1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 29, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FROM THE TRANSITION PERIOD FROM TO
Commission file number 000-30209
KRISPY KREME DOUGHNUTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-2169715
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Knollwood Street, Suite 500, Winston-Salem, North Carolina 27103
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(336) 725-2981
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at November 30, 2000
--------------------------------
Common stock at no par value 12,957,720 shares
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KRISPY KREME DOUGHNUTS, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 29, 2000
INDEX
Part I. Financial Information Page
----
Item 1. Consolidated Financial Statements (Unaudited)
a) Balance Sheets
As of January 30, 2000 and October 29, 2000 3
b) Statements of Operations
For the Three Months and the Nine Months Ended
October 31, 1999 and October 29, 2000 4
c) Statement of Shareholders' Equity
For the Nine Months Ended October 29, 2000 5
d) Statements of Cash Flows
For the Nine Months Ended October 31, 1999
and October 29, 2000 6
e) Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24
Part II. Other Information
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
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PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Krispy Kreme Doughnuts, Inc.
Krispy Kreme Doughnut Corporation
Consolidated Balance Sheets
(in thousands, except par value amounts)
(Unaudited)
January 30, October 29,
2000 2000
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,183 $ 6,534
Short-term investments -- 17,976
Accounts receivable, less allowance for doubtful accounts
of $1,324 (01/30/00) and $1,695 (10/29/00) 17,965 20,637
Accounts receivable, affiliates 1,608 2,090
Other receivables 794 1,730
Inventories 9,979 10,826
Prepaid expenses 3,148 1,692
Income taxes refundable 861 --
Deferred income taxes 3,500 4,523
--------- ---------
Total current assets 41,038 66,008
Property and equipment, net 60,584 71,170
Deferred income taxes 1,398 171
Long-term investments -- 18,537
Other assets 1,938 8,579
--------- ---------
Total assets $ 104,958 $ 164,465
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,106 $ 13,420
Accrued salaries and wages 3,256 3,562
Accrued restructuring expenses 1,115 1,065
Accrued income taxes -- 2,747
Accrued expenses 9,709 14,767
Revolving line of credit -- 1,575
Current maturities of long-term debt 2,400 --
--------- ---------
Total current liabilities 29,586 37,136
Compensation deferred 990 974
Long-term debt, net of current portion 20,502 --
Accrued restructuring expenses 4,259 3,492
Other long-term obligations 1,866 1,776
--------- ---------
Total long-term liabilities 27,617 6,242
Minority interest -- 852
SHAREHOLDERS' EQUITY:
Common stock, no par value, 100,000 shares authorized; issued
and outstanding - 0 (01/30/00) and 12,938 (10/29/00) -- 84,361
Common stock, $10 par value, 1,000 shares authorized; issued
and outstanding - 467 (01/30/00) and 0 (10/29/00) 4,670 --
Paid-in capital 10,805 --
Unearned compensation -- (203)
Notes receivable, employees (2,547) (2,362)
Nonqualified employee benefit plan asset -- (126)
Nonqualified employee benefit plan liability -- 126
Accumulated other comprehensive income -- 137
Retained earnings 34,827 38,302
--------- ---------
Total shareholders' equity 47,755 120,235
--------- ---------
Total liabilities and shareholders' equity $ 104,958 $ 164,465
========= =========
The accompanying condensed notes are an integral part of these consolidated
financial statements.
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Krispy Kreme Doughnuts, Inc.
Krispy Kreme Doughnut Corporation
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
October 31, October 29, October 31, October 29,
1999 2000 1999 2000
--------------------------------------------------------
Total revenues $ 56,849 $ 77,909 $ 161,533 $ 218,904
Operating expenses 48,464 65,327 138,544 182,833
General and administrative expenses 3,837 5,059 10,909 14,060
Depreciation and amortization 1,237 1,811 3,497 4,986
--------------------------------------------------------
Income from operations 3,311 5,712 8,583 17,025
Interest income 200 767 261 1,545
Interest expense (410) (47) (1,110) (567)
Equity loss in joint ventures -- (64) -- (664)
Minority interest -- (152) -- (403)
--------------------------------------------------------
Income before income taxes 3,101 6,216 7,734 16,936
Provision for income taxes 1,178 2,363 2,940 6,456
--------------------------------------------------------
Net income $ 1,923 $ 3,853 $ 4,794 $ 10,480
========================================================
Basic earnings per share $ 0.21 $ 0.30 $ 0.51 $ 0.87
========================================================
Diluted earnings per share $ 0.20 $ 0.27 $ 0.51 $ 0.79
========================================================
The accompanying condensed notes are an integral part of these consolidated
financial statements.
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Krispy Kreme Doughnuts, Inc.
Krispy Kreme Doughnut Corporation
Consolidated Statement of Shareholders' Equity
(Unaudited)
Krispy Kreme Krispy Kreme
Doughnut Corporation Doughnuts, Inc.
------------------------ ------------------
Additional Notes
Common Common Paid-In Common Common Unearned Receivable
Shares Stock Capital Shares Stock Compensation Employees
------ ----- ------- ------ ----- ------------ ---------
Balance at January 30, 2000 467 $ 4,670 $ 10,805 -- $ -- $ -- $ (2,547)
Proceeds from public offering 3,450 65,637
Conversion of Krispy Kreme
Doughnut Corporation shares
to Krispy Kreme
Doughnuts, Inc. shares (467) (4,670) (10,805) 9,340 15,475
Cash distribution to shareholders
Collection of notes receivable
185
Issuance of shares to employee
stock ownership plan 145 3,039
Issuance of restricted common
shares 3 210 (210)
Amortization of restricted common
shares 7
Comprehensive income:
Net income for the nine
months ended October 29, 2000
Unrealized holding loss
Total comprehensive income
Contribution to the nonqualified
employee benefit plan
Liability under the nonqualified
employee benefit plan
-------- ------- -------- -------- -------- ------- ---------
Balance at October 29, 2000 -- $ -- $ -- 12,938 $ 84,361 $ (203) $ (2,362)
======== ======= ======== ======== ======== ======= =========
Nonqualified Nonqualified Accumulated
Employee Employee Other
Benefit Benefit Retained Comprehensive
Plan Assets Plan Liability Earnings Income Total
----------- -------------- -------- ------ -----
Balance at January 30, 2000 $ -- $ -- $ 34,827 $ -- $ 47,755
Proceeds from public offering 65,637
Conversion of Krispy Kreme
Doughnut Corporation shares
to Krispy Kreme
Doughnuts, Inc. shares --
Cash distribution to shareholders $ (7,005) (7,005)
Collection of notes receivable
185
Issuance of shares to employee
stock ownership plan 3,039
Issuance of restricted common
shares --
Amortization of restricted common
shares 7
Comprehensive income:
Net income for the nine
months ended October 29, 2000 10,480 10,480
Unrealized holding loss 137 137
-------- -------- ----------
Total comprehensive income 10,480 137 10,617
Contribution to the nonqualified
employee benefit plan (126) (126)
Liability under the nonqualified
employee benefit plan 126 126
-------- ---------- -------- -------- ---------
Balance at October 29, 2000 $ (126) $ 126 $ 38,302 $ 137 $ 120,235
======== ========== ======== ======== =========
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Krispy Kreme Doughnuts, Inc.
