<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KRISPY KREME DOUGHNUTS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
NORTH CAROLINA 5812 APPLIED FOR
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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SCOTT A. LIVENGOOD
CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
370 KNOLLWOOD STREET 370 KNOLLWOOD STREET
WINSTON-SALEM, NORTH CAROLINA 27103 WINSTON-SALEM, NORTH CAROLINA 27103
(336) 725-2981 (336) 725-2981
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone number,
including area code, of registrant's principal including area code, of agent for service)
executive offices)
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COPIES TO:
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DAVID A. STOCKTON, ESQ. GERALD S. TANENBAUM, ESQ.
KILPATRICK STOCKTON LLP CAHILL GORDON & REINDEL
1100 PEACHTREE STREET, N.E., SUITE 2800 80 PINE STREET
ATLANTA, GEORGIA 30309 NEW YORK, NEW YORK
(404) 815-6500 (212) 701-3000
(404) 815-6555 (FAX) (212) 269-5420 (FAX)
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act of 1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, no par value per share $74,750,000 $19,734
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Preferred Share Purchase Rights(2) N/A N/A
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o).
(2) A right to purchase a fraction of share of the company's preferred stock is
attached to each share of common stock. See "Description of Capital Stock."
No value is attributable to a right.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON A DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS
SUBJECT TO COMPLETION
DATED DECEMBER 16, 1999
Shares
(Krispy Kreme Doughnuts Logo)
KRISPY KREME DOUGHNUTS, INC.
Common Stock
Krispy Kreme Doughnuts, Inc. is offering shares of its common stock.
This is our initial public offering. We estimate that the initial public
offering price will be between $ and $ per share.
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol KREM.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT KRISPY KREME
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<S> <C> <C> <C>
Per Share $ $ $
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Total $ $ $
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</TABLE>
We have granted the underwriters a 30-day option to purchase up to an additional
shares of common stock to cover over-allotments.
J.P. MORGAN & CO.
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
SCOTT & STRINGFELLOW, INC.
, 2000
<PAGE> 3
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements.......... 12
Use of Proceeds..................... 13
Dividend Policy..................... 14
Capitalization...................... 15
Dilution............................ 16
Selected Financial Data............. 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 19
</TABLE>
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PAGE
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Business............................ 33
Management.......................... 47
Principal Shareholders.............. 55
Related Party Transactions.......... 57
Description of Capital Stock........ 63
Shares Eligible for Future Sale..... 67
Underwriting........................ 69
Legal Matters....................... 71
Experts............................. 71
Where You Can Find More
Information....................... 71
Index to the Financial Statements... F-1
</TABLE>
---------------------------------------------
Until , 2000, all dealers that effect transactions in the
common stock, whether or not they are participating in the offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
We intend to furnish to our shareholders annual reports containing audited
financial statements and quarterly reports containing unaudited interim
financial information for the first three quarters of each fiscal year.
---------------------------------------------
Information in this prospectus related to the performance of franchised stores
is based solely on information provided by our franchisees.
---------------------------------------------
We own or have rights to various trademarks and trade names used in our
business. These include "Krispy Kreme" and the Krispy Kreme logo and "Hot
Doughnuts Now" and the Hot Doughnuts Now logo. This prospectus also includes
trademarks, service marks and trade names owned by other companies.
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(This page intentionally left blank)
-ii-
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PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because it
is a summary, it does not contain all the information that you should consider
before investing. You should read the entire prospectus carefully, including the
section entitled "Risk Factors" and our consolidated financial statements and
the accompanying notes included elsewhere in this prospectus.
KRISPY KREME DOUGHNUTS, INC.
Krispy Kreme is a leading branded specialty retailer of premium quality
doughnuts which are made throughout the day in our stores. We opened our first
store in 1937 and operated 141 stores, consisting of 59 company-owned and 82
franchised stores, as of October 31, 1999. Our principal business is the high
volume production and sale of over 20 varieties of premium quality doughnuts,
including our signature Hot Original Glazed. We have established Krispy Kreme as
a leading consumer brand with a loyal customer base through our longstanding
commitment to quality and consistency. Our place in American society was
recognized in 1997 with the induction of Krispy Kreme artifacts into the
Smithsonian Institution's National Museum of American History. We differentiate
ourselves by combining quality ingredients and a vertically integrated
production process with a unique retail experience featuring our stores' fully
displayed production process, or doughnutmaking theater.
The combination of our well-established brand, our one-of-a-kind doughnuts and
our strong franchise system creates significant opportunities for continued
growth. Our sales growth has been driven by new store openings, as well as
systemwide comparable store sales growth of 12.7% in fiscal 1998, 9.7% in fiscal
1999 and 12.4% in the first nine months of fiscal 2000. Our success is based on
the strengths described below.
COMPANY STRENGTHS
THE UNIVERSAL APPEAL OF OUR PRODUCT. Our market research indicates that Krispy
Kreme's breadth of appeal extends across major demographic groups, including age
and income. In addition to their taste, quality and simplicity, our doughnuts
are an affordable indulgence. This has contributed to many of our customers
purchasing doughnuts by the dozen for their office, clubs and family. Demand for
our doughnuts occurs throughout the day, with approximately half of our
on-premises sales occurring in the morning and half in the afternoon and
evening.
A PROVEN CONCEPT. Krispy Kreme is a focused yet versatile concept. Each of our
distinctive Krispy Kreme stores is a doughnutmaking theater with the capacity,
depending on equipment size, to produce from 2,400 dozen to over 6,000 dozen
doughnuts daily. Our stores serve as our primary retail outlets. They are also
designed to create a multi-sensory experience around our unique product and
production process which is important to our brand-building efforts. In addition
to these on-premises sales, we have developed multiple channels of sales outside
our stores, which we refer to as off-premises sales. These sales channels
improve the visibility of our brand, increase the convenience of purchase and
capture sales from a wide variety of settings and occasions.
STRONG GROWTH POTENTIAL. With only 141 stores, we believe that we are in the
infancy of our growth. Our highest priority expansion plans focus on markets
with over 100,000 households. These markets are most attractive because of their
dense population characteristics which enable us to leverage local operations
infrastructure and brand building efforts. We also believe our universal product
appeal, combined with our strategy that leverages multiple sales channels, will
facilitate our expansion into smaller markets.
THE INGREDIENTS FOR MARKET LEADERSHIP. The doughnut industry, an approximately
$4.7 billion market in 1998, is large, fragmented and characterized by
low-volume outlets with undifferentiated product
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quality. We believe that Krispy Kreme's unique combination of: (1) a strong
brand; (2) a highly differentiated product; (3) high-volume production
capability; and (4) a market penetration strategy using multiple channels of
sales gives us the ability to become the recognized leader in every market we
enter.
A PROVEN FRANCHISE SYSTEM. Krispy Kreme is committed to growth through
franchising. We intend to continue to strengthen our franchise system by
attracting experienced and well-capitalized area developers who have the
management capacity to develop multiple stores. Our development strategy permits
us to grow in a controlled manner and enables us to ensure that each area
developer strictly adheres to our high standards of quality and service. We
prefer that area developers have ownership and successful operating experience
in multi-unit food operations within the territory they propose for development.
In the future, we intend to acquire minority equity positions in selected
franchisee businesses. We believe that common ownership of equity will serve to
further strengthen our relationships and align our mutual interests.
DIRECT STORE DELIVERY CAPABILITIES. Krispy Kreme has developed a highly
effective direct store delivery system, or DSD, for executing off-premises
sales. We deliver fresh doughnuts, both packaged and unpackaged, to a variety of
retail customers, such as supermarkets and convenience stores. Through our
company-owned and franchised store operations, our route drivers are capable of
taking customer orders and delivering products directly to our customers' retail
locations where they are typically merchandised from Krispy Kreme branded
displays.
A CONTROLLED PROCESS ENSURING CONSISTENT HIGH QUALITY. Krispy Kreme has a
vertically integrated, highly automated system designed to create quality,
consistency and efficiency. Our doughnutmaking process starts well before the
store-level operations with our: (1) manufacturing plant which produces our
proprietary mixes; (2) state-of-the-art laboratory that tests all key
ingredients and each batch of mix produced; and (3) self-manufactured, custom
stainless steel doughnutmaking equipment. Additionally, at the store level, we
provide comprehensive training on all aspects of store operations.
A BALANCED FINANCIAL MODEL. Krispy Kreme generates sales and income from three
distinct sources: company stores, franchise fees and royalties and a vertically
integrated supply chain, which we refer to as Support Operations. In addition to
lowering the cost of goods sold for our stores, Support Operations generates
attractive margins on sales of our mixes and equipment. Our franchising approach
to growth minimizes our capital requirements and provides a highly attractive
royalty stream. We believe this financial model provides increased stability to
our revenues and earnings and improves our return on investment.
GROWTH STRATEGY
EXPAND OUR STORE BASE. The addition of new stores will be accomplished
primarily through franchising with area developers following a prescribed
development plan for their respective territories. An initial development plan
has been created to optimally penetrate territories with over 100,000
households. The plan assumes stores will be built in high density,
prime-retailing locations in order to maximize customer traffic and on-premises
sales volumes. We believe a territory-based development strategy creates
substantial benefits to both Krispy Kreme and our area developers. These
benefits include: (1) real estate procurement and development; (2) leverage of
organizational capabilities; (3) brand building and advertising; and (4) the
ability to make marketwide commitments to chain store customers. With respect to
new store growth, we believe that secondary markets in the United States with
less than 100,000 households also offer additional sales and profit growth
opportunities.
IMPROVE EXISTING STORES' ON-PREMISES SALES. Our area developers have
demonstrated that a store employing our updated design located in a densely
populated area is capable of generating and sustaining high volume on-premises
sales. Many of our stores built prior to 1997 were designed primarily as
wholesale bakeries and their formats and site attributes differ considerably
from newer stores. In order to improve the on-premises sales of some of these
stores, we plan to remodel many of our company-owned stores and, in some limited
instances, close or relocate certain stores to a more dynamic area within their
2
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territories. Finally, we consistently evaluate improvements or additions to our
product line in order to increase same store sales levels and balance
seasonality of sales.
INCREASE OFF-PREMISES SALES. In new markets, we typically focus our initial
efforts on on-premises sales and then leverage the store platform to capitalize
on off-premises opportunities. We intend to secure additional grocery and
convenience store customers, as well as increase sales to our existing customer
base by offering premium quality products, category management and superior
customer service.
3
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THE OFFERING
COMMON STOCK OFFERED............... shares
COMMON STOCK OUTSTANDING AFTER THE
OFFERING......................... shares
USE OF PROCEEDS.................... - Repayment of borrowings under our loan
agreement
- A distribution to our existing
shareholders as part of a corporate
reorganization in connection with this
offering
- Remodeling and relocation of older
company-owned stores
- Additional mix production capacity to
support expansion
- Joint venture investments in area
developer stores
- General corporate purposes, including
working capital needs
DIVIDEND POLICY.................... We do not anticipate paying any cash
dividends in the foreseeable future.
PROPOSED NASDAQ NATIONAL MARKET
SYMBOL........................... "KREM"
The table above excludes 91,550 shares of common stock issuable upon exercise of
stock options outstanding under our stock option plan on October 31, 1999, of
which 4,550 were exercisable, without giving effect to the exchange ratio in the
merger described below.
---------------------------------------------
Except as otherwise indicated or required by the context, references to we, our,
us, Krispy Kreme or the company refer to Krispy Kreme Doughnuts, Inc. and its
subsidiaries and predecessors.
Currently, all of the stock of Krispy Kreme Doughnuts, Inc. is owned by Krispy
Kreme Doughnut Corporation, which was incorporated in 1982. Krispy Kreme
Doughnuts, Inc., the issuer of the common stock offered by this prospectus, was
incorporated in North Carolina in 1999 to be the holding company for Krispy
Kreme Doughnut Corporation and its other subsidiaries. This will be effected
through a corporate reorganization in the form of a merger in which each
outstanding share of common stock of Krispy Kreme Doughnut Corporation will be
converted into the right to receive shares of common stock of Krispy
Kreme Doughnuts, Inc. and $ in cash. This merger will occur prior to
the closing of this offering.
Except as otherwise indicated, all information in this prospectus assumes that
the reorganization has been effected, other than the exchange ratio in the
merger, and assumes no exercise of the underwriters' over-allotment option.
---------------------------------------------
Our principal executive offices are located at 370 Knollwood Street,
Winston-Salem, North Carolina 27103 and our telephone number is (336) 725-2981.
Our web site address is http://www.krispykreme.com. Information on our web site
is not a part of this prospectus.
4
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SUMMARY FINANCIAL DATA
The following table shows our summary financial data which you should read
together with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our consolidated financial
statements and accompanying notes and the other financial data included
elsewhere in this prospectus.
Per share amounts reflect an exchange ratio in the merger in connection with our
holding company formation of -for-one, which will have the effect of a
-for-one stock split. The as adjusted balance sheet data give effect to
this offering and the merger as if they had occurred on October 31, 1999.
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YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------------------- -------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
Dollars in thousands, except
share data and store numbers
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STATEMENT OF OPERATIONS
DATA:
Total revenues.............. $114,986 $118,550 $132,614 $158,743 $180,880 $133,190 $161,571
Income from operations
before provision for store
closings and
restructuring............. 6,057 4,230 5,136 5,420 8,099 5,950 10,080
Provision for store closings
and restructuring......... -- 3,000 -- -- 11,802 -- --
Income (loss) from
operations................ 6,057 1,230 5,136 5,420 (3,703) 5,950 10,080
Net income (loss)........... 4,617 180 2,427 2,714 (3,167) 2,886 5,725
Net income (loss) per share:
Basic..................... $ $ $ $ $ $ $
Diluted................... $ $ $ $ $ $ $
Shares used in calculation
of net income (loss) per
share:
Basic.....................
Diluted...................
OPERATING DATA:
Systemwide sales............ $146,715 $151,662 $167,592 $203,439 $240,316 $176,957 $231,956
Number of stores at end of
period:
Company-owned............. 48 53 61 58 61 61 59
Franchised................ 40 42 55 62 70 64 82
-------- -------- -------- -------- -------- -------- --------
Systemwide................ 88 95 116 120 131 125 141
======== ======== ======== ======== ======== ======== ========
Average weekly sales per
store:
Company-owned............. $ 45 $ 39 $ 39 $ 42 $ 47 $ 47 $ 53
Franchised................ 22 22 22 23 28 28 37
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AS OF OCTOBER 31, 1999
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ACTUAL AS ADJUSTED
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Dollars in thousands
BALANCE SHEET DATA:
Working capital............................................. $ 11,683
Total assets................................................ 104,691
Long-term debt, including current maturities................ 22,895
Total shareholders' equity.................................. 47,524
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RISK FACTORS
You should carefully consider the risks and uncertainties described below and
all other information contained in this prospectus before deciding to purchase
shares of our common stock.
RISKS PARTICULAR TO KRISPY KREME
OUR ABILITY TO EXPAND THE NUMBER OF KRISPY KREME STORES DEPENDS UPON FACTORS
BEYOND OUR CONTROL
Our growth strategy includes, among other things, opening additional franchised
stores. The opening and success of these stores is dependent in part on a number
of factors, which neither we nor our franchisees can control. These factors
include:
- The availability of, and competition for, suitable sites
- The negotiation of acceptable lease or purchase terms for such sites
- The ability to obtain necessary permits and approvals
- The ability to meet construction schedules
- The ability to hire and train qualified managers and other store
personnel
- General economic and business conditions
If we are not able to address these factors successfully, we may not be able to
expand at the rate currently contemplated by our strategy, and our business and
results of operations may be materially and adversely impacted.
WE ARE DEPENDENT ON OUR FRANCHISEES TO DEVELOP NEW STORES
Our business is dependent upon our franchisees and the manner in which they
operate and develop their franchised stores. Our franchisees consist of (1)
associates who operate under our original franchising program developed in the
1940s and (2) area developers who operate under our franchising program
developed in the mid-1990s. We anticipate most new store growth will be from
area developers. Area developers may not have access to the financial resources
that they need to open the stores required by their development schedules or may
fail to meet their schedules for numerous other potential reasons. Although
associates have the exclusive rights to develop their assigned geographic
territories, most are not contractually obligated to develop additional stores.
Area developers and associates may not successfully develop or operate stores in
their development areas in a manner consistent with our standards and
requirements.
Most area development agreements specify a schedule for opening stores in the
territory covered by the agreement. In the past, we have agreed to extend or
modify development schedules for certain area developers, and we may do so in
the future. Currently, all of our area developers are on schedule to develop a
total of 130 additional stores in their territories during their initial
development schedule, which is generally five years. These schedules form the
basis for our expectations regarding the number and timing of new store
openings. Delays in store openings could adversely affect our future operations.
It may be difficult for us to enforce our area development agreements or
terminate the area development rights of area developers who fail to meet their
development schedules or other standards and requirements we impose. This in
turn may limit our ability to develop the territories of those area developers.
In the event any of our area developers fail to successfully develop their
territories, we may renegotiate their agreements or take other action.
Area developers and associates are generally independent contractors and are not
our employees. We provide training and support to area developers and
associates, but the quality of store operations and the
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ability of area developers to meet development schedules may be diminished by
any number of factors beyond our control.
WE MAY BE EXPOSED TO FLUCTUATIONS IN COMMODITY PRICING BECAUSE OF THE LARGE
QUANTITIES OF RAW MATERIALS AND OTHER PRODUCTS THAT WE BUY
The basic raw materials we use are agricultural products such as flour,
shortening and sugar. We also purchase other products, such as coffee, in large
quantities. Our general policy is to enter into long-term purchase agreements
covering one- to three-year periods with specific vendors within a range of
prices that we believe are advantageous to us. Shortages or interruptions in
supply of agricultural or food products can result from adverse weather
conditions, such as droughts or floods. These shortages or other factors could
lead to increased prices for raw materials and some finished goods.
To the extent commodity prices in the spot market are lower than those we pay
our suppliers under our long-term purchase agreements, we are exposed to
commodity market risk. In those cases, we pay more for our commodity ingredients
than if we had no long-term purchase agreements.
We use paper products, films and plastics to package our products. In addition,
we are dependent on gasoline for our delivery trucks that supply our
off-premises sales customers and natural gas as a fuel in the doughnut
production process. Increases in prices of agricultural and food products,
packaging materials or fuels could cause substantial and sudden increases in
costs that we might not be able to recover through price increases. These cost
increases could have a material adverse effect on our business.
WE HAVE LIMITED SOURCES OF DOUGHNUT MIXES, OTHER KEY INGREDIENTS, FLAVORS AND
DOUGHNUTMAKING EQUIPMENT
We are the exclusive supplier of doughnut mixes and other key ingredients and
flavors to all of our company-owned and franchised stores. If our business
expands according to our growth strategy, we will require additional capacity to
produce our doughnut mixes. In addition, as our business continues to expand on
the West Coast and in other geographic areas which are located at greater
distances from our sole manufacturing facility in Winston-Salem, North Carolina,
we may need to establish one or more additional manufacturing plants. Although
we have a backup source to manufacture our doughnut mixes, any interruption of
existing or planned production capacity at our manufacturing plant could have a
material adverse effect on our ability or that of our franchisees to make
doughnuts.
Our Winston-Salem facility is the only location where we manufacture our custom
doughnutmaking equipment. Although we have limited backup sources for our
equipment, obtaining our equipment quickly in the event of the loss of our
Winston-Salem plant would be difficult, and would have a material adverse effect
on our ability to supply equipment to new stores or new parts for the
maintenance of existing equipment in established stores.
We are dependent on a sole supplier for our glaze flavoring. Although we are in
the process of identifying an alternative source to produce our glaze flavoring,
we have not currently identified such a source, and any interruption in the
distribution from our current supplier could affect our ability to produce our
signature Hot Original Glazed.
In addition, because we generally enter into long-term purchase agreements with
our suppliers, in the event that any of these relationships terminate
unexpectedly, even where we have multiple suppliers for the same ingredient, we
may not be able to obtain adequate quantities of the same high-quality
ingredient at competitive prices.
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WE NEED TO SUCCESSFULLY MAINTAIN OUR STATUS AS A FRANCHISOR AND MAY BE HARMED BY
ACTIONS TAKEN BY OUR FRANCHISEES THAT ARE OUTSIDE OF OUR CONTROL
Krispy Kreme, as a franchisor, is subject to both regulation by the Federal
Trade Commission and state laws regulating the offer and sale of franchises.
State laws limit our ability to terminate or refuse to renew franchises. Our
franchisees are also subject to labor laws, including minimum wage requirements,
overtime, working and safety conditions and citizenship requirements. Our
failure to obtain or maintain approvals to sell franchises, or a franchisee's
violation of any labor law, could cause us to lose or reduce our franchise
revenues.
As a franchisor, we grant our franchisees a limited license to use our
registered service marks. The general public could incorrectly identify our
franchisees as controlled by us. In the event that a court determines the
franchisee is not adequately identified as a franchisee, we could be held liable
for the misidentified franchisee's debts, obligations and liabilities.
OUR QUARTERLY RESULTS MAY FLUCTUATE AND COULD FALL BELOW EXPECTATIONS OF
SECURITIES ANALYSTS AND INVESTORS DUE TO SEASONALITY AND OTHER FACTORS,
RESULTING IN A DECLINE IN OUR STOCK PRICE
Our quarterly and yearly results have varied in the past, and we believe that
our quarterly operating results will vary in the future. For this reason, you
should not rely upon our quarterly operating results as indications of future
performance. In some future periods, our operating results may fall below the
expectations of securities analysts and investors. This could cause the trading
price of our common stock to fall.
Our quarterly results could fluctuate because our business is subject to some
seasonal fluctuations. Historically, sales have been slower during the Christmas
holiday season and summer months.
Among the other factors that may influence our operating results are:
- The introduction of new products and services or changes in pricing
policies by us or our competitors
- The amount and timing of capital expenditures and other costs relating to
the expansion of our operations
- Increases or decreases in comparable store sales at company-owned and
franchised stores
- Economic conditions specific to the food service industry
- Significant changes in labor costs
- The ability of our area developers and associates to open stores
according to their development schedules
- Significant changes in the manufacturing and distribution costs of our
products
If we are unsuccessful in addressing any of these factors, our operating results
may fall below the expectations of securities analysts and investors, resulting
in a decline in our stock price.
OUR SUCCESS IS DEPENDENT ON THE CONTINUED SERVICE OF OUR KEY EMPLOYEES, AND ON A
NUMBER OF OUR DIRECTORS AND OFFICERS WHO ARE ALSO FRANCHISEES
Our business is managed, and our business strategies are formulated, by a
relatively small number of key executive officers and managers. You should read
"Management" for information on our officers and directors. The loss of the
services of one or more members of our management group could materially and
adversely affect our business. We do not carry key man insurance on any of our
employees.
In addition, some of our officers and directors are also franchisees, or
affiliated with franchisees. Our continued growth and success is dependent on
these officers and directors, as with our other franchisees. We have made
guaranties, entered into collateral repurchase agreements and provided other
financial
8
<PAGE> 13
assistance to some of our officers and directors who are also franchisees, and
to franchisees affiliated with officers and directors. Consequently, if they are
unsuccessful as franchisees, we could face additional financial obligations. See
"Related Party Transactions" for descriptions of these relationships.
OUR FAILURE OR INABILITY TO ENFORCE OUR TRADEMARKS COULD ADVERSELY AFFECT US
We own certain common law trademark rights and a number of federal trademark and
service mark registrations. We believe that our trademarks and other proprietary
rights are important to our success and our competitive position. We therefore
devote appropriate resources to the protection of our trademarks and proprietary
rights. The protective actions that we take, however, may not be enough to
prevent imitation by others.
Although we are not aware of anyone else who is using "Krispy Kreme" or "Hot
Original Glazed" or "Hot Doughnuts Now," as a trademark or service mark, we are
aware that some businesses are using "Krispy" or a phonetic equivalent as part
of a trademark or service mark associated with retail doughnut stores. We
believe that, in the instances where "Krispy" or a phonetic equivalent is used,
we have superior rights and are taking the necessary legal actions. For example,
one "Crispie Creme" doughnut store is operated in each of Ross and Scioto
Counties, Ohio. The operators of these stores claim priority to the mark Crispie
Creme, but it is expected that they will agree to limit their operations to
these two counties. We believe that we will be able to resolve any possible
conflicts which may arise from these uses. Similarly, the operators of two
doughnut stores in Clinton County, Ohio and one convenience store in Brown
County, Ohio, have represented that they will cease using the Crispie Creme name
by January 2000. We do not operate Krispy Kreme stores in any of these Ohio
counties. There may be similar uses we are unaware of which could arise from
prior users. These uses could limit our operations and possibly cause us to
incur litigation costs or pay damages or licensing fees to a prior user or
registrant of similar intellectual property.
PROBLEMS RELATING TO THE YEAR 2000 COMPUTER ISSUE COULD DISRUPT OUR BUSINESS
We rely on various management information systems to support a range of
administrative and operational areas throughout our company. We have completed
reviews of the ability of our hardware and software serving critical internal
functions in our stores and in our corporate offices to accurately handle data
involving the transition of dates from 1999 to 2000 and, as a result, have made
modifications to our computer systems. We believe that these modifications are
sufficient, but we cannot assure you that we have found and corrected all
noncompliant programs. A disruption in the operation of our computer systems
could result in additional expenses and reduced profitability because of the
need for additional personnel time to acquire necessary information, additional
recordkeeping costs and less efficient purchasing and distribution.
We have contacted our vendors who supply us with significant amounts of goods
and services to determine the status of their Year 2000 compliance plans. We
believe that our significant vendors will be Year 2000 compliant. However, our
vendors' operations could be materially and adversely affected by the failure of
their suppliers to be compliant. Any failure of ours, our vendors, their
suppliers or utilities providers to be Year 2000 compliant could have a material
adverse effect on our financial condition and results of operation.
RISKS RELATING TO THE FOOD SERVICE INDUSTRY
THE FOOD SERVICE INDUSTRY IS AFFECTED BY CONSUMER PREFERENCES AND PERCEPTIONS,
SEASONALITY AND GENERAL ECONOMIC CONDITIONS
Food service businesses are often affected by changes in consumer tastes;
national, regional and local economic conditions; and demographic trends.
Individual store performance may be adversely affected by traffic patterns, the
cost and availability of labor, purchasing power, availability of products and
the type,
9
<PAGE> 14
number and location of competing stores. Our results of operations could also be
affected by changing consumer tastes -- for instance, if prevailing health or
dietary preferences cause consumers to avoid doughnuts in favor of foods that
are perceived as more healthy.
Our business is usually slower during the Christmas holiday season and summer
months.
In addition, changes in economic conditions affecting our customers could reduce
traffic in some or all of our stores or impose practical limits on pricing,
either of which could have a material adverse effect on our financial condition
and results of operations. Our continued success will depend in part on our
ability to anticipate, identify and respond to these and other changing
conditions.
THE FOOD SERVICE INDUSTRY IS AFFECTED BY LITIGATION AND PUBLICITY CONCERNING
FOOD QUALITY, HEALTH AND OTHER ISSUES
Food service businesses can be adversely affected by litigation and complaints
from customers or government authorities resulting from food quality, illness,
injury or other health concerns or operating issues stemming from one store or a
limited number of stores, including stores operated by our franchisees. Adverse
publicity about such allegations may negatively affect us and our franchisees,
regardless of whether the allegations are true. We could incur significant
liabilities if a lawsuit or claim results in a decision against us, or
litigation costs regardless of the result.
OUR SUCCESS DEPENDS ON OUR ABILITY TO COMPETE WITH OTHER FOOD SERVICE BUSINESSES
The food service industry, and the quick service restaurant business segment in
particular, is intensely competitive with respect to food quality, concept,
convenience, location, customer service and value. We compete with many
well-established food service companies, some of which have substantially
greater financial and other resources than we have. Those resources may allow
them to react to changes in pricing, marketing and the quick service restaurant
industry better than us. Also, many of our competitors are less dependent on a
single, primary product than we are.
At the retail level, we compete with other doughnut retailers and bakeries,
specialty coffee retailers, bagel shops, fast-food restaurants, delicatessens,
take-out food service companies, supermarkets and convenience stores. At the
wholesale level, we compete primarily with grocery store bakeries, packaged
snack foods and vending machine dispensers of snack foods. Customer service,
including frequency of deliveries and maintenance of fully stocked shelves, is
an important factor and central to the competition for shelf space in grocery
stores and convenience stores. As competitors expand their operations, we expect
competition to intensify. In addition, the start-up costs associated with retail
doughnut and similar food service establishments are not a significant
impediment to entry into the retail doughnut business. Aggressive pricing by our
competitors or the entrance of new competitors into our market could have a
material adverse effect on our business.
GOVERNMENT REGULATION COULD ADVERSELY AFFECT OUR BUSINESS
Our operations are subject to numerous federal, state and local government
regulations, including those relating to the preparation and sale of food and
building and zoning requirements. To date, federal and state environmental
regulations have not had a material effect on our operations, but more stringent
and varied requirements of local government with respect to zoning, building
codes, land use and environmental factors have in the past increased, and can be
expected to increase the cost of, and the time required for, opening new stores
in the future.
All of our operations and those of our franchisees are also subject to laws
governing employer relationships with employees, including minimum wage
requirements, overtime, working and safety conditions and citizenship
requirements. Many of our employees are paid hourly rates based upon federal and
state minimum wage laws. Recent legislation increasing the minimum wage has
resulted in higher labor costs
10
<PAGE> 15
for us and our franchisees. We cannot assure you that we or our franchisees will
be able to pass such additional costs on to customers in whole or in part.
RISKS RELATING TO THE OFFERING
WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING AND
MAY NOT USE THEM EFFECTIVELY
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds we will receive from this offering. We
currently intend to apply the net proceeds from the offering as described under
"Use of Proceeds" in this prospectus, but our management will have broad
discretion in the application of the net proceeds. If our management fails to
apply these funds effectively, we may not be successful in our efforts to grow
our business and revenues.
OUR CHARTER, BYLAWS AND SHAREHOLDER RIGHTS AGREEMENT CONTAIN ANTI-TAKEOVER
PROVISIONS THAT MAY MAKE IT MORE DIFFICULT OR EXPENSIVE TO ACQUIRE US IN THE
FUTURE, WHICH COULD NEGATIVELY AFFECT OUR STOCK PRICE
Our articles of incorporation and bylaws contain several provisions that may
make it more difficult for a third party to acquire control of us without the
approval of our board of directors. These provisions may make it more difficult
or expensive for a third party to acquire a majority of our outstanding voting
common stock. They may also delay, prevent or deter a merger, acquisition,
tender offer or proxy contest, which may negatively affect our stock price. For
example, our articles and bylaws establish:
- A board of directors classified into three classes of directors with the
directors of each class having staggered, three-year terms
- The board's authority to issue series of preferred stock with special
powers, preferences and rights
- The board's authority to consider constituencies other than the
shareholders -- including employees, customers and the community -- in
making decisions, including decisions regarding control of Krispy Kreme
- Removal of directors only for cause
- Noncumulative voting for directors
In addition, our board of directors plans to adopt a shareholder rights
agreement which will entitle shareholders to purchase our preferred stock if a
third party acquires beneficial ownership of 15% or more of our common stock. In
certain circumstances, shareholders are also entitled to purchase the common
stock of (1) a company issuing shares in exchange for our common stock in a
merger or tender offer or (2) a company acquiring most of our assets.
These provisions of our articles of incorporation and bylaws and our shareholder
rights agreement could discourage tender offers or other transactions that might
otherwise result in our shareholders receiving a premium over the market price
for their common stock.
, OR %, OF OUR TOTAL OUTSTANDING SHARES ARE RESTRICTED
FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE FUTURE, WHICH COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
After this offering, we will have outstanding shares of common stock,
or shares if the underwriters fully exercise their over-allotment
option. This includes the shares that we are selling in this offering,
which may be resold in the public market immediately, unless held by one of our
affiliates. shares will be issuable upon the exercise of outstanding
stock options, and we intend to register for resale the unissued shares of
common stock reserved under our stock option plan as soon as practicable after
this offering. The remaining %, or shares, of our total outstanding
shares will
11
<PAGE> 16
become available for resale in the public market one year after this offering.
However, it is possible that these shares may be sold sooner if they are
registered under the Securities Act of 1933. For a more detailed description,
see "Shares Eligible for Future Sale."
As restrictions on resale end, the prevailing market price of our common stock
could drop significantly if the holders of these restricted shares sell them or
are perceived by the market as intending to sell them. Our ability to raise
additional capital through future issuances of equity securities could also be
impaired.
OUR EXISTING SHAREHOLDERS WILL CONTINUE TO CONTROL US AFTER THIS OFFERING, AND
THEY MAY MAKE DECISIONS WITH WHICH YOU WILL DISAGREE
After this offering, our existing shareholders will beneficially hold
approximately % of our outstanding common stock, or approximately % if
the underwriters' over-allotment option is exercised in full. Our executive
officers and directors as a group -- currently 16 persons -- will beneficially
hold approximately % of our outstanding common stock after this offering,
or % if the over-allotment option is fully exercised, including currently
exercisable stock options. Consequently, our existing shareholders will continue
to control us after this offering is completed, and our officers and directors
will continue to be significant holders. Through their voting power, these
persons may make decisions regarding Krispy Kreme with which you will disagree.
YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IF YOU PURCHASE COMMON
STOCK IN THIS OFFERING
The initial public offering price is substantially higher than the net tangible
book value per share of the outstanding common stock will be immediately after
this offering. Any common stock you purchase in this offering will have a
post-offering net tangible book value per share of $ less than the
initial public offering price, assuming an initial public offering price of
$ per share, which is the mid-point of the range shown on the cover
page of this prospectus. Future issuances of our common stock, including
issuances in connection with stock option exercises, could cause further
dilution.
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations which
are characterized as forward-looking statements. Forward-looking statements are
based on management's beliefs, assumptions and expectations of our future
economic performance, taking into account the information currently available to
them. These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to differ materially from the expectations of
future results, performance or financial condition we express or imply in any
forward-looking statements. Factors that could contribute to these differences
include those discussed in "Risk Factors" and in other sections of this
prospectus. The words believe, may, will, should, anticipate, estimate, expect,
intend, objective, seek, strive or similar words, or the negatives of these
words, identify forward-looking statements. We qualify any forward-looking
statements entirely by these cautionary factors.
12
<PAGE> 17
USE OF PROCEEDS
Krispy Kreme is offering for sale shares of common stock by this
prospectus. Based on an assumed initial public offering price of $ per
share, the mid-point of the range shown on the cover page of this prospectus, we
estimate that our net proceeds from the sale of these shares will be
approximately $ million after deducting the underwriting discounts and
estimated offering expenses. Our estimated net proceeds will be approximately
$ million if the underwriters exercise their option to purchase an
additional shares from us to cover over-allotments.
We expect to use our net proceeds for the following purposes:
- Repayment of borrowings under our loan agreement
- A distribution of approximately $ million to our existing
shareholders as part of a corporate reorganization in connection with
this offering
- Remodeling and relocation of older company-owned stores
- Additional mix production capacity to support expansion
- Joint venture investments in area developer stores
- General corporate purposes, including working capital needs
Although we do not contemplate any changes in our use of proceeds, we may
reprioritize the uses listed above, or use some proceeds for other purposes in
the event extra proceeds are available or the specified uses require less
capital than expected.
Our loan agreement covers both a revolving line of credit and a term loan. At
our option, the revolving line of credit bears interest at either our lender's
prime rate minus 110 basis points or a rate equal to LIBOR plus 100 basis
points. Alternatively, we can choose to convert all or a portion of our
indebtedness under the revolving line of credit to a term loan for a period of
60, 84 or 120 months with interest based on, at our option, either: (1) a
variable prime rate method; (2) a variable LIBOR method; or (3) a swap rate
method with a prime rate-linked cap. Interest on our term loan is computed on
the same basis as the revolving line of credit, except that the rate has a floor
of 5.500% and a ceiling of 8.125%. At October 31, 1999, our revolving line of
credit and term loan both bore interest rates of 6.401%.
As of October 31, 1999, $4.2 million was outstanding under the term loan and
$18.7 million under the revolving line of credit. None of our indebtedness
incurred in the past year was used for purposes other than for working capital
needs. If we do not prepay it, indebtedness under our revolving credit facility
matures in July 2002, and under our term loan, in June 2001.
Pending application of the net proceeds as described above, we will invest the
net proceeds in short-term, interest-bearing investment grade or government
securities.
13
<PAGE> 18
DIVIDEND POLICY
We intend to retain our earnings to finance the expansion of our business and do
not anticipate paying cash dividends in the foreseeable future. Any future
determination regarding cash dividend payments will be made by our board of
directors and depends upon the following factors:
<TABLE>
<S> <C>
- - Earnings - Capital requirements
- - Our financial condition - Restrictions in financing agreements
- Other factors deemed relevant by the board of directors
</TABLE>
Dividend payments are restricted by our loan agreement to 50% of our net income
for the immediately preceding fiscal year.
We have routinely declared cash dividends on our common stock in the past. The
following table shows total and per share cash dividends we have declared on the
shares of our common stock during the periods indicated:
<TABLE>
<CAPTION>
---------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
------------------------------------- -----------------
FEBRUARY 1, 1998 JANUARY 31, 1999 OCTOBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total cash dividends declared............... $1,179,562 $1,517,787 $ --
Per share................................... $ $ $ --
</TABLE>
14
<PAGE> 19
CAPITALIZATION
The following table shows, as of October 31, 1999, our cash and cash
equivalents, short-term debt and capitalization, both actual and as adjusted.
The adjustment gives effect to:
- The merger in connection with our holding company formation
- The sale of shares of common stock in this offering
- The application of a portion of the estimated net proceeds from that
sale, after deducting underwriting discounts and estimated offering
expenses, to repay bank debt and pay a distribution to our existing
shareholders as described in "Use of Proceeds"
You should read the following capitalization data in conjunction with "Use of
Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements and accompanying notes and the other financial data included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
----------------------
OCTOBER 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Dollars in thousands, except share data
Cash and cash equivalents................................... $ 3,944 $
======== ========
Short-term debt:
Current maturities of long-term debt...................... $ 2,400 $ --
======== ========
Long-term debt, excluding current maturities................ $ 20,495 $ --
-------- --------
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized after the merger; none issued and
outstanding............................................ -- --
Common stock, $10.00 par value; 1,000,000 shares
authorized before the merger; 467,011 and 0 shares
issued and outstanding................................. 4,670 --
Common stock, no par value; 100,000,000 shares authorized
after the merger; 0 and shares issued and
outstanding............................................ --
Paid-in capital........................................... 10,805
Notes receivable.......................................... (2,547) (2,547)
Retained earnings......................................... 34,596 34,596
-------- --------
Total shareholders' equity............................. 47,524
-------- --------
Total capitalization................................... $ 68,019 $
======== ========
</TABLE>
The table above excludes 91,550 shares of common stock issuable upon the
exercise of stock options outstanding under our stock option plan on October 31,
1999, of which 4,550 were exercisable, without giving effect to the exchange
ratio in the merger in connection with our holding company formation.
