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EXHIBIT 13
SELECTED FINANCIAL DATA
The following table shows selected financial data for Krispy Kreme. The selected
historical statement of operations data for each of the years ended, and the
selected historical balance sheet data as of February 2, 1997, February 1, 1998,
January 31, 1999, January 30, 2000 and January 28, 2001 have been derived from
our audited consolidated financial statements. Please note that our fiscal year
ended February 2, 1997 contained 53 weeks.
Systemwide sales include the sales by both our company and franchised stores and
exclude the sales by our KKM&D business segment. Our consolidated financial
statements appearing elsewhere in this annual report exclude franchised store
sales, include the results of the area developer in Northern California in which
Krispy Kreme has a majority ownership interest and include royalties and fees
received from our franchisees.
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and accompanying notes and
the other financial data included elsewhere herein. All references to per share
amounts and any other reference to shares in "Selected Financial Data," unless
otherwise noted, have been adjusted to reflect a two-for-one stock split paid in
the form of a stock dividend on March 19, 2001 to shareholders of record as of
March 5, 2001.
IN THOUSANDS, EXCEPT PER SHARE DATA AND STORE NUMBERS
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEB. 2, 1997 FEB. 1, 1998 JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------ ------------ ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Total revenues $ 132,614 $ 158,743 $ 180,880 $ 220,243 $ 300,715
Operating expenses 116,658 140,207 159,941 190,003 250,690
General and administrative expenses 7,630 9,530 10,897 14,856 20,061
Depreciation and amortization expenses 3,189 3,586 4,278 4,546 6,457
Provision for restructuring -- -- 9,466 -- --
--------- --------- --------- --------- ---------
Income (loss) from operations 5,137 5,420 (3,702) 10,838 23,507
Interest expense (income), net, and other 1,091 895 1,577 1,232 (1,698)
Equity loss in joint ventures -- -- -- -- 706
Minority interest -- -- -- -- 716
--------- --------- --------- --------- ---------
Income (loss) before income taxes 4,046 4,525 (5,279) 9,606 23,783
Provision (benefit) for income taxes 1,619 1,811 (2,112) 3,650 9,058
--------- --------- --------- --------- ---------
Net income (loss) $ 2,427 $ 2,714 $ (3,167) $ 5,956 $ 14,725
========== ========= ========= ========= =========
Net income (loss) per share:
Basic $ .17 $ .19 $ (.19) $ .32 $ .60
Diluted .17 .19 (.19) .30 .55
Shares used in calculation of net income
(loss) per share:
Basic 14,568 14,568 16,498 18,680 24,592
Diluted 14,568 14,568 16,498 19,640 26,828
Cash dividends declared per common share $ .08 $ .08 $ .08 $ -- $ --
OPERATING DATA (UNAUDITED):
Systemwide sales $ 167,592 $ 203,439 $ 240,316 $ 318,854 $ 448,129
Number of stores at end of period:
Company 61 58 61 58 63
Franchised 55 62 70 86 111
--------- --------- --------- --------- ---------
Systemwide 116 120 131 144 174
--------- --------- --------- --------- ---------
Average weekly sales per store:
Company $ 39 $ 42 $ 47 $ 54 $ 69
Franchised 22 23 28 38 43
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $ 10,148 $ 9,151 $ 8,387 $ 11,452 $ 29,443
Total assets 78,005 81,463 93,312 104,958 171,493
Long-term debt, including current maturities 20,187 20,870 21,020 22,902 --
Total shareholders' equity 36,516 38,265 42,247 47,755 125,679
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and results should be read
together with the financial statements and the accompanying notes. This annual
report contains statements about future events and expectations that constitute
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 management. These statements
are not statements of historical fact. Forward-looking statements involve risks
and uncertainties that may cause our actual results, performance or financial
condition to differ materially from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statement. Factors that could contribute to these differences include, but are
not limited to: the Company's ability to continue and manage growth; delays in
store openings; 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 January 30, 2001 and filed with the
Securities and Exchange Commission. The words "believe," "may," "will,"
"should," "anticipate," "estimate," "expect," "intend," "objective," "seek,"
"strive" or similar words, or the negatives of these words, identify
forward-looking statements. The Company qualifies any forward-looking statements
entirely by these cautionary factors.
All references to per share amounts and any other reference to shares in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," unless otherwise noted, have been adjusted to reflect a two-for-one
stock split paid on March 19, 2001 to shareholders of record as of March 5,
2001.
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 4,000 dozen to over 10,000
dozen doughnuts daily. Consequently, each store has significant fixed or
semi-fixed costs, and margins and profitability are significantly impacted by
doughnut production volume and sales. Our doughnut stores are versatile in that
most can support multiple sales channels to more fully utilize production
capacity. These sales channels are comprised of:
- ON-PREMISES SALES. Sales to customers visiting our stores,
including the drive-through windows, along with discounted
sales to community organizations that in turn sell our
products for fundraising purposes.
- OFF-PREMISES SALES. Daily sales of fresh doughnuts on a
branded, unbranded and private label basis to convenience and
grocery stores and select co-branding customers. Doughnuts are
sold to these customers on trays for display and sale in
glass-enclosed cases and in packages for display and sale on
both stand-alone display units and on our customers' shelves.
"Branded" refers to products sold bearing the Krispy Kreme
brand name and is the primary way we are expanding our off-
premises sales business. "Unbranded" products are sold
unpackaged from the retailer's display case. "Private label"
products carry the retailer's brand name or some other
non-Krispy Kreme brand and is not a significant portion of our
business.
In addition to our retail stores, we are vertically integrated. Our Krispy Kreme
Manufacturing and Distribution business unit, KKM&D, formerly known as our
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 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 and increased
snack food consumption.
We intend to expand our concept primarily through opening new franchise stores
in territories across the continental United States and Canada. We also have
entered and intend to enter into additional joint ventures with some of our
franchisees. As of January 28, 2001, there were a total of 174 Krispy Kreme
stores nationwide, consisting of 63 company and 111 franchised stores. In fiscal
2002, we anticipate opening approximately 36 new stores under existing
agreements, the majority of which are expected to be franchise stores. Our
franchisees, including the area developer in Northern California in which we
have a majority ownership interest, are contractually obligated to open over 250
new stores in the period fiscal 2002 through fiscal 2006.
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.
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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 2,
"Nature of Business and Significant Accounting Policies," in our Consolidated
Financial Statements. A guide to the discussion for each period is presented
below.
OVERVIEW. Outlines information on total systemwide sales and systemwide
comparable store sales. Systemwide sales includes the sales of both our company
and franchised stores and excludes the sales and revenues of our KKM&D and
Franchise Operations business segments. Our consolidated financial statements
include sales of our company stores, including the sales of any consolidated
joint venture stores, outside sales of our KKM&D business segment and royalties
and fees received from our franchisees; these statements exclude the sales of
our franchised stores. We believe systemwide sales data is significant because
it shows the overall penetration of our brand, consumer demand for our products
and the correlation between systemwide sales and our total revenues. A store is
added to our comparable store base in its nineteenth month of operation. A
summary discussion of our consolidated results is also presented.
SEGMENT RESULTS. In accordance with Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
we have three reportable segments. A description of each of the segments
follows.
- COMPANY STORE OPERATIONS. Represents the results of our
company stores and consolidated joint venture stores. Company
stores make and sell doughnuts and complementary products
through the sales channels discussed above. Expenses for this
business 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. Expenses for this business segment include costs
incurred to recruit new franchisees and to open, monitor and
aid in the performance of these stores and direct general and
administrative expenses.
- KKM&D. Represents the results of our KKM&D business unit,
located in Winston-Salem, North Carolina. This business unit
buys and processes ingredients 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, provision for store closings and
restructuring, interest expense (income), net, equity income (loss) in joint
ventures, minority interest in consolidated joint ventures and the provision for
income taxes.
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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 1999 (52 WEEKS ENDED JANUARY 31, 1999), FISCAL 2000 (52 WEEKS
ENDED JANUARY 30, 2000) AND FISCAL 2001 (52 WEEKS ENDED JANUARY 28, 2001)
EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES. CERTAIN OPERATING DATA ARE ALSO
SHOWN FOR THE SAME PERIODS.
Dollars In Thousands
---------------------------------------------
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Total revenues 100.0% 100.0% 100.0%
Operating expenses 88.4 86.3 83.4
General and administrative expenses 6.0 6.7 6.7
Depreciation and amortization expenses 2.4 2.1 2.1
Provision for restructuring 5.2 -- --
-------- -------- --------
Income (loss) from operations (2.0) 4.9 7.8
Interest expense (income), net, and other 1.0 0.5 (0.1)
-------- -------- --------
Income (loss) before income taxes (3.0) 4.4 7.9
Provision (benefit) for income taxes (1.2) 1.7 3.0
-------- -------- --------
Net income (loss) (1.8)% 2.7% 4.9%
-------- -------- --------
OPERATING DATA:
Systemwide sales $240,316 $318,854 $448,129
Increase in comparable store sales:
Company 11.1% 12.0% 22.9%
Systemwide 9.7% 14.1% 17.1%
THE TABLE BELOW SHOWS BUSINESS SEGMENT REVENUES AND OPERATING EXPENSES EXPRESSED
IN DOLLARS. KKM&D REVENUES ARE SHOWN NET OF INTERCOMPANY SALES ELIMINATIONS. SEE
NOTE 14, "BUSINESS SEGMENT INFORMATION," IN OUR CONSOLIDATED FINANCIAL
STATEMENTS. OPERATING EXPENSES EXCLUDE DEPRECIATION AND AMORTIZATION EXPENSES
AND INDIRECT (UNALLOCATED) GENERAL AND ADMINISTRATIVE EXPENSES. DIRECT GENERAL
AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN OPERATING EXPENSES.
In Thousands
---------------------------------------------
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- ------------- -------------
REVENUES BY BUSINESS SEGMENT:
Company Store Operations $145,251 $164,230 $213,677
Franchise Operations 3,236 5,529 9,445
KKM&D 32,393 50,484 77,593
-------- -------- --------
Total revenues $180,880 $220,243 $300,715
-------- -------- --------
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations $129,349 $142,925 $181,470
Franchise Operations 2,731 4,012 3,642
KKM&D 27,861 43,066 65,578
-------- -------- --------
Total operating expenses $159,941 $190,003 $250,690
-------- -------- --------
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 AND INDIRECT (UNALLOCATED) GENERAL AND ADMINISTRATIVE
EXPENSES. DIRECT GENERAL AND ADMINISTRATIVE EXPENSES ARE INCLUDED IN OPERATING
EXPENSES.