Krispy Kreme Doughnut Corporation
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine months ended
October 31, October 29,
1999 2000
---------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 4,794 $ 10,480
Items not requiring (providing) cash:
Depreciation and amortization 3,497 4,986
Loss on sale of property and equipment -- 3
Deferred income taxes (1,553) 204
Equity loss in joint ventures -- 664
Minority interest -- 403
Compensation expense -- 7
Change in assets and liabilities:
Receivables (5,760) (4,090)
Inventories (358) (847)
Prepaid expenses 212 1,456
Income taxes, net 1,057 3,608
Accounts payable 2,225 314
Accrued restructuring expenses (306) (817)
Accrued expenses 4,121 5,364
Deferred compensation and other long-term obligations (61) (105)
-----------------------
Net cash provided by operating activities 7,868 21,630
-----------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,812) (16,625)
Proceeds from disposal of property and equipment -- 1,251
Purchase of investments, net -- (36,376)
Increase in other assets (334) (7,507)
-----------------------
Net cash used for investing activities (8,146) (59,257)
-----------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from stock offering, net -- 65,637
Minority interest -- 449
Repayment of long-term debt -- (3,600)
Net borrowings from revolving line of credit 1,875 (17,727)
Capital distribution to shareholders -- (7,005)
Issuance of stock to Krispy Kreme Profit-Sharing Ownership Plan -- 3,039
(Issuance) collection of notes receivable (448) 185
Cash dividends paid (1,518) --
-----------------------
Net cash (used for) provided by financing activities (91) 40,978
-----------------------
Net increase (decrease) in cash and cash equivalents (369) 3,351
Cash and cash equivalents at beginning of period 4,313 3,183
=======================
Cash and cash equivalents at end of period $ 3,944 $ 6,534
=======================
Supplemental schedule of non-cash investing and financing
activities:
Issuance of stock to Krispy Kreme Profit-Sharing
Ownership Plan $ -- $ 3,039
Issuance of restricted common shares $ -- $ 210
The accompanying condensed notes are an integral part of these consolidated
financial statements.
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KRISPY KREME DOUGHNUTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 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 ("KKDC"). Subject to a plan of merger approved by shareholders on
November 10, 1999, the shareholders of KKDC became shareholders of Krispy Kreme
Doughnuts, Inc. on April 4, 2000. Each shareholder received 20 shares of Krispy
Kreme Doughnuts, Inc. common stock and $15 cash for each share of KKDC common
stock they held. As a result of the merger, KKDC became a wholly-owned
subsidiary of Krispy Kreme Doughnuts, Inc. Krispy Kreme Doughnuts, Inc.
completed a public offering of its common stock on April 10, 2000 by selling
3,450,000 common shares at a price of $21 per share.
All consolidated financial statements prior to the merger are those of KKDC and
all consolidated financial statements after the merger are those of the Company.
For purposes of computing earnings per share, the number of common shares prior
to the merger have been restated to reflect the 20 shares of the Company's
common stock issued for each share of KKDC's common stock.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements are presented in accordance
with the requirements of Article 10 of Regulation S-X and, consequently, do not
include all the disclosures normally required by generally accepted accounting
principles.
The financial information has been prepared in accordance with the Company's
customary accounting practices and has not been audited. In the opinion of
management, the financial information includes all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of interim
results.
EQUITY AND CONSOLIDATION METHODS OF ACCOUNTING
Investments in 20- to 49- percent owned affiliates are accounted for by the
equity method of accounting, whereby the investment is carried at cost of
acquisition, plus the Company's equity in undistributed earnings or losses since
acquisition. Investments in 50 percent or greater owned affiliates are accounted
for by the consolidation method of accounting whereby the portion not owned by
the Company is shown as minority interest in consolidated subsidiary companies.
INVESTMENTS
Investments consist of marketable securities consist of United States Treasury
notes, mortgage-backed government securities, and corporate debt securities and
are included in short term and long term investments in the accompanying balance
sheet. Marketable securities are stated at market value as determined by the
most recently traded price of each security at the balance sheet date. All
marketable securities are defined as trading securities or available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
No. ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities".
Management determines the appropriate classification of its investments in
marketable securities at the time of the purchase and reevaluates such
determination at each balance sheet date. As of October 29, 2000, all marketable
securities are classified as available-for-sale. Available-for-sale securities
are carried at fair value with the unrealized gains and losses reported as a
separate component of shareholders' equity in accumulated other comprehensive
income. The cost of investments sold is determined on the specific
identification or the first-in, first-out method.