15
<PAGE> 20
DILUTION
Our net tangible book value as of October 31, 1999 was $47,523,705, or
$ per share of common stock. Net tangible book value per share is the
amount by which total tangible assets exceeds total liabilities, divided by the
total number of shares of common stock outstanding. Our adjusted net tangible
book value as of October 31, 1999 would have been $ , or $ per
share, after giving effect to the sale of shares of common stock offered by
this prospectus at an assumed initial offering price of $ per share,
the midpoint of the range shown on the cover page of this prospectus, and after
deducting estimated underwriting discounts and estimated offering expenses and
the distribution to be paid to existing shareholders as part of the corporate
reorganization in connection with this offering. This represents an immediate
increase in the net tangible book value of $ per share to existing
shareholders, in addition to the cash distribution they will receive, and an
immediate dilution of $ per share to new investors. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
-----------------
Assumed initial public offering price....................... $
Net tangible book value per share as of October 31,
1999................................................... $
Increase attributable to the sale of shares offered
hereby................................................. $
-------
Adjusted net tangible book value after this offering........ $
-------
Dilution in the net tangible book value to new
investors.............................................. $
=======
</TABLE>
The following table shows, as of October 31, 1999, the number of shares of
common stock purchased from us, the total consideration paid to us and the
average price per share paid to us by existing shareholders, reduced to reflect
the cash distribution the existing shareholders will receive, and by new
investors in this offering at an assumed initial offering price of $
per share, the midpoint of the range shown on the cover page of this prospectus:
<TABLE>
<CAPTION>
--------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders........................ % $ % $
New investors................................ $
-------- --- ------- ---
Total.............................. 100% 100%
======== === ======= ===
</TABLE>
The tables above assume no exercise of stock options outstanding as of October
31, 1999 under our stock option plan. If any of these options are exercised,
there will be further dilution to new investors.
16
<PAGE> 21
SELECTED FINANCIAL DATA
The following table shows selected financial data for Krispy Kreme. The selected
historical statement of operations data for each of the years ended, and the
selected historical balance sheet data as of January 29, 1995, January 28, 1996,
February 2, 1997, February 1, 1998 and January 31, 1999 have been derived from
our audited consolidated financial statements, some of which are included in
this prospectus. Those consolidated financial statements and the accompanying
notes have been audited by PricewaterhouseCoopers LLP, independent public
accountants. Please note that our fiscal year ended February 2, 1997 contained
53 weeks.
The selected historical statement of operations data for the nine months ended,
and the selected historical balance sheet data as of, November 1, 1998 and
October 31, 1999 are derived from our unaudited consolidated financial
statements, which are included in this prospectus, except for the historical
balance sheet as of November 1, 1998. In the opinion of management, the
unaudited consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to present the data for those
periods fairly. Operating results for interim periods are not necessarily
indicative of results for a full fiscal year. Per share amounts reflect an
exchange ratio in the merger in connection with our holding company formation
of -for-one, which will have the effect of -for-one stock split.
You should read the following selected financial data in conjunction with "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the consolidated financial statements and accompanying
notes and the other financial data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------------------- -------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands, except
share data
STATEMENT OF OPERATIONS DATA:
Total revenues.................. $114,986 $118,550 $132,614 $158,743 $180,880 $133,190 $161,571
Operating expenses.............. 98,587 104,717 116,658 140,207 157,605 116,019 137,822
General and administrative
expenses....................... 7,578 6,804 7,631 9,530 10,898 7,885 10,171
Depreciation and amortization
expenses....................... 2,764 2,799 3,189 3,586 4,278 3,336 3,498
-------- -------- -------- -------- -------- -------- --------
Income from operations before
provision for store closings
and restructuring.............. 6,057 4,230 5,136 5,420 8,099 5,950 10,080
Provision for store closings and
restructuring.................. -- 3,000 -- -- 11,802 -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations... 6,057 1,230 5,136 5,420 (3,703) 5,950 10,080
Interest expense, net, and
other.......................... (1,291) 930 1,090 895 1,576 1,049 846
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes.......................... 7,348 300 4,046 4,525 (5,279) 4,901 9,234
Provision (benefit) for income
taxes.......................... 2,731 120 1,619 1,811 (2,112) 2,015 3,509
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............... $ 4,617 $ 180 $ 2,427 $ 2,714 $ (3,167) $ 2,886 $ 5,725
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share:
Basic.......................... $ $ $ $ $ $ $
Diluted........................ $ $ $ $ $ $ $
Shares used in calculation of
net income
(loss) per share:
Basic
Diluted
Cash dividends declared per
common share................... $ $ $ $ $ $ -- $ --
Dollars in thousands, except
store numbers
OPERATING DATA:
Systemwide sales................ $146,715 $151,662 $167,592 $203,439 $240,316 $176,957 $231,956
Number of stores at end of
period:
Company-owned.................. 48 53 61 58 61 61 59
Franchised..................... 40 42 55 62 70 64 82
-------- -------- -------- -------- -------- -------- --------
Systemwide..................... 88 95 116 120 131 125 141
======== ======== ======== ======== ======== ======== ========
Average weekly sales per store:
Company-owned.................. $ 45 $ 39 $ 39 $ 42 $ 47 $ 47 $ 53
Franchised..................... 22 22 22 23 28 28 37
</TABLE>
17
<PAGE> 22
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
AS OF AS OF
------------------------------------------------------------------- -------------------------
JANUARY 29, JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands
BALANCE SHEET DATA:
Working capital................. $ 7,730 $ 5,742 $ 10,148 $ 9,151 $ 8,387 $ 7,811 $ 11,683
Total assets.................... 67,257 72,888 78,005 81,463 93,181 93,400 104,691
Long-term debt, including
current maturities............. 12,533 18,311 20,187 20,870 21,020 20,053 22,895
Total shareholders' equity...... 35,817 35,033 36,516 38,265 42,247 49,587 47,524
</TABLE>
18
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read together with the financial statements and the accompanying notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in those forward-looking statements as a
result of certain factors, including, but not limited to, those described under
"Risk Factors" and included in other portions of the prospectus.
COMPANY OVERVIEW AND INDUSTRY OUTLOOK
Our principal business, which began in 1937, is owning and franchising Krispy
Kreme doughnut stores where we make and sell over 20 varieties of premium
quality doughnuts, including our Hot Original Glazed. Each of our stores is a
doughnut factory with the capacity to produce from 2,400 dozen to over 6,000
dozen doughnuts daily. Consequently, each store has significant fixed or
semi-fixed costs, and margins and profitability are significantly impacted by
doughnut production volume and sales. Our doughnut stores are versatile in that
most can support multiple sales channels to more fully utilize production
capacity. These sales channels are comprised of:
- ON-PREMISES SALES. Sales to customers visiting our stores, including the
drive-through windows, along with deeply discounted sales to community
organizations that in turn sell our products for fundraising purposes.
- OFF-PREMISES SALES. Daily sales of fresh doughnuts on a branded,
unbranded and private label basis to convenience and grocery stores and
select co-branding customers. Doughnuts are sold to these customers on
trays for display and sale in glass-enclosed cases and in packages for
display and sale on both stand-alone display units and on our customers'
shelves.
In addition to our retail stores, we are vertically integrated. Our Support
Operations business unit produces doughnut mixes and manufactures our
doughnutmaking equipment, which all of our stores are required to purchase.
Additionally, it operates a distribution center that provides Krispy Kreme
stores with essentially all supplies for the critical areas of their business.
This business unit is volume-driven, and its economics are enhanced by the
opening of new stores. Our vertical integration allows us to:
- Maintain the consistency and quality of our products throughout our
system
- Utilize volume buying power which helps lower the cost of supplies to
each of our stores
- Enhance our profitability
We expect doughnut industry sales to continue growing. We believe growth in the
fragmented doughnut market will be aided by a variety of factors, including a
shift from food consumed at home to food consumed away from home, increased
snack food consumption and increased doughnut sales through packaged grocery and
in-store bakeries.
We intend to expand our concept primarily through opening new franchise stores
in territories across the continental United States. We may also enter into
joint ventures with some of our franchisees. As of October 31, 1999, we operated
a total of 141 stores consisting of 59 company-owned and 82 franchised stores.
In fiscal 2001, we anticipate opening approximately new stores, all of
which are expected to be franchise stores. Additionally, our franchisees are
contractually obligated to open over new stores in the period fiscal 2002
through fiscal 2005.
As we expand the Krispy Kreme concept, we will incur infrastructure costs in the
form of additional personnel to support the expansion, and additional facilities
costs to provide mixes, equipment and other
19
<PAGE> 24
items necessary to operate the various new stores. In the course of building
this infrastructure, we may incur unplanned costs which could negatively impact
our operating results.
RESULTS OF OPERATIONS
In order to facilitate an understanding of the results of operations for each
period presented, we have included a general overview along with an analysis of
business segment activities. In addition to this analysis, refer to Note 1,
Nature of Business and Significant Accounting Policies, in our audited
consolidated financial statements. A guide to the discussion for each period is
presented below.
OVERVIEW. Outlines information on total systemwide sales, which includes both
company-owned and franchised stores, and systemwide comparable store sales. A
store is added to our comparable store base in its nineteenth month of
operation. A summary discussion of our consolidated results is also presented.
SEGMENT RESULTS. In accordance with Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
we have three reportable segments. A description of each of the segments
follows.
- COMPANY STORE OPERATIONS. Represents the results of our company-owned
stores. Company stores make and sell doughnuts and complementary products
through the sales channels discussed above. Expenses for this business
unit include store level expenses along with direct general and
administrative expenses.
- FRANCHISE OPERATIONS. Represents the results of our franchise program.
We have two franchise programs: (1) the associate program, which is our
original franchising program developed in the 1940s, and (2) the area
developer program, which was developed in the mid-1990s. Associates pay
royalties of 3.0% of on-premises sales and 1.0% of all other sales, with
the exception of private label sales, for which they pay no royalties.
Area developers pay royalties of 4.5% of all sales, contribute 1.0% of
all sales to our national advertising fund and pay franchise fees ranging
from $20,000 to $40,000 per store. See "Business -- Store Ownership" for
further information on our franchising programs. Expenses for this
business segment include costs incurred to recruit new franchisees and to
monitor and aid in the performance of these stores and direct general and
administrative expenses.
- SUPPORT OPERATIONS. Represents the results of our Support Operations
business unit, located in Winston-Salem, North Carolina. This business
unit buys ingredients used to produce doughnut mixes and manufactures
doughnutmaking equipment which all of our stores are required to
purchase. Additionally, this business unit purchases and sells
essentially all supplies necessary to operate a Krispy Kreme store,
including all food ingredients, juices, Krispy Kreme coffee, signage,
display cases, uniforms and other items. Generally, shipments are made to
each of our stores on a weekly basis by common carrier. All intercompany
transactions between Support Operations and Company Store Operations have
been eliminated in consolidation. Expenses for this business unit include
all expenses incurred at the manufacturing and distribution level along
with direct general and administrative expenses.
OTHER. Includes a discussion of significant line items not discussed in the
overview or segment discussions, including general and administrative expenses,
depreciation and amortization expenses, provision for store closings and
restructuring, interest expense, net, and other expenses and the provision for
income taxes.
20
<PAGE> 25
Our fiscal year is based on a 52 or 53 week year. The fiscal year ends on the
Sunday closest to the last day in January. The table below shows our operating
results for fiscal 1997 (53 weeks ended February 2, 1997), fiscal 1998 (52 weeks
ended February 1, 1998) and fiscal 1999 (52 weeks ended January 31, 1999) and
for the nine months ended November 1, 1998 (39 weeks) and October 31, 1999 (39
weeks) expressed as a percentage of total revenues. Certain operating data are
also shown for the same periods.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
--------------------------------------- -------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses...................... 88.0 88.3 87.1 87.1 85.3
General and administrative expenses..... 5.8 6.0 6.0 5.9 6.3
Depreciation and amortization
expenses.............................. 2.4 2.3 2.4 2.5 2.2
Provision for store closings and
restructuring......................... -- -- 6.5 -- --
-------- -------- -------- -------- --------
Income (loss) from operations........... 3.8 3.4 (2.0) 4.5 6.2
Interest expense, net, and other........ 0.8 0.6 1.0 0.8 0.5
-------- -------- -------- -------- --------
Income (loss) before income taxes....... 3.0 2.8 (3.0) 3.7 5.7
Provision (benefit) for income taxes.... 1.2 1.1 (1.2) 1.5 2.2
-------- -------- -------- -------- --------
Net income (loss)..................... 1.8% 1.7% (1.8)% 2.2% 3.5%
======== ======== ======== ======== ========
Dollars in thousands
OPERATING DATA:
Systemwide sales........................ $167,592 $203,439 $240,316 $176,957 $231,956
Increase in comparable store sales:
Company-owned......................... 5.5% 11.5% 11.1% 11.3% 10.2%
Systemwide............................ 4.9% 12.7% 9.7% 10.2% 12.4%
</TABLE>
The table below shows business segment revenues and operating expenses expressed
in dollars. Support Operations revenues are shown net of intercompany sales
eliminations. See Note 3 to our unaudited consolidated financial statements and
Note 11 to our audited consolidated financial statements. Operating expenses
exclude depreciation and amortization expenses.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
--------------------------------------- -------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Dollars in thousands
REVENUES BY BUSINESS SEGMENT:
Company Store Operations................ $113,940 $132,826 $145,251 $108,172 $121,104
Franchise Operations.................... 1,709 2,285 3,236 2,297 3,798
Support Operations...................... 16,965 23,632 32,393 22,721 36,669
-------- -------- -------- -------- --------
Total revenues........................ $132,614 $158,743 $180,880 $133,190 $161,571
======== ======== ======== ======== ========
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations................ $100,655 $117,252 $126,961 $ 94,358 $103,814
Franchise Operations.................... 1,575 2,368 2,731 1,931 2,791
Support Operations...................... 14,428 20,587 27,913 19,730 31,217
-------- -------- -------- -------- --------
Total operating expenses.............. $116,658 $140,207 $157,605 $116,019 $137,822
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 26
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.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
--------------------------------------- -------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES BY BUSINESS SEGMENT:
Company Store Operations................... 85.9% 83.7% 80.3% 81.2% 75.0%
Franchise Operations....................... 1.3 1.4 1.8 1.7 2.4
Support Operations......................... 12.8 14.9 17.9 17.1 22.6
----- ----- ----- ----- -----
Total revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations................... 88.3% 88.3% 87.4% 87.2% 85.7%
Franchise Operations....................... 92.2% 103.6% 84.4% 84.1% 73.5%
Support Operations......................... 85.0% 87.1% 86.2% 86.8% 85.1%
Total operating expenses................... 88.0% 88.3% 87.1% 87.1% 85.3%
</TABLE>
Additionally, data on store opening activity are shown below. Transferred stores
represent stores sold between the company and franchisees.
<TABLE>
<CAPTION>
-----------------------------
COMPANY-
OWNED FRANCHISED TOTAL
-------- ---------- -----
<S> <C> <C> <C>
YEAR ENDED FEBRUARY 2, 1997
Beginning count............................................. 53 42 95
Opened...................................................... 7 15 22
Closed...................................................... -- (1) (1)
Transferred................................................. 1 (1) --
-- -- ---
Ending count.............................................. 61 55 116
== == ===
YEAR ENDED FEBRUARY 1, 1998
Beginning count............................................. 61 55 116
Opened...................................................... -- 7 7
Closed...................................................... (2) (1) (3)
Transferred................................................. (1) 1 --
-- -- ---
Ending count.............................................. 58 62 120
== == ===
YEAR ENDED JANUARY 31, 1999
Beginning count............................................. 58 62 120
Opened...................................................... -- 14 14
Closed...................................................... -- (3) (3)
Transferred................................................. 3 (3) --
-- -- ---
Ending count.............................................. 61 70 131
== == ===
NINE MONTHS ENDED OCTOBER 31, 1999
Beginning count............................................. 61 70 131
Opened...................................................... 2 13 15
Closed...................................................... (4) (1) (5)
Transferred................................................. -- -- --
-- -- ---
Ending count.............................................. 59 82 141
== == ===
</TABLE>
22
<PAGE> 27
NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED WITH NINE MONTHS ENDED NOVEMBER 1,
1998
Overview
Systemwide sales increased to $232.0 million in the first nine months of fiscal
2000 from $177.0 million in the first nine months of fiscal 1999, an increase of
31.1%. This increase was comprised of company store sales increases of $12.9
million and franchise store sales increases of $42.1 million. Systemwide
comparable store sales, with 111 stores in the comparable store base, increased
12.4%. The overall systemwide sales increase was driven by comparable store
sales improvement and the opening of new stores.
Total company revenues increased to $161.6 million in the first nine months of
fiscal 2000 from $133.2 million in the first nine months of fiscal 1999, an
increase of 21.3%. This increase was comprised of Company Store Operations
revenues increases of $12.9 million, Franchise Operations revenues increases of
$1.5 million and Support Operations revenues increases of $13.9 million. Net
income increased 98.4% to $5.7 million from $2.9 million. Net income as a
percentage of total revenues was 3.5% in the first nine months of fiscal 2000
compared with 2.2% in the first nine months of fiscal 1999.
Company Store Operations
Company Store Operations revenues. Company Store Operations revenues increased
to $121.1 million in the first nine months of fiscal 2000 from $108.2 million in
the first nine months of fiscal 1999, an increase of 12.0%. Comparable store
sales, with 56 stores in the comparable store base, increased by 10.2%. The
revenue growth was primarily due to strong growth in sales from both our
on-premises and off-premises sales channels. On-premises sales 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 off-premises sales programs.
Additionally, the trend in this channel has been towards higher sales price and
margin programs with grocery and convenience stores.
Company Store Operations operating expenses. Company Store Operations operating
expenses increased to $103.8 million in the first nine months of fiscal 2000
from $94.4 million in the first nine months of fiscal 1999, an increase of
10.0%. Company Store Operations operating expenses as a percentage of Company
Store Operations revenues were 85.7% in the first nine months of fiscal 2000
compared with 87.2% in the first nine months of fiscal 1999. The decrease in
Company Store Operations operating expenses as a percentage of revenues was due
to increased operating efficiencies resulting from increased sales levels at our
stores. These additional sales have utilized excess production capacity thereby
enhancing the stores' profitability.
Franchise Operations
Franchise Operations revenues. Franchise Operations revenues increased to $3.8
million in the first nine months of fiscal 2000 from $2.3 million in the first
nine months of fiscal 1999, an increase of 65.4%. The growth in revenue was
primarily due to the opening of 13 franchise stores in the first nine months of
fiscal 2000 and the impact of 14 franchise stores opened in fiscal 1999 being
open for the full nine months in fiscal 2000. Many of these stores have had
company record-setting opening week on-premises sales levels and their
on-premises sales have remained strong in the months following their openings.
Franchise Operations operating expenses. Franchise Operations operating
expenses increased to $2.8 million in the first nine months of fiscal 2000 from
$1.9 million in the first nine months of fiscal 1999, an increase of 44.5%.
Franchise Operations operating expenses as a percentage of Franchise Operations
revenues were 73.5% in the first nine months of fiscal 2000 compared with 84.1%
in the first nine months of fiscal 1999. The decrease in Franchise Operations
operating expenses as a percentage of revenues was due to leveraging the
infrastructure we have built in preparing for our expansion.
23
<PAGE> 28
Support Operations
Support Operations revenues. Support Operations sales to franchise stores
increased to $36.7 million in the first nine months of fiscal 2000 from $22.7
million in the first nine months of fiscal 1999, an increase of 61.4%. The
primary reason for the increase in revenues was the opening of new franchise
stores, including current period openings, the impact of stores opened in fiscal
1999 and comparable store sales increases. Increased doughnut sales through both
the on-premises and off-premises sales channels by franchise stores translated
into increased revenues for Support Operations from sales of mixes, sugar,
shortening and other supplies. Also, each of these new stores is required to
purchase doughnut manufacturing equipment and other peripheral equipment from
Support Operations, thereby enhancing Support Operations sales.
Support Operations operating expenses. Support Operations operating expenses
increased to $31.2 million in the first nine months of fiscal 2000 from $19.7
million in the first nine months of fiscal 1999, an increase of 58.2%. Support
Operations operating expenses as a percentage of Support Operations revenues
were 85.1% in the first nine months of fiscal 2000 compared with 86.8% in the
first nine months of fiscal 1999. The decrease in Support Operations operating
expenses as a percentage of revenues was due to the increased capacity
utilization and resulting economies of scale of the mix and equipment
manufacturing operations attributable to the increased volume in the facilities.
Increased doughnut manufacturing equipment prices and favorable commodities
prices also contributed.
Other
General and administrative expenses. General and administrative expenses
increased to $10.2 million in the first nine months of fiscal 2000 from $7.9
million in the first nine months of fiscal 1999, an increase of 29.0%. General
and administrative expenses as a percentage of total revenues were 6.3% in the
first nine months of fiscal 2000 compared with 5.9% in the first nine months of
fiscal 1999. The primary reason for the increase in these expenses was our
continued investment in infrastructure to support our expansion.
Depreciation and amortization expenses. Depreciation and amortization expenses
increased to $3.5 million in the first nine months of fiscal 2000 from $3.3
million in the first nine months of fiscal 1999, an increase of 4.8%.
Depreciation and amortization expenses as a percentage of total revenues were
2.2% in the first nine months of fiscal 2000 compared with 2.5% in the first
nine months of fiscal 1999. Depreciation and amortization expenses increased due
to capital asset additions.
Provision for store closings and restructuring. During the nine months ended
October 31, 1999, we reassessed certain provisions of our accrued restructuring
expense initially recorded in the fourth quarter of fiscal 1999. This
reassessment, along with the sale of a parcel of land included in the provision,
resulted in a net charge to operating expenses of $86,000. See Note 5 to our
unaudited consolidated financial statements.
Interest expense, net, and other expenses. Interest expense, net, and other
expenses decreased to $847,000 in the first nine months of fiscal 2000 from $1.0
million in the first nine months of fiscal 1999, a decrease of 19.2%. Borrowing
amounts were fairly consistent in the first nine months of each fiscal year;
however, interest rates were lower in the first nine months of fiscal 2000
compared with the first nine months of fiscal 1999.
Provision for income taxes. The provision for income taxes is based on the
effective tax rate applied to the respective nine-month period's pre-tax income.
The provision for income taxes increased 74.1% to $3.5 million in the first nine
months of fiscal 2000 representing a 38.0% effective rate. The provision in the
first nine months of fiscal 1999 was $2.0 million representing an effective rate
of 41.1%.
24
<PAGE> 29
YEAR ENDED JANUARY 31, 1999 COMPARED WITH YEAR ENDED FEBRUARY 1, 1998
Overview
Systemwide sales increased to $240.3 million in fiscal 1999 from $203.4 million
in fiscal 1998, an increase of 18.1%. This increase was comprised of company
store sales increases of $12.4 million and franchise store sales increases of
$24.5 million. Systemwide comparable store sales, with 104 stores in the
comparable store base, increased 9.7%. The overall systemwide sales increase was
driven by comparable store sales improvement and the opening of new stores.
Total company revenues increased to $180.9 million in fiscal 1999 from $158.7
million in fiscal 1998, an increase of 13.9%. This increase was comprised of
Company Store Operations revenues increases of $12.4 million, Franchise
Operations revenues increases of $951,000 and Support Operations revenues
increases of $8.8 million. For fiscal 1999, the net loss was $3.2 million
compared with net income of $2.7 million for fiscal 1998. The net loss in fiscal
1999 was due to a provision for store closings and restructuring of $11.8
million, discussed below. Absent this provision, net income for fiscal 1999
would have been $3.9 million, or 2.2% of total revenues, compared with $2.7
million, or 1.7% of total revenues, in fiscal 1998.
Company Store Operations
Company Store Operations revenues. Company Store Operations revenues increased
to $145.3 million in fiscal 1999 from $132.8 million in fiscal 1998, an increase
of 9.4%. Comparable store sales, with 56 stores in the comparable store base,
increased by 11.1%. The revenue growth was primarily driven by our off-premises
sales channels as we benefited from solid customer demand for these programs.
Our sales efforts were particularly directed at convenience stores.
Company Store Operations operating expenses. Company Store Operations operating
expenses increased to $127.0 million in fiscal 1999 from $117.3 million in
fiscal 1998, an increase of 8.3%. Company Store Operations operating expenses as
a percentage of Company Store Operations revenues were 87.4% in fiscal 1999
compared with 88.3% in fiscal 1998. The decrease in Company Store Operations
operating expenses as a percentage of revenues was primarily due to increased
operating efficiencies resulting from increases in the off-premises sales
channels discussed above. The stores' operations benefited from the utilization
of excess production capacity. Additionally, we converted our direct store
delivery, or DSD, route system for packaged products from a daily delivery
system to an every other day system which reduced our route delivery costs.
These factors, along with price increases on our core packaged product of a box
of a dozen doughnuts, helped increase the profitability of the Company Store
Operations business unit.
Franchise Operations
Franchise Operations revenues. Franchise Operations revenues increased to $3.2
million in fiscal 1999 from $2.3 million in fiscal 1998, an increase of 41.6%.
This growth in revenue was primarily due to the opening of 14 new franchise
stores in fiscal 1999 along with the seven franchise stores opened in fiscal
1998 having a full year of operating results in fiscal 1999.
Franchise Operations operating expenses. Franchise Operations operating
expenses increased to $2.7 million in fiscal 1999 from $2.4 million in fiscal
1998, an increase of 15.3%. Franchise Operations operating expenses as a
percentage of Franchise Operations revenues were 84.4% in fiscal 1999 compared
with 103.6% in fiscal 1998. The decrease in Franchise Operations operating
expenses as a percentage of revenues was due to leveraging the infrastructure we
put in place in preparation for additional store openings.
Support Operations
Support Operations revenues. Support Operations sales to franchise stores
increased to $32.4 million in fiscal 1999 from $23.6 million in fiscal 1998, an
increase of 37.1%. Support Operations revenues were impacted primarily by the
opening of new stores in fiscal 1999 and a full year of operations for those
25
<PAGE> 30
franchise stores opened in fiscal 1998. Each of these stores was supplied with
doughnut manufacturing equipment and other equipment necessary to open each
store thereby enhancing Support Operations sales. Additionally, a few existing
franchise stores began to implement off-premises sales programs, thereby
increasing the amount of mixes and other supplies they purchased from Support
Operations.
Support Operations operating expenses. Support Operations operating expenses
increased to $27.9 million in fiscal 1997 from $20.6 million in fiscal 1998, an
increase of 35.6%. Support Operations operating expenses as a percentage of
Support Operations revenues was 86.2% in fiscal 1999 compared with 87.1% in
fiscal 1998. The decrease in Support Operations operating expenses as a
percentage of revenues was primarily due to increased sales volumes utilizing
existing capacity in our mix, equipment and distribution operations. Increased
freight costs incurred in delivering products to new stores opened outside our
traditional Southeastern markets partially offset these efficiency gains.
Other
General and administrative expenses. General and administrative expenses
increased to $10.9 million in fiscal 1999 from $9.5 million in fiscal 1998, an
increase of 14.4%. General and administrative expenses as a percentage of total
revenues were 6.0% in both fiscal 1999 and fiscal 1998. The primary reason for
the increase in the dollar amount of these expenses was our continued investment
in infrastructure to support growth and enhance our profitability.
Depreciation and amortization expenses. Depreciation and amortization expenses
increased to $4.3 million in fiscal 1999 from $3.6 million in fiscal 1998, an
increase of 19.3%. Depreciation and amortization expenses as a percentage of
total revenues were 2.4% in fiscal 1999 compared with 2.3% in fiscal 1998.
Depreciation and amortization expenses increased due to capital asset additions.
Provision for store closings and restructuring. In late fiscal 1999, the board
of directors approved an $11.8 million provision for store closings and
restructuring. A significant amount of this provision covered the closing of
several double drive-through stores and the write-down of a facility which makes
products such as fried pies and honey buns. More specifically, the charge
primarily involved:
- The closing of five double drive-through company stores and the
write-down of five other inactive double drive-through stores and sites,
including provisions to write down associated land, building and
equipment costs to net realizable value and to cover operating lease
commitments associated with these stores
- The closing of two satellite operations where products were sold but not
produced on-site
- The write-down of facilities which will remain open but whose carrying
value was determined not to be fully recoverable
Of the total provision, $5.9 million represented a charge for future cash
outflows, primarily in the form of lease payments on land and buildings, while
$5.9 million represented write-downs or write-offs of recorded assets. These
future cash outflows are over the life of each respective remaining lease term,
and we believe that cash flow from operations will be adequate to fund these
cash needs. All but one of these stores has been closed. No severance costs were
included as a part of the store closings and restructuring provision.
The double drive-through stores were determined to be inconsistent with our
strategy as the space constraints in these stores did not allow them to
efficiently execute both on-premises and off-premises sales. We also determined
that the two satellite operations were inconsistent with our strategy. In both
cases, these facilities were not producing adequate levels of brand value for
the company. An impairment charge for the primary facility where we produce
fried pies and honey buns was recorded in fiscal 1999. We do not envision these
products as a core part of our strategy as we execute our expansion plans. Other
facilities which were written down were producing stores which were determined
to be impaired given their current levels of operations.
26
<PAGE> 31
We anticipate future savings as a result of avoiding the losses incurred by
those stores which were closed, reduced depreciation costs on those assets we
determined were impaired and a write-off of the carrying value of double
drive-through buildings which had never been placed in service.
Interest expense, net, and other expenses. Interest expense, net, and other
expenses increased to $1.6 million in fiscal 1999 from $895,000 in fiscal 1998,
an increase of 76.2%. Interest expense decreased slightly from the prior year.
Other expenses -- consisting of the gain and loss on sales of property and
equipment -- increased on a net basis by $780,000 due to $251,000 in losses on
the disposal of assets in fiscal 1999 compared with $529,000 in gains on assets
in fiscal 1998.
Provision for income taxes. The provision (benefit) for income taxes in fiscal
1999 and fiscal 1998 is based on the effective tax rate applied to the
respective year's pre-tax book income (loss) effective tax rate. Our fiscal 1999
income tax benefit was $2.1 million representing a 40% effective tax rate
compared with a provision of $1.8 million representing a 40% effective tax rate
in fiscal 1998. We recorded a deferred tax benefit for the fiscal 1999 pre-tax
book loss as the items which gave rise to these losses will be utilized to
reduce our future taxable income.
YEAR ENDED FEBRUARY 1, 1998 COMPARED WITH YEAR ENDED FEBRUARY 2, 1997
Overview
Systemwide sales increased to $203.4 million in fiscal 1998 from $167.6 million
in fiscal 1997, an increase of 21.4%. This increase was comprised of company
store sales increases of $18.9 million and franchise store sales increases of
$17.0 million. Systemwide comparable store sales, with 96 stores in the
comparable store base, increased 12.7%. The overall systemwide sales increase
was driven by comparable store sales improvement and the opening of new stores.
Total company revenues increased to $158.7 million in fiscal 1998 from $132.6
million in fiscal 1997, an increase of 19.7%. This increase was comprised of
Company Store Operations revenues increases of $18.9 million, Franchise
Operations revenues increases of $576,000 and Support Operations revenues
increases of $6.7 million. Net income increased to $2.7 million in fiscal 1998
from $2.4 million in fiscal 1997, an increase of 11.8%. Net income as a
percentage of revenues was 1.7% in fiscal 1998 compared with 1.8% in fiscal
1997.
Company Store Operations
Company Store Operations revenues. Company Store Operations revenues increased
to $132.8 million in fiscal 1998 from $113.9 million in fiscal 1997, an increase
of 16.6%. Comparable store sales, with 52 stores in the comparable store base,
increased by 11.5%. The revenue growth was primarily due to significant growth
in our in-store bakery and convenience store off-premises sales programs. The
introduction of a new blend of Krispy Kreme coffee, sold on-premises, also
contributed to the increased revenues.
Company Store Operations operating expenses. Company Store Operations operating
expenses increased to $117.3 million in fiscal 1998 from $100.7 million in
fiscal 1997, an increase of 16.5%. Company Store Operations operating expenses
as a percentage of Company Store Operations revenues were 88.3% in both fiscal
1998 and fiscal 1997. The operating efficiencies from the incremental sales
revenues, primarily generated by the off-premises sales channels, were offset by
start-up costs in these programs related to the delivery of doughnuts to
in-store bakeries and convenience stores. These start-up costs included training
and personnel costs.
Franchise Operations
Franchise Operations revenues. Franchise Operations revenues increased to $2.3
million in fiscal 1998 from $1.7 million in fiscal 1997, an increase of 33.7%.
This revenue growth was primarily due to the
27
<PAGE> 32
opening of seven new franchise stores in fiscal 1998 along with 15 franchise
stores opened in fiscal 1997 having a full year of operating results in fiscal
1998.
Franchise Operations operating expenses. Franchise Operations operating
expenses increased to $2.4 million in fiscal 1998 from $1.6 million in fiscal
1997, an increase of 50.4%. Franchise Operations operating expenses as a
percentage of revenues were 103.6% in fiscal 1998 compared with 92.2% in fiscal
1997. We invested significantly in building our infrastructure for our national
expansion in fiscal 1998.
Support Operations
Support Operations revenues. Support Operations sales to franchise stores
increased to $23.6 million in fiscal 1998 from $17.0 million in fiscal 1997, an
increase of 39.3%. Support Operations revenues were impacted primarily by the
opening of new stores in fiscal 1998 and a full year's sales of those franchise
stores opened in fiscal 1997.
Support Operations operating expenses. Support Operations operating expenses
increased to $20.6 million in fiscal 1998 from $14.4 million in fiscal 1997, an
increase of 42.7%. Support Operations operating expenses as a percentage of
revenues were 87.1% in fiscal 1998 compared with 85.0% in fiscal 1997. As our
franchisees began to open stores outside the Southeast, we incurred increases in
both freight costs and start-up costs.
Other
General and administrative expenses. General and administrative expenses
increased to $9.5 million in fiscal 1998 from $7.6 million in fiscal 1997, an
increase of 24.9%. The primary reason for the increase in these expenses was our
continued investment in infrastructure to support growth and enhance our
profitability. Along with personnel additions, we incurred increased costs in
travel, employee benefits and information technology.
Depreciation and amortization expenses. Depreciation and amortization expenses
increased to $3.6 million in fiscal 1998 from $3.2 million in fiscal 1997, an
increase of 12.5%. Depreciation and amortization expenses as a percentage of
total revenues were 2.3% in fiscal 1998 compared with 2.4% in fiscal 1997.
Depreciation and amortization expenses increased due to capital asset additions.
Interest expense, net, and other expenses. Interest expense, net, and other
expenses decreased to $895,000 in fiscal 1998 from $1.1 million in fiscal 1997,
a decrease of 18.0%. Interest expense increased by $267,000 due to higher
borrowing levels. This increase was more than offset by an increase in gain on
the sale of property and equipment to $529,000 in fiscal 1998 from $66,000 in
fiscal 1997, an increase of 697.3%.
Provision for income taxes. The provision for income taxes in fiscal 1998 and
fiscal 1997 is based on the effective tax rate applied to the respective year's
pre-tax book income. Our fiscal 1998 income tax provision was $1.8 million
representing a 40% effective tax rate compared with a provision of $1.6 million
representing a 40% effective tax rate in fiscal 1997.
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<PAGE> 33
QUARTERLY RESULTS
The following tables set forth unaudited quarterly information for each of the
eight fiscal quarters in the two year period ended October 31, 1999. Per share
amounts reflect an exchange ratio in the merger in connection with our holding
company formation of -for-one, which will have the effect of -for-one stock
split. This quarterly information has been prepared on a basis consistent with
our audited financial statements and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. Our quarterly
operating results may fluctuate significantly as a result of a variety of
factors, and operating results for any quarter are not necessarily indicative of
results for a full fiscal year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
THREE MONTHS ENDED
-----------------------------------------------------------------------------
1998 1999
------------------------------------- -------------------------------------
FEB. 1 MAY 3 AUG. 2 NOV. 1 JAN. 31 MAY 2 AUG. 1 OCT. 31
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands, except per
share data
Total revenues.................... $40,147 $45,070 $42,941 $45,179 $47,690 $53,328 $51,356 $56,887
Operating expenses................ 36,017 38,386 37,999 39,634 41,586 45,499 44,131 48,192
General and administrative
expenses........................ 3,344 2,846 2,469 2,570 3,013 2,864 3,658 3,649
Depreciation and amortization
expenses........................ 701 1,116 1,110 1,110 942 1,102 1,159 1,237
Provision for store closings and
restructuring................... -- -- -- -- 11,802 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..... 85 2,722 1,363 1,865 (9,653) 3,863 2,408 3,809
Interest expense, net, and other
expenses........................ 88 348 350 351 527 307 331 208
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................... (3) 2,374 1,013 1,514 (10,180) 3,556 2,077 3,601
Provision (benefit) for income
taxes........................... (1) 991 395 629 (4,127) 1,351 790 1,368
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $ (2) $ 1,383 $ 618 $ 885 $(6,053) $ 2,205 $ 1,287 $ 2,233
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic........................... $ $ $ $ $ $ $ $
Diluted......................... $ $ $ $ $ $ $ $
</TABLE>
Our operating results for these eight quarters expressed as percentages of
applicable revenues were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------
1998 1999
-------------------------------- ----------------------------------
FEB. 1 MAY 3 AUG. 2 NOV. 1 JAN. 31 MAY 2 AUG. 1 OCT. 31
------ ----- ------ ------ ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses........................ 89.7 85.2 88.5 87.7 87.2 85.3 85.9 84.7
General and administrative expenses....... 8.3 6.3 5.7
5.7 6.3 5.4 7.1 6.4
Depreciation and amortization expenses.... 1.7 2.5 2.6 2.5 2.0 2.1 2.3 2.2
Provision for store closings and
restructuring........................... -- -- -- -- 24.7 -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations............. 0.3 6.0 3.2 4.1 (20.2) 7.2 4.7 6.7
Interest expense, net, and other
expenses................................ 0.3 0.7 0.9 0.8 1.2 0.6 0.7 0.4
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes......... -- 5.3 2.3 3.3 (21.4) 6.6 4.0 6.3
Provision (benefit) for income taxes...... -- 2.2 0.9 1.4 (8.7) 2.5 1.5 2.4
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....................... -- 3.1% 1.4% 1.9% (12.7)% 4.1% 2.5% 3.9%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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.
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<PAGE> 34
LIQUIDITY AND CAPITAL RESOURCES
Because management generally does not monitor liquidity and capital resources on
a segment basis, this discussion is presented on a consolidated basis.
We funded our capital requirements for fiscal 1997, 1998 and 1999 and for the
nine months ended October 31, 1999 primarily through cash flow generated from
operations, but also through borrowings under our line of credit and term loan
facility. A private stock offering in fiscal 1999 also contributed to funding
our cash needs.