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- ------------- -------------
REVENUES BY BUSINESS SEGMENT:
Company Store Operations 80.3% 74.6% 71.1%
Franchise Operations 1.8 2.5 3.1
KKM&D 17.9 22.9 25.8
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
----- ----- -----
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations 89.1% 87.0% 84.9%
Franchise Operations 84.4% 72.6% 38.6%
KKM&D 86.0% 85.3% 84.5%
----- ----- -----
Total operating expenses 88.4% 86.3% 83.4%
----- ----- -----
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ADDITIONALLY, DATA ON STORE OPENING ACTIVITY ARE SHOWN BELOW. TRANSFERRED STORES
REPRESENT STORES SOLD BETWEEN THE COMPANY AND FRANCHISEES.
YEAR ENDED COMPANY FRANCHISED TOTAL
- ---------- ------- ---------- -----
YEAR ENDED JANUARY 31, 1999
Beginning count 58 62 120
Opened -- 14 14
Closed -- (3) (3)
Transferred 3 (3) --
--- --- ---
Ending count 61 70 131
--- --- ---
YEAR ENDED JANUARY 30, 2000
Beginning count 61 70 131
Opened 2 19 21
Closed (5) (3) (8)
--- --- ---
Ending count 58 86 144
--- --- ---
YEAR ENDED JANUARY 28, 2001
Beginning count 58 86 144
Opened 8 28 36
Closed (3) (3) (6)
--- --- ---
Ending count 63 111 174
--- --- ---
Company stores as of January 28, 2001 included five stores in Northern
California operated by an area developer joint venture in which Krispy Kreme has
a majority ownership interest. Store counts include retail stores and
commissaries, which are production facilities used to serve off-premises
customers.
YEAR ENDED JANUARY 28, 2001 COMPARED WITH YEAR ENDED JANUARY 30, 2000
OVERVIEW
Systemwide sales for the fiscal year increased 40.5% to $448.1 million compared
to $318.9 million in the prior year. The increase was driven by an increase of
30.1% in company store sales, which increased to $213.7 million, and an increase
of 51.6% in franchise store sales, which increased to $234.4 million. During
fiscal 2001, the Company opened 28 franchise stores, four stores in Northern
California, one commissary in Northern California, two company stores and one
commissary in Nashville, Tennessee. Three company stores and three franchise
stores were closed, bringing the total number of stores to 174 at the end of the
fiscal 2001. We believe increased brand awareness and increased off-premises
sales contributed significantly to the 17.1% increase in our systemwide
comparable store sales.
Total company revenues increased 36.5% to $300.7 million for the fiscal year
compared with $220.2 million for the prior fiscal year. This increase was
comprised of a Company Store Operations revenue increase of 30.1% to $213.7
million, a Franchise Operations revenue increase of 70.8% to $9.4 million and a
KKM&D revenue increase, excluding inter-company sales, of 53.7% to $77.6
million. Net income for fiscal 2001 was $14.7 million versus $6.0 million in the
prior year, representing an increase of 147.2%. Diluted earnings per share were
$0.55, an increase of 80.3% over the prior year.
COMPANY STORE OPERATIONS
COMPANY STORE OPERATIONS REVENUES. Company Store Operations revenues increased
to $213.7 million in fiscal 2001 from $164.2 million in fiscal 2000, an increase
of 30.1%. Comparable store sales increased by 22.9%. 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
$18.0 million and total off-premises sales increased approximately $31.5
million. On-premises sales grew principally as a result of more customer visits
and an increase in brand awareness generated from our national store expansion,
as well as a 6% retail price increase which was implemented during the first
quarter of fiscal 2001. In addition, Company store on-premises sales were
positively impacted by the sales of the five stores in the Northern California
market. The Company has a 59% interest in the Northern California market, and as
a result, it is consolidated with the Company Store Operations 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.
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COMPANY STORE OPERATIONS OPERATING EXPENSES. Company Store Operations operating
expenses increased to $181.5 million in fiscal 2001 from $142.9 million in
fiscal 2000, an increase of 27.0%. Company Store operating expenses as a
percentage of Company Store Operations revenues were 84.9% in fiscal 2001
compared with 87.0% in fiscal 2000. The decrease in Company Store Operations 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. 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 negatively impacted our
margins.
We constantly evaluate our store base, not only with respect to our stores'
financial and operational performance, but also with respect to alignment with
our brand image and how well each store meets our customers' needs. As a result
of this review, we make provisions to cover closing or impairment costs for
underperforming stores, and for older stores that need to be closed and
relocated. We recorded a provision in the amount of $318,000 in operating
expenses in fiscal 2001 to cover costs associated with a store that was damaged
by fire. After evaluating the location, we decided not to reopen the store. The
provision is intended to cover estimated lease liabilities, the net book value
of assets disposed of and other miscellaneous costs associated with this
decision. In fiscal 2000, we recorded a charge of $1.1 million to cover the
closing of two older stores that were replaced on their existing sites in fiscal
2001.
FRANCHISE OPERATIONS
FRANCHISE OPERATIONS REVENUES. Franchise Operations revenues increased to $9.4
million for fiscal 2001 from $5.5 million in fiscal 2000, an increase of 70.8%.
The growth in revenue was primarily due to the opening of 28 franchise stores
during fiscal 2001 and the impact of those franchise stores opened in fiscal
2000 being open for the entire year in fiscal 2001.
FRANCHISE OPERATIONS OPERATING EXPENSES. Franchise Operations operating expenses
decreased to $3.6 million in fiscal 2001 from $4.0 million in the prior year. As
a percentage of Franchise Operations revenues, franchise operating expenses were
38.6% in fiscal 2001 compared with 72.6% in fiscal 2000. Consistent with 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 decrease 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 additional store openings have declined.
KKM&D
KKM&D REVENUES. KKM&D sales to franchise stores increased to $77.6 million in
fiscal 2001 from $50.5 million in fiscal 2000, an increase of 53.7%. The primary
reason for the increase in revenues was the opening of 28 new franchise stores
in fiscal 2001, the impact of franchise 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 $65.6 million in
fiscal 2001 from $43.1 million in fiscal 2000, an increase of 52.3%. KKM&D
operating expenses as a percentage of KKM&D revenues were 84.5% in fiscal 2001
compared with 85.3% in fiscal 2000.
The decrease in KKM&D operating expenses as a percentage of revenues was due to
increased capacity utilization and resulting economies of scale of the mix and
equipment manufacturing operations attributable to the increased volume in the
facilities. Continued stability in our key ingredient costs also contributed.
The effect of these factors was offset in part by startup costs associated with
our California distribution center.
OTHER
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $20.1 million in fiscal 2001 from $14.9 million in the prior year,
an increase of 35.0%. General and administrative expenses as a percentage of
total revenues for the fiscal year were 6.7% compared with 6.7% in fiscal 2000.
The dollar growth in general and administrative expense was due to increased
personnel and related benefit and travel costs needed to support our national
expansion.
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DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
increased to $6.5 million in fiscal 2001 from $4.5 million in fiscal 2000, an
increase of 42.0%. Depreciation and amortization expenses as a percentage of
total revenues for fiscal 2001 were 2.1% compared with 2.1% in fiscal 2000. The
dollar growth in depreciation and amortization expenses increased due to capital
asset additions, as well as the accelerated depreciation expense as a result of
the shortening of useful lives related to two anticipated store relocations. The
amount of accelerated depreciation expense recognized was approximately
$690,000.
INTEREST INCOME. Interest income increased in 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. After retiring our debt, we
made investments in government securities, short-term commercial paper
instruments and corporate bonds. These amounted to approximately $36.0 million
at January 28, 2001 and resulted in interest income of $2.3 million for fiscal
2001. There were no investments of this nature during fiscal 2000.
INTEREST EXPENSE. Interest expense of $607,000 for fiscal 2001 decreased 60.2%
from $1.5 million in 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 our share of operating
results associated with our investments in unconsolidated joint ventures to
develop and operate Krispy Kreme stores.
MINORITY INTEREST. These expenses represent the elimination of the minority
interest 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 is $9.1 million for fiscal 2001 representing a 38.1%
effective rate compared to $3.7 million, or 38.0%, in fiscal 2000.
YEAR ENDED JANUARY 30, 2000 COMPARED WITH YEAR ENDED JANUARY 31, 1999
OVERVIEW
Systemwide sales increased to $318.9 million in fiscal 2000 from $240.3 million
in fiscal 1999, an increase of 32.7%. This increase was comprised of company
store sales increases of $19.0 million and franchise store sales increases of
$59.6 million. Systemwide comparable store sales increased 14.1%. The overall
systemwide sales increase was driven by comparable store sales improvement and
the opening of new stores.
Total company revenues increased to $220.2 million in fiscal 2000 from $180.9
million in fiscal 1999, an increase of 21.7%. This increase was comprised of
Company Store Operations revenues increases of $19.0 million, Franchise
Operations revenues increases of $2.3 million and KKM&D revenues increases of
$18.0 million. Net income increased to $6.0 million in fiscal 2000 from a loss
of $3.2 million in fiscal 1999. Fiscal 1999 included a provision for
restructuring and store closings of $9.5 million. Absent this provision, net
income in fiscal 2000 compared to fiscal 1999 would have been $6.0 million, or
2.7% of total revenues, versus $2.5 million, or 1.4% of total revenues.
COMPANY STORE OPERATIONS
COMPANY STORE OPERATIONS REVENUES. Company Store Operations revenues increased
to $164.2 million in fiscal 2000 from $145.3 million in fiscal 1999, an increase
of 13.1%. Comparable store sales increased by 12.0%. 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 $3.6
million and off-premises sales increased approximately $15.3 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 revenue
increase in off-premises sales was due primarily to the addition of new
convenience store outlets.
COMPANY STORE OPERATIONS OPERATING EXPENSES. Company Store Operations operating
expenses increased to $142.9 million in fiscal 2000 from $129.3 million in
fiscal 1999, an increase of 10.5%. Company Store Operations operating expenses
as a percentage of Company Store Operations revenues were 87.0% in fiscal 2000
compared with 89.1% in 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.
We constantly evaluate our store base, not only with respect to our stores'
financial and operational performance, but also with respect to the brand image
portrayed by each store 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. In fiscal 2000, we recorded a provision of $1.1 million to cover the
closing of two older stores that were replaced on their existing sites in fiscal
2001. In fiscal 1999, we recorded a charge of $2.3 million as follows: $417,000
related to the write-off of unamortized leasehold improvements for two stores
which were closed in the first quarter of fiscal 2000; $283,000 in remaining
lease costs on a potential store site that will not be used; and $1.6 million
related 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.
23
8
FRANCHISE OPERATIONS
FRANCHISE OPERATIONS REVENUES. Franchise Operations revenues increased to $5.5
million in fiscal 2000 from $3.2 million in fiscal 1999, an increase of 70.9%.