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Investments consist of:
(IN THOUSANDS) GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
--------------------------------------------------
OCTOBER 29, 2000
Certificates of Deposit $ 5,000 $ -- $ -- $ 5,000
US Government Notes 7,999 26 (22) 8,003
Federal Government Agencies 16,902 166 (50) 17,018
Equity Securities 6,475 20 (3) 6,492
--------------------------------------------------
Total $36,376 $212 $(75) $36,513
==================================================
Maturities of investments were as follows at October 29, 2000:
(IN THOUSANDS) AMORTIZED FAIR
COST VALUE
---------------------------
Due within one year $14,948 $17,976
Due after one year through 5 years 21,428 18,537
-------------------------
Total $36,376 $36,513
=========================
NOTE 3: INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories
consist of the following:
(IN THOUSANDS) DISTRIBUTION EQUIPMENT MIX COMPANY
CENTER DEPARTMENT DEPARTMENT STORES TOTAL
---------------------------------------------------------------
JANUARY 30, 2000
Raw materials $ -- $2,821 $444 $1,335 $ 4,600
Work in progress -- 57 -- -- 57
Finished goods 321 1,298 39 -- 1,658
Purchased merchandise 3,129 -- -- 498 3,627
Manufacturing supplies -- -- 37 -- 37
-------------------------------------------------------------
Totals $3,450 $4,176 $520 $1,833 $ 9,979
=============================================================
OCTOBER 29, 2000
Raw materials $ -- $1,452 $425 $1,468 $ 3,345
Work in progress -- 133 -- -- 133
Finished goods 1,037 1,162 23 -- 2,222
Purchased merchandise 4,369 -- -- 734 5,103
Manufacturing supplies -- -- 23 -- 23
-------------------------------------------------------------
Totals $5,406 $2,747 $471 $2,202 $10,826
=============================================================
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NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(IN THOUSANDS) JANUARY 30, OCTOBER 29,
2000 2000
-------------------------
Land $ 11,144 $ 11,144
Buildings 24,606 26,033
Machinery and equipment 47,701 59,225
Leasehold improvements 9,627 10,254
Construction in progress 165 1,251
------------------------
93,243 107,907
Less: accumulated depreciation 32,659 36,737
------------------------
Property and equipment, net $ 60,584 $ 71,170
========================
NOTE 5: EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average number of
common shares outstanding during the period. The computation of diluted earnings
per share reflects the potential dilution that would occur if stock options were
exercised. The treasury stock method is used to calculate dilutive shares, which
reduces the gross number of dilutive shares by the number of shares purchasable
from the proceeds of both the options assumed to be exercised and the tax
benefit the Company receives as a result of the options being exercised.
The following table shows the computation of the number of shares outstanding
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 29, OCTOBER 31, OCTOBER 29,
1999 2000 1999 2000
--------------------------------------------------
Basic shares outstanding 9,340 12,936 9,340 12,078
Effect of dilutive securities:
Stock options 117 1,205 117 1,141
----------------------------------------------
Diluted shares outstanding 9,457 14,141 9,457 13,219
==============================================
The stock options in the amount of 37,500 shares for the three months ended
October 29, 2000 and 162,500 shares for the nine months ended October 29, 2000
have been excluded from the diluted shares calculation as these shares would be
antidilutive.
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NOTE 6: BUSINESS SEGMENT INFORMATION
(IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 29, OCTOBER 31, OCTOBER 29,
1999 2000 1999 2000
--------------------------------------------------------------------
REVENUES:
Company store operations $ 41,495 $ 54,103 $ 121,104 $ 156,543
Franchise operations 1,489 2,406 3,798 6,704
KKM&D 39,176 53,452 104,094 145,930
Intercompany sales eliminations (25,311) (32,052) (67,463) (90,273)
------------------------------------------------------------------
Total revenues $ 56,849 $ 77,909 $ 161,533 $ 218,904
==================================================================
OPERATING INCOME:
Company store operations $ 4,938 $ 6,467 $ 14,391 $ 19,801
Franchise operations 291 1,413 803 3,864
KKM&D 2,220 3,231 5,177 8,293
Unallocated general and administrative expenses (4,138) (5,399) (11,788) (14,933)
------------------------------------------------------------------
Total operating income $ 3,311 $ 5,712 $ 8,583 $ 17,025
==================================================================
DEPRECIATION AND AMORTIZATION EXPENSES:
Company store operations $ 857 $ 1,370 $ 2,390 $ 3,839
Franchise operations 18 18 54 54
KKM&D 62 83 174 220
Corporate administration 300 340 879 873
------------------------------------------------------------------
Total depreciation and amortization expenses $ 1,237 $ 1,811 $ 3,497 $ 4,986
==================================================================
NOTE 7: JOINT VENTURES
On March 22, 2000, the Company entered into a joint venture to develop the
Northern California market. The Company invested $2,060,000 for a 59% interest.
The financial statements of this joint venture are consolidated in the results
of the Company and the 41% interest not owned by the Company is recorded as
minority interest in consolidated subsidiary companies on the Consolidated
Balance Sheet.
On January 31, 2000, the Company repurchased the New York City market from an
area developer for approximately $6.9 million. The Company invested an
additional $300,000 in property and equipment. Subsequently, on April 17, 2000,
the Company sold 77.67% of the New York City market for $5.6 million in exchange
for cash and notes receivable. The investment in this joint venture is accounted
for using the equity method and is recorded in other assets on the Consolidated
Balance Sheet.
From time to time, the Company enters into joint ventures with partners to
develop and operate Krispy Kreme stores. The Company's ownership percentage of
the joint venture determines whether or not the joint venture results are
consolidated with the Company. See "Equity and Consolidation Methods of
Accounting" under Note 2 Summary of Significant Accounting Policies.
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NOTE 8: LEGAL CONTINGENCIES
On March 9, 2000, a lawsuit was filed against the Company, a member of
management, and Golden Gate Doughnuts, LLC, a franchisee of the Company, in the
Superior Court in the state of California. The plaintiffs allege, among other
things, breach of contract and seek compensation for injury as well as punitive
damages. The California Superior court has stayed the lawsuit and ordered the
parties to arbitration. That decision has been appealed by the plaintiffs, which
appeal has not yet been considered by the California Court of Appeals. The
Company believes that the allegations are without merit and that the outcome of
the lawsuit or arbitration will not have a material adverse effect on its
consolidated financial statements. Accordingly, no accrual for loss (if any) has
been provided in the accompanying consolidated financial statements.