Net cash flow from operations was $2.7 million in fiscal 1997, $7.1 million in
fiscal 1998, $11.7 million in fiscal 1999 and $7.9 million for the nine months
ended October 31, 1999. The trend of improved operating cash flow is due to an
improvement in our net income, net of the impact of the provision for store
closings and restructuring in fiscal 1999. Operating cash flow has been
negatively impacted by additional investments in working capital, primarily
accounts receivable and inventories, as a result of the expansion of our
off-premises sales programs and the opening of new stores which we either own or
supply.
Net cash used for investing activities was $3.4 million in fiscal 1997, $5.9
million in fiscal 1998, $11.8 million in fiscal 1999 and $8.2 million in the
nine months ended October 31, 1999. Investing activities primarily consist of
capital expenditures for property, plant and equipment. These capital
expenditures primarily relate to expenditures to support our off-premises sales
programs, maintenance, capital expenditures for existing stores and equipment,
development of new stores and the acquisition of stores from existing
franchisees.
Net cash provided by (used for) financing activities was $759,000 in fiscal
1997, ($456,000) in fiscal 1998, $1.5 million in fiscal 1999 and ($91,000) in
the nine months ended October 31, 1999. Financing activities in fiscal 1997 and
fiscal 1998 consisted primarily of borrowings under our line of credit and
payment of cash dividends. Fiscal 1999 financing activities consisted primarily
of proceeds from a private stock offering, payment of cash dividends and the
issuance of notes. Our financing activities in the first nine months of fiscal
2000 have consisted primarily of borrowings under our line of credit and payment
of cash dividends declared in fiscal 1999.
Our loan agreement, which is unsecured, provides a $28 million revolving line of
credit and a $12 million term loan. The loan agreement expires on July 10, 2002.
As of October 31, 1999, $4.2 million was outstanding under the term loan and
$18.7 million was outstanding under the line of credit facility. Under the terms
of the loan agreement, interest on the revolving line of credit is paid monthly
and charged at either the lender's prime rate less 110 basis points or at the
one-month LIBOR rate plus 100 basis points. There is no interest, fee or other
charge for the unadvanced portion of the revolving line of credit. A provision
of the loan agreement allows us to convert, prior to the expiration date of the
agreement, all or a portion of the outstanding principal balance of the
revolving line of credit to a term loan for a period of 60, 84 or 120 months.
Concerning interest on the term loan, we have the option of either a variable
prime rate based method, a variable LIBOR based method or a swap rate based
method with a ceiling tied to the prime rate at the time of conversion. As of
the date of this prospectus, no amounts from the $28 million revolving line of
credit facility had been converted to a term loan.
Interest on the $12 million term loan is computed on the same basis as the
revolving line of credit except that the floor and ceiling rates are 5.500% and
8.125%, respectively. Repayment of this loan began on July 20, 1996 in the
amount of monthly principal payments of $200,000 plus interest; the final
payment is on June 20, 2001. The term loan may be prepaid without penalty or
premium at any time. The loan agreement contains provisions that, among other
requirements, restrict capital expenditures, require the maintenance of certain
financial ratios and restrict the payment of dividends. As of the date of this
prospectus, Krispy Kreme and its lender are in the process of amending the
current loan agreement to allow for a $40 million line of credit along with the
$12 million term loan. Other than an increase in the amount of the line of
credit facility, all other provisions of the amended loan agreement will be the
same
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<PAGE> 35
as those described for the existing agreement. We anticipate that this amendment
will be completed by January 30, 2000. The expiration date of the new agreement
will be July 20, 2002.
In the next five years, we will use cash primarily for the following activities:
- Repayment of borrowings under our loan agreement
- A distribution of approximately $ million to our existing
shareholders as part of a corporate reorganization in connection with
this offering
- Remodeling and relocation of older company-owned stores
- Additional mix production capacity to support expansion
- Joint venture investments in area developer stores
- General corporate purposes, including working capital needs
Our capital requirements for the items outlined above may be significant. These
capital requirements will depend on many factors including our overall
performance, the pace of store expansion and company store remodels, the
requirements for joint venture arrangements and infrastructure needs for both
personnel and facilities. To date, we have primarily relied on cash flow
generated from operations and our line of credit to fund our capital needs. We
believe that the proceeds from this offering, cash flow generated from
operations and our borrowing capacity under our line of credit will be
sufficient to meet our capital needs for the remainder of fiscal 2000 and in
fiscal 2001. If additional capital is needed, we may raise such capital through
public or private equity or debt financings. However, there can be no assurance
that additional capital will be available or be available on satisfactory terms.
We conduct some of our corporate and store operations from leased facilities and
lease certain equipment under operating leases. Generally, these have initial
lease periods of five to 18 years, and contain provisions for renewal options of
five to ten years.
INFLATION
We do not believe that inflation has had a material impact on our results of
operations in recent years. However, we cannot predict what effect inflation may
have on our results of operations in the future.
YEAR 2000
The "year 2000 issue" refers to the possible failure of many computer systems
that may arise as a result of existing computer software and hardware using only
the last two digits to refer to a year. The issue is whether computer systems
will properly recognize date-sensitive information when the year changes to
2000. Systems that fail to recognize such information could generate erroneous
data or cause a system to fail.
We rely on various management information systems to support a range of
administrative and operational areas throughout Krispy Kreme. We have completed
reviews of the ability of our hardware and software serving critical internal
functions in our stores and in our corporate offices to accurately handle the
transition of dates from 1999 to 2000. As a result of these reviews, we have
made modifications to some of our systems. In some instances, we have taken the
approach of retaining the existing functionality of a system and modifying it to
accommodate the date change from 1999 to 2000. In most instances, however, where
we have identified year 2000 issues, we have taken the approach of upgrading
systems to greatly enhance functionality while at the same time achieving year
2000 compliance. This latter approach was taken with our point of sale systems,
core financial accounting systems, telecommunications systems and human
resources information systems. We believe that our actions will result in
complete year 2000 compliance. However, there can be no assurance that our
actions will prevent problems that may arise. As of the date of this prospectus,
we estimate that we have spent approximately $1 million for the dual
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<PAGE> 36
purposes of upgrading the functionality of systems while at the same time
achieving year 2000 compliance. The majority of these expenditures were well
beyond the minimum amount required to achieve year 2000 compliance and represent
our commitment to creating a technology infrastructure that will not only
support but also enhance our business. We do not expect additional year 2000
compliance expenditures to be material. The source of funds for our year 2000
compliance efforts has been cash flows from operations and borrowings under our
line of credit.
We believe that the most significant internal risk posed by the year 2000 issue
is the possibility of a failure of our accounting systems, either at our
corporate offices, at our Winston-Salem manufacturing and distribution facility
or at our stores. If our accounting systems were to fail, we would have to
implement manual processes in many areas, depending on the impacted areas, which
among other issues could result in: delays in shipping mixes and other
ingredients and supplies to company stores and franchise stores; delays in
billing customers for goods sold to them, whether the items are from our Support
Operations business unit or products from our stores; and delays in the
timeliness of information needed to manage our business.
Third parties whose year 2000 problems could have the greatest effect on us are
our banks that maintain our concentration and depository accounts and credit
card processing systems, the company that processes our payroll and maintains
our human resources databases and companies that supply our key raw materials.
These parties have communicated the state of their year 2000 readiness to us and
have represented that they do not foresee any year 2000 problems. Additionally,
we have developed contingency plans for critical functions in certain corporate
departments and business units to address potential year 2000 issues.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We are exposed to market risk from changes in interest rates on our outstanding
bank debt. Our revolving line of credit bears interest at either our lender's
prime rate minus 110 basis points or a rate equal to LIBOR plus 100 basis
points. We elect the rate on a monthly basis. Additionally, our term loan bears
interest under the same method as our revolving line of credit except that the
rate is capped with a floor of 5.500% and a ceiling of 8.125%. The interest cost
of our bank debt is affected by changes in either prime or LIBOR. Such changes
could adversely impact our operating results.
We have no derivative financial interests or derivative commodity instruments in
our cash or cash equivalents. On any business day that we have excess cash
available, we use it to pay down our revolving line of credit.
We purchase certain commodities such as flour, sugar and soybean oil. These
commodities are usually purchased under long-term purchase agreements, generally
one to three years, at a fixed price. We are subject to market risk in that the
current market price of any commodity item may be below our contractual price.
We do not use financial instruments to hedge commodity prices.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for years beginning after June 15, 2000,
Krispy Kreme's fiscal year 2002. FAS 133 requires that all derivatives be
recorded on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in the fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
adoption of FAS 133 is not expected to have a material impact on Krispy Kreme's
financial statements.
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<PAGE> 37
BUSINESS
OVERVIEW
Krispy Kreme is a leading branded specialty retailer of premium quality
doughnuts which are made throughout the day in our stores. We opened our first
store in 1937 and operated 141 stores, consisting of 59 company-owned and 82
franchised stores, as of October 31, 1999. Our principal business is the high
volume production and sale of over 20 varieties of premium quality doughnuts,
including our signature Hot Original Glazed. We have established Krispy Kreme as
a leading consumer brand with a loyal customer base through our longstanding
commitment to quality and consistency. Our place in American society was
recognized in 1997 with the induction of Krispy Kreme artifacts into the
Smithsonian Institution's National Museum of American History. We differentiate
ourselves by combining quality ingredients and a vertically integrated
production process with a unique retail experience featuring our stores' fully
displayed production process, or doughnutmaking theater.
The combination of our well-established brand, our one-of-a-kind doughnuts and
our strong franchise system creates significant opportunities for continued
growth. Our sales growth has been driven by new store openings, as well as
systemwide comparable store sales growth of 12.7% in fiscal 1998, 9.7% in fiscal
1999 and 12.4% in the first nine months of fiscal 2000. Our success is based on
the strengths described below.
COMPANY STRENGTHS
THE UNIVERSAL APPEAL OF OUR PRODUCT. Our market research indicates that Krispy
Kreme's breadth of appeal extends across major demographic groups, including age
and income. In addition to their taste, quality and simplicity, our doughnuts
are an affordable indulgence. This has contributed to many of our customers
purchasing doughnuts by the dozen for their office, clubs and family. Demand for
our doughnuts occurs throughout the day, with approximately half of our
on-premises sales occurring in the morning and half in the afternoon and
evening.
A PROVEN CONCEPT. Krispy Kreme is a focused yet versatile concept. Each of our
distinctive Krispy Kreme stores is a doughnutmaking theater with the capacity,
depending on equipment size, to produce from 2,400 dozen to over 6,000 dozen
doughnuts daily. Our stores serve as our primary retail outlets. They are also
designed to create a multi-sensory experience around our unique product and
production process which is important to our brand-building efforts. In addition
to these on-premises sales, we have developed multiple channels of sales outside
our stores, which we refer to as off-premises sales. These sales channels
improve the visibility of our brand, increase the convenience of purchase and
capture sales from a wide variety of settings and occasions. Additionally, the
ability to generate sales outside of our stores, utilizing the stores' existing
production capacity, minimizes the risk of an underperforming on-premises sales
location.
STRONG GROWTH POTENTIAL. With only 141 stores, we believe that we are in the
infancy of our growth. Our highest priority expansion plans focus on markets
with over 100,000 households. These markets are most attractive because of their
dense population characteristics which enable us to leverage local operations
infrastructure and brand building efforts. We also believe our universal product
appeal, combined with our strategy that leverages multiple sales channels, will
facilitate our expansion into smaller markets.
THE INGREDIENTS FOR MARKET LEADERSHIP. The doughnut industry, an approximately
$4.7 billion market in 1998, is large, fragmented and characterized by
low-volume outlets with undifferentiated product quality. We believe that Krispy
Kreme's unique combination of: (1) a strong brand; (2) a highly differentiated
product; (3) high-volume production capability; and (4) a market penetration
strategy using multiple channels of sales gives us the ability to become the
recognized leader in every market we enter.
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A PROVEN FRANCHISE SYSTEM. Krispy Kreme is committed to growth through
franchising. Our franchisees consist of (1) associates who operate under our
original franchising program developed in the 1940s and (2) area developers who
operate under our franchising program developed in the mid-1990s. See " -- Store
Ownership." We intend to continue to strengthen our franchise system by
attracting experienced and well-capitalized area developers who have the
management capacity to develop multiple stores. Our development strategy permits
us to grow in a controlled manner and enables us to ensure that each area
developer strictly adheres to our high standards of quality and service. We
prefer that area developers have ownership and successful operating experience
in multi-unit food operations within the territory they propose for development.
To ensure a consistent high quality product, we require each franchisee to
purchase our proprietary mixes and doughnutmaking equipment. We devote
significant resources to providing our franchisees with assistance in site
selection, store design, employee training and marketing. Many of our
franchisees are also our shareholders. Additionally, in the future, we intend to
acquire minority equity positions in selected franchisee businesses. We believe
that common ownership of equity will serve to further strengthen our
relationships and align our mutual interests.
DIRECT STORE DELIVERY CAPABILITIES. Krispy Kreme has developed a highly
effective direct store delivery system, or DSD, for executing off-premises
sales. We deliver fresh doughnuts, both packaged and unpackaged, to a variety of
retail customers, such as supermarkets and convenience stores. Through our
company-owned and franchised store operations, our route drivers are capable of
taking customer orders and delivering products directly to our customers' retail
locations where they are typically merchandised from Krispy Kreme branded
displays. We have also developed national account relationships and implemented
electronic invoicing and payment systems with some large DSD customers. We
believe these competencies, coupled with our premium products, will provide us
with significant sales opportunities by allowing us to assume the role of
category manager for doughnut products in both the in-store bakery and food
service distribution channels.
A CONTROLLED PROCESS ENSURING CONSISTENT HIGH QUALITY. Krispy Kreme has a
vertically integrated, highly automated system designed to create quality,
consistency and efficiency. Our doughnutmaking process starts well before the
store-level operations with:
- Our owned and operated manufacturing plant which produces our proprietary
mixes
- Our state-of-the-art laboratory that tests all key ingredients and each
batch of mix produced
- Our self-manufactured, custom stainless steel doughnutmaking equipment
Additionally, at the store-level, we provide: (1) a 13-week manager training
program covering the critical skills required to operate a Krispy Kreme store;
(2) a comprehensive training program for all positions in the store; and (3)
easy-to-follow procedures for producing and finishing our doughnuts.
A BALANCED FINANCIAL MODEL. Krispy Kreme generates sales and income from three
distinct sources: company stores, franchise fees and royalties and a vertically
integrated supply chain, which we refer to as Support Operations. In addition to
lowering the cost of goods sold for our stores, Support Operations generates
attractive margins on sales of our mixes and equipment. Our franchising approach
to growth minimizes our capital requirements and provides a highly attractive
royalty stream. We believe this financial model provides increased stability to
our revenues and earnings and improves our return on investment.
BUSINESS MODEL
Krispy Kreme is a vertically integrated company structured to support and profit
from the high volume production and sale of branded and unbranded high quality
doughnut products. "High volume, high quality" has always been the foundation of
our economic strategy. Our business is driven by two complementary business
units: Store Operations, both company and franchise, and Support Operations.
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<PAGE> 39
Independently, each is designed to ensure quality and to benefit from economies
of scale. Collectively, both function as an integrated, cost-efficient system.
STORE OPERATIONS. Our principal source of revenue is the sale of doughnuts
produced and distributed by Store Operations. As part of our unique business
model, our stores are both retail outlets and highly automated, high volume
producers of our doughnut products and can sell their products through our
multiple sales channels.
- ON-PREMISES SALES. Each of our stores offers at least 15 of our more
than 20 varieties of doughnuts, including our signature Hot Original
Glazed and nine other prescribed varieties. We also sell our special
blend Krispy Kreme coffee, other beverages, other bakery items and
collectible memorabilia such as tee shirts, sweatshirts and hats.
Fundraising sales are another component of on-premises sales. In addition
to being a source of revenue, our fundraising program demonstrates our
commitment to local communities. In order to establish our brand identity
with the total store experience and because of the higher margins
associated with on-premises sales, we plan to focus our initial sales
efforts on this channel.
- OFF-PREMISES SALES. We accomplish off-premises sales through our direct
store delivery system which is designed to: (1) generate incremental
sales; (2) increase market penetration and brand awareness; (3) increase
customer convenience; (4) optimize our stores' production capacity; and
(5) improve a store's return on investment. As of October 31, 1999, 97 of
our stores sold to major grocery store chains, including Kroger, Food
Lion, Giant Food and Acme Markets and to over 1,500 convenience stores,
as well as to select co-branding customers.
SUPPORT OPERATIONS. The mission of our Support Operations is to create
competitive advantages for our stores while operating as a profitable business
enterprise. We have developed strong operating competencies in Support
Operations which we leverage to provide critical services to our stores, which
in turn benefit from:
- Our strong product knowledge and technical skills
- Our control of all critical production and distribution processes
- Our collective buying power
We implement the mission of Support Operations through three strategic business
units:
- MIX MANUFACTURING. We produce all of our proprietary doughnut mixes at
our manufacturing facility in Winston-Salem, North Carolina. We control
production of this critical input in order to ensure that our products
meet quality expectations and to maximize our profit potential.
Manufacturing and selling our own mixes allows us to capture the profit
that normally would accrue to an outside supplier and is more cost
effective than purchasing from third party vendors.
Our mixes are produced according to our high quality standards which
include: (1) requiring each carefully selected supplier to meet or exceed
industry standards; (2) receiving truckloads of our main ingredients
daily; (3) testing each incoming key ingredient; and (4) testing each
batch of mix.
- EQUIPMENT MANUFACTURING. We manufacture proprietary doughnutmaking
equipment which our franchisees are required to purchase. Our carefully
engineered equipment, when combined with our proprietary mixes, produces
doughnuts with uniform consistency and high quality. Manufacturing our
equipment results in several advantages including:
-- Flexibility. We manufacture several models, with varying capacities,
which are capable of producing multiple products and fitting unusual
store configurations.
-- Cost-effectiveness. We believe our costs are lower than if we
purchased our equipment from third parties.
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<PAGE> 40
-- Efficiency. We continually refine our equipment design to ensure
maximum automation and thereby reduce in-store labor costs and/or
improve consistency.
- DISTRIBUTION CENTER. Also located at our Winston-Salem complex is our
distribution center, which is capable of supplying our stores with all of
their key supplies including all food ingredients, juices, Krispy Kreme
coffee, signage, display cases, uniforms and other items. Stores must use
our doughnut mixes and special blend coffee exclusively. In addition, all
store operators have agreed contractually through our Supply Chain
Alliance Program to purchase all of their requirements for the critical
areas of their business through 2002. We believe that our ability to
distribute supplies to our operators produces several advantages
including:
-- Economies of scale. We are able to purchase at volume discount prices
which we believe are lower than those that would be available to our
operators individually. In addition, we are selective in choosing our
suppliers and require that they meet certain standards with regard to
quality and reliability. Also, inventory is controlled on a systemwide
basis rather than at the store level.
-- Convenience. Our distribution center offers our operators the
convenience of one-stop shopping. We are able to supply our operators
with all of the key items they need to operate their stores which
enables them to focus their energies on running their stores, rather
than managing supplier relationships.
KRISPY KREME BRAND ELEMENTS
Krispy Kreme is a blend of several important brand elements which has created a
special bond with many of our customers. The key elements are:
- ONE-OF-A-KIND TASTE. The taste experience of our doughnuts is the
foundation of our concept and the common thread that binds generations of
our loyal customers. Our doughnuts are made from a secret recipe that has
been in our company since 1937. We use only premium ingredients, which
are blended by our custom equipment, to create this unique and very
special product.
- DOUGHNUTMAKING THEATERS. Each of our stores showcases our doughnutmaking
process. Our goal is to provide our customers with a unique entertainment
experience, and in addition, visibly reinforce our commitment to quality
and freshness.
- HOT DOUGHNUTS NOW. The Hot Doughnuts Now sign, when illuminated, is a
signal that our Hot Original Glazed are being made. The Hot Doughnuts Now
sign is a strong impulse purchase generator and an integral contributor
to our brand's mystique. Our Hot Original Glazed are made for several
hours every morning and evening, and at other special times during the
day.
- DESTINATION LOCATIONS. Our full-service stores incorporate
doughnutmaking theaters, which are designed to produce a multi-sensory
customer experience and establish a strong brand identity. Our research
indicates that many of our stores have the geographic drawing power
comparable to a regional shopping mall and that our customers, on
average, drive 14 miles from their homes to our stores.
- AFFORDABLE INDULGENCES. Our doughnuts are reasonably priced to ensure
that they are affordable for the widest audience possible.
- COMMUNITY RELATIONSHIPS. We are a national company, yet we are committed
to strong local community relationships. Our store operators support
their local communities through fundraising programs and the sponsorship
of charitable events. Many of our loyal customers have warm memories of
selling Krispy Kremes to raise money for their schools, clubs and
community organizations.
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INDUSTRY OVERVIEW
Krispy Kreme competes in the doughnut market, a highly fragmented industry,
which, according to industry sources, had sales of approximately $4.7 billion in
1998.
We expect doughnut sales to grow due to a variety of factors, including: (1) the
growth in two-income households and corresponding shift to foods consumed away
from home; (2) increased snack food consumption; and (3) further growth of
doughnut purchases from in-store bakeries.
We view the fragmented competition in the doughnut industry as an opportunity
for our continued growth. We also believe that the premium quality of our
products and the strength of our brand will help enhance the growth and
expansion of the overall doughnut market.
GROWTH STRATEGY
Krispy Kreme is a proven concept with an established heritage. The strength of
our brand and our attractive unit economics position us very well for growth. We
plan to increase our revenues and profits by expanding our store base, improving
on-premises sales at existing stores, and increasing off-premises sales.
EXPAND OUR STORE BASE. The addition of new stores will be accomplished
primarily through franchising with area developers following a prescribed
development plan for their respective territories. An initial development plan
has been created to optimally penetrate territories with over 100,000
households. The plan assumes stores will be built in high density,
prime-retailing locations in order to maximize customer traffic and on-premises
sales volumes. We believe a territory-based development strategy creates
substantial benefits to both Krispy Kreme and our area developers. These
benefits include:
- Real estate procurement and development
- Leverage of organizational capabilities
- Brand building and advertising
- Ability to make marketwide commitments to chain store customers
With respect to new store growth, we believe that secondary markets in the
United States with less than 100,000 households also offer additional sales and
profit growth opportunities. Although we operate successfully in some secondary
markets today, we believe that our primary expansion territories are sufficient
to achieve our intermediate growth objectives.
IMPROVE EXISTING STORES' ON-PREMISES SALES. Our area developers have
demonstrated that a store employing our updated design located in a densely
populated area is capable of generating and sustaining high volume on-premises
sales. Many of our stores built prior to 1997 were designed primarily as
wholesale bakeries and their formats and site attributes differ considerably
from newer stores. In order to improve the on-premises sales of some of these
stores, we plan to remodel many of our company-owned stores and, in some limited
instances, close or relocate certain stores to a more dynamic area within their
territories.
Finally, we consistently evaluate improvements or additions to our product line
in order to increase same store sales levels and balance seasonality of sales.
INCREASE OFF-PREMISES SALES. In new markets, we typically focus our initial
efforts on on-premises sales and then leverage the store platform to capitalize
on off-premises opportunities. We intend to secure additional grocery and
convenience store customers, as well as increase sales to our existing customer
base by offering premium quality products, category management and superior
customer service. In new markets where capacity utilization remains high solely
from servicing on-premises sales, we may develop commissary production
facilities to service off-premises sales. We believe that once high brand
awareness
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has been established in a market, a commissary has the potential to improve
market penetration and profitability.
UNIT ECONOMICS
We believe that Krispy Kreme unit economics represent an attractive investment
opportunity for our area developers and as such are a significant factor
contributing to the growth and success of the Krispy Kreme concept.
We estimate that the investment for a new leased store, excluding pre-opening
costs, is $500,000 for a building of approximately 3,600 square feet and
$500,000 for equipment, furniture and fixtures.
The following table provides certain financial information relating to
company-owned and franchised stores. Average weekly sales per store are
calculated by dividing store revenues by the actual number of sales weeks
included in each period. Company-owned stores' operating cash flow is store
revenues less all direct store expenses other than depreciation expenses.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED NINE MONTHS ENDED
--------------------------------------- -------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Dollars in thousands
Average weekly sales per store:
Company-owned......................... $ 39 $ 42 $ 47 $ 47 $ 53
Franchised............................ 22 23 28 28 37
Company-owned stores' operating cash
flow as a percentage of store
revenues.............................. 20.5% 20.6% 22.7% 21.9% 25.2%
</TABLE>
Average weekly sales for company-owned stores are higher than for franchised
stores due to the lower average weekly sales volumes of older associate stores
that are included in the franchised stores' calculations. However, franchised
stores' average weekly sales have been increasing as higher-volume area
developer stores become a larger proportion of the franchised store base.
Additionally, new area developer stores' sales are principally on-premises
sales, which have higher operating margins than off-premises sales.
Company-owned and associate stores generate a significant percentage of revenues
from lower-margin off-premises sales.
STORE DEVELOPMENT AND OPERATIONS
SITE SELECTION. Our objective is to create highly visible destination
locations. Our comprehensive site selection process focuses on:
- High volume traffic
- High household density
- Proximity to both daytime employment and residential centers
- Proximity to other retail traffic generators
We work closely with our franchisees to assist them in selecting sites. A site
selection team visits each site and the surrounding area before approving a
store location. We believe that this process ensures that each new store will
comply with our standards.
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STORE OPERATIONS. Our new stores are approximately 3,600 square feet. They are
equipped with automated doughnutmaking equipment capable of making approximately
240 dozen doughnuts per hour. This capacity can support sales in excess of
$100,000 per week. We outline uniform specifications and designs for each Krispy
Kreme store and require compliance with our standards regarding the operation of
the store, including, but not limited to:
- Varieties of products
- Product specifications
- Sales channels
- Packaging
- Sanitation and cleaning
- Signage
- Furniture and fixtures
- Image and use of logos and trademarks
- Training
- Marketing and advertising
We also require the use of a computer and cash register system with specified
capabilities to ensure the collection of sales information necessary for
effective store management. All of our franchisees provide us with weekly sales
reports and periodic financial statements.
We routinely assist our franchisees with issues such as: (1) operating
procedures; (2) advertising and marketing programs; (3) administrative,
bookkeeping and accounting procedures; (4) public relations; and (5) generation
of sales and operating data.
We also provide an opening team which consists of up to nine people, to provide
on-site training and assistance during the first two weeks of operation for each
initial store opened by a new franchisee. The number of opening team members
providing this assistance is reduced with each subsequent store opening.
Our stores which engage in off-premises sales typically operate on a 24-hour
schedule. Other stores generally operate from 5:30 a.m. to 1:00 a.m. seven days
a week, excluding Christmas. Traditionally, our sales have been slower during
the Christmas holiday season and the summer months.
QUALITY STANDARDS AND CUSTOMER SERVICE. We encourage all of our employees to be
courteous, helpful, knowledgeable and attentive. We emphasize the importance of
performance by linking a portion of both a company store manager's and an
assistant store manager's incentive compensation to profitability and customer
service. We also encourage high levels of customer service and the maintenance
of our high quality standards by frequently monitoring our stores through a
variety of methods including periodic quality audits and "mystery shoppers." In
addition, our Customer Experience Department handles customer comments and also
conducts routine satisfaction surveys of our off-premises customers.
MANAGEMENT AND STAFFING. It is important that our corporate staff and store
managers work as a team. Our Senior Vice President, Company Store and Associate
Operations, and Senior Vice President, Area Developer Operations, are
responsible for corporate interaction with our store operations division and
store management. Through our divisional directors, each of whom is responsible
for a specific geographic region, we communicate frequently with all store
managers and their staffs using: store audits; weekly communications by
telephone or e-mail; and scheduled and surprise store visits.
We offer a comprehensive 13-week training program, conducted both at our
headquarters and at designated stores, which provides store managers the
critical skills required to operate a Krispy Kreme store. We plan to add
computer-based training modules that will enhance the program.
Our staffing varies depending on a store's size, volume of business, and number
of sales channels. Stores with sales through all sales channels have
approximately 35 employees handling on-premises sales, processing, production,
bookkeeping and sanitation and between 2-15 delivery personnel. Area developers
frequently hire employees from leasing agencies and employ staff based on store
volume and size. Hourly employees, along with delivery personnel, are trained by
local store management through hands-on experience and training manuals.
We believe that our success is a natural result of the growth and development of
our people. We are developing a career model for both management and non-exempt
employees which will focus on personal
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<PAGE> 44
development and career growth. The program will link an individual's economic,
career and personal goals with our corporate and store-level goals.
STORE OWNERSHIP
We divide our stores into three categories of ownership: company stores,
associate stores and area developer stores. We refer to associates and area
developers as franchisees, collectively.
COMPANY STORES. Krispy Kreme owned 59 stores as of October 31, 1999. Most of
these stores were developed between 1937 and 1996 and: (1) were designed as
wholesale bakeries; (2) generate a majority of their sales volume through
off-premises sales; (3) are located in the Southeast; and (4) are larger than
our new stores.
ASSOCIATES. We had 25 associates who operated 49 stores as of October 31, 1999.
Associate stores have attributes which are similar to those of company stores.
This group generally concentrates on growing sales within their current base of
stores rather than developing new stores or new territories. With two
exceptions, associates are not obligated to develop additional stores within
their territories. We cannot grant licenses to other franchisees or sell
products bearing the Krispy Kreme brand name within an associate's territory
during the term of their license agreement.
Associates are typically parties to 15-year licensing agreements which generally
permit them to operate stores using the Krispy Kreme system within a specific
territory. Associates pay royalties of 3.0% of on-premises sales and 1.0% of all
other sales, with the exception of private label sales for which there are no
royalties. They are not currently required to contribute to the public relations
and advertising fund. Our associates who are shareholders are parties to
franchise agreements which will be extended automatically for a period of 20
years following this offering and thereafter are renewed automatically for
five-year periods, unless previously terminated by either party. We do not plan
to license any new Krispy Kreme franchisees under the terms of the associate
license agreement.
AREA DEVELOPERS. In the mid-1990s, we began to strategically expand nationally
to new territories through area developers. Under this structure, we license
territories, usually defined by metropolitan statistical areas, to area
developers who are capable of developing a prescribed number of stores within a
specified time period. Area developer stores typically are designed and
developed in locations favorable to achieving high volume on-premises sales,
although they are also equipped to generate off-premises sales. We currently
have 13 area developers operating 33 stores with contractual commitments to open
an additional 130 stores in their territories during their initial development
schedule, which is generally five years. Preferred area developer candidates are
multi-unit food operators with a high level of knowledge about the local
territory or territories they will develop. They must have a proven financial
capability to fully develop their territories.
Each of our area developers is required to enter into two types of agreements: a
development agreement which establishes the number of stores to be developed in
an area and a franchise agreement for each store which they open. Area
developers typically pay franchise fees ranging from $20,000 to $40,000 for each
store which they develop.
Our current standard franchise agreement provides for a 15-year term. The
agreement is renewable subject to our discretion and can be terminated for a
number of reasons including the failure of the franchisee to make timely
payments within applicable grace periods subject to state law. Area developers
pay a 4.5% royalty fee on all sales and are required to contribute 1.0% of all
sales to a company-administered public relations and advertising fund.
In addition to a franchise agreement, all area developers have signed
development agreements which require them to develop a specified number of
stores on or before specific dates. Generally, these agreements have a five-year
term. If area developers fail to develop their stores on schedule, we have the
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right to terminate the agreement and develop company-owned stores, or develop
stores through new area developers or joint ventures.
Generally, we do not provide financing to our franchisees. We do, however, have
a program permitting franchisees to lease proprietary Krispy Kreme equipment
from our primary bank, and we will guarantee the leases. Currently, one
franchisee has taken advantage of this program, and we do not anticipate that
the program will grow substantially.
MARKETING
Krispy Kreme's approach to marketing is a natural extension of our brand equity,
brand attributes, relationship with our customers, and our values. We believe we
have a responsibility to our customers to engage in marketing activities that
are consistent with, and further reinforce, their confidence and strong feelings
about Krispy Kreme. Accordingly, we have established certain guiding brand
principles which include:
- We will not attempt to define the Krispy Kreme experience for our
customer
- We prefer to have our customers tell their Krispy Kreme stories and share
their experiences with others
- We will focus on enhancing customer experiences through product-focused,
value-added activities
- We will develop local, community-based relationships in all Krispy Kreme
markets
To build our brand and drive our comparable store sales in a manner aligned with
our brand principles, we have focused our marketing activities in the following
areas:
STORE EXPERIENCE. Our stores are where customers first experience a Hot
Original Glazed. Customers know that when our Hot Doughnuts Now sign in the
store window is illuminated, they can see our doughnuts being made and enjoy a
Hot Original Glazed within seconds after it passes through the glaze waterfall.
We believe this begins a lifetime relationship with our customers and forms the
foundation of the Krispy Kreme experience.
RELATIONSHIP MARKETING. Most of our brand-building activities are
grassroots-based and focus on initiatives in our local communities including:
- Product donations to local radio and television stations, schools,
government agencies, and other community organizations
- Good neighbor product deliveries to create trial uses
- Sponsorship of local events and nonprofit organizations
- A "Good Grades Program" which recognizes scholastic achievement with
certificates and free doughnuts
- Our "Krispy Kreme Ambassador Program" which enlists our fans as
ambassadors in new markets to generate awareness and excitement around a
new store opening
PRODUCT PLACEMENT. Since fiscal 1997, as we began growing nationally, there has
been a significant increase in our product placements and references to our
products on television programs and in selected films, including NBC Today Show,
Rosie O'Donnell, The Tonight Show with Jay Leno, Ally McBeal, NYPD Blue, The
Practice and Primary Colors. We have been mentioned in more than 80 television
shows during 1998 and 1999. We have also been featured or mentioned in over
1,000 print publications in those two years, including The Wall Street Journal.,
The New York Times, the Washington Post, the Los Angeles Times, Forbes and Fast
Company. We believe the increasing number of placements and references are a
reflection of the growing interest in our product and brand.
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ADVERTISING. While relationship marketing and third party endorsements are the
cornerstones of our marketing strategy, we plan to develop and test media
advertising which will be accomplished in a manner consistent with our brand
principles.
STORE LOCATIONS AND OTHER PROPERTIES
STORES. As of October 31, 1999, there were 141 Krispy Kreme stores operating in
27 states, 59 of which were owned by us, 33 of which were owned by area
developers and 49 of which were owned by associates. The following map and table
shows the geographic location of these stores by ownership category.
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(MAP AND LIST SHOWING KRISPY KREME STORE LOCATIONS)
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All of our stores, except for our Charlotte manufacturing facility, have
on-premises sales, and 97 stores also engage in off-premises sales.
Of the 59 stores we operated ourselves as of October 31, 1999, we owned the land
and buildings for 32 stores. We leased both the building and the land for 12
stores. We leased only the building for six stores, and we leased only the land
for nine stores.
SATELLITE STORES. Our franchisees operated 14 satellite locations as of October
31, 1999. A satellite location is a retail doughnut store that does not produce
doughnuts on site. Satellite locations are supplied with doughnuts from another
local Krispy Kreme store that has production capability.
SPECIAL PRODUCTION FACILITIES. The manufacturing facility in Charlotte, North
Carolina produces doughnuts and other bakery items, such as honey buns, fruit
pies, dunkin sticks and miniature doughnuts for off-premises sales.
OTHER PROPERTIES. Our corporate headquarters is located in Winston-Salem, North
Carolina. We occupy this facility of approximately 35,000 square feet under a
lease which expires on December 31, 2009, with one five-year renewal option. We
also own a 137,000 square foot manufacturing plant and distribution center in
Winston-Salem.
MANAGEMENT INFORMATION SYSTEMS
Krispy Kreme has a management information system that allows for the rapid
communication of extensive information among our corporate office, support
operations, company stores, associates and area developers. Our franchisees and
other affiliates connect to this system through our Intranet and have access to
e-mail and the ability to provide financial reporting. We have adopted a
balanced scorecard approach for measuring key performance drivers in each of our
business units. Scorecard data are generated internally through our management
information system.
An enterprise resource planning system supports all major financial and
operating functions within the corporation including financial reporting,
inventory control and human resources. A comprehensive data warehouse system
supports the financial and operating needs of our Store Operations and Support
Operations.
All company stores have been retrofitted with a Windows NT-based point of sale,
or POS, system. This POS system provides each store with the ability to more
closely manage on-premises and off-premises sales while providing a kiosk into
our Intranet. We poll the sales information from each store's POS system which
gives us the ability to analyze data regularly. Daily two-way electronic
communication with our stores permits sales transactions to be uploaded and
price changes to be downloaded to in-store POS servers.
Direct store delivery sales operations have access to an internally-developed
route accounting system networked into the corporate Intranet. Information from
these systems is polled weekly and aggregated into the corporate manufacturing
data warehouse.
All information technology hardware, including POS systems, is leased.
COMPETITION
Our competitors include retailers of doughnuts and snacks sold through
supermarkets, convenience stores, restaurants and retail stores. We compete
against Dunkin' Donuts, which has the largest number of outlets in the doughnut
retail industry, as well as against regionally and locally owned doughnut shops.
We believe that in the in-store bakery market, many operators are looking for
cost-effective alternatives to making doughnuts on-site. With a quality product
and recognized brand name, Krispy Kreme has been able to provide a turnkey
program that is profitable for the grocer. In addition, we also believe that we
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compete effectively in convenience stores. There is an industry trend moving
towards expanded fresh product offerings during morning and evening drive times,
and products are either sourced from a central commissary or brought in by local
bakeries. Krispy Kreme provides a fresh daily delivery, merchandised in an
attractive branded display which retailers must use to participate in the
program. Through effective signage and merchandising, operators are able to draw
customers into the store, thus gaining add-on sales. As category management
increases in this segment, growth will come from increased market penetration
and enhanced display opportunities for our products.
In the packaged doughnut market we offer a full product line of doughnuts and
snacks that are sold on a consignment basis and are typically merchandised on a
free-standing branded display. We compete primarily with other well known
producers of baked goods such as Hostess and Dolly Madison and some regional
brands.
TRADEMARKS
Our doughnut shops are operated under the Krispy Kreme name and use over 40
federally registered trademarks, including "Krispy Kreme" and "Hot Doughnuts
Now" and the logos associated with these marks. We have also registered some of
our trademarks in approximately 20 other countries. We license the use of these
trademarks to our franchisees for the operation of their doughnut shops. We also
license the use of certain trademarks to convenience stores and grocery stores
in connection with the sale of some of our products at those locations.
GOVERNMENT REGULATION
LOCAL REGULATION. Our stores are subject to licensing and regulation by a
number of government authorities, which may include health, sanitation, safety,
fire, building and other agencies in the states or municipalities in which our
doughnut shops are located. Developing new doughnut stores in particular areas
could be delayed by problems in obtaining the required licenses and approvals or
by more stringent requirements of local government bodies with respect to
zoning, land use and environmental factors. Our standard development and
franchise agreements require our area developers and associates to comply with
all applicable federal, state and local laws and regulations, and indemnify us
for costs we may incur attributable to their failure to comply.