The growth in revenue was primarily due to the opening of 19 franchise stores in
fiscal 2000 and the impact of 14 franchise stores opened in fiscal 1999 being
open for the full year 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 $4.0 million in fiscal 2000 from $2.7 million in fiscal 1999, an
increase of 46.9%. Franchise Operations operating expenses as a percentage of
Franchise Operations revenues were 72.6% in fiscal 2000 compared with 84.4% in
fiscal 1999. The decrease in Franchise Operations operating expenses as a
percentage of revenues was due to capitalizing upon 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.
KKM&D
KKM&D REVENUES. KKM&D sales to franchise stores increased to $50.5 million in
fiscal 2000 from $32.4 million in fiscal 1999, an increase of 55.8%. The primary
reason for the increase in revenues was the opening of new franchise stores in
fiscal 2000, the full-year 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 KKM&D from sales of mixes, sugar, shortening and other supplies.
Also, each of these new stores was required to purchase doughnutmaking equipment
and other peripheral equipment from KKM&D, thereby enhancing KKM&D sales. An
increase in doughnutmaking equipment prices of approximately 20.0% also
contributed.
KKM&D OPERATING EXPENSES. KKM&D operating expenses increased to $43.1 million in
fiscal 2000 from $27.9 million in fiscal 1999, an increase of 54.6%. KKM&D
operating expenses as a percentage of KKM&D revenues were 85.3% in fiscal 2000
compared with 86.0% in fiscal 1999. 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. Favorable commodities
prices also contributed.
OTHER
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $14.9 million in fiscal 2000 from $10.9 million in fiscal 1999, an
increase of 36.3%. General and administrative expenses as a percentage of total
revenues were 6.7% in fiscal 2000 compared with 6.0% in 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 fiscal 2000 for these personnel, including
salaries, benefits and the implementation of our stock bonus plans, increased
approximately $3.3 million.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
increased to $4.5 million in fiscal 2000 from $4.3 million in fiscal 1999, an
increase of 6.3%. Depreciation and amortization expenses as a percentage of
total revenues were 2.1% in fiscal 2000 compared with 2.4% in fiscal 1999.
Depreciation and amortization expenses increased due to capital asset additions.
INTEREST EXPENSE. Interest expense of approximately $1.5 million in fiscal 2000
was relatively consistent with interest expense in fiscal 1999. Borrowing
amounts were slightly higher in fiscal 2000; however, interest rates were lower
in fiscal 2000 compared with fiscal 1999.
PROVISION FOR INCOME TAXES. The provision for income taxes is based on the
effective tax rate applied to the respective fiscal year's pre-tax income. The
provision for income taxes was $3.7 million in fiscal 2000 representing a 38.0%
effective rate. The benefit in fiscal 1999 was $2.1 million representing an
effective rate of 40.3%.
24
9
QUARTERLY RESULTS
The following tables set forth unaudited quarterly information for each of the
eight fiscal quarters in the two year period ended January 28, 2001. 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. Net income per share amounts reflect the impact
of a two-for-one stock split paid in the form of a stock dividend on March 19,
2001.
IN THOUSANDS, EXCEPT PER SHARE DATA
----------------------------------------------------------------------------------
MAY 2, AUG. 1, OCT. 31, JAN. 30, APR. 30, JUL. 30, OCT. 29, JAN. 28,
THREE MONTHS ENDED 1999 1999 1999 2000 (2000)* (2000)* (2000)* (2001)*
- ------------------ -------- -------- -------- -------- -------- -------- -------- --------
Total revenues $ 53,328 $ 51,356 $ 56,849 $ 58,710 $ 70,870 $ 70,060 $ 77,897 $ 81,888
Operating expenses 45,724 44,356 48,464 51,459 59,164 58,286 65,316 67,924
General and administrative expenses 3,139 3,933 3,837 3,947 4,435 4,566 5,059 6,001
Depreciation and amortization expenses 1,101 1,159 1,237 1,049 1,595 1,581 1,811 1,470
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 3,364 1,908 3,311 2,255 5,676 5,627 5,711 6,493
Interest (income) expense, net 308 331 210 383 249 (507) (720) (740)
Other expenses -- -- -- -- 493 358 216 375
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 3,056 1,577 3,101 1,872 4,934 5,776 6,215 6,858
Provision for income taxes 1,163 599 1,178 710 1,901 2,192 2,363 2,602
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 1,893 $ 978 $ 1,923 $ 1,162 $ 3,033 $ 3,584 $ 3,852 $ 4,256
-------- -------- -------- -------- -------- -------- -------- --------
NET INCOME PER SHARE:
Basic $ .10 $ .05 $ .11 $ .06 $ .15 $ .14 $ .15 $ .16
Diluted .10 .05 .10 .06 .13 .13 .14 .15
* Amounts presented for the first three quarters of fiscal 2001 have
been restated for a change in accounting policy for revenue
recognition, as discussed in "Recent Accounting Pronouncements" in Note
2 to the Consolidated Financial Statements. The change has an
insignificant impact on annual sales and net income but does result in
a shift in sales and earnings among the quarterly periods. The change
has no effect on earnings per share in any of the quarterly periods.
The effect of this change for each quarter of fiscal 2001 follows:
IN THOUSANDS
---------------------------
TOTAL REVENUES NET INCOME
-------------- ----------
First quarter $ (131) $ (19)
Second quarter 66 9
Third quarter (12) (1)
Fourth quarter (130) (16)
------ ------
$ (207) $ (27)
------ ------
OUR OPERATING RESULTS FOR THESE EIGHT QUARTERS EXPRESSED AS PERCENTAGES OF
APPLICABLE REVENUES WERE AS FOLLOWS:
MAY 2, AUG. 1, OCT. 31, JAN. 30, APR. 30, JUL. 30, OCT. 29, JAN. 28,
THREE MONTHS ENDED 1999 1999 1999 2000 2000 2000 2000 2001
------ ------- -------- -------- -------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses 85.7 86.4 85.3 87.6 83.5 83.2 83.9 82.9
General and administrative expenses 5.9 7.6 6.7 6.8 6.3 6.5 6.5 7.3
Depreciation and amortization expenses 2.1 2.3 2.2 1.8 2.2 2.3 2.3 1.8
----- ----- ----- ----- ----- ----- ----- -----
Income from operations 6.3 3.7 5.8 3.8 8.0 8.0 7.3 8.0
Interest (income) expense, net 0.6 0.6 0.3 0.6 0.3 (0.7) (0.9) (0.9)
Other expenses -- -- -- -- 0.7 0.5 0.3 0.5
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 5.7 3.1 5.5 3.2 7.0 8.2 7.9 8.4
Provision for income taxes 2.2 1.2 2.1 1.2 2.7 3.1 3.0 3.2
----- ----- ----- ----- ----- ----- ----- -----
Net income 3.5% 1.9% 3.4% 2.0% 4.3% 5.1% 4.9% 5.2%
===== ===== ===== ===== ===== ===== ===== =====
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.
25
10
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 1999, 2000 and 2001 primarily
through cash flow generated from operations, through borrowings under our line
of credit and term loan facility and through the proceeds from our April 2000
initial public offering. A private stock offering in fiscal 1999 also
contributed to funding our cash needs.
Net cash flow from operations was $11.7 million in fiscal 1999, $9.0 million in
fiscal 2000 and $30.6 million in fiscal 2001. Operating cash flow has benefited
from an improvement in our net income, net of the impact of the provision for
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 that we either own or supply. Offsetting the
additional investments in accounts receivable and inventories have been
increases in accounts payable, 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 $11.8 million in fiscal 1999, $10.0
million in fiscal 2000 and $67.3 million in fiscal 2001. Investing activities
primarily consist of capital expenditures for property, plant and equipment and
purchases of investments. 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 used for investing
activities was also used for investments in area developer joint ventures.
Investing activities for fiscal 2001 also included approximately $35.4 million
of purchases of marketable securities with a portion of the proceeds from the
initial public offering and cash flow generated from operations.
Net cash provided by (used for) financing activities was $1.5 million in fiscal
1999, ($84,000) in fiscal 2000 and $40.6 million in fiscal 2001. 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 fiscal 2000 consisted primarily of borrowings under our line of
credit and payment of cash dividends declared in fiscal 1999. Financing
activities in fiscal 2001 consisted primarily of the completion of our initial
public stock offering, repayment of borrowings and a capital distribution to our
shareholders existing prior to our initial public offering.
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 provided a $12
million term loan. The remaining amount of the term loan was repaid in full with
a portion of the net proceeds of our April 2000 initial public offering. The
loan agreement expires on July 10, 2002. Under the terms of the loan agreement,
interest on the revolving line of credit is payable monthly and charged at
either the lender's prime rate less 110 basis points or at one-month LIBOR 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 January 28, 2001, $91,000 is
outstanding under the $40 million revolving line of credit facility and no
amount under that facility has been converted to a term loan. We have an
outstanding letter of credit as of January 28, 2001, which reduces our available
line of credit by $2.7 million. On January 31, 2000, we repurchased the New York
City territory from an area developer for $6.9 million using funds available
under our line of credit. Subsequently, on April 17, 2000, we sold 77.67% of
this market.
The $12 million term loan entered into on December 29, 1999 was a continuation
of the $12 million term loan contained in a previous loan agreement. Interest on
the $12 million term loan was computed on the same basis as the revolving line
of credit, except that the floor and ceiling rates were 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 and was repaid in full with
a portion of the net proceeds of our April 2000 initial public offering.
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 our April 2000 initial public 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.
As of January 28, 2001, $3,435,000 was outstanding under a $4.5 million
revolving line of credit facility of our Northern California joint venture.
Krispy Kreme has guaranteed 84% of the line of credit. The line of credit bears
interest at one-month LIBOR plus 125 basis points and matures on January 15,
2002. There will be no interest, fee or other charge for the unadvanced portion
of the revolving line of credit.