NOTE 9: RESTRUCTURING
(IN THOUSANDS) LEASE ACCRUED TOTAL
LIABILITIES EXPENSES ACCRUAL
---------------------------------------
Balance at January 30, 2000 $ 4,782 $ 592 $ 5,374
Reductions (744) (73) (817)
--------------------------------------
Balance at October 29, 2000 $ 4,038 $ 519 $ 4,557
======================================
Reductions in Lease Liabilities represent ongoing lease payments on remaining
lease obligations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain certain forward-looking statements that are
beyond the control of the Company. Actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ include, but are not limited to: the
Company's ability to continue and manage growth; delays in store openings;
quality of franchise store operations; price and availability of raw materials
needed to produce doughnut mixes and other ingredients; changes in customer
preferences and perceptions; risks associated with competition; risks associated
with fluctuations in operating and quarterly results; compliance with government
regulations; and other factors discussed in more detail under "Risk Factors" in
the Company's Prospectus dated April 4, 2000 and filed with the Securities and
Exchange Commission.
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 discounted sales to community
organizations that in turn sell our products for fundraising
purposes.
- OFF-PREMISES SALES. Daily sales of fresh doughnuts on a branded,
unbranded and private label basis to convenience and grocery stores
and select co-branding customers. Doughnuts are sold to these
customers on trays for display and sale in glass-enclosed cases and
in packages for display and sale on both stand-alone display units
and on our customers' shelves. "Branded" refers to products sold
bearing the Krispy Kreme brand name and is the primary way we are
expanding our off-premises sales. "Unbranded" products are sold
unpackaged from the retailer's display case. "Private label"
products carry the retailer's brand name or some other non-Krispy
Kreme brand and is a minor portion of our business.
In addition to our retail stores, we are vertically integrated. Our Krispy Kreme
Manufacturing and Distribution (KKM&D, formerly Support Operations) business
unit produces doughnut mixes and manufactures our doughnutmaking equipment,
which all of our stores are required to purchase. Additionally, this business
unit currently operates two distribution centers that provide Krispy Kreme
stores with essentially all supplies for the critical areas of their business.
This business unit is volume-driven, and its economics are enhanced by the
opening of new stores. Our vertical integration allows us to:
- Maintain the consistency and quality of the products throughout the
system
- Utilize volume buying power which helps lower the cost of supplies
to each of our stores
- Enhance our profitability
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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 also have entered and
intend to enter into additional joint ventures with some of our franchisees. As
of October 29, 2000, there were a total of 164 Krispy Kreme stores nationwide
consisting of 60 company-owned (including four stores in a joint venture in
which we own a majority interest) and 104 franchised stores. In the fourth
quarter of fiscal 2001, we anticipate opening approximately 9 additional new
stores under existing agreements, most of which are expected to be franchise
stores. We anticipate opening approximately 36 new stores in fiscal 2002.
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.
- OVERVIEW. Outlines information on total systemwide sales and
systemwide comparable store sales. - Systemwide sales includes the
sales of both our company-owned and franchised stores and excludes
the sales of our KKM&D business segment. Our consolidated financial
statements appearing elsewhere in this filing include sales of our
company-owned stores, including the sales of consolidated joint
venture stores, outside sales of our KKM&D business segment and
royalties and fees received from our franchisees; and these
statements exclude the sales of our franchised stores. We believe
systemwide sales data is significant because it shows the overall
penetration of our brand, consumer demand for our products and the
correlation between systemwide sales and our total revenues. A store
is added to our comparable store base in its nineteenth month of
operation. A summary discussion of our consolidated results is also
presented.
- SEGMENT RESULTS. In accordance with Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," we have three reportable
segments. A description of each of the segments follows.
- COMPANY STORE OPERATIONS. Represents the results of our
company-owned stores and consolidated joint venture stores.
Company stores make and sell doughnuts and complementary
products through the sales channels discussed above. Expenses
for this business unit include store level expenses along with
direct general and administrative expenses.
- FRANCHISE OPERATIONS. Represents the results of our franchise
program. We have two franchise programs: (1) the associate
program, which is our original franchising program developed
in the 1940s, and (2) the area developer program, which was
developed in the mid-1990s. Associates pay royalties of 3.0%
of on-premises sales and 1.0% of all other sales, with the
exception of
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private label sales, for which they pay no royalties. Area
developers pay royalties of 4.5% of all sales, contribute 1.0%
of all sales to our national advertising fund and pay
franchise fees ranging from $20,000 to $40,000 per store.
Expenses for this business segment include costs incurred to
recruit new franchisees and to monitor and aid in the
performance of these stores and direct general and
administrative expenses.
- KKM&D. Represents the results of our KKM&D business unit. This
business unit buys ingredients used to produce doughnut mixes
and manufactures doughnutmaking equipment that all of our
stores are required to purchase. Additionally, this business
unit purchases and sells essentially all supplies necessary to
operate a Krispy Kreme store, including all food ingredients,
juices, Krispy Kreme coffee, signage, display cases, uniforms
and other items. Generally, shipments are made to each of our
stores on a weekly basis by common carrier. All intercompany
transactions between KKM&D and Company Store Operations have
been eliminated in consolidation. Expenses for this business
unit include all expenses incurred at the manufacturing and
distribution level along with direct general and
administrative expenses.
OTHER. Includes a discussion of significant line items not discussed in the
overview or segment discussions, including general and administrative expenses,
depreciation and amortization expenses, interest income, interest expense,
equity in joint ventures, minority interest in consolidated joint ventures,
other expenses and the provision for income taxes.
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The table below shows our operating results expressed as a percentage of total
revenues. Certain operating data are also shown for the same periods.
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
OCTOBER 31, OCTOBER 29, OCTOBER 31, OCTOBER 29,
1999 2000 1999 2000
------------------------------- ---------------------------------
STATEMENT OF OPERATIONS DATA:
Total revenues ................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses ............................. 85.3 83.9 85.8 83.5
General and administrative expenses ............ 6.7 6.5 6.7 6.4
Depreciation and amortization expenses ......... 2.2 2.3 2.2 2.3
------------------------------- --------------------------------
Income from operations ......................... 5.8 7.3 5.3 7.8
Interest income ................................ 0.4 1.0 0.2 0.7
Interest expense ............................... (0.7) (0.1) (0.7) (0.3)
Other expenses ................................. -- (0.1) -- (0.3)
Minority interest in consolidated joint
ventures .................................... -- (0.2) -- (0.2)
------------------------------- --------------------------------
Income before income taxes ..................... 5.5 7.9 4.8 7.7
Provision for income taxes ..................... 2.1 3.0 1.8 2.9
=============================== ================================
Net income .................................. 3.4% 4.9% 3.0% 4.8%
=============================== ================================
(IN THOUSANDS)
OPERATING DATA:
Systemwide sales ............................... $ 81,737 $ 112,263 $ 231,954 $ 323,316
Increase in comparable store sales:
Company-owned ............................... 23.6% 23.7%
Systemwide .................................. 15.5% 17.9%
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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.