FOOD PRODUCT REGULATION. Our doughnut mixes are produced at our manufacturing
facility in Winston-Salem, North Carolina. The North Carolina Department of
Agriculture has regulatory power over food products shipped from this facility,
as well as from Krispy Kreme's commissary in Charlotte, North Carolina. Similar
state regulations may apply to products shipped from our doughnut shops to
grocery or convenience stores. Many of our grocery and convenience store
customers require us to guarantee our products' compliance with applicable food
regulations.
As is the case for other food producers, numerous other government regulations
apply to our products. For example, the ingredient list, product weight and
other aspects of our product labels are subject to state and federal regulation
for accuracy and content. Most states will periodically check the product for
compliance. The use of various product ingredients and packaging materials is
regulated by the U.S. Department of Agriculture and the Federal Food and Drug
Administration. Conceivably, one or more ingredients in our products could be
banned and substitute ingredients would then need to be found.
FRANCHISE REGULATION. We must comply with regulations adopted by the Federal
Trade Commission, or the FTC, and with several state laws that regulate the
offer and sale of franchises. The FTC's Trade Regulation Rule on Franchising, or
the FTC Rule, and certain state laws require that we furnish prospective
franchisees with a franchise offering circular containing information prescribed
by the FTC Rule and applicable state laws and regulations.
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We also must comply with a number of state laws that regulate some substantive
aspects of the franchisor-franchisee relationship. These laws may limit a
franchisor's ability to: terminate or not renew a franchise without good cause;
prohibit interference with the right of free association among franchisees;
disapprove the transfer of a franchise; discriminate among franchisees with
regard to charges, royalties and other fees, and place new stores near existing
franchises. To date, these laws have not precluded us from seeking franchisees
in any given area and have not had a material adverse effect on our operations.
Bills intended to regulate certain aspects of franchise relationships have been
introduced into Congress on several occasions during the last decade, but none
has been enacted.
EMPLOYMENT REGULATIONS. We are subject to state and federal labor laws that
govern our relationship with employees, such as minimum wage requirements,
overtime and working conditions and citizenship requirements. Many of our
on-premises and delivery personnel are paid at rates related to the federal
minimum wage. Accordingly, further increases in the minimum wage could increase
our labor costs. Furthermore, the work conditions at our facilities are
regulated by the Occupational Safety and Health Administration and subject to
periodic inspections.
OTHER REGULATIONS. We have several contracts to serve United States military
bases, which require compliance with certain applicable regulations. The stores
which serve these military bases are subject to health and cleanliness
inspections by military authorities. These accounts are not material to our
overall business. We are also subject to federal and state environmental
regulations, but we currently believe that these will not have a material effect
on our operations.
EMPLOYEES
As of October 31, 1999 we had 2,923 employees. Of these, 196 were employed in
our administrative offices and 100 were employed in our manufacturing and
distribution centers. In our company-owned stores and commissaries, we have
2,627 employees. Of these, 2,364 are full-time, including 182 managers and
administrators.
None of our employees are parties to a collective bargaining agreement, although
we have experienced occasional unionization initiatives. We believe our
relationships with our employees are good.
LEGAL PROCEEDINGS
As of the date of this prospectus, we are not a party to any litigation that we
believe is likely to have a material effect on our financial condition or
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following contains information concerning our directors and executive
officers as of December 10, 1999, each of whom will continue to serve in the
following capacities for both us and our operating subsidiary after this
offering:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
DIRECTOR
NAME AGE POSITION TERM EXPIRES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Scott A. Livengood....... 47 Chairman of the Board of Directors, President and 2001
Chief Executive Officer
John N. McAleer.......... 41 Vice Chairman of the Board of Directors and 2002
Executive Vice President, Concept Development
J. Paul Breitbach........ 62 Executive Vice President, Finance, Administration --
and Support Operations
Margaret M. Urquhart..... 50 Executive Vice President and Chief Operating --
Officer
Randy S. Casstevens...... 34 Senior Vice President, Finance and Secretary --
L. Stephen Hendrix....... 50 Senior Vice President, Company Store and --
Associate Operations
Michelle P. Parman....... 37 Senior Vice President, Corporate Development --
Robert H. Vaughn, Jr..... 43 Senior Vice President, Area Developer Operations --
Philip R.S. Waugh, Jr.... 39 Senior Vice President, Franchise Development --
Frank E. Guthrie......... 60 Director 2000
William T. Lynch, Jr..... 57 Director 2002
Joseph A. McAleer, Jr.... 49 Director 2001
Robert L. McCoy.......... 50 Director 2000
Robert J. Simmons........ 76 Director 2000
Steven D. Smith.......... 46 Director 2001
Robert L. Strickland..... 68 Director 2002
</TABLE>
- ---------------
SCOTT A. LIVENGOOD has been employed by Krispy Kreme since 1978. He was
appointed Chairman of the board of directors in October 1999. He has served as
Chief Executive Officer since February 1998 and as President since August 1992.
From August 1992 to January 1998, Mr. Livengood was also Chief Operating
Officer. He has served as a director since February 1994.
JOHN N. MCALEER has been employed by Krispy Kreme since 1981. Mr. McAleer has
served as Executive Vice President, Concept Development and as Vice Chairman of
the board of directors since October 1999. He has also served as Executive Vice
President, Brand Development from March 1998 until October 1999, Executive Vice
President, Marketing from August 1992 until March 1998 and as Senior Vice
President, Marketing, Real Estate and Construction from September 1990 until
August 1992. Mr. McAleer has served as a director since September 1990 and
served as Chairman of the board of directors from February 1998 until October
1999. Mr. McAleer is the brother of Mr. Joseph A. McAleer, Jr., another member
of the board of directors.
J. PAUL BREITBACH has been employed by Krispy Kreme since November 1992 as
Executive Vice President, Finance, Administration and Support Operations. From
1973 to November 1992, Mr. Breitbach was a partner at the accounting firm of
Price Waterhouse, and from 1983 to 1992 was managing partner of that firm's
Winston-Salem, North Carolina office. From 1987 to 1992 he was also group
managing partner
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for all Price Waterhouse offices in North Carolina and South Carolina. Mr.
Breitbach is a certified public accountant.
MARGARET M. URQUHART has been employed with Krispy Kreme as Executive Vice
President and Chief Operating Officer since December 1999. Prior to joining
Krispy Kreme, Ms. Urquhart was President of Lowes Foods, a supermarket chain,
since November 1995. From July 1993 until November 1995, Ms. Urquhart was
President of Spurwink Consulting Group, a consulting firm advising national
consumer goods manufacturers and retailers. Previously, she was employed for 17
years in various capacities with Hannaford Bros. Co., a supermarket chain,
including as President of its subsidiary, Wellby Super Drug Stores.
RANDY S. CASSTEVENS has been employed by Krispy Kreme since 1993. Mr. Casstevens
has served as Senior Vice President, Finance, since April 1998 and as Secretary
since November 1995. Prior to joining Krispy Kreme, Mr. Casstevens was employed
by Price Waterhouse from 1987 to 1993. Mr. Casstevens is a certified public
accountant.
L. STEPHEN HENDRIX has been employed by Krispy Kreme since January 1978. From
October 1993 to March 1995, Mr. Hendrix served as Senior Vice President,
Development. Mr. Hendrix has served as Senior Vice President, Company Store and
Associate Operations, since March 1995.
MICHELLE P. PARMAN has been employed by Krispy Kreme since 1993. Ms. Parman has
served as Senior Vice President, Corporate Development since April 1998.
Previously, she served as Vice President, Strategic Planning. Before joining
Krispy Kreme, Ms. Parman was employed by Price Waterhouse from 1984 to 1993. Ms.
Parman is a certified public accountant.
ROBERT H. VAUGHN, JR. has been employed by Krispy Kreme since March 1998. Mr.
Vaughn has served as Senior Vice President, Area Developer Operations since
December 1999. Previously, he served as Senior Vice President, Sales and
Marketing. From January 1993 to March 1998, Mr. Vaughn was President of Gullwing
Productions, a licensed apparel company. Mr. Vaughn also served in various
capacities with Hanes Printables, a printed and embroidered sportswear
manufacturer and a division of Sara Lee Knit Products and the Sara Lee
Corporation, from September 1987 until November 1992.
PHILIP R.S. WAUGH, JR. has been employed by Krispy Kreme since May 1993. He has
served as Senior Vice President, Franchise Development since April 1998.
Previously, he served as Vice President, Franchising. From October 1991 until he
joined Krispy Kreme, Mr. Waugh served as Vice President, Corporate Banking with
Southern National Bank of North Carolina. From 1982 until October 1991, he
served in various capacities with Wachovia Bank, N.A. Mr. Waugh is a co-owner of
Midwest Doughnuts, LLC, our Kansas City franchisee.
FRANK E. GUTHRIE has been a director since February 1994. Mr. Guthrie has been
President of Magic City Doughnuts Corp., our Orlando area franchisee, since
1998, and co-owns that company with another one of our directors, Mr. McCoy. He
has also been President and owner of Classic City Doughnuts Corp., our Athens,
Georgia franchisee, since 1992. Additionally, he has been employed by Augusta
Doughnut Company, our Augusta, Georgia franchisee, in various capacities since
1961, and he is currently its President and majority owner.
WILLIAM T. LYNCH, JR. has been a director since November 1998. He currently
serves as President and Chief Executive Officer of Liam Holdings LLC, a
marketing and capital management firm. Mr. Lynch retired as President and Chief
Executive Officer of Leo Burnett Co. in March 1997 after serving with that
advertising agency for 31 years.
JOSEPH A. MCALEER, JR. has been a director since May 1988. Mr. McAleer served as
Chairman of the board of directors and Chief Executive Officer from September
1995 until his retirement from Krispy Kreme in January 1998. He also served as
President from May 1988 until August 1992 and as Chief Operating Officer from
May 1988 until August 1992. Mr. McAleer is a co-owner with Mr. Smith, another
one of our directors, of Dallas Doughnuts, our Dallas/Fort Worth franchisee. Mr.
McAleer is also manager
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<PAGE> 53
and owner of Mackk LLC, our Mobile, Alabama franchisee. Mr. McAleer is the
brother of John N. McAleer, Vice Chairman of our board of directors.
ROBERT L. MCCOY has been a director since February 1994. Mr. McCoy has been
President and majority owner of Gulf Florida Doughnut Corp., our Tampa, Florida
franchisee, since November 1983, and he is Vice President and co-owner of Magic
City Doughnuts with Mr. Guthrie.
ROBERT J. SIMMONS has been a director since May 1989. Since 1970, he has also
been the President and majority owner of Simac, Inc., our Akron, Ohio
franchisee.
STEVEN D. SMITH has been a director since April 1991. Since April 1997, Mr.
Smith has been President, and a co-owner with Mr. Joseph A. McAleer, Jr., of
Dallas Doughnuts. He has also been President and majority owner of Dales
Doughnut Corp., our Tallahassee and Panama City, Florida franchisee, since 1985
and Dales of Dothan, Inc., our Dothan, Alabama franchisee, since 1991. He has
also been the Chief Executive Officer and owner of Smiths Doughnuts Inc., our
Tuscaloosa, Alabama franchisee, since 1994.
ROBERT L. STRICKLAND has been a director since November 1998. Mr. Strickland
retired as Chairman of the Board of Directors of Lowe's Companies, Inc., a home
improvement retailer, in January 1998, after 41 years of service. He is still a
director of Lowe's. Mr. Strickland is also a director of T. Rowe Price
Associates, an investment management firm, and Hannaford Bros. Co., a
supermarket chain.
BOARD OF DIRECTORS
CLASSIFICATION OF DIRECTORS
The board of directors is divided into three classes under our articles of
incorporation. Class I consists of three directors who will stand for election
at the annual meeting of shareholders to be held in 2000. Class II consists of
three directors who will stand for election at the annual meeting of
shareholders to be held in 2001. Class III consists of three directors who will
stand for election at the annual meeting of shareholders to be held in 2002.
After their initial term following this offering, directors in each class will
serve for a term of three years. Our bylaws provide that directors can be
removed only with cause by a two-thirds majority of the shareholders. Officers
are chosen by and serve at the discretion of the board of directors.
BOARD COMMITTEES
The audit committee has the responsibility to review our audited consolidated
financial statements and accounting practices and to consider and recommend the
employment of, and approve the fee arrangements with, independent accountants
for both audit functions and for advisory and other consulting services. Messrs.
William T. Lynch, Jr., Steven D. Smith, Frank E. Guthrie and Robert J. Simmons
comprise the members of the audit committee.
The compensation committee reviews and approves the compensation and benefits
for our executive officers and the employee benefit plans for all other
employees. It makes recommendations to our board of directors regarding these
matters. Messrs. Robert L. Strickland, Robert L. McCoy and Joseph A. McAleer,
Jr. comprise the members of the compensation committee.
EXECUTIVE COMPENSATION
The table below provides information concerning the total compensation received
for services rendered to Krispy Kreme during its fiscal year ended January 31,
1999 by our chief executive officer and Krispy Kreme's four other highest paid
executive officers, who are referred to as the named officers. "Other annual
compensation" includes perquisites and other personal benefits paid to each of
the named officers, such as automobile allowances, club dues and medical
insurance premiums. Amounts under "Restricted stock awards" represent bonuses
paid to cover loan repayments due to Krispy Kreme in connection with purchases
of restricted stock by the named officer. See "-- Other
compensation -- Restricted stock plan" for more information.
Share information in this table and in the discussion of our stock option plan
do not reflect the exchange ratio in the merger in connection with our holding
company formation.
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<PAGE> 54
Fiscal 1999 Summary Compensation Table
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
LONG-TERM COMPENSATION
-------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION --------------------------------- -------
---------------------------------- COMMON SHARES
OTHER ANNUAL RESTRICTED UNDERLYING LTIP
NAMED OFFICER SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS PAYOUTS
- ------------- -------- -------- ------------ ------------ ------------------ -------
<S> <C> <C> <C> <C> <C> <C>
Scott A. Livengood........... $302,223 $341,815 $63,743 $117,185 29,000 $31,340
Chairman of the Board,
President and Chief
Executive Officer
J. Paul Breitbach............ 219,375 251,827 54,540 87,991 7,500 37,092
Executive Vice President,
Finance, Administration
and Support Operations
John N. McAleer.............. 186,771 215,972 49,896 -- 7,500 18,216
Vice Chairman of the Board
and Executive Vice
President, Concept
Development
L. Stephen Hendrix........... 119,221 116,997 31,596 -- 3,000 8,687
Senior Vice President,
Company Store and
Associate Operations
Randy S. Casstevens.......... 100,548 102,197 3,144 -- 3,000 2,233
Senior Vice President,
Finance and Secretary
</TABLE>
STOCK OPTIONS
In fiscal 1999, we established the 1998 Stock Option Plan. Under the terms of
the plan, 95,650 shares of our common stock are reserved for issuance to
employees and directors. Grants may be made to participants in the form of
either incentive stock options or nonqualified stock options. A board committee
is granted discretion to administer the plan. Options granted to employees under
the plan vest ratably over a three-year period commencing with the second
anniversary of the grant date. Options granted to directors under the plan vest
ratably over a three-year period commencing on the grant date of the options.
In fiscal 1999, 77,800 options were granted to all employees as a group, and
13,750 options were granted to non-employee directors. All such grants were made
under our 1998 stock option plan and are nonqualified stock options. The options
are for a term of ten years and vest in one-third increments over a three-year
period that begins on the second anniversary after the date of grant. Under the
terms of the plan, any forfeitures of options by participants for any reason
will be granted to Mr. Livengood, up to a maximum of 7,420 shares. All shares of
our common stock acquired pursuant to the exercise of stock options are subject
to a stock purchase agreement and, at the board committee's discretion, a
separate voting agreement, neither of which will be in effect following the
completion of this offering.
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<PAGE> 55
The following table shows information concerning stock option grants to each of
the named officers during the fiscal year ended January 31, 1999. The values
assigned to each reported option are shown assuming 5% and 10% percent
compounded annual growth rates in the market value of our common stock. The
actual value of these stock options will depend on the market value of our stock
at a future date.
Stock Option Grants in Fiscal 1999
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
------------------------------------------------------------------ ASSUMED ANNUAL
PERCENT OF RATES OF STOCK PRICE
COMMON TOTAL OPTIONS EXERCISE APPRECIATION
SHARES GRANTED TO ALL OR BASE FOR OPTION TERM
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAMED OFFICER OPTIONS FISCAL YEAR SHARE DATE 5% 10%
- ------------- ------------- ------------------ ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott A. Livengood 29,000 37.3% $103.64 08/06/08 $1,890,181 $4,790,089
J. Paul Breitbach 7,500 9.6 103.64 08/06/08 488,840 1,238,816
John N. McAleer 7,500 9.6 103.64 08/06/08 488,840 1,238,816
L. Stephen Hendrix 3,000 3.9 103.64 08/06/08 195,536 495,526
Randy S. Casstevens 3,000 3.9 103.64 08/06/08 195,536 495,526
</TABLE>
The following table shows information concerning stock options held by each of
the named officers at January 31, 1999. None of the named officers held
exercisable options as of that date.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
-------------------------------------------------
VALUE OF
UNEXERCISED
COMMON SHARES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS
NAMED OFFICER OPTIONS AT FISCAL YEAR END AT FISCAL YEAR
- ------------- -------------------------- --------------------
<S> <C> <C>
Scott A. Livengood.................................... 29,000 $173,710
J. Paul Breitbach..................................... 7,500 44,925
John N. McAleer....................................... 7,500 44,925
L. Stephen Hendrix.................................... 3,000 17,970
Randy S. Casstevens................................... 3,000 17,970
</TABLE>
RETIREMENT INCOME PLAN FOR KEY EMPLOYEES
Effective May 1, 1994, we established a noncontributory, nonqualified defined
benefit pension plan known as the Retirement Income Plan for Key Employees for
certain of our key employees. The benefits under the retirement plan are based
on years of service after 1993 and average final compensation during the
employee's career.
The following table shows estimated annual benefits payable to participants in
the retirement plan upon retirement at age 65 at the specified remuneration in
the various years of service classifications:
Retirement Plan Table
<TABLE>
<CAPTION>
---------------------------------------
YEARS OF SERVICE
---------------------------------------
FINAL AVERAGE COMPENSATION 15 20 25 30
- -------------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
$100,000................................................ $15,000 $20,000 $ 25,000 $ 30,000
$200,000................................................ 30,000 40,000 50,000 60,000
$300,000................................................ 45,000 60,000 75,000 90,000
$400,000................................................ 60,000 80,000 100,000 120,000
</TABLE>
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<PAGE> 56
Each of the named officers has five years of credited service. Final average
compensation is based solely on the officer's salary. Benefits are computed on a
straight-life annuity basis and are not subject to any deductions.
OTHER COMPENSATION
Long-Term Incentive Plan
The Employees' Long-Term Incentive Plan, or the LTIP, enabled eligible employees
to defer some or all of bonuses earned under our incentive compensation plans.
The deferred amounts were converted to units of phantom stock based on a formula
contained in the LTIP. The phantom stock units granted under the LTIP were
credited with dividends in a manner identical to our common stock. Pursuant to
the terms of the LTIP, a participant's account was to be distributed to him in
accordance with the deferral election made by the participant.
In our fiscal year ended January 31, 1999, we made dividend payments to the
named officers with respect to the phantom units credited to such named officers
under the LTIP. The awards are shown in the "1999 Summary Compensation Table"
under the "LTIP payouts" column. The amounts reflect the value of all bonuses
deferred under the LTIP and the growth in the value of our common stock.
Conversion of the Long-Term Incentive Plan
In fiscal 1999, we determined that it was in Krispy Kreme's best interest to
liquidate the LTIP. Accordingly, we undertook a conversion program whereby
phantom stock units under the LTIP were converted into an equivalent number of
actual shares of Krispy Kreme common stock. Participants who elected to
participate in the conversion received a distribution of shares of our common
stock. Non-participants received a cash payout. All shares so distributed are
subject to a stock purchase agreement and a special voting agreement, neither of
which will be in effect upon completion of this offering. The conversion took
place after the LTIP payouts for fiscal 1999.
Because the distribution of shares of our common stock pursuant to the
conversion triggered recognition of income for participants, we established a
loan program by which we made 10-year loans with fixed 6% rates of interest
available to senior executive participants in an amount equal to 45% of the
amount of income recognized as a result of the conversion. Pursuant to this
program, we extended loans to the following officers and directors on August 31,
1998:
<TABLE>
<CAPTION>
-----------------------------------------
AMOUNT OUTSTANDING
OFFICER OR DIRECTOR PRINCIPAL AMOUNT AS OF OCTOBER 31, 1999
- ------------------- ---------------- ----------------------
<S> <C> <C>
Scott A. Livengood....................................... $449,730 $415,610
J. Paul Breitbach........................................ 532,279 491,897
John N. McAleer.......................................... 261,406 241,574
Randy S. Casstevens...................................... 32,040 29,609
L. Stephen Hendrix....................................... 124,663 115,205
Joseph A. McAleer, Jr.................................... 504,390 466,123
</TABLE>
Some of our other officers and directors also received loans of less than
$60,000. Although we are not legally obligated to do so, we have paid and intend
to pay supplemental bonuses to the participants over the ten-year period of the
loan in an amount necessary to enable the participant to make the loan payment
due us after payment of federal and state taxes. Payment of these bonuses began
in fiscal 2000.
Compensation of directors
We compensate each director who is not an employee with an annual fee of
$18,800. Beginning in our fiscal year ending January 28, 2001, this fee will be
paid quarterly. Non-employee directors also receive additional fees of $300 per
quarter for miscellaneous expenses and approximately $200 monthly for
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<PAGE> 57
insurance coverage for themselves and their spouses. In addition to these fees,
we reimburse each director for travel and other related expenses incurred in
attending meetings of the board of directors. In fiscal 1999, we granted each of
our seven non-employee directors nonqualified stock options for 1,950 shares
under the 1998 stock option plan. These options vest ratably over a three-year
period commencing on the grant date and have an exercise price of $103.64 per
share. Options for 4,550 shares are currently exercisable.
Restricted stock plan
In November 1993 and April 1994, the board of directors authorized the issuance
of 12,645 and 2,500 shares of restricted stock, respectively, to some of our
directors and officers. We made loans to each of the participants for the
purchase of these restricted shares. The loans were repaid over a four to six
year period and bore interest at 6% per annum. All of these loans have been
repaid and all restrictions on the purchased shares have lapsed. The following
named officers received loans to purchase restricted stock: Scott A.
Livengood -- $155,311; J. Paul Breitbach -- $116,652; and John N.
McAleer -- $52,844. Some of our other directors also received loans in amounts
not exceeding $60,000. We paid the restricted stock plan participants a bonus
each year equal to the installment due on the loan. The amounts shown in the
"1999 Summary Compensation Table" under the "Restricted Stock Awards" column
reflect the bonuses paid in that year.
EXECUTIVE CONTRACTS, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS
Employment contracts
Krispy Kreme has entered into employment agreements with the following named
officers:
Scott A. Livengood. Mr. Livengood's employment agreement expires on August 10,
2002. Commencing on August 10, 2000, the term of the agreement is automatically
extended for successive one-year periods each year as of August 10, unless
Krispy Kreme notifies him, on or before that date each year, that his term is
not being extended. Mr. Livengood receives an annual salary of $332,446 and is
eligible for annual increases and a performance-based bonus. Additionally, Mr.
Livengood receives non-incentive compensation in the amount of $5,081 per month.
He is entitled to participate in and receive other employee benefits which may
include, but are not limited to, benefits under any life, health, accident,
disability, medical, dental and hospitalization insurance plans, use of a
company automobile or an automobile allowance, and other perquisites and
benefits as are provided to senior managers.
Mr. Livengood's employment agreement may be terminated by Krispy Kreme for good
cause. If the agreement is terminated without good cause, Mr. Livengood is
entitled to a severance payment consisting of:
- An amount equal to his current annual base salary and non-incentive
compensation through the expiration date of the agreement
- A lump sum payment, payable within 30 days of termination, equal to his
current monthly base salary multiplied by the number of months between
the month of discharge and the preceding August, inclusive
- A lump sum payment, payable within 30 days of termination, equal to three
times Mr. Livengood's bonus, calculated at 50% of his annualized base
salary for the then current fiscal year, and discounted at the rate of 6%
per annum
Mr. Livengood is entitled to the same payments if he terminates his employment
after a change in control of Krispy Kreme and his duties or responsibilities
with Krispy Kreme are diminished, or he is required to relocate or Krispy Kreme
fails to maintain his corporation or benefits levels.
If Mr. Livengood's employment is terminated by reason of death, retirement or
voluntary termination, Krispy Kreme will pay him or his estate his base salary,
non-incentive compensation, bonuses and benefits
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<PAGE> 58
through the expiration date of the agreement. In the event he dies, his estate
will be paid a $5,000 benefit. In the event Mr. Livengood's employment is
terminated by reason of disability, Krispy Kreme will pay his base salary,
non-incentive compensation, bonuses and benefits for a period of six months
following the date of disability. In addition, if Mr. Livengood is terminated
for any reason other than by voluntary termination or upon a change in control
of Krispy Kreme (whether or not he terminates employment), his outstanding stock
options will fully vest.
Krispy Kreme will also pay Mr. Livengood an additional amount equal to any
excise tax he is required to pay due to any payments under his agreement
constituting "excess parachute payments" under the Internal Revenue Code, as
well as any additional income taxes or excise taxes imposed on such payments.
In the event Mr. Livengood's employment is terminated for good cause or he
terminates voluntarily, Mr. Livengood will be subject to a non-compete agreement
for a period of two years following the termination. During this two year
period, Mr. Livengood will be prohibited from engaging in the business of making
and selling doughnuts and complementary products within certain defined
geographical areas. This prohibition does not apply, however, to Mr. Livengood's
development rights described in "Related Party Transactions."
John N. McAleer. Mr. McAleer's employment agreement expires on August 10, 2002.
Commencing on August 10, 2000, the term of this agreement is automatically
extended for successive one-year periods each year as of August 10, unless
Krispy Kreme notifies him, on or before that date each year, that his term is
not being extended. Mr. McAleer receives an annual salary of $199,845 and is
eligible for annual increases and for a performance-based bonus. Additionally,
Mr. McAleer receives non-incentive compensation in the amount of $3,927 per
month. Mr. McAleer is entitled to participate in and receive other employee
benefits and perquisites similar to those provided to Mr. Livengood, and the
severance provisions for Mr. McAleer are also similar to Mr. Livengood's.
J. Paul Breitbach. Mr. Breitbach's employment agreement expires on August 10,
2001. Commencing on August 10, 2000, the term of this agreement is automatically
extended for successive one-year periods each year as of August 10, unless
Krispy Kreme notifies him, on or before that date each year, that his term is
not being extended. Mr. Breitbach receives an annual salary of $234,732 and is
eligible for annual increases and for a performance-based bonus. Additionally,
Mr. Breitbach receives non-incentive compensation in the amount of $4,314 per
month. Mr. Breitbach is entitled to participate in and receive other employee
benefits and perquisites similar to those provided to Mr. Livengood, and the
severance provisions for Mr. Breitbach are also similar to Mr. Livengood's.
Termination arrangements
On August 10, 1999, our board of directors approved the transfer to Mr.
Livengood of some membership benefits to the Educational Foundation of the
University of North Carolina at Chapel Hill upon Mr. Livengood's termination of
service.
Change-in-control arrangements
The option agreements under our stock option plan provide that all options
become vested and exercisable upon a corporate reorganization, as defined in the
stock option plan, provided that the executives Krispy Kreme employed on the
date of that corporate reorganization remain employed by Krispy Kreme on the
date of the corporate reorganization.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Robert L. Strickland, Robert L. McCoy and Joseph A. McAleer, Jr.
comprised the members of the compensation committee during our fiscal year ended
January 31, 1999. Mr. McAleer is a former executive officer of Krispy Kreme, and
both Messrs. McAleer and McCoy conduct business with Krispy Kreme through
franchises as described in "Related Party Transactions."
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<PAGE> 59
PRINCIPAL SHAREHOLDERS
The following table presents information regarding the beneficial ownership of
common stock as of October 28, 1999 by: (1) each person who beneficially owns
more than 5% of our common stock; (2) each of our directors and named officers;
and (3) all current executive officers and directors as a group, without giving
effect to the exchange ratio in the merger in connection with our holding
company formation. Beneficial ownership is determined under the rules of the
Securities and Exchange Commission, or SEC. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with regard to all
shares beneficially owned. The applicable percentage ownership for each
shareholder is based on 467,011 shares of common stock outstanding as of October
28, 1999.
<TABLE>
<CAPTION>
----------------------------------------
PERCENT
BENEFICIALLY
OWNED
NUMBER OF SHARES -------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
- ---- ------------------ -------- --------
<S> <C> <C> <C>
Jeanne McAleer Sanderford (1)............................. 126,674 27.1%
Robert L. McCoy (2)(3)(4)................................. 35,269 7.5
Bonnie Silvey Vandegrift (4)(5)........................... 31,250 6.7
Carolyn McCoy (4)(6)...................................... 27,500 5.9
Joseph A. McAleer, Jr. (2)................................ 22,786 4.9
John N. McAleer........................................... 17,326 3.7
J. Paul Breitbach (7)..................................... 16,228 3.5
Scott A. Livengood........................................ 15,393 3.3
Steven D. Smith (2)(8).................................... 9,679 2.1
Frank E. Guthrie (2)(9)................................... 9,019 1.9
Robert J. Simmons (2)(10)................................. 6,650 1.4
L. Stephen Hendrix........................................ 3,673 *
Randy S. Casstevens....................................... 1,687 *
William T. Lynch (2)(11).................................. 1,650 *
Robert L. Strickland (2).................................. 1,650 *
All directors and executive officers as a group (16
persons)................................................ 145,275 30.8
</TABLE>
- ---------------
* Less than one percent.
(1) Includes: (a) 117,203 shares owned by the estate of Joseph A. McAleer, of
which Mrs. Sanderford is the executrix. Mrs. Sanderford's address is 6148 Lennox
Place, Mobile, Alabama 36693; (b) 100 shares held by a trust for the benefit of
Carter Reid Sanderford, of which Mrs. Sanderford is the trustee; and (c) 100
shares held by a trust for the benefit of Ryan Nicholas Sanderford, of which
Mrs. Sanderford is the trustee.
(2) Includes 650 shares issuable upon the exercise of currently vested stock
options awarded under our stock option plan.
(3) Includes: (a) 750 shares owned beneficially by Patricia B. McCoy, Mr.
McCoy's spouse; (b) 1,000 shares held by the Patricia B. McCoy Revocable Trust,
a trust of which Patricia B. McCoy is the sole trustee; (c) 500 shares held by
the Robert L. McCoy Revocable Trust, a trust of which Mr. McCoy is the sole
trustee; (d) 460 shares held by the William Robert McCoy Trust established under
the Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole
custodian; (e) 465 shares held by the
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<PAGE> 60
Julie Ann McCoy Trust established under the Florida Uniform Trust for Minors
Act, a trust of which Mr. McCoy is the sole custodian; (f) 450 shares held by
the Robert Bailey McCoy Trust established under the Florida Uniform Trust for
Minors Act, a trust of which Mr. McCoy is the sole custodian; (g) 450 shares
held by the Sarah Elizabeth McCoy Trust established under the Florida Uniform
Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian; (h) 450
shares held by the Lisa Michelle McCoy Trust established under the Florida
Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian;
and (i) 450 shares held by the Michael Phillip McCoy Trust established under the
Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole
custodian. Mr. McCoy's address is 8425 North Florida Avenue, Tampa, Florida
33604.
(4) Includes 27,500 shares held by the B.L. McCoy, Jr. Residual Trust, a trust
of which Carolyn McCoy, Robert L. McCoy and Bonnie Silvey Vandegrift are
co-trustees.
(5) Mrs. Vandegrift's address is 5 Robin Circle, Brevard, North Carolina,
28712.
(6) Mrs. McCoy's address is College Walk Apartment 224, Neely Road, Brevard,
North Carolina, 28712.
(7) Includes 3,390 shares held by the Breitbach Children's Trust, a trust of
which Mr. Breitbach is the sole trustee.
(8) Includes 1,416 shares owned beneficially by Connie Sue Smith, Mr. Smith's
spouse.
(9) Includes 6,600 shares owned by Mr. Guthrie indirectly through his ownership
of 60% of the outstanding voting shares of Augusta Doughnut Company.
(10) Includes 4,000 shares owned by Mr. Simmons indirectly through his ownership
of 60% of the outstanding shares of Simac, Inc.
(11) Includes 1,000 shares owned by Mr. Lynch indirectly through his ownership
of 100% of the outstanding shares of Liam Holdings, LLC.
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RELATED PARTY TRANSACTIONS
ASSOCIATES' LICENSE AGREEMENTS WITH RELATED PARTIES
We are parties to associates' license agreements with some of our directors. Our
associates' license agreements permit the associate to sublicense the franchise
to a company which is majority-owned and principally managed by the associate.
Our director-associates have generally sublicensed in this manner. These
agreements grant each associate a license to produce, market, package and sell
Krispy Kreme doughnuts and other products in a specified territory. We have
agreed to extend the license agreements of our existing shareholders, which
include our director-associates, for a term of 20 years commencing upon the
completion of this offering.
Each associate must purchase mixes and equipment from us and, as a result, we
have outstanding accounts receivable, from time to time, with each of our
associates. Additionally, our associates pay us franchise royalties. The table
below shows Support Operations sales to and royalties from our directors'
affiliated franchise companies during the periods indicated.
<TABLE>
<CAPTION>
----------------------------------------------------
YEAR ENDED
----------------------------------------------------
DIRECTOR AND FRANCHISE COMPANIES FEBRUARY 2, 1997 FEBRUARY 1, 1998 JANUARY 31, 1999
- -------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Dollars in thousands
Frank E. Guthrie:
Augusta Doughnut Company.................. $392 $639 $669
Classic City Doughnuts Corp............... 225 229 236
Joseph A. McAleer, Jr.:
Mackk LLC................................. -- -- 1,878
Robert L. McCoy:
Gulf Florida Doughnut Corp................ 1,016 1,290 1,868
Robert J. Simmons:
Simac, Inc................................ 445 578 576
Steven D. Smith:
Dales Doughnut Corp....................... 681 646 803
Dale's Doughnuts of Dothan, Inc........... 231 287 288
Smiths Doughnuts, Inc..................... 329 429 435
</TABLE>
Our agreement with Mr. Guthrie, which he has sublicensed to Magic City Doughnuts
Corporation, obligates him to develop and operate a total of four stores in the
Orlando, Florida area by December 31, 2001, one of which was open as of December
2, 1999. Mr. Guthrie co-owns Magic City Doughnuts with Mr. McCoy. Our agreement
with Mr. Joseph A. McAleer, Jr., which he has sublicensed to Dallas Doughnuts,
obligates him to develop and operate a total of eight stores in the Dallas/Fort
Worth territory by December 31, 2003, one of which was open as of December 2,
1999. Mr. Joseph A. McAleer, Jr. co-owns Dallas Doughnuts with Mr. Smith.
We are also parties to associates' license agreements with two brothers-in-law
of Messrs. Joseph A. McAleer, Jr. and John N. McAleer, our Vice Chairman and
Executive Vice President, Concept Development. Mr. William J. Dorgan operates
stores in Biloxi and Gulfport, Mississippi through Dorgan's Doughnut Company,
Inc. Total Support Operations sales to and royalties from Dorgan's Doughnuts
were $211,000 in fiscal 1997, $315,000 in fiscal 1998 and $332,000 in fiscal
1999. Since September 1998, Pat Silvernail has operated two stores in Macon,
Georgia through S&P of Macon, Inc.
THE KINGSMILL PLAN
In December 1994, we implemented a plan to provide franchise opportunities to
corporate management, which we refer to as the Kingsmill Plan. Under the terms
of the Kingsmill Plan, we agreed to make franchise opportunities available to
members of corporate management who met our ordinary franchisee
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<PAGE> 62
qualifications and to provide financial assistance in the form of collateral
repurchase agreements and company guaranties of bank loans. We established
similar franchise opportunity plans for store managers and associate operators.
We anticipate terminating the plan, except for existing participants with whom
we have entered into or agreed to enter into a franchise agreement. The
collateral repurchase agreements and guaranties we have made pursuant to the
Kingsmill Plan are described below.
DEVELOPMENT RIGHTS OF OFFICERS AND DIRECTORS
We entered into a letter agreement with Mr. Scott A. Livengood, our Chairman,
President and Chief Executive Officer, on April 12, 1994. We granted Mr.
Livengood the option to develop stores in Alamance, Durham and Orange Counties,
North Carolina, and the State of Colorado. We also agreed to provide financial
assistance to Mr. Livengood in the development of stores in these areas pursuant
to the Kingsmill Plan. Mr. Livengood subsequently relinquished his development
rights to the State of Colorado and obtained the rights to develop stores in
Northern California, also pursuant to the Kingsmill Plan. Mr. Livengood
anticipates transferring his Northern California rights to Golden Gate
Doughnuts, LLC, in which he will retain a minority ownership percentage. It is
contemplated that Krispy Kreme will also have a minority interest in Golden
Gate. We do not anticipate that Mr. Livengood will be active in the management
of Golden Gate while employed by Krispy Kreme. Additionally, the terms of Golden
Gate's franchise agreement will be consistent with other area developers.
In August 1999, Mr. John N. McAleer, our Vice Chairman and Executive Vice
President, Concept Development, obtained area development rights for Oregon and
Washington pursuant to the Kingsmill Plan. Mr. McAleer anticipates transferring
these rights to a limited liability company in which he will retain a minority
ownership percentage. We do not anticipate that Mr. McAleer will be active in
the management of the territory while employed by Krispy Kreme. Additionally,
the terms of the franchise agreement for this territory will be consistent with
other area developers.
Pursuant to the Kingsmill Plan, we are a party to an area development agreement
with Midwest Doughnuts, LLC, dated May 29, 1996. Mr. Philip R.S. Waugh, Jr., our
Senior Vice President, Franchise Development, owns 50% of the membership
interests in Midwest Doughnuts. Under the terms of the agreement, the area
developer is required to open a minimum of four stores in the Kansas City
territory, three of which were open as of December 2, 1999. The requirement to
open a fourth store has been suspended. Total Support Operations sales to and
royalties from Midwest Doughnuts were $388,000 in fiscal 1997, $545,000 in 1998
and $1.4 million in fiscal 1999.
We entered into a letter agreement with Mr. Joseph A. McAleer, Jr., a Krispy
Kreme director, on February 15, 1994 granting him the option to acquire three
stores located in Mobile, Alabama. Mr. McAleer purchased the stores on February
1, 1998 for a total purchase price of $1.6 million, subject to certain
adjustments. The purchase price was determined on the basis of the amount paid
for the stores in 1990, the face value of store receivables and the cost of the
store's inventory, mutually determined by Mr. McAleer and Krispy Kreme. We also
granted Mr. McAleer the right to develop up to ten stores in the New Orleans,
Louisiana territory.