26
11
In the next five years, we expect to use cash primarily for the following
activities:
- Adding mix production and distribution capacity to support
expansion
- Remodeling and relocating selected older company stores
- Expanding our equipment manufacturing and operations training
facilities
- Investing in all or part of franchisees' operations
- Working capital and other corporate purposes
Our capital requirements for the items outlined above may be significant. These
capital requirements will depend on many factors, including our overall
performance, the pace of store expansion and company store remodels, the
requirements for joint venture arrangements and infrastructure needs for both
personnel and facilities. Prior to our April 2000 initial public offering, we
primarily relied on cash flow generated from operations and our $40 million
revolving line of credit to fund our capital needs. We believe that the proceeds
from our April 2000 initial public offering and our follow-on public offering
completed in February 2001, 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 financings or
other financing arrangements. Future capital funding transactions may result in
dilution to shareholders. However, there can be no assurance that additional
capital will be available or be available on satisfactory terms. Our failure to
raise additional capital could have one or more of the following effects on our
operations and growth plans over the next five years:
- Slowing our plans to remodel and relocate older company stores
- Reducing the number and amount of our joint venture
investments in area developers
- Slowing the building of our infrastructure of both personnel
and facilities
We conduct some of our corporate and store operations from leased facilities and
lease certain equipment under operating leases. Generally, our leased facilities
have initial lease periods of four to 18 years, and contain provisions for
renewal options of five to 10 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.
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, the Northern
California revolving line of credit bears interest at one-month LIBOR plus 125
basis points. We have guaranteed 84% of that line of credit. 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 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 fixed prices. 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 first quarter of 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. Because we do not use derivatives, the adoption of FAS
133 will not have any impact on our financial statements.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which among other guidance, clarifies certain conditions to be met
in order to recognize revenue. SAB 101 is required to be adopted no later than
the fourth quarter of fiscal years beginning after December 15, 1999. We have
adopted SAB 101 in fiscal 2001, which has resulted in no material effect on our
revenue recognition policy or revenues recorded.
27
12
KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS
- -----------------------------------------------------------------------------------------------
YEAR ENDED JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,183 $ 7,026
Short-term investments -- 18,103
Accounts receivable, less allowance for doubtful accounts
of $1,324 (2000) and $1,302 (2001) 17,965 19,855
Accounts receivable, affiliates 1,608 2,599
Other receivables 794 2,279
Inventories 9,979 12,031
Prepaid expenses 3,148 1,909
Income taxes refundable 861 --
Deferred income taxes 3,500 3,809
--------- ---------
Total current assets 41,038 67,611
Property and equipment, net 60,584 78,340
Deferred income taxes 1,398 --
Long-term investments -- 17,877
Investment in unconsolidated joint ventures -- 4,695
Other assets 1,938 2,970
--------- ---------
Total assets $ 104,958 $ 171,493
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,106 $ 14,697
Accrued expenses 14,080 19,904
Revolving line of credit -- 3,526
Current maturities of long-term debt 2,400 --
Income taxes payable -- 41
--------- ---------
Total current liabilities 29,586 38,168
========= =========
Deferred income taxes -- 579
Compensation deferred (unpaid) 990 1,106
Long-term debt, net of current portion 20,502 --
Accrued restructuring expenses 4,259 3,109
Other long-term obligations 1,866 1,735
--------- ---------
Total long-term liabilities 27,617 6,529
Minority interest -- 1,117
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 10 million shares authorized;
none issued and outstanding -- --
Common stock, no par value, 100,000 shares authorized;
issued and outstanding -- 0 (2000) and 25,916 (2001) -- 85,060
Common stock, $10 par value, 1,000 shares authorized;
issued and outstanding -- 467 (2000) and 0 (2001) 4,670 --
Paid-in capital 10,805 --
Unearned compensation -- (188)
Notes receivable, employees (2,547) (2,349)
Nonqualified employee benefit plan asset -- (126)
Nonqualified employee benefit plan liability -- 126
Accumulated other comprehensive income -- 609
Retained earnings 34,827 42,547
--------- ---------
Total shareholders' equity 47,755 125,679
--------- ---------
Total liabilities and shareholders' equity $ 104,958 $ 171,493
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
28
13
KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
- -------------------------------------------------------------------------------------------------------
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
------------- ------------- -------------
Total revenues $ 180,880 $ 220,243 $ 300,715
Operating expenses 159,941 190,003 250,690
General and administrative expenses 10,897 14,856 20,061
Depreciation and amortization expenses 4,278 4,546 6,457
Provision for restructuring 9,466 -- --
--------- --------- ---------
Income (loss) from operations (3,702) 10,838 23,507
Interest income 181 293 2,325
Interest expense (1,507) (1,525) (607)
Equity loss in joint ventures -- -- (706)
Minority interest -- -- (716)
Loss on sale of property and equipment (251) -- (20)
--------- --------- ---------
Income (loss) before income taxes (5,279) 9,606 23,783
Provision (benefit) for income taxes (2,112) 3,650 9,058
--------- --------- ---------
Net income (loss) $ (3,167) $ 5,956 $ 14,725
========= ========= =========
Basic earnings (loss) per share $ (.19) $ 0.32 $ 0.60
========= ========= =========
Diluted earnings (loss) per share $ (.19) $ 0.30 $ 0.55
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
29
14
KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------------- ----------------------------------------
KRISPY KREME DOUGHNUT CORPORATION KRISPY KREME DOUGHNUTS, INC.
-------------------------------------------------------------------------------------
COMMON COMMON ADDITIONAL PREFERRED PREFERRED COMMON COMMON
SHARES STOCK PAID-IN CAPITAL SHARES STOCK SHARES STOCK
------ ------ --------------- --------- ---------- ------ ------
BALANCE AS OF FEBRUARY 1, 1998 364 $ 3,642 $ 1,102 -- $ -- -- $ --
Net loss for the year ended
January 31, 1999
Cash dividends on common stock
($3.25 per share)
Sale of common stock 44 438 4,181
Conversion of Long-Term Incentive
Plan shares to common stock 59 590 5,522
Collections on notes receivable
Issuance of notes receivable
---- -------- -------- ----- -------- ----- --------
BALANCE AT JANUARY 31, 1999 467 $ 4,670 $ 10,805 -- $ -- -- $ --
Net income for the year ended
January 30, 2000
Collections of Long-Term Incentive
Plan shares receivable
Issuance of notes receivable
---- -------- -------- ----- -------- ----- --------
BALANCE AT JANUARY 30, 2000 467 $ 4,670 $ 10,805 -- $ -- -- $ --
Comprehensive income:
Net income for the year ended
January 28, 2001
Unrealized holding gain
Total comprehensive income
Proceeds from public offering 6,900 65,637
Conversion of Krispy Kreme Doughnut
Corporation shares to Krispy Kreme
Doughnuts, Inc. shares (467) (4,670) (10,805) 18,680 15,475
Cash dividend to shareholders
Issuance of shares to employee stock
ownership plan 290 3,039
Contribution to the nonqualified
employee benefit plan
Liability under the nonqualified
employee benefit plan
Issuance of restricted common shares 6 210
Exercise of stock options 40 699
Amortization of restricted common shares
Collections on notes receivable
---- --------- -------- ----- -------- ------- --------
BALANCE AT JANUARY 28, 2001 -- $ -- $ -- -- $ -- 25,916 $ 85,060
==== ========= ======== ===== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
15
IN THOUSANDS
- -------------------------------------------------------------------------------------------------------------------------------
NOTES NONQUALIFIED NONQUALIFIED ACCUMULATED OTHER
UNEARNED RECEIVABLE EMPLOYEE BENEFIT EMPLOYEE BENEFIT COMPREHENSIVE RETAINED
COMPENSATION EMPLOYEES PLAN ASSET PLAN LIABILITY INCOME EARNINGS TOTAL
------------ ---------- ---------------- ---------------- ----------------- -------- ------
$ -- $ (34) $ -- $ -- $ -- $33,556 $ 38,266
(3,167) (3,167)
(1,518) (1,518)
4,619
6,112
34 34
(2,099) (2,099)
- -------- -------- ----- ---- ---- ------- --------
$ -- $ (2,099) $ -- $ -- $ -- $28,871 $ 42,247
5,956 5,956
226 226
(674) (674)
- -------- -------- ----- ---- ---- ------- --------
$ -- $ (2,547) $ -- $ -- $ -- $34,827 $ 47,755
14,725 14,725
609 609
--------
15,334
65,637
--
(7,005) (7,005)
3,039
(126) (126)
126 126
(210) --
699
22 22
198 198
- -------- -------- ----- ---- ---- ------- ---------
$ (188) $ (2,349) $(126) $126 $609 $42,547 $ 125,679
======== ======== ===== ==== ==== ======= =========
31
16
KRISPY KREME DOUGHNUTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
--------------------------------------------------
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
------------- ------------- -------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,167) $ 5,956 $ 14,725
Items not requiring (providing) cash:
Depreciation and amortization 4,278 4,546 6,457
Deferred income taxes (3,658) 258 1,668
Loss on disposal of property and equipment, net 251 -- 20
Compensation expense related to restricted stock awards -- -- 22
Provision for restructuring 9,466 (127) --
Provision for store closings and impairment 2,336 1,139 318
Minority interest -- -- 716
Equity loss in joint ventures -- -- 706
Change in assets and liabilities:
Receivables (3,422) (4,760) (3,434)
Inventories (1,881) (93) (2,052)
Prepaid expenses (252) (1,619) 1,239
Income taxes, net 1,397 (2,016) 902
Accounts payable 4,584 1,570 1,591
Accrued restructuring expenses -- (1,185) (1,243)
Accrued expenses 1,008 4,966 8,956
Deferred compensation and other long-term obligations 742 345 (15)
-------- -------- --------
Net cash provided by operating activities 11,682 8,980 30,576
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (12,374) (11,335) (25,655)
Proceeds from disposal of property and equipment -- -- 1,419
Proceeds from disposal of assets held for sale -- 830 --
Investments in unconsolidated joint ventures -- -- (6,333)
(Increase) decrease in other assets 548 479 (1,348)
Purchase of investments net -- -- (35,371)
-------- -------- --------
Net cash used for investing activities: (11,826) (10,026) (67,288)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of long-term debt (2,400) (2,400) (22,901)
Net borrowings from revolving line of credit -- -- 3,526
Borrowings of long-term debt 2,550 4,282 --
Proceeds from stock offering 4,619 -- 65,637
Proceeds from exercise of stock options -- -- 699
Minority interest -- -- 401
Cash dividends paid (1,180) (1,518) (7,005)
Issuance of notes receivable (2,099) (674) --
Collection of notes receivable 34 226 198
-------- -------- --------
Net cash provided by (used for) financing activities: 1,524 (84) 40,555
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,380 (1,130) 3,843
Cash and cash equivalents at beginning of year 2,933 4,313 3,183
-------- -------- --------
Cash and cash equivalents at end of year $ 4,313 $ 3,183 $ 7,026
-------- -------- --------
Supplemental schedule of non-cash investing and
financing activities
Issuance of stock to Krispy Kreme Profit-Sharing Stock
Ownership Plan -- -- $ 3,039
Issuance of stock to restricted stock plan -- -- $ 210
The accompanying notes are an integral part of these consolidated financial
statements.