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 29, OCTOBER 31, OCTOBER 29,
1999 2000 1999 2000
-------------------------- --------------------------
REVENUES BY BUSINESS SEGMENT:
Company store operations .................... 73.0% 69.4% 75.0% 71.5%
Franchise operations ........................ 2.6 3.1 2.3 3.1
KKM&D ....................................... 24.4 27.5 22.7 25.4
--------------------- -----------------------
Total revenues ........................... 100.0% 100.0% 100.0% 100.0%
====================== =======================
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company store operations .................... 86.0% 85.5% 86.1% 84.9%
Franchise operations ........................ 79.2% 40.5% 77.4% 41.6%
KKM&D ....................................... 83.5% 84.5% 85.4% 84.7%
Total business segment operating expenses ... 85.3% 83.9% 85.8% 83.5%
THREE MONTHS ENDED OCTOBER 29, 2000 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
1999
Overview
Systemwide sales for the quarter increased 37.3% to $112.3 million compared to
$81.7 million in the third quarter of the prior year. The increase was comprised
of an increase of 30.4% in company store sales which increased to $54.1 million
and an increase of 44.5% in franchise store sales which increased to $58.2
million. During the quarter, the Company opened seven new franchise stores, two
stores in Northern California and one commissary in Northern California,
bringing the total number of stores to 164 at the end of the quarter. Of those,
60 are company-owned (including four stores in which we own a majority interest)
and 104 franchised stores. We believe increased brand awareness and increased
off-premises sales contributed significantly to the 15.5% increase in our
systemwide comparable store sales.
Total company revenues increased 37.0% to $77.9 million in the third quarter of
fiscal 2001 compared with $56.8 million in the third quarter of the prior fiscal
year. This increase was comprised of Company Store Operations revenue increases
of 30.4% to $54.1 million, Franchise Operations revenue increases of 61.6% to
$2.4 million and KKM&D revenue, excluding intercompany sales, increases of 54.3%
to $21.4 million. Net income for the quarter was $3.8 million versus $1.9
million a year ago, representing an increase of 100%. Diluted earnings per share
were $.27, an increase of 35% over the third quarter of the prior year.
Company Store Operations
Company Store Operations Revenues. Company Store Operations revenues increased
to $54.1 million in the third quarter of fiscal 2001 from $41.5 million in the
third quarter of fiscal 2000, an increase of 30.4%. Comparable store sales
increased by 23.6%. The revenue growth was primarily due to strong growth in
sales from both our on-premises and off-premises sales channels. Total
on-premises sales increased approximately $4.3 million and total off-premises
sales increased approximately $8.3 million. On-premises sales grew principally
as a result of more customer visits, an increase in brand awareness and our
national store expansion. Additionally, a 6% retail price increase was
implemented during the first quarter of fiscal 2001. Company store on-premises
sales were also positively impacted by the sales of the
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three stores in the Northern California market, two of which opened in the third
quarter. The Company has a 59% interest in the Northern California market, and
as a result, it is consolidated with the Company Store sales and results. Our
company stores benefited from efforts, such as the route management computer
assisted ordering system, to increase the average sales per off-premises outlet.
We also significantly expanded our product offering with one grocery store chain
in the quarter.
Company Store Operations Operating Expenses. Company Store Operations operating
expenses increased to $46.3 million in the third quarter of fiscal 2001 from
$35.7 million in the same quarter of fiscal 2000, an increase of 29.6%. Company
Store Operations operating expenses as a percentage of Company Store Operations
revenues were 85.5% in third quarter of fiscal 2001 compared with 86.0% in the
same quarter of the prior year. The decrease in Company Store Operations
operating expenses as a percentage of revenues was due to increased operating
efficiencies generated by growth in store sales volumes, selected price
increases and improved profitability of our off-premises sales that benefited
from the implementation of a new route management system, a computer-assisted
ordering system that is designed to optimize the sale of packaged doughnuts in
each outlet by minimizing stockouts. These margin improvements were partially
offset by the impact of stores closed for remodeling and rebuilding and
increased casualty insurance costs. During the period when some of the stores
were closed for remodeling or rebuilding, we lost the higher margin on-premises
sales, which in turn impacted our margins. The primary driver of increased
casualty costs in the quarter was a matter surrounding our former insurance
company. During the quarter, we became concerned about the financial stability
of our former casualty insurance carrier and its ability to meet its obligations
with respect to the two year period ended July 30, 1999 in which it provided
coverage for the Company. As a result, we recorded a charge in the third quarter
to cover liabilities related to these two years of coverage, which we believe
our former carrier may not be able to cover.
We constantly evaluate our store base, not only with respect to our stores'
financial and operational performance, but also with respect to alignment with
our brand image and how well each store meets our customers' needs. As a result
of this review, we make provisions to cover closing or impairment costs for
stores that perform poorly, and for older stores that need to be closed and
relocated. No provisions were made during the third quarter of fiscal 2001.
Franchise Operations
Franchise Operations Revenues. Franchise Operations revenues increased to $2.4
million in the third quarter of fiscal 2001 from $1.5 million in the third
quarter of the prior year, an increase of 61.6%. The growth in revenue was
primarily due to the opening of new franchise stores in the third quarter of
fiscal 2001, as well as the opening of franchise stores in the first half of
fiscal 2001 and the impact of franchise stores opened in fiscal 2000 being open
for the full third quarter of fiscal 2001.