COLLATERAL REPURCHASE AGREEMENTS, FRANCHISEE GUARANTIES AND OTHER AGREEMENTS
On December 21, 1998, we entered into collateral repurchase agreements in favor
of Suntrust Bank, Central Florida, National association with respect to a loan
incurred by Magic City Doughnut Corporation in the original principal amount of
$435,000. Messrs. Frank E. Guthrie and Robert L. McCoy, two of our directors,
co-own Magic City Doughnut Corporation. The loan is secured by the equipment
used in the operation of a Krispy Kreme store located in Winter Park, Florida
and a pledge of company stock owned by: (1) Mr. Guthrie; (2) a trust of which
Mr. McCoy is the sole trustee; and (3) Mrs. Patricia B. McCoy, who is Mr.
McCoy's spouse. In the event that the borrower defaults on the loan, we are
obligated to
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repurchase the equipment at a purchase price equal to the lesser of $302,000 or
the unpaid balance of the loan. We are also obligated to purchase the pledged
shares from the bank at book value.
On September 18, 1998, we entered into a guaranty agreement with Mr. Beattie F.
Armstrong and Beattie F. Armstrong, Inc. for Mr. Pat Silvernail and his wife,
Mrs. Shannon McAleer Silvernail, and S&P of Macon, Inc., our Macon, Georgia
franchisee. Mrs. Silvernail is the sister of, and Mr. Silvernail is consequently
a brother-in-law to, Mr. Joseph A. McAleer, Jr. and Mr. John N. McAleer. Under
the terms of the agreement, we agreed to guarantee two loans in the combined
original principal amount of $1.0 million obtained by the Silvernails and S&P of
Macon to finance the purchase of a Krispy Kreme associates' license agreement
and the two Macon stores.
On March 31, 1998, we entered into a collateral repurchase agreement and a
guaranty agreement in favor of Bank of Blue Valley with respect to a loan in the
amount of $765,000 incurred by Midwest Doughnuts under the terms of the
Kingsmill Plan. Mr. Philip R.S. Waugh, Jr., who is our Senior Vice President,
Franchise Development, is a 50% owner of Midwest Doughnuts. The loan is secured
by the equipment used in the operation of a Krispy Kreme store located in
Merriam, Kansas. In the event Midwest Doughnuts defaults on the loan, we are
obligated to repurchase the equipment at a purchase price equal to the lesser of
$335,000 or the unpaid portion of the loan used to fund the purchase of the
pledged assets. In addition to our obligation under the collateral repurchase
agreement, we are obligated under the guaranty agreement to pay the lender up to
$205,000 in the event Midwest Doughnuts defaults on the loan.
On January 30, 1998, we entered into a collateral repurchase agreement in favor
of Branch Banking and Trust Company with respect to loans incurred by Mackk, LLC
in the maximum aggregate principal amount of $1.8 million. Mr. Joseph A.
McAleer, Jr. is the manager and owner of Mackk, LLC. The loans are secured in
part by the equipment and other items of personal property used in the operation
of three Krispy Kreme stores located in Mobile, Alabama. The loans are further
secured by a pledge of shares of Krispy Kreme stock owned by Mr. McAleer. In the
event that Mackk, LLC defaults on the loans, we are obligated to repurchase the
equipment and personal property at a purchase price equal to the lesser of
$325,000 or the unpaid portion of the loans used to fund the purchase of the
pledged assets. We are also required to purchase the pledged shares from the
bank at book value in the event of default.
On January 2, 1998, we entered into a collateral repurchase agreement in favor
of Branch Banking and Trust Company with respect to a loan incurred by the
Brevard Tennis and Athletic Club, Incorporated and Mrs. Bonnie Silvey Vandegrift
in the original principal amount of $326,000. Mrs. Vandegrift beneficially owns
more than 5% of our outstanding stock and is the sister of Mr. Robert L. McCoy,
one of our directors. The loan is secured by a pledge of Krispy Kreme stock
personally owned by Mrs. Vandegrift. In the event that the borrower defaults on
the loan, we are obligated to purchase the pledged shares from the bank at book
value.
On October 15, 1997, we entered into a collateral repurchase agreement and a
guaranty agreement in favor of Bank of Blue Valley with respect to a loan in the
amount of $765,000 incurred by Midwest Doughnuts under the terms of the
Kingsmill Plan. The loan is secured by the equipment used in the operation of a
Krispy Kreme store located in Overland Park, Kansas. In the event Midwest
Doughnuts defaults on the loan, we are obligated to repurchase the equipment at
a purchase price equal to the lesser of $205,000 or the unpaid portion of the
loan used to fund the purchase of the pledged assets. In addition to our
obligation under the collateral repurchase agreement, we are obligated under the
guaranty agreement to pay the lender up to $300,000 in the event Midwest
Doughnuts defaults on the loan.
On December 1, 1997, we entered into a commitment letter among Krispy Kreme,
Branch Banking and Trust Company, Mr. Waugh and the other owners of Midwest
Doughnuts pursuant to the Kingsmill Plan. Under the terms of the commitment
letter, we agreed to guarantee loans obtained by Mr. Waugh and the other members
of Midwest Doughnuts to finance the development of two Krispy Kreme stores in
the
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Kansas City territory. Our maximum liability under the two guaranties was
limited to $150,000. We have been released from these guarantees.
On October 22, 1996, we entered into a collateral repurchase agreement in favor
of Branch Banking and Trust Company with respect to a loan incurred by Gulf
Florida Doughnut Corp. in the original principal amount of $180,000. Mr. McCoy,
one of our directors, is the President and majority owner of Gulf Florida
Doughnut Corp. The loan is secured by a pledge of Mr. McCoy's Krispy Kreme
shares. In the event that the borrower defaults on the loan, we are obligated to
purchase the pledged shares from the bank at book value.
On May 29, 1996, we entered into a collateral repurchase agreement and a
guaranty agreement in favor of The First National Bank of Olathe with respect to
a loan in the amount of $905,000 incurred by Mr. Waugh and the other members of
Midwest Doughnuts under the terms of the Kingsmill Plan. The loan is secured by
the equipment used in the operation of a Krispy Kreme store located in
Independence, Missouri. In the event Midwest Doughnuts defaults on the loan, we
are obligated to repurchase the equipment at a purchase price equal to the
lesser of $300,000 or the unpaid portion of the loan used to fund the purchase
of the pledged assets. In addition to our obligation under the collateral
repurchase agreement, we are obligated under the guaranty agreement to pay the
lender up to $300,000 in the event Midwest Doughnuts defaults on the loan.
On May 16, 1996, we entered into a guaranty agreement with Branch Banking and
Trust Company for Mr. Waugh and the other members of Midwest Doughnuts pursuant
to the Kingsmill Plan. Under the terms of the agreement, we agreed to guarantee
a loan in the original principal amount of $200,000 obtained by Mr. Waugh and
the other members of Midwest Doughnuts to finance expansion in the Kansas City
market. Our maximum liability under the guaranty was limited to $175,000. We
have been released from the guaranty.
On March 1, 1996, we entered into a collateral repurchase agreement in favor of
Wachovia Bank of North Carolina, N.A. with respect to two separate loans
incurred by Mr. Steven D. Smith, one of our directors, in the original principal
amounts of $310,000 and $900,000. The loans were secured by store equipment and
other personal property and a pledge of Mr. Smith's Krispy Kreme shares. In the
event of default, we were obligated to purchase the pledged shares from the bank
at book value and to repurchase the equipment at a purchase price equal to the
greater of its amortized cost or 20% of its original cost. Those loans have been
fully repaid.
On July 7, 1995, we entered into a collateral repurchase agreement in favor of
First National Bank of Ohio with respect to a loan incurred by Simac, Inc. in
the original principal amount of $340,000. Mr. Robert J. Simmons, a Krispy Kreme
director, is the President and majority owner of Simac, Inc., our Akron, Ohio
franchisee. The loan is secured by the equipment and personal property assets
used in the operation of a Krispy Kreme store located in Middleburg Heights,
Ohio. In the event that Simac, Inc. defaults on the loan, we are obligated to
repurchase the bank's collateral at a purchase price equal to the lesser of the
unpaid balance of the loan or the amortized cost of the pledged assets. On
September 29, 1996, we leased the Middleburg Heights, Ohio store for a term of
five years from Mr. Simmons and certain related parties. Under the terms of the
lease we are required to pay annual rent in the amount of $72,000 and have the
option to purchase the store for a total purchase price equal to $1.0 million.
On February 25, 1994, we entered into an equipment repurchase and amendment to
associates' license agreement with Mr. William J. Dorgan, a brother-in-law to
Messrs. Joseph A. McAleer, Jr. and John N. McAleer. This agreement was in
connection with financing in the aggregate amount of $1.2 million obtained by
Mr. Dorgan and his wife, Mrs. Patricia M. Dorgan, from Branch Banking and Trust
Company, relating to Mr. Dorgan's Biloxi and Gulfport, Mississippi franchises.
Upon termination of Mr. Dorgan's associates' license agreement for any reason,
we are obligated to repurchase some equipment used in the operation of Mr.
Dorgan's stores at a purchase price of $350,000. We also executed a collateral
repurchase
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agreement in favor of Branch Banking and Trust Company with respect to Krispy
Kreme stock pledged by Mrs. Dorgan, who is a sister to Messrs. Joseph A.
McAleer, Jr. and John N. McAleer, as collateral for the loan. Under the terms of
the collateral repurchase agreement, in the event of default on the loan, we are
required to repurchase the pledged common stock at book value and/or the
equipment under the terms of the equipment repurchase agreement.
On February 1, 1993, we entered into an equipment repurchase agreement and
amendment to associate's license agreement with Mr. Smith, one of our directors.
Upon termination of Mr. Smith's associates' license agreement for any reason, we
are obligated to repurchase some equipment used in the operation of the
franchise store in Dothan, Alabama at a purchase price equal to the greater of
its amortized cost or 20% of its original cost of $335,000. Mr. Smith operates
his Dothan franchise through Dale's Doughnuts of Dothan, Inc.
On September 22, 1992, we entered into an equipment repurchase and amendment to
associates' license agreement with Mr. Guthrie, one of our directors. Upon the
termination of Mr. Guthrie's associates' license agreement for any reason, we
are obligated to repurchase some equipment used in the operation of the
franchise store in Athens, Georgia at a purchase price equal to the greater of
its amortized cost or 20% of its original cost of $348,000. Mr. Guthrie operates
his Athens franchise through Classic City Doughnuts.
LOAN AGREEMENTS AND OTHER TRANSACTIONS
We have entered into loan agreements with some of our directors and officers as
described below.
On March 13, 1997, we made two loans to Midwest Doughnuts, LLC in the principal
amounts of $66,000 and $34,000, bearing interest at 9.25% and the prime rate
plus 1%, respectively. Mr. Waugh, our Senior Vice President, Franchise
Development, is a 50% owner of Midwest Doughnuts. The loans, which have been
fully repaid, were secured by the equipment and property used in connection with
a Krispy Kreme store located in Independence, Missouri.
On November 17, 1995, we made a loan to Mr. Livengood, our Chairman, President
and Chief Executive Officer, in the principal amount of $333,000. The loan,
which has been fully repaid, provided bridge financing in the purchase of a
personal residence. The loan was secured by a deed of trust and bore interest at
the rate applicable to our revolving line of credit.
On November 17, 1995, we made a loan to Mr. John N. McAleer, our Vice Chairman
and Executive Vice President, Concept Development, in the principal amount of
$80,000. The loan, which has been fully repaid, provided bridge financing in the
purchase of a personal residence. The loan was secured by a deed of trust and
bore interest at the rate applicable to our revolving line of credit.
We have waived the payment of royalties by Mr. Guthrie in connection with his
Athens, Georgia store, operated through Classic City Doughnuts, during the past
several years due to operational difficulties the store has encountered. The
cumulative amount of these royalties during the last three fiscal years did not
exceed $60,000.
In connection with the holding company formation occurring in conjunction with
this offering, each existing shareholder of our operating subsidiary, including
our directors, officers and their affiliates, will receive shares of
common stock in our holding company, plus $ in cash, in exchange for each
share of operating subsidiary common stock they hold.
We have extended loans to some of our officers and directors to cover tax
payments in connection with the conversion of our LTIP and to purchase shares of
restricted stock, as described in "Management -- Executive Compensation -- Other
compensation."
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POLICY ON RELATED PARTY TRANSACTIONS
On November 10, 1999, our board of directors adopted a resolution whereby all
future transactions with related parties, including any loans from us to our
officers, directors, principal shareholders or affiliates, must be approved by a
majority of the disinterested members of the board of directors and must be on
terms no less favorable to us than could be obtained from unaffiliated third
parties. The audit committee of the board of directors will be responsible for
reviewing all related party transactions on a continuing basis and potential
conflict of interest situations where appropriate.
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DESCRIPTION OF CAPITAL STOCK
Our articles of incorporation authorize the issuance of up to 100,000,000 shares
of common stock and 10,000,000 shares of preferred stock, the rights and
preferences of which may be established from time to time by our board of
directors. Upon completion of this offering, shares of common stock and
no shares of preferred stock will be outstanding. As of October 28, 1999, we had
approximately 114 shareholders.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Thus, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of common stock are entitled to receive ratably any dividends
that may be declared by our board of directors out of funds legally available
for dividends, subject to any preferential dividend rights of outstanding
preferred stock. If we liquidate, dissolve or wind up, the holders of common
stock are entitled to receive ratably all of our assets available after payment
of all debts and other liabilities, subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights or any rights to share in any
sinking fund. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future. All currently outstanding shares of common stock are, and
the shares offered hereby when sold in the manner contemplated by this
prospectus will be, fully paid and nonassessable. There has been no established
public trading market for our common stock before this offering.
PREFERRED STOCK
Our articles of incorporation authorize the issuance of up to 10,000,000 shares
of preferred stock from time to time in one or more series and with terms of
each series stated in our board's resolutions providing for the designation and
issue of that series. Our articles also authorize the board of directors to
determine the dividend, voting, conversion, redemption and liquidation
preferences, rights, privileges and limitations pertaining to each series of
preferred stock that we issue. Without seeking any shareholder approval, our
board of directors may issue preferred stock with voting and other rights that
could adversely affect the voting power of the holders of our common stock and
could have the effect of delaying, deferring or preventing a change in control.
Other than the issuance of the series of preferred stock previously authorized
by the board of directors in connection with the shareholder rights plan
described below, we have no present plans to issue any shares of preferred
stock.
ANTI-TAKEOVER PROVISIONS OF KRISPY KREME'S ARTICLES OF INCORPORATION, BYLAWS AND
SHAREHOLDER RIGHTS PLAN
The rights of our shareholders are governed by provisions in our articles of
incorporation, bylaws and shareholder rights plan that are intended to affect
any attempted change in control. Our articles of incorporation opt us out of
some provisions of North Carolina law that would otherwise affect attempted
changes in control of Krispy Kreme.
CLASSIFICATION OF DIRECTORS
Our bylaws provide that our board of directors consists of not more than 15 nor
less than nine members. The board of directors has the power to set the
authorized number of directors by majority vote of the whole board within those
limits. The board currently consists of nine directors, two of whom are employed
by Krispy Kreme and five of whom are Krispy Kreme franchisees. Our bylaws also
divide the board into three classes serving staggered three-year terms. The
classification of directors could prevent a
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shareholder, or group of shareholders, having majority voting power, from
obtaining control of our board until the second annual shareholders' meeting
following the date that the shareholder, or group of shareholders, obtains
majority voting power. Thus, this provision may discourage a potential acquiror
from making a tender offer or otherwise attempting to obtain control of us.
ADVANCE NOTICE PROVISIONS
Our bylaws provide that shareholders must provide timely notice in writing to
bring business before an annual meeting of shareholders or to nominate
candidates for election as directors at an annual meeting of shareholders.
Notice for an annual meeting is timely if our Secretary receives the written
notice not less than 40 days prior to the scheduled annual meeting. If less than
50 days notice of the meeting is given or made by us to the shareholders, a
shareholder's notice will be timely if received by our Secretary on the tenth
day following the date such notice was given or made.
The bylaws also specify the form and content of a shareholder's notice. These
provisions may prevent shareholders from bringing matters before an annual
meeting of shareholders or from making nominations for directors at an annual
meeting of shareholders.
SHAREHOLDER RIGHTS PLAN
We intend to implement a shareholder rights plan prior to completing this
offering. To do so, our board of directors will declare a dividend of one
preferred share purchase right for each share of Krispy Kreme common stock. Each
share purchase right entitles the registered holder to purchase from us one one-
hundredth (1/100) of a share of Krispy Kreme Series A Participating Cumulative
Preferred Stock, $1.00 par value per share, at a price of $ per one
one-hundredth of a Series A preferred share. The exercise price and the number
of Series A preferred shares issuable upon exercise are subject to adjustments
from time to time to prevent dilution. The share purchase rights are not
exercisable until the earlier to occur of (1) 10 days following a public
announcement that a person or group of affiliated or associated
persons -- referred to as an acquiring person -- have acquired beneficial
ownership of 15% or more of our outstanding common stock or (2) 10 business days
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer which would result in an acquiring person beneficially
owning 15% or more of our outstanding shares of common stock.
If we are acquired in a merger or other business combination, or if 50% or more
of our consolidated assets or earning power is sold after a person or group has
become an acquiring person, proper provision will be made so that each holder of
a share purchase right -- other than share purchase rights beneficially owned by
the acquiring person, which will thereafter be void -- will have the right to
receive, upon exercise of the share purchase right at the then current exercise
price, the number of shares of common stock of the acquiring company which at
the time of the transaction have a market value of two times the share purchase
right exercise price. If any person or group becomes an acquiring person, proper
provision shall be made so that each holder of a share purchase right -- other
than share purchase rights beneficially owned by the acquiring person, which
will thereafter be void -- will have the right to receive upon exercise, and
without paying the exercise price, the number of shares of Krispy Kreme common
stock with a market value equal to the share purchase right exercise price.
Series A preferred shares purchasable upon exercise of the share purchase rights
will not be redeemable. Each Series A preferred share will be entitled to a
minimum preferential dividend payment of $1.00 per share and will be entitled to
an aggregate dividend of 100 times the dividend declared per share of common
stock. In the event we liquidate, the holders of the Series A preferred shares
will be entitled to a minimum preferential liquidation payment of $1.00 per
share but will be entitled to an aggregate payment of 100 times the payment made
per share of common stock. Each Series A preferred share will have 100 votes,
voting together with the shares of common stock. Finally, in the event of any
merger, consolidation or other transaction in which shares of common stock are
exchanged, each Series A preferred share will be
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entitled to receive 100 times the amount received per share of common stock.
These rights are protected by customary antidilution provisions.
Before the date the share purchase rights are exercisable, the share purchase
rights may not be detached or transferred separately from the common stock. The
share purchase rights will expire on , unless that
expiration date is extended or unless the share purchase rights are redeemed or
exchanged by Krispy Kreme. At any time before an acquiring person acquires
beneficial ownership of 15% or more of our outstanding common stock, our board
of directors may redeem the share purchase rights in whole, but not in part, at
a price of $.001 per share purchase right. Immediately upon any share purchase
rights redemption, the exercise rights terminate, and the holders will only be
entitled to receive the redemption price. A more detailed description and terms
of the share purchase rights are set forth in a rights agreement between Krispy
Kreme and , as rights agent. This rights agreement could
have the effect of discouraging tender offers or other transactions that might
otherwise result in Krispy Kreme shareholders receiving a premium over the
market price for their common stock.
DIRECTOR REMOVAL AND VACANCIES
A director may be removed only with cause by the vote of the holders of a
two-thirds majority of the shares entitled to vote for the election of
directors. Our bylaws generally provide that any board vacancy may be filled by
a majority of the remaining directors, even if less than a quorum, which is
normally a majority of the authorized number of directors. A vacancy resulting
from an increase in the authorized number of directors may only be filled by the
shareholders at an annual or special meeting.
ABILITY TO CONSIDER OTHER CONSTITUENCIES
Our articles of incorporation permit our board of directors, in determining what
is believed to be in the best interest of Krispy Kreme, to consider the
interests of our employees, customers, suppliers and creditors, the communities
in which our offices or other facilities are located and all other factors our
directors may consider pertinent, in addition to considering the effects of any
actions on Krispy Kreme and our shareholders. Pursuant to this provision, our
board of directors may consider many judgmental or subjective factors affecting
a proposal, including certain nonfinancial matters. On the basis of these
considerations, our board may oppose a business combination or other transaction
which, viewed exclusively from a financial perspective, might be attractive to
some, or even a majority, of our shareholders.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
Our bylaws provide for indemnification of directors to the fullest extent
permitted by North Carolina law. The articles of incorporation, to the extent
permitted by North Carolina law, eliminate or limit the personal liability of
directors to Krispy Kreme and its shareholders for monetary damages for breach
of the duty of care. Such indemnification may be available for liabilities
arising in connection with this offering. To the extent that limitation of
liability or indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling Krispy Kreme under the
foregoing provisions, we have been informed that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore unenforceable. Our bylaws also allow us to indemnify
our officers, employees, agents and other persons to the fullest extent
permitted by North Carolina law. Our bylaws obligate us, under certain
circumstances, to advance expenses to our directors, officers, employees and
agents in defending an action, suit or proceeding for which indemnification may
be sought. We can also indemnify someone serving at our request as a director,
officer, trustee, partner, employee or agent of one of our subsidiaries or of
any other organization against these liabilities.
Our bylaws also provide that we have the power to purchase and maintain
insurance on behalf of any person who is or was one of our directors, officers,
employees or agents against any liability asserted
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against that person or incurred by that person in these capacities, whether or
not we would have the power to indemnify that person against these liabilities
under North Carolina law. We maintain insurance on behalf of all of our
directors and executive officers.
TRANSFER AGENT AND REGISTRAR
Branch Banking and Trust Company will act as the transfer agent and registrar
for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common stock, and
we cannot predict the effect, if any, that sales of our common stock or the
availability of common stock for sale will have on its market price.
Nevertheless, sales of substantial amounts of our common stock in the public
market, or the perception that such sales could occur, could negatively affect
the market price of our common stock and impair our ability to raise capital
through the sale of our equity securities in the future.
Upon completion of this offering, we will have shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options under the plan. Of these shares, the
shares sold in this offering will be freely transferable without restriction or
further registration under the Securities Act of 1933, unless held by affiliates
of our company, as that term is defined in Rule 144 under the Securities Act.
For purposes of Rule 144, an affiliate is a person that, directly or indirectly
through one or more intermediaries, controls, or is controlled by or is under
common control with, Krispy Kreme. Any shares held by one of our affiliates will
be subject to the resale limitations of restricted stock as defined in Rule 144
under the Securities Act.
All of our officers, directors and shareholders will agree not to sell any
shares of common stock for 180 days after the date of this prospectus without
the prior written consent of J.P. Morgan Securities Inc., subject to some
exceptions.
Beginning one year after this offering, shares will become eligible for
sale in reliance upon Rule 144 under the Securities Act. It is possible that
these shares may be sold sooner if the sale is registered under the Securities
Act. We may, but are not obligated to, undertake such a registration to permit
our shareholders to sell their shares in the public market or in private
transactions after the expiration of the contractual restrictions described
above.
In general, under Rule 144 as currently in effect, a person who has beneficially
owned shares of our common stock for at least one year is entitled to sell,
within any three-month period, a number of shares that is not more than the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering, or
- the average weekly trading volume of the common stock during the four
calendar weeks before a notice of the sale is filed.
Sales under Rule 144 must also comply with manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who has not been one of our affiliates at any time
during the 90 days before a sale, and who has beneficially owned the restricted
shares for at least two years, is entitled to sell the shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon regarding the resale of securities
originally purchased from us by our employees, directors, officers, consultants
or advisors before the date we become subject to the reporting requirements of
the Exchange Act, under written compensatory benefit plans or written contracts
relating to compensation of those persons. In addition, the SEC has indicated
that Rule 701 will apply to the typical stock options granted by an issuer
before it becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, along with the shares acquired upon exercise of these
options, including exercises after the date of this prospectus. Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
180-day contractual restrictions described above, beginning 90 days after the
date of this prospectus, may be sold (1) by persons other than affiliates,
subject only to the manner of sale provisions of Rule 144, and (2) by affiliates
under Rule 144 without compliance with its one-year holding period requirement.
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Based on stock option grants as of the date of this prospectus, options for
shares will be exercisable upon the expiration of the 180-day
restricted period.
We have agreed not to offer, sell or dispose of any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock
or any rights to acquire common stock for a period of 180 days after the date of
this prospectus without the prior written consent of J.P. Morgan Securities Inc.
with a limited number of exceptions.
We intend to file one or more registration statements under the Securities Act
to register all shares of common stock issued, issuable or reserved for issuance
under our stock option plan. These registration statements are expected to be
filed as soon as practicable after the date of this prospectus and will
automatically become effective upon filing. Following this filing, shares
registered under these registration statements will, subject to the 180-day
lock-up agreements described above and Rule 144 volume limitations applicable to
affiliates, be available for sale in the open market.
68
<PAGE> 73
UNDERWRITING
Krispy Kreme and the underwriters named below have entered into an underwriting
agreement covering the common stock to be offered in this offering. J.P. Morgan
Securities Inc., Deutsche Bank Securities Inc., Dain Rauscher Incorporated and
Scott & Stringfellow, Inc. are acting as representatives of the underwriters.
Each underwriter has agreed to purchase the number of shares of common stock
opposite its name below.
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
UNDERWRITERS ----------------
<S> <C>
J.P. Morgan Securities Inc..................................
Deutsche Bank Securities Inc................................
Dain Rauscher Incorporated..................................
Scott & Stringfellow, Inc...................................
----------------
Total.............................................
================
</TABLE>
The underwriting agreement provides that if the underwriters take any of the
shares presented in the table above, then they must take all of these shares. No
underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the prior
sale of shares, and when, as and if such shares are delivered to and accepted by
them. The underwriters will initially offer to sell shares to the public at the
initial public offering price shown on the cover page of this prospectus. The
underwriters may sell shares to securities dealers at a discount of up to $ per
share from the initial public offering price. Any of these securities dealers
may resell shares to other brokers or dealers at a discount of up to
$ per share from the initial public offering price. After the initial
public offering, the underwriters may vary the public offering price and other
selling terms.
If the underwriters sell more shares than the total number shown in the table
above, the underwriters have the option to buy up to an additional shares
of common stock from us to cover such sales. The underwriters may exercise this
option during the 30-day period from the date of this prospectus. If any shares
are purchased with this option, the underwriters will purchase shares in
approximately the same proportion as shown in the table above.
The following table shows the per share and total underwriting discounts that we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
----------- -------------
Total............................................. $ $
=========== =============
</TABLE>
The underwriters may purchase and sell shares of common stock in the open market
in connection with this offering. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
slowing a decline in the market price of the common stock while the offering is
in progress. The underwriters may also impose a penalty bid, which means that an
underwriter must repay to the other underwriters a portion of the underwriting
discount received by it. An underwriter may be subject to a penalty bid if the
representatives of the underwriters, while engaging in stabilizing or short
covering transactions, repurchase shares sold by or for the account of that
underwriter. These activities may stabilize, maintain or affect the market price
of the common stock. As a
69
<PAGE> 74
result, the price of the common stock may be higher than the price that might
exist in the open market. If the underwriters commence these activities, they
may discontinue them at any time.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be $ .
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
Krispy Kreme and its directors, officers and shareholders have agreed with the
underwriters not to transfer, dispose of or hedge any shares of common stock, or
securities convertible into or exchangeable for shares of common stock, for a
period of 180 days after the date of this prospectus, subject to some
exceptions, except with the prior written consent of J.P. Morgan Securities Inc.
This agreement does not apply to any of our employee benefit plans existing on
the date of this prospectus.
At our request, the underwriters have reserved shares of common stock for sale
to our officers, directors and employees, persons having business relationships
with us and friends who have expressed an interest in participating in this
offering. We expect these persons to purchase no more than 10% of the common
stock offered in this offering. The number of shares available for sale to the
general public will be reduced to the extent these persons purchase reserved
shares.
We have applied to have the common stock quoted on the Nasdaq National Market
under the symbol KREM.
It is expected that delivery of the shares will be made to investors on or about
, 2000.
There has been no public market for the common stock prior to this offering. We
and the underwriters will negotiate the initial offering price. In determining
the price, we and the underwriters expect to consider a number of factors in
addition to prevailing market conditions, including:
- The history of and prospects for our industry
- An assessment of our management
- Our present operations
- Our historical results of operations
- The trend of our revenues and earnings
- Our earnings prospects
We and the underwriters will consider these and other relevant factors in
relation to the price of similar securities of generally comparable companies.
Neither Krispy Kreme nor the underwriters can assure investors that an active
trading market will develop for the common stock, or that the common stock will
trade in the public market at or above the initial offering price.
As described under "Use of Proceeds" in this prospectus, we intend to use a
portion of the proceeds of this offering to repay borrowings under our existing
loan agreement with our bank, Branch Banking and Trust Company. We estimate that
this repayment will exceed 10% of the net proceeds we receive from this
offering. Scott & Stringfellow, Inc., one of the representatives, is an
affiliate of Branch Banking and Trust Company. In view of this relationship,
this offering is being conducted in accordance with Conduct Rules 2710(c)(8) and
2720(c)(3) of the National Association of Securities Dealers, Inc., which
provide that the offering price to the public may not be higher than that
recommended by a qualified independent underwriter who has participated in the
preparation of the registration statement and prospectus and has exercised the
usual standards of due diligence with respect thereto. J.P. Morgan Securities
Inc. has agreed to serve as the qualified independent underwriter, and the
offering price to the public will not be higher than the price recommended by
J.P. Morgan Securities Inc.
70
<PAGE> 75
From time to time in the ordinary course of their respective businesses, some of
the underwriters and their affiliates have engaged in and may in the future
engage in commercial banking and/or investment banking transactions with Krispy
Kreme and its affiliates.
LEGAL MATTERS
Certain legal matters with respect to the validity of common stock offered
hereby are being passed upon for us by Kilpatrick Stockton LLP, Atlanta, Georgia
and Winston-Salem, North Carolina. Cahill Gordon & Reindel, a partnership
including a professional corporation, New York, New York, is acting as counsel
to the underwriters in connection with certain legal matters relating to the
common stock offered hereby.
EXPERTS
The financial statements of Krispy Kreme Doughnut Corporation as of February 1,
1998 and January 31, 1999 and for each of the three years in the period ended
January 31, 1999 and the balance sheet of Krispy Kreme Doughnuts, Inc. as of
December 3, 1999 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-1 that Krispy
Kreme has filed with the SEC covering the shares of common stock that Krispy
Kreme is offering. This prospectus does not contain all of the information
presented in the registration statement, and you should refer to that
registration statement with its exhibits for further information. Statements in
this prospectus describing or summarizing any contract or other document are not
complete, and you should review the copies of those documents filed as exhibits
to the registration statement for more detail. You may read and copy the
registration statement at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. For information on the operation of the Public
Reference Room, call the SEC at 1-800-SEC-0330. You can also inspect our
registration statement on the Internet at the SEC's web site,
http://www.sec.gov.
After this offering, we will be required to file annual, quarterly, and current
reports, proxy and information statements and other information with the SEC.
You can review this information at the SEC's Public Reference Room or on the
SEC's web site, as described above.
71
<PAGE> 76
KRISPY KREME DOUGHNUT CORPORATION
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENT ----
<S> <C>
Unaudited Consolidated Balance Sheets....................... F-2
Unaudited Consolidated Statements of Operations............. F-3
Unaudited Consolidated Statements of Cash Flows............. F-4
Notes to Unaudited Consolidated Financial Statements........ F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-8
Consolidated Balance Sheets................................. F-9
Consolidated Statements of Operations....................... F-10
Consolidated Statements of Shareholders' Equity............. F-11
Consolidated Statements of Cash Flows....................... F-12
Notes to Audited Consolidated Financial Statements.......... F-13
</TABLE>
KRISPY KREME DOUGHNUTS, INC.
INDEX TO THE FINANCIAL STATEMENT
<TABLE>
<CAPTION>
PAGE
AUDITED BALANCE SHEET ----
<S> <C>
Report of Independent Accountants........................... F-25
Balance Sheet............................................... F-26
Notes to Balance Sheet...................................... F-26
</TABLE>
F-1
<PAGE> 77
KRISPY KREME DOUGHNUT CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------------------
PRO FORMA
JANUARY 31, OCTOBER 31, OCTOBER 31,
1999 1999 1999 (NOTE 6)
----------- ------------ --------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 4,312,518 $ 3,944,201
Accounts receivable, less allowance for doubtful
accounts of $975,000 (January 31, 1999) and
$1,602,000 (October 31, 1999)....................... 13,775,436 17,944,741
Accounts receivable, affiliates....................... 1,297,372 1,698,979
Other receivables..................................... 535,309 1,723,467
Inventories........................................... 9,754,194 9,884,675
Prepaid expenses...................................... 1,528,617 1,317,446
Deferred income taxes................................. 2,120,288 4,074,804
Assets held for sale.................................. 325,000 400,000
----------- ------------
Total current assets........................ 33,648,734 40,988,313
Property and equipment, net........................... 53,575,399 58,192,290
Deferred income taxes................................. 3,036,134 2,633,468
Other assets.......................................... 2,920,746 2,876,991
----------- ------------
Total assets................................ $93,181,013 $104,691,062
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $11,404,763 $ 13,401,989
Dividends payable..................................... 1,517,786 --
Accrued salaries and wages............................ 2,445,863 2,645,649
Accrued restructuring expenses........................ 1,690,772 1,007,878
Accrued expenses...................................... 4,648,142 7,068,862
Current maturities of long-term debt.................. 2,400,000 2,400,000
Income taxes payable.................................. 1,154,637 2,780,890
----------- ------------ -----------
Total current liabilities................... 25,261,963 29,305,268
----------- ------------ -----------
Compensation deferred (unpaid)........................ 792,204 789,526
Long-term debt........................................ 18,620,409 20,495,421
Accrued restructuring expenses........................ 4,742,270 5,118,209
Other long-term obligations........................... 1,517,176 1,458,933
----------- ------------ -----------
Total long-term liabilities................. 25,672,059 27,862,089
SHAREHOLDERS' EQUITY -- SUBJECT TO REDEMPTION:
Common stock, $10 par value, 1,000,000 shares
authorized; issued and outstanding -- 467,011
(January 31, 1999 and October 31, 1999)............. 4,670,110 4,670,110
Paid-in capital....................................... 10,804,563 10,804,563
Notes receivable, employees........................... (2,098,559) (2,546,730)
Retained earnings..................................... 28,870,877 34,595,762
----------- ------------ -----------
Total shareholders' equity.................. 42,246,991 47,523,705
----------- ------------ -----------
Total liabilities and shareholders'
equity.................................... $93,181,013 $104,691,062
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-2
<PAGE> 78
KRISPY KREME DOUGHNUT CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------
NINE MONTHS ENDED
---------------------------
NOVEMBER 1, OCTOBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Total revenues.............................................. $133,190,030 $161,571,316
Operating expenses.......................................... 116,018,700 137,821,692
General and administrative expenses......................... 7,885,480 10,170,699
Depreciation and amortization expenses...................... 3,336,183 3,497,625
------------ ------------
Income from operations...................................... 5,949,667 10,081,300
Interest expense, net....................................... 1,048,813 847,414
------------ ------------
Income before income taxes.................................. 4,900,854 9,233,886
Provision for income taxes.................................. 2,015,000 3,509,000
------------ ------------
Net income.................................................. $ 2,885,854 $ 5,724,886
============ ============
Basic earnings per share.................................... $ 7.31 $ 12.26
============ ============
Diluted earnings per share.................................. $ 7.30 $ 12.11
============ ============
Pro forma (Note 2):
Basic earnings per share.................................. $ $
============ ============
Diluted earnings per share................................ $ $
============ ============
Supplemental (Note 2):
Basic earnings per share.................................. $
============
Diluted earnings per share................................ $
============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-3
<PAGE> 79
KRISPY KREME DOUGHNUT CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS ENDED
--------------------------
NOVEMBER 1, OCTOBER 31,
1998 1999
------------ -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.................................................. $ 2,885,854 $ 5,724,886
Items not requiring cash:
Depreciation and amortization............................. 3,336,183 3,497,625
Deferred income taxes..................................... -- (1,551,850)
Provision for store closings and restructuring............ -- 86,159
Change in assets and liabilities:
Receivables............................................... (4,337,079) (5,759,070)
Inventories............................................... (384,379) (130,481)
Prepaid expenses.......................................... (860,238) 324,641
Income taxes, net......................................... 1,984,882 1,626,253
Accounts payable.......................................... 4,023,811 1,997,226
Accrued restructuring expenses............................ (136,404) (854,549)
Accrued expenses.......................................... 2,248,956 2,620,506
Deferred compensation and other long-term obligations..... 845,750 (60,921)
------------ -----------
Net cash provided by operating activities......... 9,607,336 7,520,425
------------ -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (10,919,937) (7,850,360)
Decrease (increase) in other assets......................... 717,975 (333,872)
Proceeds from sale of assets held for sale.................. -- 386,435
------------ -----------
Net cash used for investing activities............ (10,201,962) (7,797,797)
------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds (repayments) on long-term borrowings........... (817,678) 1,875,012
Proceeds from stock offering................................ 4,399,908 --
Cash dividends paid......................................... (1,179,562) (1,517,786)
Issuance of notes receivable................................ (2,076,559) (674,111)
Collection of notes receivable.............................. -- 225,940
------------ -----------
Net cash provided by (used for) financing
activities...................................... 326,109 (90,945)
------------ -----------
Net decrease in cash and cash equivalents................... (268,517) (368,317)
Cash and cash equivalents at beginning of period............ 2,932,610 4,312,518
------------ -----------
Cash and cash equivalents at end of period.................. $ 2,664,093 $ 3,944,201
============ ===========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-4
<PAGE> 80
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated balance sheet as of October 31, 1999,
and the unaudited consolidated statements of operations and cash flows for the
nine month periods ended November 1, 1998 and October 31, 1999, should be read
in conjunction with the audited consolidated financial statements and
accompanying footnotes of Krispy Kreme Doughnut Corporation (the Company) as of
February 1, 1998, and January 31, 1999, and for each of the three years in the
period ended January 31, 1999, included elsewhere herein. In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all material adjustments, consisting principally of normal recurring
adjustments, necessary for a fair presentation of the Company's interim results.
Certain information and footnote disclosures required for complete financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to applicable rules and regulations;
however, the Company believes that the disclosures herein when read with the
aforementioned audited financial statements are adequate to make the information
presented not misleading. The operating results for the interim periods are not
necessarily indicative of the results to be expected for the full year.
2. EARNINGS PER SHARE
HISTORICAL. Earnings per share data presented is computed in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", which was issued in 1998. Basic earnings per share (EPS) is computed by
dividing income available to common shareholders (net income) by the
weighted-average number of common shares outstanding for the year. Diluted EPS
reflects the potential dilution that could occur if stock options were
exercised.