32
17
KRISPY KREME DOUGHNUTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PURPOSE
Krispy Kreme Doughnuts, Inc. was incorporated in North Carolina on December 2,
1999 as a wholly-owned subsidiary of Krispy Kreme Doughnut Corporation
("KKDC"). Pursuant to a plan of merger approved by shareholders on November 10,
1999, the shareholders of KKDC became shareholders of Krispy Kreme Doughnuts,
Inc. on April 4, 2000. Each shareholder received 20 shares of Krispy Kreme
Doughnuts, Inc. common stock and $15 in cash for each share of KKDC common
stock they held. As a result of the merger, KKDC became a wholly-owned
subsidiary of Krispy Kreme Doughnuts, Inc. Krispy Kreme Doughnuts, Inc. closed
a public offering of its common stock on April 10, 2000 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 Krispy
Kreme Doughnuts, Inc. 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 Krispy Kreme Doughnuts, Inc. common stock issued for each share of
KKDC's common stock and to reflect a two-for-one stock split effective March
19, 2001 to shareholders of record as of March 5, 2001. All references to the
number of shares (other than common stock issued or outstanding on the 2000
Consolidated Balance Sheet and 1999 and 2000 Consolidated Statements of
Shareholders' Equity), per share amounts, cash dividends and any other
reference to shares in the Consolidated Financial Statements and all subsequent
references in the accompanying Notes to Consolidated Financial Statements
("Notes"), unless otherwise noted, have been adjusted to reflect the split on a
retroactive basis. Previously awarded stock options, restricted stock awards,
and all other agreements payable in Krispy Kreme Doughnuts, Inc. common stock
have been adjusted or amended to reflect the split.
2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. Krispy Kreme Doughnuts, Inc. and its subsidiaries (the
"Company") are engaged principally in the sale of doughnuts and related items
through Company-owned stores. The Company also derives revenue from franchise
and development fees and the collection of royalties from franchisees.
Additionally, the Company sells doughnutmaking equipment and mix 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 wholly-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Investments of 50% or greater in affiliates are also consolidated and the
portion not owned by the company is shown as a minority interest in
consolidated subsidiary companies.
EQUITY METHOD OF ACCOUNTING. Investments in 20% to 49.9% 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.
FISCAL YEAR. The Company's fiscal year is based on a 52/53 week year. The
fiscal year ends on the Sunday closest to the last day in January. The years
ended January 31, 1999, January 30, 2000 and January 28, 2001 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. Cash overdrafts
are reclassified to accounts payable. The amounts reclassified are $7,175,000
and $6,487,000 at January 30, 2000 and January 28, 2001, respectively.
INVENTORIES. Inventories are recorded at the lower of average cost or market.
INVESTMENTS. Investments consist of United States Treasury notes,
mortgage-backed government securities, corporate debt securities and
certificates of deposit and are included in short term and long term
investments in the accompanying balance sheet. Certificates of deposit are
carried at cost which approximates fair value. All other marketable securities
are stated at market value as determined by the most recently traded price of
each security at the balance sheet date.
Management determines the appropriate classification of its investments in
marketable securities at the time of the purchase and reevaluates such
determination at each balance sheet date. As of January 28, 2001, 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.
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.
33
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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.
FAIR VALUE OF FINANCIAL 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.
STORE CLOSING COSTS. When a decision is made to close a store, the Company
records a charge to cover the estimated costs of the planned store closing
including (1) the unrecoverable portion of the remaining lease payments on
leased stores, (2) the write-down of store assets to reflect estimated
realizable values (recorded as a reduction of the recorded asset on the
Company's consolidated balance sheet), and (3) other costs associated with the
store closing. Other closing costs and the current portion of lease liabilities
are recorded in Accrued Expenses on the Company's consolidated balance sheet.
The long-term portion of lease liabilities is recorded in Other Long-Term
Obligations.
At the store closing date, the Company discontinues depreciation on all assets
related to closed store properties. Disposition efforts on assets held for sale
begin immediately following the store closing. Reductions in the amount accrued
for store closings represent ongoing lease payments on remaining lease
obligations.
REVENUE RECOGNITION. A summary of the revenue recognition policies for each
segment of the Company (see Note 14) is as follows:
- Company Store Operations revenue is derived from the sale of
doughnuts and related items to on-premises and off-premises
customers. Revenue is recognized at the time of sale for
on-premises sales 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 certain new stores and are
deferred until the store is opened. The royalties recognized
in each period are based on the sales in that period.
- KKM&D revenue is derived from the sale of doughnutmaking
equipment, mix and other supplies needed to operate a
doughnut store to Company-owned and franchised stores.
Revenue is recognized at the time the title and the risk of
loss pass to the customer. Revenue from Company-owned stores
and consolidated joint venture stores is eliminated in
consolidation.
STOCK-BASED COMPENSATION. The Company accounts for employee stock options in
accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." Under APB 25, the Company recognizes no
compensation expense related to employee stock options, as no options are
granted below the market price at the grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
recognition of compensation expense based on the fair value of options on the
grant date but allows companies to continue applying APB 25 if certain pro
forma disclosures are made assuming hypothetical fair value method application.
For additional information on the Company's stock options, including pro forma
disclosures required by SFAS 123, refer to Note 13.
SHAREHOLDER RIGHTS PLAN. Each share of the Company's common stock has one
preferred share purchase right. Each share purchase right entitles the
registered shareholder to purchase one one-hundredth (1/100) of a share of
Krispy Kreme Series A Participating Cumulative Preferred Stock, $1.00 par value
per share, at a price of $96.00 per one one-hundredth of a Series A preferred
share. The share purchase rights are not exercisable until the earlier to occur
of (1) 10 days following a public announcement that a person or group of
affiliated or associated persons -- referred to as an acquiring person -- have
acquired beneficial ownership of 15% or more of the Company's outstanding
common stock or (2) 10 business days following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer which
would result in an acquiring person beneficially owning 15% or more of the
outstanding shares of common stock. The share purchase rights will expire on
January 18, 2010, unless that expiration date is extended or unless the share
purchase rights are redeemed or exchanged by the Company.
34
19
If the Company is acquired in a merger or other business combination, or if 50%
or more of the Company's consolidated assets or earning power is sold after a
person or group has become an acquiring person, proper provision will be made
so that each holder of a share purchase right -- other than share purchase
rights beneficially owned by the acquiring person, which will thereafter be
void -- will have the right to receive, upon exercise of the share purchase
right at the then current exercise price, the number of shares of common stock
of the acquiring company which at the time of the transaction have a market
value of two times the share purchase right exercise price. If any person or
group becomes an acquiring person, proper provision shall be made so that each
holder of a share purchase right -- other than share purchase rights
beneficially owned by the acquiring person, which will thereafter be void --
will have the right to receive upon exercise, and without paying the exercise
price, the number of shares of Krispy Kreme common stock with a market value
equal to the share purchase right exercise price.
Series A preferred shares purchasable upon exercise of the share purchase
rights will not be redeemable. Each Series A preferred share will be entitled
to a minimum preferential dividend payment of $1 per share and will be entitled
to an aggregate dividend of 100 times the dividend declared per share of common
stock. In the event the Company liquidates, the holders of the Series A
preferred shares will be entitled to a minimum preferential liquidation payment
of $1 per share but will be entitled to an aggregate payment of 100 times the
payment made per share of common stock. Each Series A preferred share will have
100 votes, voting together with the shares of common stock. Finally, in the
event of any merger, consolidation or other transaction in which shares of
common stock are exchanged, each Series A preferred share will be entitled to
receive 100 times the amount received per share of common stock. These rights
are protected by customary antidilution provision.
Before the date the share purchase rights are exercisable, the share purchase
rights may not be detached or transferred separately from the common stock. The
share purchase rights will expire on January 18, 2010, unless that expiration
date is extended or unless the share purchase rights are redeemed or exchanged
by the Company. At any time an acquiring person acquires beneficial ownership
of 15% or more of the Company's outstanding common stock, the board of
directors may redeem the share purchase rights in whole, but not in part, at a
price of $0.001 per share purchase right. Immediately upon any share purchase
rights redemption, the exercise rights terminate, and the holders will only be
entitled to receive the redemption price.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject
the Company to credit risk consist principally of accounts receivable. Accounts
receivable are primarily from grocery and convenience stores. The Company
performs ongoing credit evaluations of its customers' financial condition. The
Company had no single customer that accounted for more than 10% of total
revenues in fiscal 2001. In fiscal 2000, there was one customer that accounted
for 10.2% of total revenues. The Company's two largest customers accounted for
17.9% and 15.6% of total revenues for fiscal 2000 and fiscal 2001,
respectively. Accounts receivable for these two customers accounted for
approximately 42.5% of net accounts receivable at January 30, 2000 and 16.9% of
net accounts receivable at January 28, 2001.
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 28, 2001,
accumulated other comprehensive income, as reflected in the consolidated
statements of shareholders' equity, was comprised of net unrealized holding
gains on marketable securities of $609,000.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for years beginning after June 15, 2000, the
Company's first quarter of fiscal year 2002. SFAS 133, as amended by SFAS 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 hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Since derivatives are not used, the adoption of SFAS 133 will not
have any impact on the financial statements of the Company.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which, among other guidance, clarifies certain conditions to be
met in order to recognize revenue. SAB 101 is required to be adopted no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
Company has adopted SAB 101 in fiscal 2001. Its adoption has resulted in no
material effect on the Company's revenue recognition policy or revenues
recorded.
RECLASSIFICATIONS. Certain reclassifications of the 1999 and 2000 Consolidated
Financial Statements and related footnotes have been made to conform with the
2001 presentation.
35
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3. INVESTMENTS
The following table provides certain information about investments at January
28, 2001. The Company did not hold any investments at January 30, 2000.