Franchise Operations Operating Expenses. Franchise Operations operating expenses
decreased slightly to $1.0 million in the third quarter of fiscal 2001 from $1.2
million in the same quarter of the prior year. As a percentage of Franchise
Operations revenues, franchise operating expenses were 40.5% in the third
quarter of the current year compared with 79.2% in the third quarter of the
prior year. The decrease in Franchise Operations operating expenses as a
percentage of revenues reflects the continued growth in our franchise system
sales with a minimal increase in related operating expenses. In prior years, we
hired and trained personnel to oversee the expansion of our franchise concept
across the country. In addition to our management training program, they
received field training primarily consisting of working with and learning from
existing personnel who were qualified to oversee store operations. As these
personnel successfully completed their training, we have been able to open
additional stores without incurring significant incremental personnel costs.
Additionally, the amount of support that we provide for each Area Developer
group's store openings decline with each successive opening. As some of our
individual
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Area Developer groups are now operating multiple stores, our costs associated
with their new openings have declined.
KKM&D
KKM&D Revenues. KKM&D sales to franchise stores increased to $21.4 million in
the third quarter of fiscal 2001 from $13.9 million in the same quarter of
fiscal 2000, an increase of 54.3%. The primary reason for the increase in
revenues was the opening of new franchise stores in the third quarter of fiscal
2001; the opening of new franchise stores in the first half of fiscal 2001; the
full-quarter impact of stores opened in fiscal 2000; and comparable store sales
increases. Increased doughnut sales through both the on-premises and
off-premises sales channels by franchise stores translated into increased
revenues for KKM&D from sales of mixes, sugar, shortening and other supplies.
Also, each of these new stores is required to purchase doughnutmaking equipment
and other peripheral equipment from KKM&D, thereby enhancing KKM&D sales.
KKM&D Operating Expenses. KKM&D operating expenses increased to $18.1 million in
third quarter of fiscal 2001 from $11.6 million in third quarter of fiscal 2000,
an increase of 56.1%. KKM&D operating expenses as a percentage of KKM&D revenues
were 84.5% in third quarter of the current year compared with 83.5% in third
quarter of the prior year. The increase in KKM&D operating expenses as a
percentage of revenues was due to the high level of equipment sales, which carry
a relatively higher margin, in the third quarter of fiscal 2000 in relation to
total KKM&D sales.
Other
General And Administrative Expenses. General and administrative expenses
increased to $5.0 million in the third quarter of fiscal 2001 from $3.8 million
in the third quarter of fiscal 2000, an increase of 31.8%. General and
administrative expenses as a percentage of total revenues for the third quarter
were 6.5% in fiscal 2001 compared with 6.7% in fiscal 2000. The strong sales
growth in the quarter reduced these expenses as a percentage of revenues. The
dollar growth in general and administrative expenses is due to increased
personnel and related benefits and travel costs needed to support our national
expansion.
Depreciation And Amortization Expenses. Depreciation and amortization expenses
increased to $1.8 million in the third quarter of fiscal 2001 from $1.2 million
in the third quarter of the prior year, an increase of 46.4%. Depreciation and
amortization expenses as a percentage of total revenues for the third quarter
were 2.3% in fiscal 2001 compared with 2.2% in fiscal 2000. Depreciation and
amortization expenses increased due to capital asset additions.
Interest Income. Interest income increased in the third quarter of fiscal 2001
as a result of the investment of proceeds from our initial public offering.
Proceeds from the public offering were received in mid-April 2000.
Approximately, $36.5 million was invested in various government securities,
short-term commercial paper instruments, and corporate bonds at the end of the
third quarter resulting in interest income of $767,000 for the quarter. There
were no investments of this nature during the third quarter of fiscal 2000.
Interest Expense. Interest expense decreased significantly in third quarter of
fiscal 2001 over the same quarter of the prior year. This decrease is a direct
result of paying off substantially all our debt in mid-April after the
completion of our initial public offering.
Equity loss in joint ventures. These expenses consist of the Company's share of
operating results associated with the Company's investments in unconsolidated
joint ventures to develop and operate Krispy Kreme stores.
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19
Minority interest in consolidated joint ventures. This expense represents the
elimination of the minority interests in a consolidated joint venture to develop
and operate Krispy Kreme stores.
Provision For Income Taxes. The provision for income taxes is based on the
effective tax rate applied to the respective period's pre-tax income. The
provision for income taxes was $2.4 million in the third quarter of fiscal 2001
representing a 38.0% effective rate compared to $1.2 million, or 38.0%, in the
third quarter of the prior year.
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.
NINE MONTHS ENDED OCTOBER 29, 2000 COMPARED WITH NINE MONTHS ENDED OCTOBER 31,
1999
Overview
Systemwide sales for the nine months increased 39.4% to $323.3 million compared
to $232.0 million in the same period of the prior year. The increase was driven
by an increase of 29.3% in company store sales which increased to $156.5 million
and an increase of 50.5% in franchise store sales which increased to $166.8
million. During the first nine months, the Company opened 20 franchise stores,
three stores in Northern California, one commissary in Northern California and
one commissary in Nashville, Tennessee. Three company stores and two franchise
stores were closed, bringing the total number of stores to 164 at the end of the
nine months. We believe increased brand awareness and increased off-premises
sales contributed significantly to the 17.9% increase in our systemwide
comparable store sales.
Total company revenues increased 35.5% to $218.9 million in the first nine
months of fiscal 2001 compared with $161.5 million in the first nine months of
the prior fiscal year. This increase was comprised of Company Store Operations
revenue increases of 29.3% to $156.5 million, Franchise Operations revenue
increases of 76.5% to $6.7 million and KKM&D revenue, excluding intercompany
sales, increases of 51.9% to $55.7 million. Net income for the first nine months
was $10.5 million versus $4.8 million a year ago, representing an increase of
118.6%. Diluted earnings per share were $.79, an increase of 54.9% over the same
period of the prior year.