The weighted average number of shares outstanding for basic EPS was 394,524 for
the nine months ended November 1, 1998, and 467,011 for the nine months ended
October 31, 1999. The calculation of diluted EPS in both nine month periods
includes the assumed exercise of 91,550 stock options issued in August 1998. The
weighted average number of shares used for the diluted earnings per share
calculation for the nine months ended November 1, 1998, and October 31, 1999,
was 395,487 and 472,888, respectively.
PRO FORMA. On November 10, 1999, shareholders approved a corporate
reorganization to create a holding company (Krispy Kreme Doughnuts, Inc.) to
function as the publicly held parent of Krispy Kreme Doughnut Corporation and
its subsidiaries. Krispy Kreme Doughnut Corporation and the holding company will
enter into a plan of merger, expected to become effective just prior to the
closing of the holding company's public offering of its common stock. As a
result of the merger, the former shareholders of Krispy Kreme Doughnut
Corporation will become shareholders of the holding company, with each of them
receiving a number of holding company shares based on his or her percentage
ownership of the shares of Krispy Kreme Doughnut Corporation and a cash payment
of $ per share to be paid from the proceeds of the offering. This
merger will result in Krispy Kreme Doughnut Corporation becoming a wholly-owned
subsidiary of the holding company. Pro forma basic and diluted earnings per
share is calculated in the same manner as historical earnings per share after
giving effect to the merger exchange ratio of -for-1. Shares used in pro
forma basic and diluted earnings per share are and , respectively
for the nine months ended November 1, 1998 and and , respectively for
the nine months ended October 31, 1999.
SUPPLEMENTAL. Supplemental earnings per share adjusts pro forma earnings per
share to reflect the assumed issuance of holding company common shares to
fund the cash payment to shareholders. Shares used in supplemental basic and
diluted earnings per share are and , respectively.
F-5
<PAGE> 81
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BUSINESS SEGMENT INFORMATION
The Company has three reportable business segments. The Company Store Operations
segment is comprised of the operating activities of the 59 stores owned by the
Company. These stores sell doughnuts and complementary products through both
on-premises and off-premises sales. The majority of the ingredients and
materials used by Company Store Operations is purchased from the Support
Operations business segment.
The Franchise Operations segment is comprised of the operating activities of the
individual franchise business units which license qualified operators to conduct
business under the Krispy Kreme name and also monitor the operations of these
stores. Under the terms of the agreements, the licensed operators pay royalties
and fees to the Company in return for the use of the Krispy Kreme name.
The Support Operations segment supplies mix, equipment and other items to both
Company-owned and franchisee-owned stores. All intercompany transactions between
the Support Operations business segment and Company-owned stores are eliminated
in consolidation.
Segment operating income is income before general corporate expenses and income
taxes.
Segment information for total assets and capital expenditures is not presented
as such information is not used in measuring segment performance or allocating
resources among segments.
<TABLE>
<CAPTION>
---------------------------
NINE MONTHS ENDED
---------------------------
NOVEMBER 1, OCTOBER 31,
1998 1999
------------ ------------
<S> <C> <C>
REVENUES:
Company Store Operations.................................... $108,172,655 $121,104,100
Franchise Operations........................................ 2,296,732 3,797,800
Support Operations.......................................... 80,033,293 104,132,062
Intercompany sales eliminations............................. (57,312,650) (67,462,646)
------------ ------------
Total revenues.................................... $133,190,030 $161,571,316
============ ============
OPERATING INCOME:
Company Store Operations.................................... $ 11,538,999 $ 14,900,096
Franchise Operations........................................ 322,623 952,781
Support Operations.......................................... 2,822,135 5,278,293
Unallocated general and administrative expenses............. (8,734,090) (11,049,870)
------------ ------------
Total operating income............................ $ 5,949,667 $ 10,081,300
============ ============
DEPRECIATION AND AMORTIZATION EXPENSES:
Company Store Operations.................................... $ 2,275,810 $ 2,390,290
Franchise Operations........................................ 43,094 54,000
Support Operations.......................................... 168,669 174,164
Corporate administration.................................... 848,610 879,171
------------ ------------
Total depreciation and amortization expenses...... $ 3,336,183 $ 3,497,625
============ ============
</TABLE>
4. RELATED PARTY TRANSACTIONS
Total revenues includes $5,663,621 for the nine months ended November 1, 1998
and $8,634,646 for the nine months ended October 31, 1999 of sales to franchise
doughnut stores owned by directors and an
F-6
<PAGE> 82
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee of the Company. Trade accounts receivable from these stores totaled
$1,297,372 and $1,698,979 at January 31, 1999 and October 31, 1999,
respectively. Total revenues also includes royalties from these stores of
$387,582 for the nine months ended November 1, 1998 and $614,904 for the nine
months ended October 31, 1999. Additionally, from time to time the Company
extends credit to customers in the form of notes receivable. Interest is
generally charged at the prime rate plus 1% and terms range from six months to
ten years. Notes receivable from franchise doughnut stores owned by directors
and an employee totaled $56,339 at January 31, 1999 and $22,181 at October 31,
1999.
5. RESTRUCTURING AND IMPAIRMENT OF ASSETS
On January 13, 1999, the Board of Directors of the Company approved a
restructuring plan for assets and operations determined either to be
inconsistent with the Company's strategy or whose carrying value may not be
fully recoverable. The restructuring and impairment charge of $11,802,159
primarily involved: 1) $8,080,117 for the closing of five double drive-through
Company stores and the write-down of five other inactive double drive-through
stores and sites, including provisions to write down associated land, building
and equipment costs to estimated net realizable value and to cover operating
lease commitments associated with these stores; 2) $416,680 for the closing of
two satellite operations; 3) $2,636,559 for the write-down of facilities which
will remain open but whose carrying value was determined not to be fully
recoverable; and 4) $668,803 in other costs. Land included in the restructuring
plan was written down to its estimated net realizable value of $325,000 and
recorded as Assets Held for Sale. After an income tax benefit of $4,720,865,
these actions reduced fiscal 1999 earnings by $7,081,294 or $17.17 per diluted
share.
As of October 31, 1999, the Company reassessed certain provisions of its
restructuring accrual. Land included in Assets Held for Sale with a book value
of $100,000 was sold in October, 1999 for $386,435 resulting in a credit to
store closings and restructuring expense. The Company increased the estimated
net realizable value for another piece of land held for sale by $175,000. In
addition, the Company determined that it was under accrued for losses associated
with operating lease commitments related to double drive-through buildings by
$547,594. Together, these adjustments resulted in a net increase in
restructuring expenses of $86,159 for the nine months ended October 31, 1999.
This amount has been included in Operating Expenses. An analysis of the accrual
balance at January 31, 1999, and October 31, 1999, is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
CURRENT PORTION OF LONG-TERM PORTION OF TOTAL RESTRUCTURING
RESTRUCTURING ACCRUAL RESTRUCTURING ACCRUAL ACCRUAL
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
As of January 31, 1999................ $1,690,772 $4,742,270 $6,433,042
As of October 31, 1999................ 1,007,878 5,118,209 6,126,087
---------- ---------- ----------
(Increase) decrease................... $ 682,894 $ (375,939) $ 306,955
========== ========== ==========
</TABLE>
6. PRO FORMA BALANCE SHEET
The pro forma balance sheet at October 31, 1999 reflects the accrual of the cash
payment to shareholders to be paid from the proceeds of the offering as
discussed in Note 2, "Pro Forma."
F-7
<PAGE> 83
KRISPY KREME DOUGHNUT CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Krispy Kreme Doughnut Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Krispy Kreme
Doughnut Corporation and its subsidiaries (the Company) at February 1, 1998 and
January 31, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended January 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Greensboro, North Carolina
March 19, 1999
F-8
<PAGE> 84
KRISPY KREME DOUGHNUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 2,932,610 $ 4,312,518
Accounts receivable, less allowance for doubtful accounts of
$373,388 (1998) and $975,000 (1999)....................... 11,260,986 13,775,436
Accounts receivable, affiliates............................. 727,123 1,297,372
Other receivables........................................... 198,163 535,309
Inventories................................................. 7,874,169 9,754,194
Prepaid expenses............................................ 1,277,338 1,528,617
Income taxes refundable..................................... 241,716 --
Deferred income taxes....................................... 1,280,113 2,120,288
Assets held for sale........................................ -- 325,000
----------- -----------
Total current assets.............................. 25,792,218 33,648,734
Property and equipment, net................................. 51,546,773 53,575,399
Deferred income taxes....................................... 218,350 3,036,134
Other assets................................................ 3,905,803 2,920,746
----------- -----------
Total assets...................................... $81,463,144 $93,181,013
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 6,821,253 $11,404,763
Dividends payable........................................... 1,179,562 1,517,786
Accrued salaries and wages.................................. 1,542,493 2,445,863
Accrued restructuring expenses.............................. 665,777 1,690,772
Accrued expenses............................................ 4,032,535 4,648,142
Current maturities of long-term debt........................ 2,400,000 2,400,000
Income taxes payable........................................ -- 1,154,637
----------- -----------
Total current liabilities......................... 16,641,620 25,261,963
----------- -----------
Compensation deferred (unpaid).............................. 6,434,653 792,204
Long-term debt.............................................. 18,470,180 18,620,409
Accrued restructuring expenses.............................. -- 4,742,270
Other long-term obligations................................. 1,651,293 1,517,176
----------- -----------
Total long-term liabilities....................... 26,556,126 25,672,059
SHAREHOLDERS' EQUITY -- SUBJECT TO REDEMPTION:
Common stock, $10 par value, 1,000,000 shares authorized;
issued and outstanding -- 364,221 (1998) and 467,011
(1999).................................................... 3,642,210 4,670,110
Paid-in capital............................................. 1,101,437 10,804,563
Notes receivable, employees................................. (33,921) (2,098,559)
Retained earnings........................................... 33,555,672 28,870,877
----------- -----------
Total shareholders' equity........................ 38,265,398 42,246,991
----------- -----------
Total liabilities and shareholders' equity........ $81,463,144 $93,181,013
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 85
KRISPY KREME DOUGHNUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------------
YEAR ENDED
------------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues....................................... $132,614,004 $158,743,022 $180,880,485
Operating expenses................................... 116,657,908 140,206,728 157,604,746
General and administrative expenses.................. 7,630,802 9,530,172 10,897,994
Depreciation and amortization expenses............... 3,188,753 3,586,150 4,277,711
Provision for store closings and restructuring....... -- -- 11,802,159
------------ ------------ ------------
Income (loss) from operations........................ 5,136,541 5,419,972 (3,702,125)
Interest expense, net................................ 1,157,238 1,424,125 1,326,022
(Gain) loss on sale of property and equipment........ (66,384) (529,276) 250,861
------------ ------------ ------------
Income (loss) before income taxes.................... 4,045,687 4,525,123 (5,279,008)
Provision (benefit) for income taxes................. 1,619,001 1,811,000 (2,112,000)
------------ ------------ ------------
Net income (loss).................................... $ 2,426,686 $ 2,714,123 $ (3,167,008)
============ ============ ============
Basic and diluted earnings (loss) per share.......... $ 6.66 $ 7.45 $ (7.68)
============ ============ ============
Pro forma (Unaudited -- Note 1):
Basic and diluted earnings (loss) per share........ $ $ $
============ ============ ============
Supplemental (Unaudited -- Note 1):
Basic and diluted loss per share................... $
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 86
KRISPY KREME DOUGHNUT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
COMMON PAID-IN UNEARNED NOTES RETAINED SHAREHOLDERS'
STOCK CAPITAL COMPENSATION RECEIVABLE EARNINGS EQUITY
---------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 28,
1996.......................... $3,642,210 $ 1,101,437 $(368,476) $ (109,540) $30,767,119 $35,032,750
---------- ----------- --------- ----------- ----------- -----------
Net income for the year ended
February 2, 1997............ -- -- -- -- 2,426,686 2,426,686
Cash dividends on common stock
($3.25 per share)........... -- -- -- -- (1,172,694) (1,172,694)
Compensation expense
associated with the
restricted stock plan....... -- -- 187,317 -- -- 187,317
Collections on notes
receivable.................. -- -- -- 41,980 -- 41,980
---------- ----------- --------- ----------- ----------- -----------
Balance as of February 2,
1997........................ $3,642,210 $ 1,101,437 $(181,159) $ (67,560) $32,021,111 $36,516,039
---------- ----------- --------- ----------- ----------- -----------
Net income for the year ended
February 1, 1998............ -- -- -- -- 2,714,123 2,714,123
Cash dividends on common stock
($3.25 per share)........... -- -- -- -- (1,179,562) (1,179,562)
Compensation expense
associated with the
restricted stock plan....... -- -- 181,159 -- -- 181,159
Collections on notes
receivable.................. -- -- -- 33,639 -- 33,639
---------- ----------- --------- ----------- ----------- -----------
Balance as of February 1,
1998........................ $3,642,210 $ 1,101,437 $ -- $ (33,921) $33,555,672 $38,265,398
---------- ----------- --------- ----------- ----------- -----------
Net loss for the year ended
January 31, 1999............ -- -- -- -- (3,167,008) (3,167,008)
Cash dividends on common stock
($3.25 per share)........... -- -- -- -- (1,517,787) (1,517,787)
Collections on notes
receivable.................. -- -- -- 33,921 -- 33,921
Conversion of Long-Term
Incentive Plan shares to
common stock................ 589,720 5,522,138 -- -- -- 6,111,858
Sale of common stock.......... 438,180 4,180,988 -- -- -- 4,619,168
Issuance of notes
receivable.................. -- -- -- (2,098,559) -- (2,098,559)
---------- ----------- --------- ----------- ----------- -----------
Balance as of January 31,
1999........................ $4,670,110 $10,804,563 $ -- $(2,098,559) $28,870,877 $42,246,991
========== =========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 87
KRISPY KREME DOUGHNUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 2,426,687 $ 2,714,123 $(3,167,009)
Items not requiring (providing) cash:
Depreciation and amortization.......................... 3,188,753 3,586,150 4,277,711
Deferred income taxes.................................. 744,575 391,970 (3,657,959)
Loss (gain) on disposal of property and equipment,
net................................................. (66,384) (529,276) 250,861
Compensation deferred.................................. 572,845 660,926 --
Provision for store closings and restructuring......... -- -- 11,802,159
Other.................................................. 209,454 795,325 --
Change in assets and liabilities:
Receivables............................................ (3,895,297) (674,985) (3,421,845)
Inventories............................................ (82,075) (1,034,436) (1,880,025)
Prepaid expenses....................................... (527,589) 281,177 (251,279)
Income taxes, net...................................... (571,196) 696,991 1,396,353
Accounts payable....................................... 1,001,234 617,977 4,583,510
Accrued restructuring expenses......................... (803,038) (11,317) --
Accrued expenses....................................... 796,138 (77,252) 1,008,198
Deferred compensation and other long-term
obligations......................................... (341,814) (290,647) 741,702
----------- ----------- -----------
Net cash provided by operating activities...... 2,652,293 7,126,726 11,682,377
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (9,572,362) (6,707,579) (12,375,792)
Proceeds from disposal of property and equipment......... 5,430,118 1,740,008 --
Assets held for sale..................................... 698,269 1,292,641 --
Decrease (increase) in other assets...................... 17,523 (2,221,455) 548,126
----------- ----------- -----------
Net cash used for investing activities:........ (3,426,452) (5,896,385) (11,827,666)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds on long-term borrowings..................... 1,876,313 683,155 150,229
Proceeds from stock offering............................. -- -- 4,619,168
Cash dividends paid...................................... (1,159,051) (1,172,694) (1,179,562)
Issuance of notes receivable............................. -- -- (2,098,559)
Collection of notes receivable........................... 41,980 33,639 33,921
----------- ----------- -----------
Net cash provided by (used for) financing
activities:.................................. 759,242 (455,900) 1,525,197
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..... (14,917) 774,441 1,379,908
Cash and cash equivalents at beginning of year........... 2,173,086 2,158,169 2,932,610
----------- ----------- -----------
Cash and cash equivalents at end of year................. $ 2,158,169 $ 2,932,610 $ 4,312,518
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 88
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. Krispy Kreme Doughnut Corporation (the Company) and its
subsidiaries are engaged principally in the sale of doughnuts through
Company-owned and franchised locations. The Company also produces and sells
doughnut-making equipment and mix for use by the Company-owned and franchised
stores. Additionally, the Company operates a commissary to distribute food
products and supplies to Company-owned and franchised stores.
The significant accounting policies followed by the Company in preparing the
accompanying financial statements are as follows:
BASIS OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.
FISCAL YEAR. The Company's fiscal year is based on a fifty-two/fifty-three week
year. The fiscal year ends on the Sunday closest to the last day in January. The
year ended February 2, 1997 contained 53 weeks while the years ended February 1,
1998 and January 31, 1999 contained 52 weeks.
CASH AND CASH EQUIVALENTS. The Company considers cash on hand, deposits in
banks, and all highly liquid debt instruments with a maturity of three months or
less at date of acquisition to be cash and cash equivalents.
INVENTORIES. Inventories are recorded at the lower of average cost or market.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost less
accumulated depreciation. Major renewals and betterments are charged to the
property accounts while replacements, maintenance, and repairs which do not
improve or extend the lives of the respective assets are expensed currently.
Interest is capitalized on major capital expenditures during the period of
construction.
Depreciation of property and equipment is provided on the straight-line method
over the estimated useful lives: Buildings -- 15 to 35 years; Equipment -- 3 to
15 years; Leasehold improvements -- lesser of useful lives of assets or lease
term.
Assets acquired in the first half of the fiscal year are depreciated for a half
year in the year of acquisition. Assets acquired in the second half of the
fiscal year are not depreciated in the year of acquisition but are depreciated
for a full year in the next fiscal year.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INCOME TAXES. The Company uses the asset and liability method to account for
income taxes, which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
tax bases and financial reporting bases for assets and liabilities.
EARNINGS PER SHARE. Historical: Earnings per share data presented are computed
in accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," which was issued in 1998. Basic earnings per share (EPS)
is computed by dividing income available to common shareholders (net income) by
the weighted-average number of common shares outstanding for the year. Diluted
EPS reflects the potential dilution that could occur if stock options were
exercised.
F-13
<PAGE> 89
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average number of shares outstanding for basic EPS was 364,221 in
fiscal 1997 and fiscal 1998 and 412,459 in fiscal 1999. There were no stock
options outstanding in fiscal 1997 or fiscal 1998. The calculation of diluted
EPS in fiscal 1999 included the assumed exercise of 91,550 stock options issued
during the year. This assumed exercise had an antidilutive effect on the
earnings per share calculation thus diluted earnings per share equals basic
earnings per share.
Pro forma (Unaudited): On November 10, 1999, shareholders approved a corporate
reorganization to create a holding company (Krispy Kreme Doughnuts, Inc.) to
function as the publicly held parent of Krispy Kreme Doughnut Corporation and
its subsidiaries. Krispy Kreme Doughnut Corporation and the holding company will
enter into a plan of merger, expected to become effective just prior to the
closing of the holding company's public offering of its common stock. As a
result of the merger, the former shareholders of Krispy Kreme Doughnut
Corporation will become shareholders of the holding company, with each of them
receiving a number of holding company shares based on his or her percentage of
ownership of the shares of Krispy Kreme Doughnut Corporation and a cash payment
of $ per share to be paid from the proceeds of the offering. This
merger will result in Krispy Kreme Doughnut Corporation becoming a wholly-owned
subsidiary of the holding company. Pro forma basic and diluted earnings per
share is calculated in the same manner as historical earnings per share after
giving effect to the merger exchange ratio of -for-1. Shares used in pro forma
basic and diluted earnings per share are and , respectively
in fiscal 1997, and , respectively in fiscal 1998 and and ,
respectively in fiscal 1999.
Supplemental (Unaudited): Supplemental earnings per share adjusts pro forma
earnings per share to reflect the assumed issuance of holding
company common shares to fund the cash payment to shareholders. Shares used in
supplemental basic and diluted earnings per share are and ,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS. SFAS No. 107. "Disclosures about Fair
Value of Financial Instruments," requires disclosure about the fair value of
certain instruments. Cash, accounts receivable, accounts payable, accrued
liabilities and variable rate debt are reflected in the financial statements at
cost which approximates fair value because of the short-term maturity of these
instruments.
ADVERTISING COSTS. All costs associated with advertising and promoting products
are expensed in the year incurred.
STORE OPENING COSTS. Costs incurred to open either Company or franchise stores
are expensed in the period incurred.
REVENUE RECOGNITION. A summary of the revenue recognition policies for each
segment of the Company (see Note 11) is as follows:
- Company Store Operations revenue is derived from the sale of doughnuts
and related items to on-premises and off-premises customers. Revenue is
recognized at the time of sale for on-premises sales and at the time of
delivery for off-premises sales.
- Franchise Operations revenue is derived from: (1) development and
franchise fees from the opening of new stores; and (2) royalties charged
to franchisees based on sales. Development and franchise fees are charged
for each new store and are recognized when the store is opened. The
royalties recognized in each period are based on the sales in that
period.
- Support Operations revenue is derived from the sale of doughnut-making
equipment and mix to Company-owned and franchised stores. Revenue is
recognized at the time goods are shipped.
F-14
<PAGE> 90
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income," requires
that certain items such as foreign currency translation adjustments, unrealized
gains and losses on certain investments in debt and equity securities and
minimum pension liability adjustments be presented as separate components of
shareholders' equity. SFAS 130 defines these as items of other comprehensive
income and as such must be reported in a financial statement that is displayed
with the same prominence as other financial statements. At January 31, 1999, the
Company does not have any items of other comprehensive income to report.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
years beginning after June 15, 2000, the Company's fiscal year 2002. SFAS 133
requires that all derivatives be recorded on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in the fair
value of hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The adoption of FAS 133 is not expected to have a material impact on
the financial statements of the Company.
2. ASSETS HELD FOR SALE
At January 31, 1999, assets held for sale represented investments in land which
were expected to be sold. The Company established a provision to cover any
anticipated losses to be incurred in disposing of these assets. See Note 14 for
additional information.
3. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
DISTRIBUTION EQUIPMENT MIX COMPANY
CENTER DEPARTMENT DEPARTMENT SHOPS TOTAL
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FEBRUARY 1, 1998
Raw materials........................ $ -- $2,596,311 $ 390,556 $ 773,061 $3,759,928
Work in progress..................... -- 119,026 -- -- 119,026
Finished goods....................... 487,496 461,002 12,190 -- 960,688
Purchased merchandise................ 2,516,266 -- -- 483,022 2,999,288
Manufacturing supplies............... -- -- 35,239 -- 35,239
---------- ---------- ---------- ---------- ----------
Totals..................... $3,003,762 $3,176,339 $ 437,985 $1,256,083 $7,874,169
========== ========== ========== ========== ==========
JANUARY 31, 1999
Raw materials........................ $ -- $2,749,910 $ 411,946 $1,115,388 $4,277,244
Work in progress..................... -- 45,898 -- -- 45,898
Finished goods....................... 723,854 1,280,802 21,395 -- 2,026,051
Purchased merchandise................ 2,843,402 -- -- 540,379 3,383,781
Manufacturing supplies............... -- -- 21,220 -- 21,220
---------- ---------- ---------- ---------- ----------
Totals..................... $3,567,256 $4,076,610 $ 454,561 $1,655,767 $9,754,194
========== ========== ========== ========== ==========
</TABLE>
F-15
<PAGE> 91
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
-------------------------
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
Land........................................................ $11,254,812 $11,128,569
Buildings................................................... 20,616,612 22,702,866
Machinery and equipment..................................... 35,687,400 40,236,973
Leasehold improvements...................................... 9,021,532 8,262,368
Construction in progress.................................... 1,600,966 22,993
----------- -----------
78,181,322 82,353,769
Less: accumulated depreciation.............................. 26,634,549 28,778,370
----------- -----------
Property and equipment, net....................... $51,546,773 $53,575,399
=========== ===========
</TABLE>
An analysis of the loss (gain) on disposal of property and equipment is as
follows:
<TABLE>
<CAPTION>
---------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Gain on sale of real estate................................. $ -- $(567,473) $ --
Other, net.................................................. (66,384) 38,197 250,861
-------- --------- --------
$(66,384) $(529,276) $250,861
======== ========= ========
</TABLE>
5. REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT
On December 21, 1998, the Company amended and restated its Loan Agreement (the
Agreement) with a bank. The new agreement provides a $28 million revolving line
of credit and a $12 million term loan. The Agreement, which is unsecured,
expires on July 10, 2002.
REVOLVING LINE OF CREDIT. Under the terms of the Agreement, interest on the
revolving line of credit is charged, at the Company's option, at either the
Lender's Prime Rate less 110 basis points or at the one-month Interbank Rate
plus 100 basis points. There is no interest, fee or other charge for the
unadvanced portion of the line of credit. As of January 31, 1999, the amount
outstanding under the revolving line of credit was $15,020,409 and the interest
rate was 6.064%.
A provision of the Agreement allows the Company to convert, prior to the
expiration date of the Agreement, all or a portion of the outstanding principal
balance of the revolving line of credit to a term loan for a period of 60, 84,
or 120 months with interest at the Company's option of either a variable Prime
Rate based method, a variable Interbank Rate based method, or a Swap Rate based
method with a ceiling tied to the Prime Rate at the time of conversion. As of
January 31, 1999, no amounts from the $28 million line of credit facility had
been converted to a term loan.
TERM LOAN. Interest on the term loan is computed on the same basis as the
revolving line of credit except that the floor and ceiling rates are 5.5% and
8.125%, respectively (6.064% at January 31, 1999). Repayment of this loan began
on July 20, 1996, in the amount of monthly principal payments of $200,000 plus
interest; the final payment is due on June 20, 2001. The Term Loan may be
prepaid without penalty or premium at any time. As of February 1, 1998 and
January 31, 1999, the outstanding principal balance
F-16
<PAGE> 92
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the term loan was $8,400,000 and $6,000,000, respectively and the interest
rate was 6.598% and 6.064%, respectively.
The Agreement contains provisions that, among other requirements, restrict
capital expenditures, require the maintenance of certain financial ratios and
restrict the payment of dividends. At January 31, 1999, the Company was in
compliance with each of these covenants.
Interest paid, net of amounts capitalized, was $1,183,000 in fiscal 1997,
$1,482,000 in fiscal 1998, and $1,404,000 in fiscal 1999.
The amended and restated Agreement which was entered into in December 1998
replaced a Loan Agreement with a bank which was scheduled to expire on July 20,
1999. The previous Loan Agreement was in the form of a $30 million line of
credit facility and had term loan provisions similar to those described above
for the amended and restated Agreement. The interest rate methods under the
former Loan Agreement did not vary significantly from those prescribed in the
amended and restated Agreement.
6. LEASE COMMITMENTS
The Company conducts some of its operations from leased facilities and,
additionally, leases certain equipment under operating leases. Generally, these
have initial lease periods of 5 to 18 years and contain provisions for renewal
options of 5 to 10 years.
At January 31, 1999, future minimum annual rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
-----------
FISCAL YEAR ENDING IN AMOUNT
- --------------------- -----------
<S> <C>
2000........................................................ $ 6,410,000
2001........................................................ 6,275,000
2002........................................................ 5,781,000
2003........................................................ 4,749,000
2004........................................................ 3,186,000
Thereafter.................................................. 11,121,000
-----------
$37,522,000
===========
</TABLE>
Rental expense, net of rental income, totaled $3,772,000 in 1997, $4,912,000 in
1998 and $5,565,000 in 1999.
7. INCOME TAXES
The components of the provision for federal and state income taxes are
summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Currently payable......................................... $ 874,425 $1,419,030 $ 1,545,959
Deferred.................................................. 744,575 391,970 (3,657,959)
---------- ---------- -----------
$1,619,000 $1,811,000 $(2,112,000)
========== ========== ===========
</TABLE>
F-17
<PAGE> 93
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate with the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Federal taxes at statutory rate........................... $1,375,534 $1,538,542 $(1,794,863)
State taxes, net of federal benefit....................... 227,502 229,486 (440,220)
Other..................................................... 15,964 42,972 123,083
---------- ---------- -----------
$1,619,000 $1,811,000 $(2,112,000)
========== ========== ===========
</TABLE>
Income tax payments, net of refunds, were $1,664,293 in fiscal 1997, $669,904 in
fiscal 1998 and $239,341 in fiscal 1999.
The net current and non-current components of deferred income taxes recognized
in the balance sheet are as follows:
<TABLE>
<CAPTION>
-------------------------
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
Net current assets.......................................... $1,280,113 $2,120,288
Net non-current assets...................................... 218,350 3,036,134
---------- ----------
$1,498,463 $5,156,422
========== ==========
</TABLE>
F-18
<PAGE> 94
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
-------------------------
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
- ------
Compensation deferred (unpaid).............................. $2,680,039 $ 470,731
Accrued group insurance..................................... 149,422 209,646
Other long-term obligations................................. 354,086 418,432
Accrued insurance........................................... 686,242 340,580
Accrued reorganization costs................................ 252,995 2,444,556
Unearned revenue............................................ 334,758 201,400
Accounts receivable......................................... 141,887 370,500
Inventory................................................... 210,866 229,202
Charitable contributions carryforward....................... -- 704,752
State NOL carryforwards..................................... -- 571,373
Other....................................................... -- 621,684
---------- ----------
Gross deferred tax assets......................... 4,810,295 6,582,856
---------- ----------
LIABILITIES
- -----------
Property and equipment...................................... 3,061,269 1,174,082
Prepaid VEBA contribution................................... -- 133,000
Prepaid store opening costs................................. -- --
Prepaid expenses............................................ 250,563 119,352
Other....................................................... -- --
---------- ----------
Gross deferred tax liabilities.................... 3,311,832 1,426,434
---------- ----------
Net asset......................................... $1,498,463 $5,156,422
========== ==========
</TABLE>
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.
8. EMPLOYEE BENEFITS PLANS
The Company has a 401(k) savings plan, which provides that employees may
contribute a portion of their salary to the plan on a tax deferred basis. The
Company matches one-half of the first 2% and one-fourth of the next 4% of salary
contributed by each employee. The Company's matching contributions approximated
$350,000 in fiscal 1997, $419,000 in fiscal 1998 and $440,000 in fiscal 1999.
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.
F-19
<PAGE> 95
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize the status of the Plan and the amounts recognized
in the Balance Sheet:
<TABLE>
<CAPTION>
-------------------------
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
a. Projected benefit obligation at beginning of year........ $ 451,677 $ 669,973
b. Service cost............................................. 130,251 152,469
c. Interest cost............................................ 33,876 46,891
d. Actuarial (gain) loss.................................... 54,169 (21,872)
e. Benefits paid............................................ -- (13,452)
f. Change in plan provisions................................ -- --
g. Projected benefit obligation at end of year.............. 669,973 834,009
CHANGE IN PLAN ASSETS
a. Fair value of plan assets at beginning of year........... $ -- $ --
b. Actual return on plan assets............................. -- --
c. Employer contributions................................... -- 13,452
d. Benefits paid............................................ -- (13,452)
e. Fair value of plan assets at end of year................. -- --
NET AMOUNT RECOGNIZED
a. Funded status............................................ $(669,973) $(834,009)
b. Unrecognized transition obligation (asset)............... -- --
c. Unrecognized prior service cost.......................... -- --
d. Unrecognized net loss.................................... 54,169 32,297
e. Contributions from measurement date to fiscal year end... -- --
f. Net amount recognized.................................... (615,804) (801,712)
WEIGHTED-AVERAGE ASSUMPTIONS
a. Weighted average assumed discount rate................... 7.00% 6.75%
b. Weighted average expected long-term rate of return on
plan assets.............................................. N/A N/A
c. Assumed rate of annual compensation increases............ 5.00% 5.00%
NET PERIODIC PENSION COST
a. Service cost............................................. $ 130,251 $ 152,469
b. Interest cost............................................ 33,876 46,891
c. Estimated return on plan assets.......................... -- --
d. Amortization of unrecognized transitional liability
(asset).................................................. -- --
e. Amortization of prior service cost....................... -- --
f. Recognized net actuarial (gain) or loss.................. -- --
g. Total.................................................... 164,127 199,360
RECONCILIATION OF NET PENSION ASSET (LIABILITY) FOR FISCAL
YEAR
a. Prepaid (accrued) pension cost as of end of prior year... $(451,677) $(615,804)
b. Contributions during the fiscal year..................... -- 13,452
c. Net periodic pension cost for the fiscal year............ 164,127 199,360
d. Prepaid (accrued) pension cost as of fiscal year end..... (615,804) (801,712)
</TABLE>
9. INCENTIVE COMPENSATION
The Company has an incentive compensation plan for officers, directors and
management level employees. Incentive compensation amounted to $1,380,000 in
fiscal 1997, $1,652,000 in fiscal 1998 and $2,300,000 in fiscal 1999.
F-20
<PAGE> 96
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, in fiscal 1997 and fiscal 1998, the Company had a Long-Term
Incentive Plan (the Plan). Under the provisions of the Plan, a participant could
elect to defer, for a period of not less than five years, from 0% to 100% of the
bonus earned under the provisions of the incentive compensation plan described
above. The deferred amount was converted to performance units based on the
appropriate value (book value) of the Company's common stock as defined in the
Plan. Upon completion of the deferral period, each participant's account would
be distributed in accordance with the participant's election. The performance
units granted under the Plan were credited with dividends in a manner identical
to the common stock of the Company. The amount payable to a participant at the
time benefit payments are due was equal in amount to the number of performance
units credited to a participant's account multiplied by the current book value
of the Company's common stock as defined in the Plan. Effective with fiscal
year-end 1997, the right to defer additional incentive compensation under the
provisions of the plan was temporarily suspended. Long-term incentive
compensation amounted to $386,000 in fiscal 1997 and $480,000 in 1998.
In fiscal 1999, participants still employed by the Company were given the option
to convert their performance units earned under the Plan to common shares of the
Company's common stock, subject to certain restrictions. Shares received through
the conversion are subject to the provisions of the Stock Purchase Agreement
dated July 1, 1982, as amended by the Amendment to Stock Purchase Agreement
dated March 19, 1998 and the Addition to the Amendment to the Stock Purchase
Agreement dated April 21, 1998 along with any other agreements which may be
approved by the holders of common shares prior to the conversion. These shares
have no voting rights until the earlier of July 31, 2008, or an initial public
offering of the Company's common stock. The number of performance units
converted was 58,972 at a conversion rate of $103.64 per performance unit for a
total of $6,111,858 in common stock issued in connection with the conversion.
Due to the Federal and State income tax consequences of the conversion incurred
by each participant, the Company made a loan to each participant equal to their
tax liability. These loans were executed via a 10-year promissory note
(collateralized by the common stock) with a fixed interest rate of 6%. The
amount of such loans outstanding at January 31, 1999, was $2,098,559 and has
been recorded as a deduction from shareholders' equity.
In November 1993 and April 1994, the Board of Directors authorized the issuance
of 12,645 and 2,500 respectively, restricted stock awards in substitution for
stock options previously granted to certain directors and officers of the
Company. All unexercised stock options were canceled in substitution for
restricted stock awards. Restricted stock plan participants are not entitled to
receive cash dividends and voting rights on their shares until the lapse of
restrictions. The Company made loans to each of the participants for the
purchase of the restricted shares. Vesting of such awards occurs equally over a
four to six year period from the date of grant and is subject to future service
requirements. The difference between cash paid by the employee for the awarded
shares and the market value of the shares as of the award date was charged as
unearned compensation and is amortized over the four to six year service period.
The unamortized, unearned compensation value is shown as a reduction of
shareholders' equity in the accompanying consolidated balance sheet.
Compensation expense under the plan for fiscal 1997, fiscal 1998 and fiscal 1999
was approximately $187,000, $181,000 and $0 respectively.
10. STOCK OPTION PLAN
During fiscal 1999, the Company established the Krispy Kreme Doughnut
Corporation 1998 Stock Option Plan (the Plan). Under the terms of the Plan,
95,650 shares of common stock of the Company were reserved for issuance to
employees and Directors of the Company. Grants may be in the form of either
incentive stock options or nonqualified stock options. During fiscal 1999,
91,550 options with a 10-year
F-21
<PAGE> 97
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
life were issued to employees and Directors at an exercise price of $103.64 per
share which was the fair market value of the common stock at the date of grant.
Options granted to employees under the Plan vest ratably over a three-year
period commencing with the second anniversary of the grant date. Options granted
to Directors under the Plan vest ratably over a three-year period commencing on
the grant date of the options.
The Financial Accounting Standards Board has adopted SFAS No. 123 "Accounting
for Stock-Based Compensation," which permits, but does not require, the Company
to utilize a fair-value based method of accounting for stock-based compensation.
The Company has elected to continue use of the APB 25 accounting principles for
its stock option plan and accordingly has recorded no compensation cost for
grants of stock options. Had compensation cost for the Company's stock option
plan been determined based on the estimated fair value at the grant dates for
the awards made in 1999 consistent with the provisions of SFAS No. 123, the
Company's net income and basic and diluted earnings per share would have been
reduced by $117,512 and $.28, respectively. This proforma information reflects
an estimated fair value of $9.86 for each stock option issued in fiscal 1999.
This estimated fair value was computed using the Black-Scholes option pricing
model with the following assumptions: the expected life for all options is seven
years, the expected dividend is $3.25 per year, paid quarterly, the expected
volatility of all stock is zero and a risk-free interest rate of 4.8%.
11. BUSINESS SEGMENT INFORMATION
The Company has three reportable business segments. The Company Store Operations
segment is comprised of the operating activities of the 61 stores owned by the
Company. These stores sell doughnuts and complementary products through both
on-premises and off-premises sales. The majority of the ingredients and
materials used by Company Store Operations is purchased from the Support
Operations business segment.
The Franchise Operations segment is comprised of the operating activities of the
individual franchise business units which license qualified operators to conduct
business under the Krispy Kreme name and also monitor the operations of these
stores. Under the terms of the agreements, the licensed operators pay royalties
and fees to the Company in return for the use of the Krispy Kreme name.
The Support Operations segment supplies mix, equipment and other items to both
Company-owned and franchisee owned stores. All intercompany transactions between
the Support Operations business segment and Company-owned stores are eliminated
in consolidation.
Segment information for total assets and capital expenditures is not presented
as such information is not used in measuring segment performance or allocating
resources among segments.
F-22
<PAGE> 98
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment operating income is income before general corporate expenses and income
taxes.