IN THOUSANDS
----------------------------------------------------------------
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
--------- ---------------- ---------------- -----
JANUARY 28, 2001
Certificates of deposit $ 5,000 $ -- $ -- $ 5,000
US government notes 4,996 73 (20) 5,049
Federal government agencies 18,900 458 (50) 19,308
Corporate debt securities 6,475 151 (3) 6,623
------- ---- ---- -------
Total $35,371 $682 $(73) $35,980
======= ==== ==== =======
MATURITIES OF INVESTMENTS WERE AS FOLLOWS AT JANUARY 28, 2001:
IN THOUSANDS
------------------------------
AMORTIZED FAIR
COST VALUE
--------- -----
Due within one year $17,937 $18,103
Due after one year through five years 17,434 17,877
------- -------
Total $35,371 $35,980
======= =======
4. INVENTORIES
THE COMPONENTS OF INVENTORIES ARE AS FOLLOWS:
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
====== ====== ==== ====== =======
JANUARY 28, 2001
Raw materials $ -- $1,756 $475 $1,578 $ 3,809
Work in progress -- 248 -- -- 248
Finished goods 880 1,435 13 -- 2,328
Purchased merchandise 4,981 -- -- 641 5,622
Manufacturing supplies -- -- 24 -- 24
------ ------ ---- ------ -------
Totals $5,861 $3,439 $512 $2,219 $12,031
====== ====== ==== ====== =======
5. PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
IN THOUSANDS
---------------------------------------
JAN. 30, 2000 JAN. 28, 2001
------------- -------------
Land $ 11,144 $ 11,144
Buildings 24,606 29,637
Machinery and equipment 47,701 65,119
Leasehold improvements 9,627 10,440
Construction in progress 165 556
-------- --------
93,243 116,896
Less: accumulated depreciation 32,659 38,556
-------- --------
Property and equipment, net $ 60,584 $ 78,340
======== ========
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6. ACCRUED EXPENSES
ACCRUED EXPENSES CONSIST OF THE FOLLOWING:
IN THOUSANDS
---------------------------------
JAN. 30, 2000 JAN. 28, 2001
------------- -------------
Salaries and wages $ 3,255 $ 5,728
Restructuring expenses 1,115 1,022
Deferred revenue 655 2,042
Profit-sharing stock ownership plan contribution 2,750 2,075
Advertising fund 422 1,353
Casualty insurance 908 1,925
Group insurance 925 762
Impairment 1,188 49
Other 2,862 4,948
------- -------
$14,080 $19,904
======= =======
7. REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT
On December 29, 1999, the Company amended and restated its Loan Agreement (the
"Agreement") with a bank. The new agreement provides a $40 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 LIBOR plus 100
basis points. There is no interest, fee or other charge for the unadvanced
portion of the line of credit. As of January 30, 2000 and January 28, 2001, the
amount outstanding under the revolving line of credit was $19,302,000 and
$91,000, respectively, and the interest rate was 6.823% and 7.561%,
respectively. The amount available under the line of credit was $37.2 million at
January 28, 2001.
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 LIBOR based method, or a Swap Rate based method
with a ceiling tied to the Prime Rate at the time of conversion. As of January
28, 2001, no amounts from the $40 million line of credit facility had been
converted to a term loan.
TERM LOAN. Interest on term loans 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 (6.823% at January 30, 2000). The Company entered into a
$12,000,000 term loan in July 1996 and repayment of this loan began on August
20, 1996, with monthly principal payments of $200,000 plus interest. As of
January 30, 2000, the outstanding principal balance of the term loan was
$3,600,000 and the interest rate was 6.823%. The term loan was repaid in full on
April 10, 2000 without any penalty or premium.
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 28, 2001, the Company was in
compliance with each of these covenants.
The amended and restated Agreement, which was entered into in December 1999,
replaced a Loan Agreement with a bank which was scheduled to expire on July 10,
2002. The previous Loan Agreement was in the form of a $28 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 from those prescribed in the amended and
restated Agreement.
At January 28, 2001, the Company had an outstanding letter of credit in the
amount of $2,676,000 for insurance liability purposes, which reduces the
Company's available line of credit.
CONSOLIDATED JOINT VENTURES. On January 25, 2001, the Northern California joint
venture entered into a $4,500,000 revolving line of credit agreement in which
the Company has guaranteed 84% of the line of credit. The line of credit bears
interest at one-month LIBOR plus 125 basis points and matures on January 15,
2002. There is no interest, fee or other charge for the unadvanced portion of
the line of credit. As of January 28, 2001, the amount outstanding under the
revolving line of credit was $3,435,000.
Prior to the January 25, 2001 agreement, the Northern California joint venture
had a $5 million revolving line of credit in place. The Company guaranteed the
amounts outstanding under that line of credit. Under the terms of that
agreement, interest on the revolving line of credit was payable monthly and
charged at the one-month LIBOR plus 100 basis points. That line of credit
expired on October 31, 2000 with an outstanding balance of $1,575,000.
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The aggregate maturities for the term loan and the revolvers for the five years
after January 28, 2001 are $3,526,000, $0, $0, $0, and $0, respectively.
Interest paid was $1,404,000 in fiscal 1999, $1,421,000 in fiscal 2000 and
$458,000 in fiscal 2001.
8. 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 28, 2001, FUTURE MINIMUM ANNUAL RENTAL COMMITMENTS UNDER
NONCANCELABLE OPERATING LEASES ARE AS FOLLOWS:
IN THOUSANDS
------------
FISCAL YEAR ENDING IN AMOUNT
- --------------------- ------------
2002 $ 8,695
2003 7,527
2004 5,195
2005 3,699
2006 2,616
Thereafter 14,583
--------
$ 42,315
========
Rental expense, net of rental income, totaled $5,565,000 in fiscal 1999,
$6,220,000 in fiscal 2000 and $8,540,000 in fiscal 2001.
9. INCOME TAXES
THE COMPONENTS OF THE PROVISION (BENEFIT) FOR FEDERAL AND STATE INCOME TAXES ARE
SUMMARIZED AS FOLLOWS:
IN THOUSANDS
-------------------------------------------------------
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- ------------- -------------
Currently payable $ 1,546 $ 3,392 $ 7,390
Deferred (3,658) 258 1,668
------- ------- -------
$(2,112) $ 3,650 $ 9,058
======= ======= =======
A RECONCILIATION OF THE STATUTORY FEDERAL INCOME TAX RATE WITH THE COMPANY'S
EFFECTIVE RATE IS AS FOLLOWS:
IN THOUSANDS
-------------------------------------------------------
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- ------------- -------------
Federal taxes at statutory rate $(1,795) $ 3,266 $ 8,321
State taxes, net of federal benefit ( 440) 264 673
Other 123 120 64
------- ------- -------
$(2,112) $ 3,650 $ 9,058
======= ======= =======
Income tax payments, net of refunds, were $239,000 in fiscal 1999, $5,407,000 in
fiscal 2000 and $5,894,000 in fiscal 2001.
THE NET CURRENT AND NON-CURRENT COMPONENTS OF DEFERRED INCOME TAXES RECOGNIZED
IN THE BALANCE SHEET ARE AS FOLLOWS:
IN THOUSANDS
----------------------------------
YEAR ENDED JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- -------------
Net current assets $ 3,500 $ 3,809
Net non-current assets (liabilities) 1,398 (579)
------- -------
$ 4,898 $ 3,230
======= =======
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THE TAX EFFECTS OF THE SIGNIFICANT TEMPORARY DIFFERENCES WHICH COMPRISE THE
DEFERRED TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:
IN THOUSANDS
----------------------------------
YEAR ENDED JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- -------------
ASSETS
Compensation deferred (unpaid) $ 738 $ 826
Accrued group insurance 352 290
Other long-term obligations 509 592
Accrued insurance 1,097 732
Accrued restructuring expenses 2,042 1,570
Accrued store closings and impairment expenses 528 76
Deferred revenue 249 776
Accounts receivable 503 456
Inventory 236 397
Charitable contributions carryforward 835 420
State NOL carryforwards 895 895
Other 597 928
------- -------
Gross deferred tax assets 8,581 7,958
------- -------
LIABILITIES
Property and equipment 3,343 4,279
Prepaid VEBA contribution 232 266
Prepaid expenses 108 183
------- -------
Gross deferred tax liabilities 3,683 4,728
------- -------
Net asset $ 4,898 $ 3,230
======= =======
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.
10. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income (loss) available
to common shareholders 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 and the impact of outstanding shares under
our restricted stock plan. 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 the options assumed to be exercised,
the proceeds of the tax benefits recognized by the Company in conjunction with
nonqualified stock plans and from the amounts of unearned compensation
associated with the restricted shares.
THE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER
SHARE:
IN THOUSANDS, EXCEPT SHARE AMOUNTS
-------------------------------------------------------
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- ------------- -------------
Numerator:
Net income (loss) $ (3,167) $ 5,956 $ 14,725
========== ========== ==========
Denominator:
Basic earnings per share -- weighted average shares 16,498,360 18,680,440 24,591,958
Effect of dilutive securities:
Stock options -- 959,440 2,235,788
---------- ---------- ----------
Diluted earnings per share -- adjusted weighted average
shares 16,498,360 19,639,880 26,827,746
========== ========== ==========
Due to the loss in fiscal 1999, the 3,662,000 stock options outstanding would
have been antidilutive and were excluded from the calculation of diluted
earnings per share.
39
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11. EMPLOYEE BENEFITS PLANS
The Company has a 401(k) savings plan, which provides that employees may
contribute a portion of their salaries 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
$440,000 in fiscal 1999, $501,000 in fiscal 2000 and $64,000 in fiscal 2001.
Effective March 15, 2000, the Company ceased matching contributions to the
401(k) savings plan.
Effective October 1, 2000, the Company established an unfunded Nonqualified
Deferred Compensation Plan (the "401(k) Mirror Plan"). The 401(k) Mirror Plan is
designed to enable the Company's executives to have the same opportunity to
defer compensation as is available to other employees of the Company under the
qualified 401(k) savings plan. Participants may defer from 1% to 15% of their
base salary into the 401(k) Mirror Plan, may direct the investment of the
amounts they have deferred and are always 100% vested with respect to the
amounts they have deferred. The investments, however, are not a separate fund of
assets and are shown in other assets on the consolidated balance sheet. The
corresponding liability to participants is included in other long-term
obligations. As of January 28, 2001 the balance in the asset and corresponding
liability account was approximately $24,000.
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.