Company Store Operations
Company Store Operations Revenues. Company Store Operations revenues increased
to $156.5 million in the first nine months of fiscal 2001 from $121.1 million in
the first nine months of fiscal 2000, an increase of 29.3%. Comparable store
sales increased by 23.7%. The revenue growth was primarily due to strong growth
in sales from both our on-premises and off-premises sales channels. Total
on-premises sales increased approximately $13.3 million and total off-premises
sales increased approximately $22.1 million. On-premises sales grew principally
as a result of more customer visits, an increase in brand awareness and our
national store expansion. Additionally, a 6% retail price increase was
implemented during the first quarter of fiscal 2001. In addition, Company store
on-premises sales were positively impacted by the sales of the three stores in
the Northern California market, two of which opened in the third quarter. The
Company has a 59% interest in the Northern California market, and as a result,
it is consolidated with the Company Store sales and results. Our company stores
continued to benefit from both an increase in the number of outlets we serve via
our off-premises sales programs and from efforts such as the route management
computer assisted ordering system to increase sales per off-premises outlet. The
revenue increase in off-premises sales is due to the addition of both
convenience store and grocery store outlets.
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20
Company Store Operations Operating Expenses. Company Store Operations operating
expenses increased to $132.9 million in the first nine months of fiscal 2001
from $104.3 million in the same period of fiscal 2000, an increase of 27.4%.
Company Store Operations operating expenses as a percentage of Company Store
Operations revenues were 84.9% in first nine months of fiscal 2001 compared with
86.1% in the same period of the prior year. 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. The
margin on off-premises sales benefited from the implementation of a new route
management system during the second quarter of fiscal 2001. These margin
improvements were partially offset by the impact of the stores closed for
remodeling and rebuilding and increased casualty insurance costs. During the
period when some of stores were closed for remodeling or rebuilding, we lost the
higher margin on-premises sales, which in turn impacted our margins. The primary
driver of increased casualty costs in the period was a matter surrounding our
former insurance company. During the third quarter, we became concerned about
the financial stability of our former casualty insurance carrier and its ability
to meet its obligations with respect to the two year period ended July 30, 1999
in which it provided coverage for the company. As a result, we recorded a charge
in the third quarter to cover liabilities related to these two years of
coverage, which we believe our former carrier may not be able to cover.
We constantly evaluate our store base, not only with respect to our stores'
financial and operational performance, but also with respect to alignment with
our brand image and how well each store meets our customers' needs. As a result
of this review, we make provisions to cover closing or impairment costs for
stores that perform poorly, and for older stores that need to be closed and
relocated. No provisions were made during the first nine months of fiscal 2001.
Franchise Operations
Franchise Operations Revenues. Franchise Operations revenues increased to $6.7
million in the first nine months of fiscal 2001 from $3.8 million in the first
nine months of the prior year, an increase of 76.5%. The growth in revenue was
primarily due to the opening of franchise stores in the first nine months of
fiscal 2001 and the impact of those franchise stores opened in fiscal 2000 being
open for the entire first nine months of fiscal 2001.
Franchise Operations Operating Expenses. Franchise Operations operating expenses
decreased slightly to $2.8 million in the first nine months of fiscal 2001 from
$2.9 million in the same period of the prior year. As a percentage of Franchise
Operations revenues, franchise operating expenses were 41.6% in the first nine
months of the current year compared with 77.4% in the same period of the prior
year. The decrease in Franchise Operations operating expenses as a percentage of
revenues reflects the continued growth in our franchise system sales with a
minimal increase in related operating expenses. In prior years, we hired and
trained personnel to oversee the expansion of our franchise concept across the
country. In addition to our management training program, they received field
training primarily consisting of working with and learning from existing
personnel who were qualified to oversee store operations. As our personnel
successfully completed their training, we have been able to open additional
stores without incurring significant incremental personnel costs. Additionally,
the amount of support that we provide for each Area Developer group's store
openings decline with each successive opening. As some of our individual Area
Developer groups are now operating multiple stores, our costs associated with
their new openings have declined.
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KKM&D
KKM&D Revenues. KKM&D sales to franchise stores increased to $55.7 million in
the first nine months of fiscal 2001 from $36.6 million in the same period of
fiscal 2000, an increase of 51.9%. The primary reason for the increase in
revenues was the opening of new franchise stores, the full-period impact of
stores opened in fiscal 2000, and comparable store sales increases. Increased
doughnut sales through both the on-premises and off-premises sales channels by
franchise stores translated into increased revenues for KKM&D from sales of
mixes, sugar, shortening and other supplies. Also, each of these new stores is
required to purchase doughnutmaking equipment and other peripheral equipment
from KKM&D, thereby enhancing KKM&D sales.
KKM&D Operating Expenses. KKM&D operating expenses increased to $47.1 million in
the first nine months of fiscal 2001 from $31.3 million in same period of fiscal
2000, an increase of 50.7%. KKM&D operating expenses as a percentage of KKM&D
revenues were 84.7% in the first nine months of the current year compared with
85.4% in the first nine months of the prior year. The decrease in KKM&D
operating expenses as a percentage of revenues was due to the increased capacity
utilization and resulting economies of scale of the mix and equipment
manufacturing operations attributable to the increased volume in the facilities.
Continued stability in our key ingredient costs also contributed. Higher
transportation costs due primarily to fuel cost increases, as well as the
startup costs associated with the California distribution center, offset the
decrease in operating expenses as a percentage of revenue.
Other
General And Administrative Expenses. General and administrative expenses
increased to $14.1 million in the first nine months of fiscal 2001 from $10.9
million in the first nine months of fiscal 2000, an increase of 28.9%. General
and administrative expenses as a percentage of total revenues for the nine
months were 6.4% in fiscal 2001 compared with 6.7% in fiscal 2000. The decrease
was primarily due to the revenue growth during the period. The dollar growth in
general and administrative expense is due to increased personnel and related
benefit and travel costs needed to support our national expansion.
Depreciation And Amortization Expenses. Depreciation and amortization expenses
increased to $5.0 million in the first nine months of fiscal 2001 from $3.5
million in the same period of the prior year, an increase of 42.6%. Depreciation
and amortization expenses as a percentage of total revenues for the first nine
months were 2.3% in fiscal 2001 compared with 2.2% in fiscal 2000. Depreciation
and amortization expenses increased due to capital asset additions.
Interest Income. Interest income increased in the first nine months of fiscal
2001 as a result of the investment of proceeds from our initial public offering.
Proceeds from the public offering were received in mid-April 2000.
Approximately, $36.5 million was invested in various government securities,
short-term commercial paper instruments, and corporate bonds at the end of the
period resulting in interest income of $1.5 million for the first nine months.
There were no investments of this nature during the same period of fiscal 2000.