<TABLE>
<CAPTION>
------------------------------------------
YEAR ENDED
------------------------------------------
FEBRUARY 2, FEBRUARY 1, JANUARY 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Company Store Operations............................. $113,939,454 $132,826,003 $145,251,369
Franchise Operations................................. 1,709,245 2,285,256 3,236,456
Support Operations................................... 77,141,243 90,820,523 107,430,686
Intercompany sales eliminations...................... (60,175,938) (67,188,760) (75,038,026)
------------ ------------ ------------
Total revenues............................. $132,614,004 $158,743,022 $180,880,485
============ ============ ============
OPERATING INCOME:
Company Store Operations............................. $ 10,325,537 $ 13,236,186 $ 15,417,728
Franchise Operations................................. (23,067) (183,028) 448,032
Support Operations................................... 2,343,110 2,843,570 4,255,073
Unallocated general and administrative expenses...... (7,509,039) (10,476,756) (12,020,799)
Provision for store closings and restructuring....... -- -- (11,802,159)
------------ ------------ ------------
Total operating income..................... $ 5,136,541 $ 5,419,972 $ (3,702,125)
============ ============ ============
DEPRECIATION AND AMORTIZATION EXPENSES:
Company Store Operations............................. $ 2,958,768 $ 2,338,514 $ 2,872,869
Franchise Operations................................. 157,202 100,000 57,144
Support Operations................................... 194,546 201,051 224,892
Corporate administration............................. (121,763) 946,585 1,122,806
------------ ------------ ------------
Total depreciation and amortization
expenses................................. $ 3,188,753 $ 3,586,150 $ 4,277,711
============ ============ ============
</TABLE>
12. RELATED PARTY TRANSACTIONS
Total revenues includes $3,458,192 in fiscal 1997, $4,304,382 in fiscal 1998 and
$7,614,014 in fiscal 1999 of sales to franchise doughnut stores owned by
directors and an employee of the Company. Trade accounts receivable from these
stores totaled $727,123 and $1,297,372 at February 1, 1998 and January 31, 1999,
respectively. Total revenues also includes royalties from these stores of
$248,958 in fiscal 1997, $338,448 in fiscal 1998 and $525,228 in fiscal 1999.
Additionally, from time to time the Company extends credit to customers in the
form of notes receivable. Interest is generally charged at the Prime Rate plus
1% and terms range from 6 months to 10 years. Notes receivable due from
franchise doughnut stores owned by directors and an employee totaled $108,838 at
February 1, 1998 and $56,339 at January 31, 1999.
Certain members of the board of directors own 22 stores and are committed to
open an additional 22 stores. Two officers of the Company are investors in
groups that own three stores and are committed to open four additional stores.
In December 1994, the Company implemented the Kingsmill Plan to provide
franchise opportunities to corporate management and directors. Under the terms
of the Kingsmill Plan, the Company makes franchise opportunities available to
members of corporate management and provides financial assistance in the form of
collateral repurchase agreements and guarantees of bank loans. At February 1,
1998 and January 31, 1999, the Company had guaranteed bank loans of $550,000 and
$425,146, respectively, under the Kingsmill Plan. The Kingsmill Plan was
suspended in fiscal 1999.
F-23
<PAGE> 99
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1998, the Company sold a market to a shareholder. The gain recognized
on this sale was approximately $267,000.
13. COMMITMENTS AND CONTINGENCIES
Under the terms of a stock purchase agreement dated July 1, 1984, the Company
has agreed to purchase the outstanding stock of any deceased shareholder at a
price equal to the book value of the stock as of the last day of the fiscal
quarter immediately preceding death. The stock purchase agreement will terminate
upon the closing of an initial public offering of the Company's stock.
In order to assist certain associate and franchise operators in obtaining
third-party financing, the Company has entered into collateral repurchase
agreements involving both Company stock and doughnut-making equipment. The
Company's contingent liability related to these agreements is approximately
$5,146,000 at February 1, 1998 and $4,054,000 at January 31, 1999. Additionally,
the Company has guaranteed certain loans to third-party financial institutions
on behalf of associate and franchise operators. The Company's contingent
liability related to these guarantees was approximately $2,683,000 at February
1, 1998 and $2,407,000 at January 31, 1999.
From time to time, the Company is engaged in various legal proceedings
incidental to its normal business activities. In the opinion of the Company,
none of these proceedings is material in relation to the Company's consolidated
financial position.
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.
14. RESTRUCTURING AND IMPAIRMENT OF ASSETS
On January 13, 1999, the Board of Directors of the Company approved a
restructuring plan for assets and operations determined either to be
inconsistent with the Company's strategy or whose carrying value may not be
fully recoverable. The restructuring and impairment charge of $11,802,159
primarily involves: 1) $8,080,117 for the closing of five double drive-through
Company stores and the write-down of five other inactive double drive-through
stores and sites, including provisions to write down associated land, building
and equipment costs to estimated net realizable value and to cover operating
lease commitments associated with these stores; 2) $416,680 for the closing of
two satellite operations; 3) $2,636,559 for the write-down of facilities which
will remain open but whose carrying value was determined not to be fully
recoverable; and 4) $668,803 for other costs. Of the total provision, $5,927,000
represents a charge for future cash outflows for lease payments on land and
buildings, while $5,875,000 represents a write-down or write-off of a recorded
asset. After an income tax benefit of $4,720,865, these actions reduced fiscal
1999 earnings by $7,081,294 or $17.17 per diluted share.
F-24
<PAGE> 100
KRISPY KREME DOUGHNUTS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder
of Krispy Kreme Doughnuts, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of Krispy Kreme Doughnuts, Inc. (the Company)
at December 3, 1999, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Greensboro, North Carolina
December 3, 1999
F-25
<PAGE> 101
KRISPY KREME DOUGHNUTS, INC.
BALANCE SHEET
<TABLE>
<S> <C>
ASSETS -- Cash.............................................. $1,000
======
SHAREHOLDER'S EQUITY........................................ $1,000
======
</TABLE>
NOTES TO BALANCE SHEET
1. ORGANIZATION AND PURPOSE
Krispy Kreme Doughnuts, Inc. (the Company) was incorporated in North Carolina on
December 2, 1999 as a wholly-owned subsidiary of Krispy Kreme Doughnut
Corporation. Subject to a plan of merger approved by the shareholders on
November 10, 1999, the shareholders of Krispy Kreme Doughnut Corporation will
become shareholders of Krispy Kreme Doughnuts, Inc. Each shareholder will
receive a number of shares of Krispy Kreme Doughnuts, Inc. based on his or her
percentage ownership of the shares of Krispy Kreme Doughnut Corporation and a
cash payment of $ per share. As a result of this merger, Krispy Kreme
Doughnut Corporation will become a wholly-owned subsidiary of Krispy Kreme
Doughnuts, Inc. This plan of merger is expected to become effective just prior
to the completion of a public offering of the Company's common stock.
2. SHAREHOLDER'S EQUITY
The Company is authorized to issue 10 million shares of no par value preferred
stock and 100 million shares of no par value common stock. Krispy Kreme Doughnut
Corporation has invested $1,000 in exchange for shares of the Company's common
stock.
F-26
<PAGE> 102
(KRISPY KREME LOGO)
<PAGE> 103
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by Krispy
Kreme Doughnuts, Inc. ("Krispy Kreme" or the "Company") in connection with this
offering.
<TABLE>
<CAPTION>
-------
<S> <C>
Securities and Exchange Commission Registration Fee......... $19,734
National Association of Securities Dealers Inc. Registration
Fee....................................................... 7,975
Nasdaq National Market Listing Fees......................... *
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Transfer Agent Fees and Expenses............................ *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Krispy Kreme's Articles of Incorporation and Bylaws provide that our directors
and officers shall not be personally liable to us or our shareholders for
monetary damages for breach of fiduciary duty as a director or officer to the
fullest extent permitted by North Carolina law. Under Section 55-8-51 of the
North Carolina Business Corporation Act, we may indemnify a present or former
director if he conducted himself in good faith and reasonably believed, in the
case of conduct in his official capacity, that his conduct was in Krispy Kreme's
best interests. In all other cases, the director must have believed that his
conduct was at least not opposed to our best interests. In the case of any
criminal proceeding, the director must have had no reasonable cause to believe
his conduct was unlawful. We may not indemnify a director in connection with a
proceeding by or in the right of Krispy Kreme in which the director was adjudged
liable to us or, in connection with any other proceeding, whether or not
involving action in his official capacity, in which he was adjudged liable on
the basis that personal benefit was improperly received by him. Under North
Carolina law, we may indemnify our officers to the same extent as our directors
and to such further extent as is consistent with public policy. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers or persons controlling Krispy Kreme pursuant to
the foregoing provisions, or otherwise, we have been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
Krispy Kreme maintains directors' and officers' liability insurance against any
actual or alleged error, misstatement, misleading statement, act, omission,
neglect or breach of duty by any director or officer, excluding certain matters
including fraudulent, dishonest or criminal acts or self-dealing.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of Krispy Kreme, its directors and executive officers and other
persons for certain liabilities, including liabilities arising under the
Securities Act of 1933.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with a corporate reorganization in the form of a merger conducted
in conjunction with this offering, Krispy Kreme Doughnuts, Inc. will
issue shares of its common stock, no par value, in
II-1
<PAGE> 104
exchange for each outstanding share of the common stock, par value $10.00 per
share, of Krispy Kreme Doughnut Corporation. Krispy Kreme Doughnuts, Inc.
expects to issue a total of shares of its common stock in this
exchange. The issuance will be a private placement exempt from registration
under Section 4(2) of the Securities Act. Pursuant to the reorganization, Krispy
Kreme Doughnut Corporation will become a wholly-owned subsidiary of Krispy Kreme
Doughnuts, Inc.
The shareholders of Krispy Kreme Doughnut Corporation approved this transaction
at a special shareholders' meeting on November 10, 1999. It is anticipated that
the reorganization will be effective soon after the effectiveness of this
registration statement. The Agreement and Plan of Merger by and between Krispy
Kreme Doughnut Corporation, Krispy Kreme Doughnuts, Inc. and KKDC Reorganization
Corporation dated December 2, 1999 is filed with this registration statement as
Exhibit 2.1.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement
2.1 -- Agreement and Plan of Merger among the Company, Krispy Kreme
Doughnut Corporation and KKDC Reorganization Corporation
dated December 2, 1999
3.1 -- Articles of Incorporation of the Company
3.2 -- Bylaws of the Company
4.1* -- Form of Certificate for Common Stock
5.1* -- Opinion of Kilpatrick Stockton, LLP, as to the legality of
the securities being registered
10.1 -- Amended and Restated Loan Agreement, dated December 21,
1998, between Krispy Kreme Doughnut Corporation and the
subsidiaries thereof and Branch Banking and Trust Company
10.2 -- Form of Associates License Agreement
10.3 -- Form of Development Agreement
10.4 -- Form of Franchise Agreement
10.5* -- Letter Agreement, dated April 12, 1994, between Krispy Kreme
Doughnut Corporation and Mr. Scott A. Livengood
10.6* -- Letter Agreement, dated February 15, 1994, between Krispy
Kreme Doughnut Corporation and Mr. Joseph A. McAleer, Jr.
10.7* -- Guaranty of Payment Agreement, dated September 18, 1998, by
Krispy Kreme Doughnut Corporation for the benefit of Beattie
F. Armstrong and Beattie F. Armstrong, Inc.
10.8* -- Collateral Repurchase Agreement, dated March 31, 1998 by and
among Krispy Kreme Doughnut Corporation, the Bank of Blue
Valley and Midwest Doughnuts, LLC
10.9* -- Guaranty by Krispy Kreme Doughnut Corporation, dated March
31, 1998, in favor of the Bank of Blue Valley with respect
to the obligations of Midwest Doughnuts, LLC
10.10 -- Collateral Repurchase Agreement, dated January 30, 1998, by
and among Krispy Kreme Doughnut Corporation, Mackk, L.L.C.
and Branch Banking and Trust Company
</TABLE>
II-2
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.11 -- Collateral Repurchase Agreement, dated January 30, 1998, by
and among Mr. Joseph A. McAleer, Jr., Mackk, L.L.C., Krispy
Kreme Doughnut Corporation and Branch Banking and Trust
Company
10.12* -- Collateral Repurchase Agreement, dated January 2, 1998, by
and among Mrs. Bonnie Silvey Vandegrift, Brevard Tennis and
Athletic Club Incorporated, Krispy Kreme Doughnut
Corporation and Branch Banking and Trust Company
10.13* -- Collateral Repurchase Agreement, dated October 15, 1997, by
and among Krispy Kreme Doughnut Corporation, Midwest
Doughnuts, LLC, and the Bank of Blue Valley
10.14* -- Guaranty by Krispy Kreme Doughnut Corporation, dated October
15, 1997, in favor of the Bank of Blue Valley with respect
to the obligation of Midwest Doughnuts, LLC
10.15* -- Collateral Repurchase Agreement, dated October 22, 1996, by
and among Robert L. McCoy, Gulf Florida Doughnut
Corporation, Krispy Kreme Doughnut Corporation and Branch
Banking and Trust Company
10.16 -- Collateral Repurchase Agreement, dated May 29, 1996, among
Krispy Kreme Doughnut Corporation, Midwest Doughnuts, LLC
and The First National Bank of Olathe
10.17* -- Guaranty by Krispy Kreme Doughnut Corporation, dated May 29,
1996, in favor of the First National Bank of Olathe with
respect to the obligations of Midwest Doughnuts, LLC
10.18* -- Collateral Repurchase Agreement, dated July 7, 1995 by and
among Robert J. Simmons, Simac, Inc., Krispy Kreme Doughnut
Corporation and First National Bank of Ohio
10.19* -- Collateral Repurchase Agreement, dated February 25, 1994, by
and among Mr. William J. Dorgan, Mrs. Patricia M. Dorgan,
Krispy Kreme Doughnut Corporation and Branch Banking and
Trust Company
10.20* -- Promissory Note, dated March 13, 1997, of Midwest Doughnuts,
LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties
payable to the order of Krispy Kreme Doughnut Corporation
10.21* -- Promissory Note, dated March 13, 1997, of Midwest Doughnuts,
LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties
payable to the order of Krispy Kreme Doughnut Corporation
10.22* -- Trademark License Agreement, dated May 27, 1996, between HDN
Development -- Corporation and Krispy Kreme Corporation
10.23* -- Stock Option Plan dated August 6, 1998
10.24* -- Long-Term Incentive Plan dated January 30, 1993
10.25* -- Form of Promissory Note relating to termination of Long-Term
Incentive Plan
10.26* -- Form of Restricted Stock Purchase Agreement
10.27* -- Form of Promissory Note relating to restricted stock
purchases
10.28* -- Employment Agreement dated between Krispy Kreme
Doughnut Corporation and John N. McAleer
10.29* -- Employment Agreement dated between Krispy Kreme
Doughnut Corporation and Scott A. Livengood
10.30* -- Employment Agreement dated between Krispy Kreme
Doughnut Corporation and J. Paul Breitbach
10.31* -- Kingsmill Plan
21.1 -- List of subsidiaries
</TABLE>
II-3
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
23.1* -- Consent of Kilpatrick Stockton LLP (will be included in the
opinion filed as Exhibit No. 5 to this Registration
Statement)
23.2 -- Consent of PricewaterhouseCoopers L.L.P.
24.1 -- Powers of Attorney of certain officers and directors of the
Company (included on the signature pages of this
Registration Statement)
</TABLE>
- ---------------
* To be filed by amendment.
b. Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS.
Krispy Kreme hereby undertakes to provide to the Underwriters at the closing
specified in the underwriting agreements certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Krispy Kreme
pursuant to the provisions of our Articles of Incorporation and Bylaws or
otherwise, Krispy Kreme has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person of Krispy Kreme in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Krispy Kreme will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned undertakes that:
1. For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Krispy Kreme pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Krispy Kreme has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Winston-Salem, North
Carolina, on December 16, 1999.
KRISPY KREME DOUGHNUTS, INC.
By: /s/ SCOTT A. LIVENGOOD
------------------------------------
Scott A. Livengood,
Chairman of the Board of
Directors,
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes, constitutes
and appoints Scott A. Livengood and Randy S. Casstevens and each of them acting
alone, his true and lawful attorney-in-fact, with full power of substitution,
for him in any and all capacities to execute and cause to be filed with the
Securities and Exchange Commission any and all amendments and post-effective
amendments to this registration statement, and any registration statement for
the same offering covered by this registration statement that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act, and all post-
effective amendments thereto together with exhibits to any such registration
statements or amendments and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or said attorney-in-fact's
substitute or substitutes may do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed on December 16, 1999, by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION
- --------- --------
<S> <C>
/s/ SCOTT A. LIVENGOOD Chairman of the Board of Directors,
- ------------------------------------------- President and Chief Executive Officer
Scott A. Livengood (Principal Executive Officer)
/s/ JOHN N. MCALEER Vice Chairman of the Board of Directors and
- ------------------------------------------- Executive Vice President, Concept
John N. McAleer Development
/s/ J. PAUL BREITBACH Executive Vice President, Finance,
- ------------------------------------------- Administration and Support Operations
J. Paul Breitbach (Principal Financial and Accounting
Officer)
/s/ FRANK E. GUTHRIE Director
- -------------------------------------------
Frank E. Guthrie
/s/ WILLIAM T. LYNCH Director
- -------------------------------------------
William T. Lynch
/s/ JOSEPH A. MCALEER, JR. Director
- -------------------------------------------
Joseph A. McAleer, Jr.
</TABLE>
II-5
<PAGE> 108
<TABLE>
<CAPTION>
SIGNATURE POSITION
- --------- --------
<S> <C>
/s/ ROBERT L. MCCOY Director
- -------------------------------------------
Robert L. McCoy
/s/ ROBERT J. SIMMONS Director
- -------------------------------------------
Robert J. Simmons
/s/ STEVEN D. SMITH Director
- -------------------------------------------
Steven D. Smith
/s/ ROBERT L. STRICKLAND Director
- -------------------------------------------
Robert L. Strickland
</TABLE>
II-6
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
December 2, 1999, is made and entered into by and between Krispy Kreme Doughnut
Corporation, a North Carolina corporation ("the Company"), Krispy Kreme
Doughnuts, Inc., a North Carolina corporation and a wholly-owned subsidiary of
the Company (the "Holding Company"), and KKDC Merger Corporation, a North
Carolina corporation and a wholly-owned subsidiary of the Holding Company
("Newco").
W I T N E S S E T H:
WHEREAS, the Company is the owner of all of the issued and outstanding
capital stock of the Holding Company, and the Holding Company is the owner of
all of the issued and outstanding capital stock of Newco;
WHEREAS, the Board of Directors of the Company, the Board of Directors
of the Holding Company, and the Board of Directors of Newco have each determined
that it is desirable to merge Newco with and into the Company upon the terms and
conditions hereinafter provided (such merger being hereinafter referred to as
the "Merger") and pursuant to Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
I. - MERGER
A. At the Effective Time (as hereafter defined), Newco shall be merged
with and into the Company, the separate existence of Newco shall cease, and the
Company shall continue as the surviving corporation. The Company as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
B. In connection with the Merger, the Holding Company shall change its
corporate name to "Krispy Kreme Doughnuts, Inc."
C. The parties hereto shall cause Articles of Merger to be delivered to
the Secretary of State of the State of North Carolina, in such form as required
by, and executed in accordance with, the relevant provisions of the North
Carolina Business Corporation Act, as amended (the "NCBCA"), for filing thereby.
The Merger will become effective at such time as the Articles of Merger are duly
filed or at such later time as is specified therein (the "Effective Time").
<PAGE> 2
D. At the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof:
(a) the issued and outstanding shares of capital stock of the
Company, other than shares held by the Holding Company, shall be
converted into the right to receive (i) an equal or greater number of
shares of common stock, no par value, of the Holding Company ("Holding
Company Common Stock"), based upon a share exchange ratio to be
determined by the Board of Directors of the Company prior to the
Effective Time (the "Exchange Ratio") and (ii) a cash payment in an
amount per share to be determined by the Board of Directors of the
Company prior to the Effective Time, which amount shall not be less
than $10.00 per share and shall be payable from the proceeds of an
underwritten public offering of Holding Company Common Stock (the "Cash
Consideration");
(b) the issued and outstanding shares of capital stock of the
Company held by the Holding Company shall not be converted, exchanged,
or altered in any manner and shall remain outstanding as fully paid and
nonassessable shares of capital stock of the Surviving Corporation;
(c) the issued and outstanding shares of capital stock of the
Holding Company held by the Company shall be canceled and no
consideration shall be issued in exchange therefor; and
(d) the issued and outstanding shares of capital stock of
Newco shall be canceled and no consideration shall be issued in
exchange therefor.
The parties acknowledge and agree that the Exchange Ratio reflects the payment
of the Cash Consideration to the shareholders of the Company and that, absent
the payment of the Cash Consideration, each such shareholder would have been
entitled to receive a proportionately greater number of shares of Holding
Company Common Stock. The Cash Consideration shall be deemed to be paid in
consideration of the effective redemption of the additional shares of Holding
Company Common Stock that each shareholder would have received in the event that
the Cash Consideration had not been paid.
E. The Articles of Incorporation and Bylaws, respectively, of the
Company, as in effect immediately prior to the Effective Time, shall be the
Articles of Incorporation and Bylaws of the Surviving Corporation.
F. The officers and directors of the Company immediately prior to the
Effective Time shall be the officers and directors of the Surviving Corporation,
in each case until their respective successors are duly elected and qualified.
G. Each holder of a certificate representing shares to be converted or
exchanged in the merger will surrender such certificate and after the Effective
Time will be entitled to receive in exchange therefor a certificate or
certificates representing the number of shares to which he is
2
<PAGE> 3
entitled under this Plan. Until so surrendered, each outstanding certificate
that prior to the Effective Time represented shares of the Company will be
deemed for all purposes to evidence ownership of the consideration to be issued
for such shares under this Plan.
H. The Merger shall otherwise have the effects set forth in the NCBCA.
II. - CONDITIONS TO CONSUMMATION OF THE MERGER
A. Consummation of the Merger is conditioned on the satisfaction or, to
the extent legally permissible, waiver by the Company of the following
conditions: (a) this Agreement and the Merger shall have been approved by the
shareholders of the Company in accordance with the NCBA; (b) a registration
statement relating to an underwritten public offering of Holding Company Common
Stock shall have been filed with the Securities and Exchange Commission (the
"SEC") and declared effective under the Securities Act of 1933, as amended, and
no stop order suspending the effectiveness of such registration statement shall
be in effect and no proceedings for such purpose shall be pending or threatened
by the SEC; (c) the shares of Holding Company Common Stock to be issued in
connection with such public offering shall have been approved for listing on a
national securities exchange, subject to official notice of issuance and (d) the
Holding Company and underwriters selected by the Board of Directors of the
Company shall have entered into an underwriting agreement, upon terms and
conditions acceptable to the Board of Directors of the Company, relating to the
proposed public offering of Holding Company Common Stock and such agreement
shall remain in full force and effect.
B. Payment of the Cash Consideration shall be further conditioned on
the completion of an underwritten public offering of Holding Company Common
Stock within thirty days of the Effective Date.
III. - AMENDMENT AND TERMINATION OF AGREEMENT
To the extent permitted by North Carolina law, this Agreement may be
amended, modified and supplemented at any time prior to the effectiveness of the
Merger, whether before or after shareholder approval, by written consent of the
Board of Directors of the respective parties and shall be amended by consent of
the Board of Directors of the Company prior to the effectiveness of the Merger
in order to reflect the determination of the Exchange Ratio. This Agreement may
be terminated and the Merger abandoned at any time prior to the Effective Time
by the consent of the Board of Directors of the Company.
IV. - MISCELLANEOUS
If any term or provision of this Agreement is held by a court or other
authority of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired, or invalidated. This Agreement shall be
governed in all respects, including validity, interpretation, and effect, by the
laws of the State of North Carolina, without giving effect to the conflict of
laws rules thereof.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers, all as of the date and year first above written.
KRISPY KREME DOUGHNUT CORPORATION
By: /s/ SCOTT A. LIVENGOOD
-------------------------------------
Scott A. Livengood, President
KRISPY KREME DOUGHNUTS, INC.
By: /s/ SCOTT A. LIVENGOOD
-------------------------------------
Scott A. Livengood, President
KKDC MERGER CORPORATION
By: /s/ SCOTT A. LIVENGOOD
-------------------------------------
Scott A. Livengood, President
4
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
KRISPY KREME DOUGHNUTS, INC.
The undersigned hereby submits these Articles of Incorporation for the purpose
of forming a business corporation under and by virtue of the laws of the State
of North Carolina:
ARTICLE I.
The name of the corporation is KRISPY KREME DOUGHNUTS, INC.
ARTICLE II.
The period of duration of the corporation is perpetual.
ARTICLE III.
The purposes for which the corporation is organized are to engage in any lawful
act or activity for which corporations may be organized under Chapter 55 of the
General Statutes of North Carolina, and nothing contained herein shall in any
way limit or restrict or take away from this corporation the general powers
granted to it under and by virtue of the provisions of Chapter 55 of the General
Statutes of North Carolina and the several amendments thereto.
ARTICLE IV.
The corporation shall have the authority to issue not more than (a) 100,000,000
shares of common stock, no par value ("Common Stock"), and (b) 10,000,000 shares
of preferred stock, no par value ("Preferred Stock").
Holders of the Common Stock are entitled to the entire voting power, all
distributions declared and all assets of the corporation upon dissolution,
subject to the rights and preferences, if any, of the holders of Preferred Stock
to such voting powers, dividends and assets upon dissolution pursuant to
applicable law and the resolution or resolutions of the Board of Directors
providing for the issue of one or more series of Preferred Stock.
The Board of Directors is hereby expressly authorized to issue, at any time and
from time to time, shares of Preferred Stock in one or more series. The number
of shares within any such series shall be designated by the Board of Directors
in one or more resolutions and the shares of each series so designated shall
have such preferences with respect to the Common Stock and other series of
Preferred Stock, and such other rights, restrictions or limitations with respect
to voting, dividends, conversion, exchange, redemption and any other matters, as
may
<PAGE> 2
be set forth in one or more resolutions adopted by the Board of Directors. If
and to the extent required by law, the Board of Directors must file Articles of
Amendment setting forth any designation, preferences, rights, restrictions or
limitations of other series of Preferred Stock with the North Carolina Secretary
of State prior to issuance of any shares of such series.
The authority of the Board of Directors with respect to the establishment of
each series of Preferred Stock shall include, without limiting the generality of
the foregoing, determination of the following matters which may vary between
series:
(a) The distinctive designation of that series and the number of shares
constituting that series, which number may be increased (except where
otherwise provided by the Board of Directors in creating such series)
or decreased (but not below the number of shares of such series then
outstanding) from time to time;
(b) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, to payments of dividends on shares
of that series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting
rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provisions for
adjustment of the conversion rate in such events as the Board of
Directors shall determine;
(e) Whether the shares of that series shall be redeemable, and, if so,
the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under
different conditions;
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding-up of the
corporation, and the relative rights of priority, if any, of payment of
shares of that series; and
(h) Any other relative preferences, rights, restrictions or limitations
of that series, including but not limited to any obligations of the
corporation to repurchase shares of the series upon specified events.
2
<PAGE> 3
ARTICLE V.
The initial registered office of the corporation shall be located at 370
Knollwood Street, Winston-Salem, Forsyth County, North Carolina 27103, and the
initial registered agent at such address shall be Stephen A. Johnson.
ARTICLE VI.
The number of directors of this corporation constituting the Board of Directors
may be fixed by the bylaws.
ARTICLE VII.
In discharging the duties of their respective positions and in determining what
is believed to be the best interests of the corporation, the Board of Directors,
committees of the Board of Directors and individual directors, in addition to
considering the effects of any action on the corporation or its shareholders,
may consider the interests of the employees, customers, suppliers and creditors
of the corporation and its subsidiaries, the communities in which offices of
other establishments of the corporation and its subsidiaries are located, and
all other factors the directors consider pertinent.
ARTICLE VIII.
No director of the corporation shall have personal liability arising out of an
action whether by or in the right of the corporation or otherwise for monetary
damages for breach of his or her duty as a director; provided, however, that the
foregoing shall not limit or eliminate the personal liability of a director with
respect to those acts, omissions, or transactions for which the personal
liability of a director may not be limited or eliminated as set forth in North
Carolina General Statute Section 55-2-02 as it is currently enacted or as it may
be amended, modified or rewritten from time to time in the future or as
otherwise set forth in the North Carolina General Statutes as they are currently
or as they may be enacted, modified or rewritten from time to time in the
future.
Furthermore, notwithstanding the foregoing provision, in the event that Section
55-2-02 or any other provision of the North Carolina General Statutes is
amended, modified or rewritten to permit further limitation or elimination of
the personal liability of the director, the personal liability of the
corporation's directors shall be limited or eliminated to the fullest extent
permitted by the applicable law.
This Article shall not affect a charter or bylaw provision or contract or
resolution of the corporation indemnifying or agreeing to indemnify a director
against personal liability. Any repeal or modification of this Article shall not
adversely affect any limitation hereunder on
3
<PAGE> 4
the personal liability of the director with respect to acts or omissions
occurring prior to such repeal or modification.
ARTICLE IX.
The provisions of Article 9 and Article 9A of the North Carolina Business
Corporation Act entitled "The North Carolina Shareholder Protection Act" and the
"The North Carolina Control Share Acquisition Act", respectively, shall not be
applicable to the corporation.
ARTICLE X.
The name and address of the incorporator are as follows: Stephen A. Johnson, 370
Knollwood Street, Winston-Salem, North Carolina 27103.
ARTICLE XI.
These Articles will be effective at 12:02 a.m. upon the date when filed.
This the 30th day of November, 1999.
/s/ Stephen A. Johnson
------------------------------------
Stephen A. Johnson, Incorporator
4
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
KRISPY KREME DOUGHNUTS, INC.
* * * * * * * * * * * * * * * * * * * * * * *
ARTICLE I. - OFFICES
Section 1. Registered Office: The registered office of the corporation
shall be at 370 Knollwood Street, Winston-Salem, North
Carolina 27103.
Section 2. Principal Office: The principal office of the corporation
shall be located at the same address as the registered office
or such other place as may be designated by the Board of
Directors.
Section 3. Other Offices: The corporation may have offices at such
other places, either within or without the State of North
Carolina, as the Board of Directors may from time to time
determine, or as the affairs of the corporation may require.
ARTICLE II. - MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings: All meetings of shareholders shall be
held at the registered office of the corporation, or at such
other place, either within or without the State of North
Carolina, as shall be designated in the notice of the meeting
or agreed on by a majority of the shareholders entitled to
vote thereat.
Section 2. Annual Meetings: (a) The annual meeting of shareholders
shall be held at an hour to be fixed by the President on the
third Tuesday in the fourth month after the end of the fiscal
year of the corporation, if not a legal holiday, but if a
legal holiday, then on the next secular day following which is
not a legal holiday, or at such other time and date as may be
established by the Board of Directors from time to time, for
the purpose of electing directors of the corporation and for
the transaction of such other business as may be properly
brought before the meeting.
(b) No business shall be transacted at an annual meeting of
shareholders, except such business as shall be (i) specified
in the notice of meeting given as provided in Article II,
Section 5, (ii) otherwise brought before the meeting by or at
the direction of the Board of Directors or (iii) otherwise
brought before the meeting by a shareholder of record entitled
to vote at the meeting, in compliance with the procedures set
forth in this Article II, Section 2(b).
<PAGE> 2
For business to be brought before an annual meeting by a
shareholder pursuant to (iii) above, the shareholder must have
given timely notice in writing to the Secretary of the
Company. To be timely, a shareholder's notice must be
delivered to, or mailed to and received at, the principal
office of the corporation not less than forty days nor more
than ninety days prior to the meeting. If less than fifty
days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the
shareholder will be timely if received by the Secretary of the
Company not later than the close of business on the tenth day
following the day on which such notice of the date of the
meeting or such public disclosure was given or made. Notice of
the date of the meeting shall be deemed to have been given by
the corporation more than fifty days in advance of the annual
meeting if the annual meeting is called on the date prescribed
by Article II, Section 1 (i.e. the third Tuesday in the fourth
month after the end of the fiscal year of the corporation, or
if such date is a legal holiday, then on the next secular day
following which is not a legal holiday), without regard to
whether notice or public disclosure thereof is made. Notice of
action to be brought before the annual meeting pursuant to
(iii) above shall set forth as to each such matter the
shareholder proposes to bring before the annual meeting (A) a
brief description of the business desired to be brought before
the annual meeting and the reasons for bringing such business
before the annual meeting, (B) the name and address, as they
appear on the corporation's books, of each shareholder
proposing such business, (C) the classes and number of shares
of the corporation that are owned of record and beneficially
by each such shareholder, and (D) any material interest of
such shareholders in such business other than any interest as
a shareholder of the corporation. Notwithstanding anything in
these Bylaws to the contrary, no business shall be conducted
at an annual meeting except in accordance with the provisions
set forth in this Article II, Section 2(b). If the chairman of
the annual meeting determines that any business was not
properly brought before the meeting in accordance with the
provisions of these Bylaws, he shall so declare to the meeting
and, to the extent permitted by law, any such business not
properly brought before the meeting shall not be transacted.
Section 3. Substitute Annual Meeting: If the annual meeting shall not
be held on the day designated by these bylaws, a substitute
meeting may be called in accordance with the provisions of
Section 4 of this Article. A meeting so called shall be
designated and treated for all purposes as the annual meeting.
Section 4. Special Meetings: Special meetings of the shareholders may
be called at any time by the President, Secretary or Board of
Directors of the corporation.
Section 5. Notice of Meetings: Written or printed notice stating the
time and place of the meeting shall be delivered not less than
ten nor more than fifty days before the date thereof, either
personally or by mail, by or at the direction of the Chairman,
the President, the Secretary, or other person calling the
meeting, to each shareholder of record entitled to vote at
such meeting.
2
<PAGE> 3
In the case of an annual or substitute annual meeting, the
notice of meeting need not specifically state the business to
be transacted thereat unless it is a matter, other than
election of Directors, on which the vote of shareholders is
expressly required by the provisions of the North Carolina
Business Corporation Act. In the case of a special meeting,
the notice of meeting shall specifically state the purpose or
purposes for which the meeting is called.
When a meeting is adjourned for one hundred twenty days or
more, notice of the adjourned meeting shall be given as in the
case of an original meeting. When a meeting is adjourned for
less than one hundred twenty days in any one adjournment, it
is not necessary to give any notice of the adjourned meeting
other than by announcement at the meeting at which the
adjournment is taken.
Section 6. Voting Lists: After fixing the record date for a meeting,
the Secretary of the corporation shall prepare an alphabetical
list of the shareholders entitled to notice of such meeting or
any adjournment thereof, arranged by voting group, class and
series, with the address of and number of shares held by each.
Such list shall be kept on file at the principal office of the
corporation, or at a place identified in the meeting notice in
the city where the meeting will be held, beginning two
business days after notice of such meeting is given and
continuing through the meeting, and on written demand shall be
subject to inspection or copying by any shareholder, his agent
or attorney at any time during regular business hours. This
list shall also be produced and kept open at the time and
place of the meeting and shall be subject to inspection by any
shareholder during the whole time of the meeting.
Section 7. Quorum: The holders of a majority of the shares entitled to
vote, represented in person or by proxy, shall constitute a
quorum at meetings of shareholders. If there is no quorum at
the opening of a meeting of shareholders, such meeting may be
adjourned from time to time by the vote of a majority of the
shares voting on the motion to adjourn; and, at any adjourned
meeting at which a quorum is present, any business may be
transacted which might have been transacted at the original
meeting.
The shareholders at a meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a
quorum.
Section 8. Voting of Shares: Each outstanding share having voting
rights shall be entitled to one vote on each matter submitted
to a vote at a meeting of shareholders.
Except in the election of Directors the vote of a majority of
the shares voted on any matter at a meeting of shareholders at
which a quorum is present shall be the act of the shareholders
on that matter, unless the vote of a greater number is
3
<PAGE> 4
required by law. In the election of Directors those receiving
the greatest number of votes shall be deemed elected even
though not receiving a majority.
Voting on all matters shall be by voice vote or by a show of
hands unless the holders of one tenth of the shares
represented at the meeting shall, prior to the voting on any
matter, demand a ballot vote on that par ticular matter. The
election of directors is governed by Article III, Section 3.
Section 9. Informal Action by Shareholders: Any action which may be
taken at a meeting of the shareholders may be taken without a
meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the persons who would be
entitled to vote upon such action at a meeting, and filed with
the Secretary of the corporation to be kept in the Corporate
Minute Book.
Section 10. Proxies: At all meetings of shareholders, shares may be
voted either in person or by one or more agents authorized by
a written proxy executed by the shareholder or his duly
authorized attorney-in-fact. A telegram, cablegram, wireless
message or photogram appearing to have been transmitted by a
shareholder, or a photographic, photostatic or equivalent
reproduction of a writing appointing one or more agents shall
be deemed a written proxy within the meaning of this section.
ARTICLE III. - DIRECTORS
Section 1. General Powers: The business and affairs of the corporation
shall be managed by the Board of Directors.
Section 2. Number, Term and Qualifications: (a) The number of
Directors constituting the whole Board shall be not more than
fifteen nor less than nine. The authorized number of
Directors, within the limits above specified, shall be
determined by the affirmative vote of a majority of the whole
Board given at a regular or special meeting of the Board of
Directors; provided that, if the number so determined is to be
increased, or decreased, notice of the proposed increase or
decrease shall be included in the notice of such meeting, or
all of the Directors at the time in office be present at such
meeting, or those not present at any time waive or have waived
notice there of in writing; and provided, further, that the
number of Directors which shall con stitute the whole Board
shall not be less than nine nor shall it be reduced to a
number less than the number of Directors then in office unless
such reduction shall become effective only at and after the
next ensuing meeting of shareholders for the election of
Directors.
(b) The directors of the corporation shall be divided into the
following three classes: Class I, Class II and Class III. The
number of directors in each class shall be as nearly equal in
number as possible. Each initial director in Class I shall be
elected to an initial term of one (1) year, each initial
director in Class II shall be elected to an initial term of
two (2) years and each initial director in Class III shall
4
<PAGE> 5
be elected to an initial term of three (3) years. Each
director shall hold office until the election and
qualification of his successor or his earlier death,
resignation, retirement or removal from office. Upon the
expiration of the initial term for each class of directors,
the directors of each class shall be elected for a term of
three (3) years. Directors need not be residents of the State
of North Carolina or shareholders of the corporation.
Section 3. Nomination and Election of Directors: Except as provided in
Section 5 and Section 2 of this Article, the Directors shall
be elected at the annual meeting of shareholders. If any
shareholder so demands, elec tion of Directors shall be by
ballot.
Only persons who are nominated in accordance with the
provisions set forth in these bylaws shall be eligible to be
elected as directors at an annual or special meeting of
shareholders. Nomination of election to the Board of Directors
shall be made by or at the direction of the Board of Directors
or a committee appointed thereby.