40
25
THE FOLLOWING TABLES SUMMARIZE THE STATUS OF THE PLAN AND THE AMOUNTS RECOGNIZED
IN THE BALANCE SHEET:
IN THOUSANDS, EXCEPT PERCENTAGES
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- -------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year $ 834 $ 1,162
Service cost 180 181
Interest cost 56 87
Actuarial (gain) loss (120) --
Benefits paid -- --
Change in plan provisions -- --
-------- --------
Projected benefit obligation at end of year $ 950 $ 1,430
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions -- --
Benefits paid -- --
-------- --------
Fair value of plan assets at end of year $ -- $ --
======== ========
NET AMOUNT RECOGNIZED
Funded status $ (950) $ (1,430)
Unrecognized transition obligation (asset) -- --
Unrecognized prior service cost -- --
Unrecognized net loss (88) (86)
Contributions from measurement date to fiscal year end -- --
-------- --------
Net amount recognized $ (1,038) $ (1,516)
======== ========
ASSUMPTIONS
Weighted average assumed discount rate 7.50% 7.50%
Weighted average expected long-term rate of return on plan assets N/A N/A
Assumed rate of annual compensation increases 5.00% 5.00%
NET PERIODIC PENSION COST
Service cost $ 180 $ 181
Interest cost 56 87
Estimated return on plan assets -- --
Amortization of unrecognized transitional liability (asset) -- --
Amortization of prior service cost -- --
Recognized net actuarial (gain) or loss -- --
-------- --------
Total $ 236 $ 268
======== ========
RECONCILIATION OF NET PENSION ASSET (LIABILITY) FOR FISCAL YEAR
Prepaid (accrued) pension cost as of end of prior year $ (802) $ (1,248)
Contributions during the fiscal year -- --
Net periodic pension cost for the fiscal year 236 268
-------- --------
Accrued pension cost as of fiscal year end $ (1,038) $ (1,516)
======== ========
Effective February 1, 1999, the Company established the Krispy Kreme
Profit-Sharing Stock Ownership Plan. Under the terms of this qualified plan, the
Company contributes a percentage of each employee's compensation, subject to
Internal Revenue Service limits, to each eligible employee's account under the
plan. The expense associated with this plan was $2,647,000 and $2,056,000 in
fiscal 2000 and fiscal 2001, respectively, based on a contribution of 7% of
eligible compensation. Under the terms of the plan, the contribution can be made
in the form of cash or newly issued shares of common stock. With the exception
of the initial year of the plan, the contribution is made annually on April 15
or the closest business day to April 15. The contribution for fiscal 2000 was
made in the form of newly issued shares based on the initial price of the
Company's common stock in the IPO. Employees become eligible for participation
in the plan upon the completion of one year of service and vest ratably over
five years. Credit for past service was granted to employees at the inception of
the plan.
The Company established a nonqualified "mirror" plan, effective February 1,
1999. Contributions to this nonqualified plan will be made under the same terms
and conditions as the qualified plan, with respect to compensation earned by
participants in excess of the maximum amount of compensation that may be taken
into account under the qualified plan. The Company recorded compensation expense
of $103,000 in fiscal 2000 and $19,000 in fiscal 2001 for amounts credited to
certain employees under the nonqualified plan.
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26
12. INCENTIVE COMPENSATION
The Company has an incentive compensation plan for certain management and
non-management level employees. Incentive compensation amounted to $2,300,000 in
fiscal 1999, $3,146,000 in fiscal 2000 and $5,500,000 in fiscal 2001.
In addition, in 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 suspended.
In fiscal 1999, participants still employed by the Company were given the option
to convert their performance units earned under the Plan to common shares of the
Company's common stock, subject to certain restrictions. These shares had no
voting rights prior to the initial public offering of the Company's common
stock. The number of performance units converted was 2,358,900 at a conversion
rate of $2.59 per performance unit for a total of approximately $6,112,000 in
common stock issued in connection with the conversion. Due to the Federal and
State income tax consequences of the conversion incurred by each participant,
the Company 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 30, 2000 and January 28, 2001 was $2,547,000 and $2,349,000,
respectively and has been recorded as a deduction from shareholders' equity.
13. STOCK OPTION PLAN AND RESTRICTED STOCK AWARD
STOCK OPTION PLANS. During fiscal 1999, the Company established the Krispy Kreme
Doughnut Corporation 1998 Stock Option Plan (the "1998 Plan"). Under the terms
of the 1998 Plan, 3,826,000 shares of common stock of the Company were reserved
for issuance to employees and Directors of the Company. During fiscal 2000, an
additional 480,000 shares of common stock of the Company were reserved for
issuance under the 1998 Plan. Grants may be in the form of either incentive
stock options or nonqualified stock options. During fiscal 1999, 3,662,000
nonqualified options with a 10-year life were issued to employees and Directors
at an exercise price of $2.59 per share, the fair market value of the common
stock at the grant date. During fiscal 2000, no additional stock options were
issued under the 1998 Plan. In fiscal 2001, 564,000 stock options were issued
under the 1998 Plan at an exercise price ranging from $10.50 per shares to
$27.38. Stock options were granted at prices at fair market value on the date of
grant.
In July 2000, the shareholders approved the 2000 Stock Incentive Plan (the "2000
Plan"), which was adopted by the Board of Directors on June 6, 2000. Awards
under the 2000 Plan may be incentive stock options, nonqualified stock options,
stock appreciation rights, performance units, restricted stock (or units) and
share awards. The maximum number of shares of common stock with respect to which
awards may be granted under the 2000 Plan is 2,000,000 shares plus 280,000
shares that were available for grant, but not granted, under the 1998 Plan. The
2000 Plan provides aggregate limits on grants of the various types of awards in
the amount of 1,500,000 shares for incentive stock options and 600,000 shares,
in the aggregate for stock appreciation rights, performance units, restricted
stock and stock awards. During fiscal 2001, 366,400 stock options were issued
under the plan at an exercise price ranging from $29.53 to $41.25. Stock options
were granted at prices at fair market value on the date of grant.
OPTIONS UNDER BOTH PLANS VEST AND EXPIRE ACCORDING TO TERMS ESTABLISHED AT THE
GRANT DATE. THE FOLLOWING TABLE SUMMARIZES ALL STOCK OPTION TRANSACTIONS FROM
JANUARY 31, 1999 TO JANUARY 28, 2001:
SHARES SUBJECT WEIGHTED AVERAGE SHARES SUBJECT TO WEIGHTED AVERAGE
TO OPTIONS EXERCISE PRICE PER SHARE EXERCISABLE OPTIONS EXERCISE PRICE PER SHARE
---------- ------------------------ ------------------- ------------------------
OUTSTANDING, FEBRUARY 1, 1998 -- -- -- --
Granted 3,662,000 $ 2.59 182,000 $ 2.59
Exercised -- -- -- --
Canceled -- -- -- --
---------- ----------- -------- ---------
OUTSTANDING, JANUARY 31, 1999 3,662,000 $ 2.59 182,000 $ 2.59
Granted -- -- -- --
Exercised -- -- -- --
Canceled 24,000 2.59 -- --
---------- ----------- -------- ---------
OUTSTANDING, JANUARY 30, 2000 3,638,000 $ 2.59 182,000 $ 2.59
Granted 931,800 19.54 -- --
Exercised 40,000 2.59 -- --
Canceled 21,400 5.15 -- --
---------- ----------- -------- ---------
OUTSTANDING, JANUARY 28, 2001 4,508,400 $ 6.08 468,000 $ 5.13
========== =========== ======== =========
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27
At January 28, 2001, there were approximately 1,896,000 shares of common stock
available for issuance pursuant to future stock option grants.
Additional information regarding options outstanding as of January 28, 2001 is
as follows:
- ------------------------------------------------------------------------------------- --------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------
RANGE OF WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE SHARES CONTRACTUAL LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- ------ ----------------------- -------------- ------ --------------
$2.59-$10.50 4,122,000 7.7 $ 3.63 468,000 $5.13
$27.38-41.25 386,400 9.6 $32.18 -- --
$2.59-$41.25 4,508,400 7.9 $ 6.08 468,000 $5.13
RESTRICTED STOCK AWARDS. In fiscal 2001, the Company granted 5,526 restricted
stock awards in the form of the Company's common stock under the 2000 Plan to
certain employees to provide incentive compensation. The weighted average
grant-date fair value of the shares issued was $38.02. These shares vest ratably
over either a three or four year period from the date of grant.
PRO FORMA FAIR VALUE DISCLOSURES
HAD COMPENSATION EXPENSE FOR THE COMPANY'S STOCK OPTIONS BEEN BASED ON THE FAIR
VALUE OF THE GRANT DATE UNDER THE METHODOLOGY PRESCRIBED BY SFAS 123, THE
COMPANY'S INCOME FROM CONTINUING OPERATIONS AND EARNINGS PER SHARE FOR THE THREE
YEARS ENDED JANUARY 28, 2001 WOULD HAVE BEEN IMPACTED AS FOLLOWS:
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
--------------------------------------------------------------
JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
------------- -------------- -------------
Reported net income (loss) $ (3,167) $ 5,956 $ 14,725
Pro forma net income (loss) (3,280) 5,843 13,693
Reported earnings per share-- Basic (.19) .32 .60
Pro forma earnings per share-- Basic (.20) .31 .56
Reported earnings per share-- Diluted (.19) .30 .55
Pro forma earnings per share-- Diluted (.20) .30 .51
THE FAIR VALUE OF OPTIONS GRANTED, WHICH IS AMORTIZED TO EXPENSE OVER THE OPTION
VESTING PERIOD IN DETERMINING THE PRO FORMA IMPACT, IS ESTIMATED AT THE DATE OF
GRANT USING THE BLACK-SCHOLES OPTION-PRICING MODEL WITH THE FOLLOWING WEIGHTED
AVERAGE ASSUMPTIONS:
JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
------------- -------------- -------------
Expected life of option 7 years 7 years 7 years
Risk-free interest rate 4.8% 4.8% 6.1%
Expected volatility of stock -- -- 49.7%
Expected dividend yield 3.1% 3.1% --
THE WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING 1999, 2000 AND 2001 IS
AS FOLLOWS:
JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
------------- -------------- -------------
Fair value of each option granted $ .24 $ -- $ 23.08
Total number of options granted 3,662,000 -- 931,800
Total fair value of all options granted $ 864,232 $ -- $21,505,944
43
28
14. BUSINESS SEGMENT INFORMATION
The Company has three reportable business segments. The Company Store Operations
segment is comprised of the operating activities of the stores owned by the
Company and those in consolidated joint ventures. These stores sell doughnuts
and complementary products through both on-premises and off-premises sales. The
majority of the ingredients and materials used by Company Store Operations is
purchased from the KKM&D business segment.
The Franchise Operations segment represents the results of the Company's
franchise program. Under the terms of the franchise agreements, the licensed
operators pay royalties and fees to the Company in return for the use of the
Krispy Kreme name. Expenses for this business segment include costs incurred to
recruit new franchisees and to open, monitor and aid in the performance of these
stores and direct general and administrative expenses.
The KKM&D segment supplies mix, equipment and other items to both Company and
franchisee owned stores. All intercompany transactions between the KKM&D
business segment and Company stores and consolidated joint venture stores are
eliminated in consolidation.
Segment information for total assets and capital expenditures is not presented
as such information is not used in measuring segment performance or allocating
resources among segments.
Segment operating income is income before general corporate expenses and income
taxes.