Interest Expense. Interest expense of $567,000 in the first nine months of
fiscal 2001 decreased 49.0% from $1.1 million in the same period of fiscal 2000.
This decrease is a direct result of paying off substantially all of our debt in
mid-April 2000 after the completion of our initial public offering.
Equity loss in joint ventures. These expenses consist of the Company's share of
operating results associated with the Company's investments in unconsolidated
joint ventures to develop and operate Krispy Kreme stores.
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Minority interest in consolidated joint ventures. These expenses represent the
elimination of the minority interests in a consolidated joint venture to develop
and operate Krispy Kreme stores.
Provision For Income Taxes. The provision for income taxes is based on the
effective tax rate applied to the respective period's pre-tax income. The
provision for income taxes was $6.5 million in the first nine months of fiscal
2001 representing a 38.1% effective rate compared to $2.9 million, or 38.0%, in
the same period of the prior year.
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 the first nine months of fiscal 2001
primarily through cash flow generated from operations, as well as proceeds from
the stock offering.
Net cash flow from operations was $21.6 million in the first nine months of
fiscal 2001 and $7.9 million in the first nine months of fiscal 2000. Operating
cash flow has benefited from an improvement in our net income. 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. Offsetting the additional investments in accounts receivable and
inventories are increases in accrued income taxes and accrued expenses due to
the timing of payments associated with each of these items.
Net cash used for investing activities was $59.3 million in the first nine
months of fiscal 2001 and $8.1 million in the first nine months of the prior
year. Investing activities primarily consist of approximately $36.0 million of
investment purchasing using proceeds from the initial public offering and cash
flow generated from operations, as well as capital expenditures for property,
plant and equipment. These capital expenditures primarily relate to expenditures
to support our off-premises sales programs, capital expenditures for existing
stores and equipment and development of new stores. Net cash for investing
activities was also used for investments in joint ventures. Our investing
activities in the first nine months of fiscal 2000 primarily related to capital
expenditures for existing stores.
Net cash provided by financing activities was $41.0 million in the first nine
months of fiscal 2001 and net cash used for financing activities was $91,000 in
first nine months of fiscal 2000. Financing activities in the first nine months
of fiscal 2001 consisted primarily of the completion of our initial public stock
offering; repayment of borrowings; a capital distribution to our existing
shareholders; and issuance of stock to the company's stock ownership plan. Our
financing activities in first nine months of fiscal 2000 consisted primarily of
borrowings under our line of credit and payment of cash dividends declared in
fiscal 1999.
In the next five years, we will use cash primarily for the following activities:
- Remodeling and relocation of selected older company-owned
stores
- Expansion of our equipment manufacturing and operations
training facilities
- Additional mix production and distribution capacity to support
expansion
- Joint venture investments in area developer stores
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- 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. Prior to fiscal 2001, 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 the initial public offering completed in April
2000, cash flow generated from operations and our borrowing capacity under our
line of credit will be sufficient to meet our capital needs for at least the
next 24 months. If additional capital is needed, we may raise such capital
through public or private equity or debt financing. 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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, Krispy Kreme's fiscal year 2002. FAS 133, as
amended by FAS 138, requires that all derivatives be recorded on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives are either offset against
the change in the fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. Due to our limited use of
derivatives, the adoption of FAS 133 is not expected to have a material impact
on our financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company maintains investment portfolio holdings of various issuers, types
and maturities. These securities are classified as available-for-sale and are
recorded on the balance sheet at fair value, with unrealized gains or losses
reported as a separate component in the Shareholders' Equity section of the
balance sheet. The Company does not hedge its interest rate exposure.
We have no derivative financial interests or derivative commodity instruments in
our cash or cash equivalents.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 9, 2000, a lawsuit was filed against the Company, a
member of management, Golden Gate Doughnuts, LLC, a franchisee
of the Company and other persons in Superior Court in the
state of California. (Kevin L. Boylan and Bruce Newberg v.
Golden Gate Doughnuts, LLC, Krispy Kreme Doughnut Corporation,
Krispy Kreme Doughnuts, Inc., Scott Livengood, Brad Bruckman,
and Does 1 through 20, Superior Court for the County of Los
Angeles, California, case No. RC226214). The plaintiffs allege
that the Company and other defendants breached an agreement
regarding plaintiffs' participation in a franchise operation
in Northern California. The complaint, which asserts breach of
contract, promissory estoppel, intentional interference with
contract and business relations and breach of fiduciary duty
claims, seeks unspecified money damages in an amount to be
proven at trial, but not less than $10 million. The complaint
also seeks punitive damages. Although the Company had been
negotiating with the plaintiffs with respect to their
participation in the Northern California franchise, numerous
material differences regarding the terms and conditions of
their participation were never resolved. As a result, no oral
agreement was ever reached and no written agreement was
executed. On September 22, 2000, the Sacramento Superior Court
granted the Company's motion to compel arbitration and stayed
the action pending the outcome of arbitration. On November 3,
2000, the plaintiffs appealed that ruling, and the Court of
Appeals has not yet ruled on the plaintiffs' appeal. Based on
the information presently available to the Company, the
Company believes the complaint has no merit and will not have
a material adverse effect on its consolidated financial
statements. Consequently, the Company will vigorously defend
the lawsuit or arbitration, as the case may be. No accrual for
loss (if any) has been provided in the accompanying
consolidated financial statements. The lawsuit against Mr.
Livengood was dismissed by the California Superior court for
lack of personal jurisdiction. Plaintiffs have not appealed
this judgment, but their right to do so has not expired.
From time to time, we are subject to other claims and suits
arising in the course of our business, none of which we
believe is likely to have a material effect on our financial
condition or results of operations.
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
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27.1 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K - There were no Form 8-K filings.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KRISPY KREME DOUGHNUTS INC.
(Registrant)
Date: December 13, 2000 By: /s/ Scott A. Livengood
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Scott A. Livengood
Chairman of the Board, President,
and Chief Executive Officer
(principal executive officer)
Date: December 13, 2000 By: /s/ J. Paul Breitbach
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J. Paul Breitbach
Chief Financial Officer and President
of the Manufacturing and Distribution
Division
(principal financial and accounting
officer)
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