and distribution center products will be made at standard prices and on standard terms. VII. Application Procedure Begin accepting applications on December 1, 1994. Applications must be accompanied by - business plan - financial statements * * * * * * * * * * * * * * * * * * * * * * * * * * * This Plan may be changed at any time due to availability of production equipment the financial condition of the company, demand and other factors. It is for an indefinite term but subject to termination at any time by the Board of Directors. 4 17 Exhibit A Franchise Fee: $20,000 Development Fee: $10,000 (Credited against Franchise Fee) Royalty: 4.5% Advertising: 4% (broken down as follows) - Marketing and Promotional Fund: Up to a maximum of 3% of Gross Sales. - Local Advertising: 4% of Gross sales less the percent of gross sales contributed to the Marketing and Promotional Fund. Estimate per store total investment: Low - high range of $640,000 - $813,000 (Includes build ing cost but is exclusive of land and site costs) to develop one outlet. These costs include the franchise fee, $50,000 - $85,000 in working capital, grand opening advertising/promotion and initial inventory. Applicants should demonstrate, in addition to any other items the Company feels are relevant, the following to the Company's satisfaction: 1. They possess food service operating experience; 2. They possess or have the proven ability to raise capital sufficient to fund their development commitment; 3. They have familiarity with the market proposed for development; 4. They possess the ability to timely and diligently fulfill all obligations of the Company's development and franchise agreement; 5. They are not contractually or legally prohibited from fully performing their obligations, in a timely and diligent manner, under the Company's area development and franchise agreements and 6. They are honest and creditworthy; possess sound reputation and integrity, and have no prior criminal records. For more information: Details about the franchise are made available at a personal meeting with the Krispy Kreme Franchise Department at which time prospects receive the Krispy Kreme Uniform Offering Circular and discuss their franchise opportunities. EX-23.2 24 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated March 19, 1999 relating to the financial statements and financial statement schedule of Krispy Kreme Doughnut Corporation and our report dated December 3, 1999 relating to the balance sheet of Krispy Kreme Doughnuts, Inc., which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. /S/ PricewaterhouseCoopers LLP Greensboro, North Carolina February 22, 2000 EX-27.1 25 FINANCIAL DATA SCHEDULE
5 9-MOS YEAR JAN-30-2000 JAN-31-1999 FEB-01-1999 FEB-02-1998 OCT-31-1999 JAN-31-1999 3,944,201 4,312,518 0 0 19,546,741 14,750,436 1,602,000 975,000 9,884,675 9,754,194 40,988,313 33,648,734 90,013,087 82,353,769 31,820,797 28,778,370 104,691,062 93,181,013 29,305,268 25,261,963 22,895,421 21,020,409 0 0 0 0 4,670,110 4,670,110 (2,546,730) (2,098,559) 104,691,062 93,181,013 161,571,316 180,880,485 161,571,316 180,880,485 137,821,692 159,940,594 151,490,016 184,582,611 4,619,472 1,507,299 1,602,000 975,000 1,110,472 1,507,299 9,233,886 (5,279,009) 3,509,000 (2,112,000) 5,724,886 (3,167,009) 0 0 0 0 0 0 5,724,886 (3,167,009) 12.26 (7.68) 12.11 (7.68)
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