IN THOUSANDS
------------------------------------------------------------
YEAR ENDED JAN. 31, 1999 JAN. 30, 2000 JAN. 28, 2001
- ---------- ------------- ------------- -------------
Revenues:
Company Store Operations $ 145,251 $ 164,230 $ 213,677
Franchise Operations 3,236 5,529 9,445
KKM&D 107,431 142,215 201,406
Intercompany sales eliminations (75,038) (91,731) (123,813)
--------- --------- ---------
Total revenues $ 180,880 $ 220,243 $ 300,715
========= ========= =========
Operating Income (loss):
Company Store Operations $ 13,029 $ 18,246 $ 27,370
Franchise Operations 448 1,445 5,730
KKM&D 4,307 7,182 11,712
Unallocated general and administrative expenses (12,020) (16,035) (21,305)
Provision for restructuring (9,466) -- --
--------- --------- ---------
Total operating income $ (3,702) $ 10,838 $ 23,507
========= ========= =========
Depreciation and Amortization Expenses:
Company Store Operations $ 2,873 $ 3,059 $ 4,838
Franchise Operations 57 72 72
KKM&D 225 236 303
Corporate administration 1,123 1,179 1,244
--------- --------- ---------
Total depreciation and amortization expenses $ 4,278 $ 4,546 $ 6,457
========= ========= =========
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15. RELATED PARTY TRANSACTIONS
Total revenues includes $8,216,000 in fiscal 1999, $12,721,000 in fiscal 2000
and $22,515,000 in fiscal 2001 of sales to franchise doughnut stores owned by
directors and an employee of the Company. Trade accounts receivable from these
stores totaled $1,608,000 and $2,599,000 at January 30, 2000 and January 28,
2001, respectively. Total revenues also includes royalties from these stores of
$569,000 in fiscal 1999, $904,000 in fiscal 2000 and $1,689,000 in fiscal 2001.
Additionally, from time to time the Company extends credit to franchisees 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.
In March 2000, a pooled investment fund was established, the Krispy Kreme Equity
Group, LLC, which invests in new area developers in certain markets. Krispy
Kreme officers are eligible to invest in the fund. Members of the board of
directors who are not Krispy Kreme officers are not eligible to invest in the
fund. Krispy Kreme does not provide any funds to its officers to invest in the
fund or provide guarantees for the investment. The fund invests exclusively in
certain new area developers as approved by the Board of Directors, obtaining up
to a 5% interest in them. As of January 28, 2001, the fund had invested in five
area developers. If any member of the fund withdraws, the fund has a right of
first refusal with respect to the withdrawing member's interest. The remaining
members then have the right to purchase any interest the fund does not purchase.
Finally, Krispy Kreme is obligated to purchase any remaining interest. Members
are required to withdraw from the fund in the event of their death, retirement
or termination of employment with Krispy Kreme.
Certain members of the board of directors own 21 stores and are committed to
open an additional 12 stores. In addition to officers' investments in the Krispy
Kreme Equity Group, LLC, four officers of the Company are investors in groups
that own 13 stores and are committed to open 171 additional stores. Certain of
these investments are in the same entities as those invested in by the Krispy
Kreme Equity Group, LLC.
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. The Kingsmill
Plan was suspended in fiscal 1999. The Company has also entered into collateral
repurchase agreements and loan guarantees with officers and directors outside
the Kingsmill Plan.
The Company's contingent liability related to collateral repurchase agreements
for officers and directors is $2,456,000 at January 30, 2000 and $249,000 at
January 28, 2001. The Company has guaranteed bank loans of $2,100,000 and
$600,000 at January 30, 2000 and January 28, 2001, respectively.
16. COMMITMENTS AND CONTINGENCIES
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 doughnutmaking equipment. The
Company's contingent liability related to these agreements is approximately
$999,000 at January 30, 2000 and $1,266,000 at January 28, 2001. 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 $3,332,000 at January
30, 2000 and $2,593,000 at January 28, 2001.
Because the Company enters into long-term contracts with its suppliers, in the
event that any of these relationships terminate unexpectedly, even where it has
multiple suppliers for the same ingredient, the Company's ability to obtain
adequate quantities of the same high quality ingredient at the same competitive
price could be negatively impacted.
17. RESTRUCTURING
IN THOUSANDS
---------------------------------------------------------
LEASE LIABILITIES ACCRUED EXPENSES TOTAL ACCRUAL
----------------- ---------------- -------------
BALANCE AT JANUARY 31, 1999 $ 6,082 $ 350 $ 6,432
Additions 723 -- 723
Reductions (1,536) (70) (1,606)
Transfers (487) 487 --
Adjustments -- (175) (175)
------- ----- -------
BALANCE AT JANUARY 30, 2000 4,782 592 5,374
Reductions (1,130) (113) (1,243)
------- ----- -------
BALANCE AT JANUARY 28, 2001 $ 3,652 $ 479 $ 4,131
======= ===== =======
45
30
FISCAL 2000. During fiscal 2000, 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 $723,000 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 $325,000 was sold for $830,000 resulting in a credit to
restructuring expense. Together, these adjustments resulted in a net increase in
restructuring expense of $43,000 for the year ended January 30, 2000. 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. Reductions in Accrued Expenses represent the cost
of moving two double drive-through buildings. Accrued property taxes of
$487,000, originally recorded as Lease Liabilities, have been transferred to
Accrued Expenses.
FISCAL 2001. Reductions in Lease Liabilities represent ongoing lease payments on
remaining lease obligations. Reductions in Accrued Expenses represent the
removal of one double drive-through building, as well as other miscellaneous
expenses of three other double drive-though buildings. There was no additional
restructuring expense for the year ended January 28, 2001.
18. STORE CLOSINGS AND IMPAIRMENT
IN THOUSANDS
--------------------------------------
LEASE LIABILITIES AND ACCRUED EXPENSES
BALANCE AT JANUARY 31, 1999 $ 283
Additions 1,139
Reductions (45)
-------
BALANCE AT JANUARY 30, 2000 1,377
Additions 318
Reductions (1,494)
-------
BALANCE AT JANUARY 28, 2001 $ 201
=======
FISCAL 2000. In the fourth quarter of fiscal 2000, the Company recorded a $1.1
million charge for the closing of two stores. These stores were torn down in the
second quarter of fiscal 2001 and new buildings constructed on the same sites.
The accrual consists of the write-off of the net book value of buildings and
leasehold improvements as well as equipment that will be abandoned. This charge
has been recorded in Operating Expenses of the Company Store Operations segment.
Reductions in the accrual consist of ongoing lease payments on remaining lease
obligations.
FISCAL 2001. In fiscal 2001, the Company recorded a $318,000 charge for the
closing of a store damaged by fire. After a thorough evaluation of the property,
the Company made the decision not to reopen the store. This charge has been
recorded in Operating Expenses of the Company Store Operations segment.
Reductions in the accrual represent the write-off of the net book value of
leasehold improvements, the liabilities under rent termination agreements and
other miscellaneous costs relating to the store damaged by fire. Additionally,
reductions include ongoing lease payments on remaining lease obligations, as
well as the write-off of the net book value of buildings, leasehold
improvements, and equipment for two stores that were torn down in the second
quarter of fiscal 2001.
19. JOINT VENTURES
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 "Basis of Consolidation" and "Equity Method
of Accounting" under Note 2 -- Summary of Significant Accounting Policies.
CONSOLIDATED 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.
46
31
EQUITY METHOD JOINT VENTURES
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 Company's remaining investment of $1,608,000
in this joint venture is accounted for using the equity method.
The Company has invested in four additional joint ventures as a minority
interest party. Ownership percentages in these joint ventures range from 3.33%
to 22.33%. Investments in these joint ventures have been made in the form of
capital contributions, as well as notes receivable. Terms of the notes
receivable include interest rates from 5.5% to 12.0% per annum, payable
semiannually with due dates from April 17, 2001 to the dissolution of the joint
venture. As of January 28, 2001, the Company had investments in equity method
joint ventures of $1,674,000 and outstanding notes receivable of $3,021,000 in
these joint ventures. These investments and notes receivable are recorded in
investments in unconsolidated joint ventures and other receivables in the
Consolidated Balance Sheet.
SUMMARIZED FINANCIAL INFORMATION FOR THE COMPANY'S INVESTMENTS IN JOINT
VENTURES, ACCOUNTED FOR BY THE EQUITY METHOD, FOLLOWS:
IN THOUSANDS
--------------
JAN. 28, 2001
--------------
Current assets $ 3,809
Noncurrent assets 10,785
Current liabilities 729
Noncurrent liabilities 5,298
IN THOUSANDS
--------------
JAN. 28, 2001
--------------
Net sales $ 7,029
Gross profit 1,057
Net loss (1,629)
20. LEGAL CONTINGENCIES
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.
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
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. On September 22, 2000, after the case was transferred to the Sacramento
Superior Court, that court granted our motion to compel arbitration of the
action and stayed the action pending the outcome of arbitration. On November 3,
2000, the plaintiffs petitioned for a writ of mandate overruling the Superior
Court. On December 21, 2000, the Court of Appeals summarily denied the writ
petition. Plaintiffs failed to petition the California Supreme Court for review
of the lower court's decision within the time permitted by law. Plaintiffs may
now initiate arbitration proceedings in North Carolina. The lawsuit against Mr.
Livengood was dismissed by the California court for lack of personal
jurisdiction. Plaintiffs have not appealed this judgment, and their time for
doing so has expired. The Company believes that the allegations are without
merit and that the outcome of the lawsuit 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.
21. SUBSEQUENT EVENTS
In February 2001, the Company completed a follow-on public offering of 5,200,000
shares of common stock at a price of $33.50 per share with the net proceeds
totaling $31.83 per share after underwriters' commissions. The 5,200,000 shares
included a 600,000 share over-allotment option exercised by the underwriters. Of
the 5,200,000 shares, 4,656,650 were sold by selling shareholders and 543,350
were sold by the Company. Net proceeds to the Company were $17,295,000.
On February 2, 2001, the Company acquired the assets of Digital Java, Inc., a
Chicago-based coffee company for a purchase price of $389,500 plus an earn-out
not to exceed $775,000. Digital Java, Inc. is a sourcer and micro-roaster of
premium quality coffees and offers a broad line of coffee-based and non-coffee
beverages.
On February 5, 2001, the Company purchased a 104,000 square foot manufacturing
facility in Winston-Salem for approximately $3.3 million. The Company will
relocate its equipment manufacturing and training facilities from its current
location in Winston-Salem to this new facility.
47
32
KRISPY KREME DOUGHNUTS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF KRISPY KREME DOUGHNUTS, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Krispy Kreme
Doughnuts, Inc. and its subsidiaries (the Company) at January 30, 2000 and
January 28, 2001, and the results of their operations and their cash flows for
each of the three years in the period ended January 28, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/S/ PRICEWATERHOUSECOOPERS LLP
Greensboro, North Carolina
March 8, 2001, except as to the last paragraph of Note 1 for which the date is
March 19, 2001
48