Nomination for election of any person to the Board of
Directors may also be made by a shareholder entitled to vote
on such election if written notice of the nomination of such
person shall have been delivered to the Secretary of the
corporation at the principal office of the corporation not
less than forty days nor more than ninety days prior to the
meeting. If less than fifty days' notice or prior public
disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder will be timely if
received by the Secretary of the Company not later than the
close of business on the tenth day following the day on which
such notice of the date of the meeting or such public
disclosure was given or made. Notice of the date of the
meeting shall be deemed to have give by the corporation more
than fifty days in advance of the annual meeting if the annual
meeting is called on the date prescribed by Article II,
Section 1 (i.e. the third Tuesday in the fourth month after
the end of the fiscal year of the corporation, or if such date
is a legal holiday, then on the next secular day following
which is not a legal holiday), without regard to whether
notice or public disclosure thereof is made. Each such notice
shall set forth: (i) the name and address of the shareholder
who intends to make the nomination; (ii) a representation that
such shareholder is a holder of record of shares of the
corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (iii) as to each
person to be nominated (A) such person's name and address,
employment history for the past five years, affiliations, if
any, with the corporation and other corporations, the class
and number of shares of the corporation that are owned of
record or beneficially by such person and information
concerning any transaction in such shares within the prior
sixty days, whether such person has been convicted in a
criminal proceeding (excluding traffic violations or similar
misdemeanors) within the past five years and the details
thereof, whether such person has been a party to any
proceeding or subject to any judgment, decree or final order
with respect to violations of federal or state securities laws
within the past five years and the
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details thereof, and the details of any contract, arrangement,
understanding or relationships with any person with respect to
any securities of the corporation; (B) such person's written
consent to being named as a nominee and to serving as director
if elected and (C) a description of all arrangements or
understandings between the shareholder and each such nominee
and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are
to be made by the shareholder. The chairman of the meeting
shall refuse to acknowledge the nomination of any person not
made in compliance with the foregoing procedure.
Section 4. Removal: Directors may be removed from office only with
cause by a vote of shareholders holding 66 2/3% of the
outstanding shares entitled to vote at an election of
Directors. If any Directors are so removed, new Directors may
be elected at the same meeting.
Section 5. Vacancies: A vacancy occurring in the Board of Directors
may be filled by a majority of the remaining Directors though
less than a quorum, or by the sole remaining Director; but a
vacancy created by an increase in the authorized number of
Directors shall be filled by election at an annual meeting or
at a special meeting of shareholders called for that purpose.
The shareholders may elect a Director at any time to fill any
vacancy not filled by the Directors.
Section 6. Compensation: The Board of Directors may compensate
Directors for their services as such and may provide for the
payment of all expenses incurred by the Directors in attending
regular and special meetings of the Board.
ARTICLE IV. - MEETINGS OF DIRECTORS
Section 1. Regular Meetings A regular meeting of the Board of
Directors shall be held immediately after, and at the same
place as, the annual meeting of the shareholders. In addition,
to the annual meeting of the Board of Directors, there shall
be three regular meetings of the Board of Directors to be held
at the offices of the corporation or at such other place as
may be designated by the Chairman of the Board or the
President in August and November (on the third Tuesday thereof
after the closing of the corporation's previous fiscal month)
and on the last Tuesday in January prior to close of each
fiscal year. The Chairman of the Board may designate the time
of the meetings.
Section 2. Special Meetings: Special meetings of the Board of
Directors may be called by or at the request of the Chairman,
President or any two Directors. Such meetings may be held
within or without the State of North Carolina.
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Section 3. Notice of Meetings: Regular meetings of the Board of
Directors may be held without notice.
The person or persons calling a special meeting of the Board
of Directors shall, at least two days before the meeting, give
notice thereof by any usual means of com munication. Such
notice need not specify the purpose for which the meeting is
called.
Attendance by a Director at a meeting shall constitute a
waiver of notice of such meeting, except where a Director
attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not
lawfully called.
Section 4. Quorum: A majority of the Directors fixed by these bylaws
shall constitute a quorum for the transaction of business at
any meeting of the Board of Directors.
Section 5. Manner of Acting: Except as otherwise provided in this
section, the act of the majority of the Directors present at a
meeting at which a quorum is present shall be the act of the
Board of Directors.
Section 6. Informal Action by Directors: Action taken by a majority of
the Directors without a meeting is nevertheless Board action
if written consent to the action in question is signed by all
the Directors and filed with the minutes of the proceedings of
the Board, whether done before or after the action so taken.
Section 7. Meeting by Telephone: Any one or more members of any such
committee may participate in a meeting of the committee by
means of a conference telephone or similar communications
device which allows all persons participating in the meeting
to hear each other and such participation in a meeting shall
be deemed presence in person at such meeting.
ARTICLE V. - EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment: The Board of Directors, by resolution adopted
by a majority of the number of Directors then in office, may
designate from among its members an Executive Committee or one
or more other committees, each consisting of two or more
Directors. The designation of any such committee and the
delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any
responsibility or liability imposed upon it or him by law.
Section 2. Authority: Any such committee shall have and exercise all
authority of the Board of Directors in the management of the
corporation except to the extent, if any, that such authority
shall be limited by the resolution appointing such committee
and except also to the extent limited by law.
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Section 3. Tenure and Qualifications: Each member of any such
committee shall hold office until the next regular annual
meeting of the Board of Directors following his designation
and until his successor is designated as a member of any such
committee and is elected and qualified.
Section 4. Meetings: Regular meetings of any such committee may be
held without notice at such time and place as such committee
may fix from time to time by resolution. Special meetings of
any such committee may be called by any member thereof upon
not less than one day's notice stating the place, date and
hour of such meeting, which notice may be written or oral,
and if mailed, shall be deemed to be delivered when deposited
in the United States mail addressed to any member of the
Executive Committee at his business address. Any member of the
Executive Committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof to
attend in person. The notice of a meeting of the Executive
Committee need not state the business proposed to be
transacted at the meeting.
Section 5. Quorum: A majority of the members of any such committee
shall constitute a quorum for the transaction of business at
any meeting thereof, and actions of such committee must be
authorized by the affirmative vote of a majority of the
members present at the meeting at which a quorum is present.
Section 6. Informal Action: Action taken by a majority of the members
of any such committee without meeting is nevertheless action
of such committee if written consent to the action in question
is signed by all of the members of such committee and filed
with the minutes of the proceedings of the committee, whether
done before or after the actions so taken.
Section 7. Removal: Any member of any such committee may be removed at
any time with or without cause by resolution adopted by a
majority of the Board of Directors.
Section 8. Vacancies: Any vacancy in any such committee may be filled
by resolution adopted by a majority of the Board of Directors.
Section 9. Procedure: Any such committee shall elect a presiding
officer from among its members and may fix its own rules of
procedure which shall not be inconsistent with these bylaws.
It shall keep regular minutes of its proceedings and report
the same to the Board of Directors for its information at the
meeting thereof held next after the proceedings shall have
been taken.
Section 10. Meeting by Telephone: Any one or more members of any such
committee may participate in a meeting of the committee by
means of a conference telephone or similar communications
device which allows all persons participating in the meeting
to hear each other and such participation in a meeting shall
be deemed presence in person at such meeting.
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ARTICLE VI. - OFFICERS
Section 1. Number: The officers of the corporation shall consist of a
President, a Secretary, a Treasurer, and such Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents, Assistant
Secretaries, Assistant Treasurers and other officers as the
Board of Directors may from time to time elect. Any two or
more offices may be held by the same person, except the
offices of President and Secretary may not be held by the same
person.
Section 2. Election and Term: The officers of the corporation shall be
selected by the Board of Directors. Such elections may be held
at any regular or special meeting of the Board. Each officer
shall hold office for a period of one year or until his death,
resignation, retirement, removal, disqualification or his
successor is elected and qualifies.
Section 3. Removal: Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board with or without
cause; but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
Section 4. President: The President, subject to the control of the
Board of Directors, shall supervise and control the management
of the corporation in accordance with these bylaws. He shall
preside at all meetings of shareholders and directors. He
shall sign, with any other proper officer, certificates for
shares of the corporation and any deeds, mortgages, bonds,
contracts, or other instruments which may be lawfully executed
on behalf of the corporation, except where required or
permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be
delegated by the Board of Directors to some other officer or
agent; and, in general, he shall perform such other duties as
may be prescribed by the Board of Directors from time to time.
Section 5. Vice Presidents: The Executive Vice Presidents, Senior Vice
Presidents, and Vice Presidents in the order of their
election, unless otherwise determined by the Board of
Directors, shall, in the absence or disability of the
President, perform the duties and exercise the powers of that
office. In addition, they shall perform such other duties and
have such other powers as the Board of Directors shall
prescribe.
Section 6. Secretary: The Secretary shall keep a correct record of all
the proceedings of the meetings of the shareholders and
Directors. He shall attend to the giving of notices, have
custody of the corporate seal, and affix it to all instruments
required to be executed under seal as authorized by the Board
of Directors. He shall perform such other duties as are
incident to the office of Secretary, and shall have such other
powers and duties as may be conferred upon him by the Board of
Directors.
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Section 7. Treasurer: The Treasurer shall have charge of all the
moneys and securities belonging to the corporation. He shall
deposit said property with such banks as the Board of
Directors shall designate and in the name of the corporation.
He shall keep a record of all receipts and disbursements, and
shall have charge of all records of the corporation relating
to its finances. He shall perform such other duties as are
incident to the office of Treasurer, and shall have such other
powers and duties as may be conferred upon him by the Board of
Directors.
Section 8. Assistant Secretaries and Treasurers: The Assistant
Secretaries and Assistant Treasurers shall, in the absence or
disability of the Secretary or the Treasurer, respectively,
perform the duties and exercise the powers of those offices,
and they shall, in general, perform such other duties as shall
be assigned to them by the Secretary or the Treasurer,
respectively, or by the President or the Board of Directors.
Section 9. Bonds: The Board of Directors may by resolution require any
or all officers, agents and employees of the corporation to
give bond to the corporation, with sufficient sureties,
conditioned on the faithful performance of the duties of their
respective offices or positions, and to comply with such other
conditions as may from time to time be required by the Board
of Directors.
Section 10. Vacancies: A vacancy in any office because of death,
resignation, removal, disqualification, or other reason, may
be filled by the Board of Directors for the unexpired portion
of the term.
ARTICLE VII. - INDEMNIFICATION
Section 1. Expenses and Liabilities: (a) Any person who at any time
serves or has served (1) as a Director, officer, employee or
agent of the corporation, (2) at the request of the
corporation as a Director, officer, partner, trustee, employee
or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise, or (3)
at the request of the corporation as a trustee or
administrator under an employee benefit plan, shall have a
right to be indemnified by the corporation to the fullest
extent from time to time permitted by law against Liability
and Expenses in any Proceeding (including without limitation a
Proceeding brought by or on behalf of the corporation itself)
arising out of his or her status as such or activities in any
of the foregoing capacities or results from him being called
as a witness at a time when he has not been made a named
defendant or respondent to any Proceeding.
(b) The Board of Directors of the corporation shall take all
such action as may be necessary and appropriate to authorize
the corporation to pay the indemnification required by this
provision, including without limitation, to the extent needed,
making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of
indemnity due him.
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(c) Any person who at any time serves or has served in any of
the aforesaid capacities for or on behalf of the corporation
shall be deemed to be doing or to have done so in reliance
upon, and as consideration for, the rights provided for
herein. Any repeal or modification of these indemnification
provisions shall not affect any rights or obligations existing
at the time of such repeal or modification. The rights
provided for herein shall inure to the benefit of the legal
representatives of any such person and shall not be exclusive
of any other rights to which such person may be entitled apart
from this provision.
(d) The rights granted herein shall not be limited by the
provisions contained in Sections 55-8-51 through 55-8-56 of
the North Carolina General Statutes or any successor to such
statute.
Section 2. Advance Payment of Expenses: The Corporation shall (upon
receipt of an undertaking by or on behalf of the Director,
officer, employee or agent involved to repay the Expenses
described herein unless it shall ultimately be determined that
he or she is entitled to be indemnified by the corporation
against such Expenses) pay Expenses incurred by such Director,
officer, employee or agent in defending a Proceeding or
appearing as a witness at a time when he or she has not been
named as a defendant or a respondent with respect thereto in
advance of the final disposition of such Proceeding.
Section 3. Insurance: The corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a
Director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a
Director, officer, employee or agent of another domestic or
foreign corporation, partnership, joint venture, trust or
other enterprise or as a trustee or administrator under an
employee benefit plan against any liability asserted against
him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her
against such liability.
Section 4. Definitions: The following terms as used in this Article
shall have the following meanings. "Proceeding" means any
threatened, pending or completed action, suit, or proceeding
and any appeal therein (and any inquiry or investigation that
could lead to such action, suit, or proceeding), whether
civil, criminal, administrative, investigative or arbitrative
and whether formal or informal. "Expenses" means expenses of
every kind, including counsel fees. "Liability" means the
obligation to pay a judgment, settlement, penalty, fine
(including an excise tax assessed with respect to an employee
benefit plan), reasonable expenses incurred with respect to a
Proceeding, and all reasonable expenses incurred in enforcing
the indemnification rights provided herein. "Director"
includes the estate or personal representative of a director.
"Corporation" shall include any domestic or foreign
predecessor of this corporation in a merger or other
transaction in which the predecessor's existence ceased upon
consummation of the transaction.
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ARTICLE VIII. - CONTRACTS, CHECKS AND DEPOSITS
Section 1. Contracts: The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract or
execute and deliver any instrument on behalf of the
corporation and such authority may be general or confined to
specific instances.
Section 2. Checks and Drafts: All checks, drafts or other orders for
the payment of money issued in the name of the corporation
shall be signed by such officer or officers, agent or agents,
of the corporation and in such manner as shall from time to
time be determined by resolution of the Board of Directors.
Section 3. Deposits: All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of
the corporation in such depositories as the Board of Directors
shall direct.
ARTICLE IX. - CERTIFICATES FOR SHARES AND TRANSFER THEREOF
Section 1. Certificates for Shares: Certificates representing shares
of the corporation shall be issued, in such form as the Board
of Directors shall determine, to every shareholder for the
fully paid shares owned by him. These certificates shall be
signed by the President or any Vice President, and the
Secretary, Assistant Secretary, Treasurer or Assistant
Treasurer. They shall be consecutively numbered or other wise
identified; and the name and address of the persons to whom
they are issued, with the number of shares and date of issue,
shall be entered on the stock transfer books of the
corporation.
Section 2. Transfer of Shares: Transfer of shares shall be made on the
stock transfer books of the corporation only upon surrender of
the certificates for the shares sought to be transferred by
the record holder thereof or by his duly authorized agent,
transferee or legal representative. All certificates
surrendered for transfer shall be can celed before new
certificates for the transferred shares shall be issued.
Section 3. Closing Transfer Books and Fixing Record Date: For the
purpose of determining shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment
thereof, or entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other
proper purpose, the Board of Directors may provide that the
stock transfer books shall be closed for a stated period but
not to exceed, in any case, fifty days. If the stock transfer
books shall be closed for the purpose of determining
shareholders entitled to notice or to vote at a meeting of
shareholders, such books shall be closed for at least ten days
immediately preceding such meeting.
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In lieu of closing the stock transfer books, the Board of
Directors may fix in advance a date as the record date for any
such determination of shareholders, such record date in any
case to be not more than fifty days and, in case of a meeting
of shareholders, not less than ten days immediately preceding
the date on which the particular action, requiring such
determination of shareholders, is to be taken.
If the stock transfer books are not closed and no record date
is fixed for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders, or
shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on
which the resolution of the Board of Directors declaring such
dividend is adopted, as the case may be, shall be the record
date for such determination of shareholders.
Section 4. Lost Certificates: The Board of Directors may authorize the
issuance of a new certificate in place of a certificate
claimed to have been lost or destroyed, upon receipt of an
affidavit of such fact from the person claiming the loss or
destruction. When authorizing such issuance of a new
certificate, the Board may require the claimant to give the
corporation a bond in said sum as it may direct to indem nify
the corporation against loss from any claim with respect to
the certificate claimed to have been lost or destroyed; or the
Board may, by resolution reciting that the circumstances
justify such action, authorize the issuance of a new certifi
cate without requiring such a bond.
ARTICLE X. - GENERAL PROVISIONS
Section 1. Dividends: The Board of Directors may from time to time
declare, and the corporation may pay, dividends on its
outstanding shares in the manner and upon the terms and
conditions provided by law and by its charter.
Section 2. Seal: The seal shall be in the form of a circle with the
name of the corporation and N.C. on the circumference and the
word "SEAL" in the center as shown by the impress of the
corporate seal on the margin of this section of the bylaws.
Section 3. Waiver of Notice: Whenever any notice is required to be
given to any shareholder or Director under the provisions of
the North Carolina Business Corporation Act or under the
provisions of the charter or bylaws of this corporation a
waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time
stated therein, shall be equivalent to the giving of such
notice.
Section 4. Fiscal Year: Unless otherwise ordered by the Board of
Directors by action recorded in the minutes, the fiscal year
of the corporation shall end on the Sunday in January closest
to January 31.
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Section 5. Amendments: Except as otherwise provided herein, these
bylaws may be amended or repealed and new bylaws may be
adopted by the affirmative vote of a majority of the Directors
then holding office at any regular or special meeting of the
Board of Directors.
The Board of Directors shall have no power to adopt a bylaw:
(1) requiring more than a majority of the voting shares for a
quorum at a meeting of shareholders or more than a majority of
the votes cast to constitute action of the shareholders,
except where higher percentages are required by law; or (2)
providing for the management of the corporation other than by
the Board of Directors or a committee thereof.
No bylaw adopted or amended by the shareholders shall be
altered or repealed by the Board of Directors. Notwithstanding
any provision contained in these Bylaws to the contrary, the
affirmative vote of at least 66 2/3% of the outstanding shares
of Common Stock of the corporation shall be required to amend
or repeal the following provisions of these Bylaws: Article
II, Section 2(b) (Annual Meetings); Article II, Section 4
(Special Meetings); Article II, Section 5 (Notice of
Meetings); Article III, Section 2 (Directors - Number, Term
and Qualifications); or Article III, Section 4 (Directors -
Removal).
No alteration, amendment or rescission of a bylaw shall be
voted upon unless notice thereof has been given in the notice
of the meeting or unless all of the Directors of the
corporation execute a written waiver of notice stating that
action upon the bylaws is to be taken at the meeting, and the
original of such waiver shall be recorded in the Minute Book.
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EXHIBIT 10.1
AMENDED AND RESTATED
LOAN AGREEMENT
AMONG
BRANCH BANKING AND TRUST COMPANY,
KRISPY KREME DOUGHNUT CORPORATION,
THORNTON'S FLAV-O-RICH BAKERY, INCORPORATED,
KRISPY KREME DISTRIBUTING COMPANY, INCORPORATED,
KRISPY KREME DOUGHNUTS COMPANY,
HD CAPITAL CORPORATION
AND
HDN DEVELOPMENT CORPORATION
$28,000,000.00
REVOLVING LINE OF CREDIT
$12,000,000.00
TERM LOAN
DECEMBER 21, 1998
<PAGE> 2
ANNEX I - Lender's Commitment dated September 25, 1998
EXHIBITS
Exhibit A - Forms of Conversion Notes
Exhibit A-1 - Conversion Interbank Rate Promissory Note
Exhibit A-2 - Fixed Swap Rate Promissory Note
Exhibit B - Revolving Line of Credit Note
Exhibit C - Term Note
Exhibit D - Disbursement Authorization
Exhibit E - Stock Purchase Agreement
SCHEDULES
Schedule 6.1 - Foreign Qualifications/Subsidiaries
Schedule 6.2 - Litigation; Governmental Regulation
Schedule 6.3 - Taxes
Schedule 6.4 - Defaults
Schedule 6.8 - List of Franchisees
Schedule 6.10 - Employee Benefit Plans
Schedule 6.11 - Financial Statements
Schedule 6.12 - Title to Assets
Schedule 6.15 - List of Patents, Etc.
Schedule 6.17 - Compliance with Laws
Schedule 6.18 - Environmental Matters
Schedule 6.21 - Realty Property Owned
Schedule 6.22 - Real Property Leased
Schedule 7.7 - Insurance
Schedule 8.6 - Borrower's Existing Loans/Obligations and Liabilities
Schedule 8.18 - Management Personnel
AMENDED AND RESTATED
LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT, dated effective as of the
21st day of December, 1998 (the "Loan Agreement" or "Agreement"), is by and
among
<PAGE> 3
BRANCH BANKING AND TRUST COMPANY, a North Carolina banking corporation
(the "Lender"); and
KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation
("Krispy Kreme"), THORNTON'S FLAV-O-RICH BAKERY, INCORPORATED, a North Carolina
corporation ("Thornton's"), KRISPY KREME DISTRIBUTING COMPANY, INCORPORATED, a
North Carolina corporation ("Distributing"), KRISPY KREME DOUGHNUTS COMPANY, a
North Carolina corporation ("Doughnuts"), all with their principal offices in
Winston-Salem, North Carolina, HD CAPITAL CORPORATION, a Delaware corporation
("HD Capital") with its principal office in Wilmington, Delaware, and HDN
DEVELOPMENT CORPORATION, a Kentucky corporation ("HD Development") with its
principal office in Florence, Kentucky.
R E C I T A L S:
A. Krispy Kreme owns all of the issued and outstanding shares of Stock
of Thornton's, Distributing and Doughnuts. Thornton's owns all of the issued and
outstanding shares of stock of HD Capital and HD Capital owns all of the issued
and outstanding shares of stock of HD Development.
B. The parties entered into that certain Amended and Restated Loan
Agreement dated July 12, 1996 (the "Prior Loan Agreement"), pursuant to which
Lender extended a revolving credit facility in the principal amount of up to
$18,000,000 and a term loan credit facility of $12,000,000.
C. The parties have agreed to restructure the credit facilities
extended pursuant to the Prior Loan Agreement, and Lender has been requested to
increase availability under the Revolving Line of Credit from $18,000,000 to
$28,000,000.
D. The parties desire to amend and restate the Prior Loan Agreement to
evidence the restructuring of the existing credit facilities and the increased
availability under the Revolving Line of Credit.
E. The Borrowers will use the proceeds of the Loans (i) to refinance
certain indebtedness; (ii) to provide working capital; (iii) to provide
financing for expansion of stores; and (iv) for such other corporate purposes as
are permitted hereunder, all as more fully set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the Borrowers and the Lender amend and
restate the Prior Loan Agreement as follows:
3
<PAGE> 4
ARTICLE I
DEFINITIONS
1.1 Defined Terms. For purposes of this Loan Agreement, in addition to
the terms defined elsewhere herein, the following terms shall have the meanings
set forth below:
"Affiliate" shall mean, as to any Person, each of the Persons that
directly or indirectly, through one or more intermediaries, owns or controls, or
is controlled by or under common control with, such Person. For the purpose of
this definition, "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of management and policies, whether
through the ownership of voting securities, by contract or otherwise.
"Agreement" or "Loan Agreement" shall mean this Loan Agreement and all
amendments, modifications and supplements hereto, and restatements hereof, and
all schedules and exhibits hereto, and shall refer to this Agreement as the same
may be in effect at the time such reference becomes operative.
"Bankruptcy Code" shall mean 11 U.S.C. ss. 101 et seq., as amended, and
any successor statute or statutes having substantially the same function.
"Borrower" or "Borrowers" shall mean Krispy Kreme, Thornton's,
Distributing, Doughnuts, HD Capital and HD Development, or any or all of them,
and each Subsidiary formed, activated or acquired after the date hereof which
becomes a party hereto pursuant to Section 8.15, and each and all of their
respective successors and assigns.
"Business Day" shall mean any day (excluding Saturday, Sunday and legal
holidays) on which commercial banks in Winston-Salem, North Carolina are open.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C.A. ss. 9601 et seq., as amended
from time to time, and all rules and regulations from time to time promulgated
thereunder.
"Capital Asset" shall mean any asset that would, in accordance with
Generally Accepted Accounting Principles, be required to be classified and
accounted for as a capital asset.
"Capital Lease" shall mean, as applied to any Person, any lease of any
property (whether real, personal or mixed) that would, in accordance with
Generally Accepted Accounting Principles, be required to be classified and
accounted for as a capital lease on a balance sheet of the lessee.
"Capital Lease Obligation" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder that would, in
accordance with Generally Accepted Accounting Principles, appear on a balance
sheet as a liability of such lessee in respect of such Capital Lease.
"Closing" shall mean the execution and delivery of this Agreement and
such of the other Loan Documents, which is to occur at the time and place
specified in Section 5.1.
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"Closing Date" shall mean the date referred to in Section 5.1 hereof.
"Consolidated Tangible Net Worth" shall mean, at any date, the
shareholders' equity of the Borrowers and their Subsidiaries, decreased by all
(i) assets of whatever kind or nature of each Subsidiary (that is not a
Borrower) and (ii) intangible assets of the Borrowers; and increased by all
intercompany receivables to a Borrower from a Subsidiary (which is not a
Borrower) which are subordinated to the rights of Lender pursuant to Section
8.3, as determined in accordance with Generally Accepted Accounting Principles.
"Conversion Loan" shall mean that portion of the principal amount
outstanding under the Revolving Line of Credit which is converted to a term loan
pursuant to Article III.
"Conversion Note" shall mean any promissory note issued by the
Borrowers to the Lender in connection with a Conversion Loan pursuant to Article
III, the forms of which are attached as Exhibits A-1, A-2 and A-3.
"Credit Card Obligations" shall mean all obligations of all or any of
the Borrowers and any Affiliate or Subsidiary of a Borrower to repay Lender all
amounts advanced, or subject to advance, by Lender in connection with any credit
cards or similar arrangements, whether heretofore, now or hereafter issued on
behalf of any Borrower or any of its or their Affiliates or Subsidiaries.
"Current Assets" shall mean, at any date, the aggregate of the current
assets of the Borrowers and their Subsidiaries on a consolidated basis appearing
on the asset side of the Borrowers' consolidated balance sheet, decreased by all
current assets, of whatever kind or nature, of each Subsidiary (that is not a
Borrower), and increased by all intercompany receivables which are subordinated
to the rights of Lender pursuant to Section 8.3, but only to the extent that
such subordinated receivables constitute current assets, as determined in
accordance with Generally Accepted Accounting Principles.
"Current Liabilities" shall mean, at any date, the aggregate of the
current liabilities of the Borrowers and their Subsidiaries on a consolidated
basis appearing on the liability side of Borrowers' consolidated balance sheet,
determined in accordance with Generally Accepted Accounting Principles.
"Debt Service Requirements" shall mean, for any period, the sum of (a)
Interest Expense, (b) such portions of Long-Term Indebtedness which are or were
due and payable during such period, and (c) such portions of Capital Lease
Obligations which are or were due and payable during such period.
"Default" shall mean any of the events specified in Article IX,
regardless of whether there shall have occurred any passage of time or giving of
notice or both that would be necessary in order to constitute such default an
Event of Default.
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"Default Rate" shall mean, with respect to any Loan, the Note Rate
thereof, plus two (2) percentage points.
"Disclosure Statement" shall have the meaning specified in Section 6.8.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and all rules and regulations from time to time
promulgated thereunder.
"Employee Plan" shall mean any "employee benefit plan" within the
meaning of Section 3(3) of ERISA maintained by any Borrower or Subsidiary.
"Event of Default" shall have the meaning specified in Article IX.
"Financials" or "Financial Statements" shall mean the audited
consolidated balance sheets and consolidated statements of income, retained
earnings and cash flows of the Borrowers for the fiscal years ended January 30,
1994, January 29, 1995, January 28, 1996, January 26, 1997 and January 25, 1998,
and all interim financial statements of the Borrowers and/or their Subsidiaries
that have previously been delivered by any Borrower or Subsidiary to the Lender.
"Generally Accepted Accounting Principles" shall mean generally
accepted accounting principles, as recognized by the American Institute of
Certified Public Accountants, consistently applied and maintained on a
consistent basis for the Borrowers and each of the Borrowers' Subsidiaries
throughout the period indicated and consistent with the prior financial
practices of the Borrowers and each of their Subsidiaries as reflected on the
Financials so as to properly reflect the financial condition, and the results of
operations and changes in financial position, of the Borrowers and their
Subsidiaries.
"Hazardous Substances" shall have the meaning given in Section 6.18.
"Indebtedness" shall mean all liabilities, obligations and indebtedness
of the Borrowers or any of them or of any of their Subsidiaries of any and every
kind and nature, including, without limitation, the Obligations and all
obligations to trade creditors, whether heretofore, now or hereafter owing,
arising, due or payable from any Borrower or Subsidiary to any Person and
howsoever evidenced, created, incurred, acquired or owing, whether primary,
secondary, direct, contingent, fixed or otherwise, and whether matured or
unmatured. Without in any way limiting the generality of the foregoing,
Indebtedness specifically includes the following:
(a) All obligations or liabilities that are secured by any
lien, claim, encumbrance or security interest upon property owned by
any Borrower or Subsidiary even though such Borrower or Subsidiary has
not assumed or become liable for the payment thereof;
(b) All obligations or liabilities created or arising under
any Capital Lease of real or personal property, or conditional sale or
other title retention agreement with respect to property used or
acquired by any Borrower or Subsidiary, even though the
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rights and remedies of the lessor, seller or lender thereunder are
limited to repossession of such property;
(c) All unfunded pension fund obligations and liabilities; and
(d) Deferred taxes.
"Interbank Rate" (also known as "LIBOR") shall mean the interest rate
as quoted in the Wall Street Journal (Credit Markets Section) or on Bloomberg
Screen MMR2 (or any successor or comparable reporting service) by 9:00 A.M. on
the Business Day of each month which either is or is closest to the tenth day of
such month, for the offering of dollar deposits by leading banks in the London
interbank market for amounts comparable to the maximum amount of the Loans or
the outstanding principal balance of any Conversion Loan, as the case may be. In
the event that the Interbank Rate or the practice of announcing it shall be
abolished or abandoned, or should the same be unascertainable, the Lender and
the Borrowers shall agree in writing on a comparable reference rate, which shall
be deemed to be the Interbank Rate under this Loan Agreement and the other Loan
Documents; provided, if such agreement is not reached within a reasonable period
of time (in Lender's judgment), it shall be a rate reasonably determined by
Lender in its sole discretion as a rate being paid, as of the date of
determination, by first class banking organizations (as determined by Lender) in
the London interbank market for the offering of dollar deposits.
"Interest Expense" shall mean, for any period, total interest expense
of the Borrowers and their Subsidiaries on a consolidated basis (including,
without limitation, interest expense attributable to Capital Leases) determined
in accordance with Generally Accepted Accounting Principles.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986,
as the same may be amended from time to time.
"Lender" shall mean Branch Banking and Trust Company and its successors
and assigns.
"Letter of Credit Obligations" shall mean all obligations of all or any
of the Borrowers and any Affiliate or Subsidiary of a Borrower to repay Lender
all amounts advanced, or subject to advance, by Lender in connection with any
letter(s) of credit or similar arrangements, whether heretofore, now or
hereafter issued on behalf of any Borrower or any of its or their Affiliates or
Subsidiaries.
"Letter of Credit Reserve" shall mean an undisbursed reserve against
the Revolving Line of Credit in an amount equal to all Letter of Credit
Obligations.
"Loan" or "Loans" shall mean the Revolving Line of Credit, the Term
Loan and/or any Conversion Loan.
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"Loan Documents" shall mean and collectively refer to this Agreement,
the Revolving Line of Credit Note, the Term Note, any Conversion Note and any
and all agreements, instruments and other documents, including, without
limitation, consents, contracts, notices, trust account agreements and all other
written matters (excluding however general correspondence) whether heretofore,
now or hereafter executed by or on behalf of the Borrowers or any of them and
delivered to Lender, which evidence or relate to this Agreement or the
transactions contemplated hereby, and all other documents, instruments and other
written matters required by this Agreement to be delivered by any Borrower or
any third party and any and all amendments, modifications, restatements,
replacements, substitutes and supplements to any of the foregoing documents.
"Long-Term Indebtedness" shall mean all outstanding Indebtedness of the
Borrowers and their Subsidiaries on a consolidated basis that by its terms or by
the terms of any instrument or agreement relating thereto matures more than one
year from, or is renewable or extendable at the option of any Borrower or
Subsidiary to a date more than one year from (including an option of any
Borrower or Subsidiary under a revolving credit or similar arrangement
obligating the lender or lenders to extend credit over a period of one year or
more) the date of creation thereof, and includes current maturities of any such
Indebtedness.
"Multiemployer Plan" shall mean any "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA to which any Borrower or Subsidiary is
required to make contributions.
"Net Income" shall mean, for any period, the net income (or loss) of
the Borrowers and their Subsidiaries, on a consolidated basis for such period,
determined in accordance with Generally Accepted Accounting Principles.
"Note Rate" shall mean, at any time, and as the context requires, the
interest rate in effect on the Revolving Line of Credit Note, the Term Note or
any Conversion Note at such time.
"OSHA" shall mean the Occupational Safety and Health Act, as amended
from time to time, and all rules and regulations from time to time promulgated
thereunder.
"Obligations" shall mean and include the Revolving Line of Credit, the
Term Loan, each Conversion Loan and all other loans, advances, indebtedness,
liabilities, obligations, covenants and duties (including post-petition interest
on the foregoing, to the extent lawful) owing, arising, due or payable from any
Borrower or Subsidiary to the Lender of any kind or nature, present or future,
arising under this Agreement, the Revolving Line of Credit Note, the Term Note,
any Conversion Note or any of the other Loan Documents or otherwise (including
all Letter of Credit Obligations), whether direct or indirect (including those
acquired by assignment), absolute or contingent, primary or secondary, due or to
become due, now existing or hereafter arising, as the same may be modified,
extended or renewed from time to time. The term includes, without limitation,
all interest, charges, expenses, fees, attorneys' fees and any other sums
chargeable to any Borrower or Subsidiary by the Lender under this Agreement or
any of the other Loan Documents.
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"Operating Cash Flow" shall mean, for any period, the Borrowers'
consolidated Net Income for such period, after deduction of income taxes and all
amounts paid or payable to a Subsidiary (that is not a Borrower) for or during
such period, plus depreciation expense, amortization of intangibles, Interest
Expense, all intercompany receivables arising during such period which are
subordinated to the rights of Lender pursuant to Section 8.3 and dividends paid
or payable from any Subsidiary (which is not a Borrower) for or during such
period, all as determined in accordance with Generally Accepted Accounting
Principles, less all dividends, distributions and advances to shareholders of
Krispy Kreme.
"Pension Plan" shall mean any employee pension benefit plan within the
meaning of Section 3(2) of ERISA which is maintained by any Borrower or
Subsidiary, except that Pension Plan shall not include any Multiemployer Plan
that is subject to the provisions of Title IV of ERISA.
"Permitted Liens" shall mean any of the following liens securing any
Indebtedness of any Borrower or Subsidiary with the property of any Borrower or
Subsidiary, whether real or personal, and whether now owned or hereafter
acquired:
(a) Liens of carriers, warehousemen, mechanics, materialmen
and vendors imposed by mandatory provisions of law and incurred in the
ordinary course of business for sums not yet due and payable;
(b) Liens with respect to personal property only incurred in
the ordinary course of business in connection with worker's
compensation, unemployment insurance or other forms of governmental
insurance or benefits, or liens arising from good faith deposits in
connection with bids, tenders, statutory obligations and contracts
(other than for borrowed funds) entered into in the ordinary course of
business or to secure obligations on surety or appeal bonds;
(c) Liens for current taxes, assessments or other governmental
charges that are not delinquent or remain payable without any penalty
or that are being contested in good faith and with due diligence by
appropriate proceedings and against which the Borrowers will establish
and maintain such reserves as may be required, and in such amounts, as
provided for in Section 11.15;
(d) Liens upon personal property leased under a Capital Lease
(which is currently existing) or any other lease and placed upon such
leased property in connection with such lease to secure the lease
payments of such lease, provided (i) any such lien shall not encumber
any other property of a Borrower or a Subsidiary, and (ii) Lender shall
have been notified in advance of such lease.
(e) Liens, if any, securing the Obligations in favor of the
Lender;
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(f) Applicable statutory and contractual liens in favor of
lessors of real property leased by any Borrower or Subsidiary; provided
that any such contractual liens (i) are granted in connection with such
lease to secure only the lease payments and other obligations to the
Lessor of such lease, (ii) any such liens shall encumber only leasehold
improvements and tangible personal property physically located upon
such leased real property, and in the case of multiple properties
leased from the same lessor or an Affiliate of such lessor, shall not
serve as cross-collateral for any other lease or lease payments with
respect to any other property; (iii) Lender shall be notified of each
such lien within thirty (30) days after the grant thereof (except for
any such liens that presently exist or have arisen by operation of
law), and (iv) that the aggregate book value of all tangible assets and
properties subject to all such liens shall not exceed 2.5% of the
aggregate book value of all tangible assets and properties, before
accumulated depreciation and amortization, owned by the Borrowers and
their Subsidiaries;
(g) Liens, if any, securing Letter of Credit #4910034192-00013
issued by the Lender for the benefit of Lumbermens Mutual Casualty
Company et al or pursuant to the Automated Clearing House Customer
Participation Agreement by and between the Lender and the Borrower, or
other credit or contractual arrangements with Lender; and
(h) The liens set forth on item 1 of Schedule 6.12.
"Person" shall mean a corporation, an association, a joint venture, a
partnership, an organization, a business, an individual, a trust or a government
or political subdivision thereof or any government agency or any other legal
entity.
"Prime Rate" shall mean the per annum interest rate publicly announced
from time to time by Lender, from its office in Winston-Salem, North Carolina,
to be its prime rate, which may not necessarily be its best lending rate, as
adjusted to conform to changes as of the opening of business on the date of any
such change in the Prime Rate. The Prime Rate pertains to an internal index or
reference rate which is used by the Lender as a basis for both commercial and
consumer lending rates. This rate is recorded and maintained by the Lender and
changed by Lender from time-to-time in accordance with money market conditions,
loan demand and various other factors. Loans to other customers of Lender may
bear interest rates at, above or below the Prime Rate, which is but one of
several interest indices used by Lender. In the event Lender shall abolish or
abandon the practice of announcing its prime rate or should the same be
unascertainable, the Lender and Borrower shall agree in writing on a comparable
reference rate, which shall be deemed to be the Prime Rate under this Loan
Agreement and the other Loan Documents.
"Prohibited Transaction" shall mean any transaction described in (i)
Section 406 of ERISA that is not exempt by reason of Section 408 of ERISA or
(ii) Section 4975(c) of the Internal Revenue Code that is not exempt by reason
of Section 4975(c)(2) or 4975(d), or in any successor statute or regulation or
in any statute or regulation having substantially the same function.
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"RCRA" shall mean the Resource Conservation and Recovery Act, 42
U.S.C.A.ss. 6901 et seq., as amended from time to time, and all rules and
regulations from time to time promulgated thereunder.
"Realty" shall mean all of those certain tracts or parcels of land
currently owned or leased by any Borrower or Subsidiary, and hereafter acquired
or leased by any Borrower or Subsidiary.
"Regulation U" shall mean Regulation U promulgated by the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 221, or any successor or
other regulation hereafter promulgated by said Board to replace the prior
Regulation U and having substantially the same function.
"Regulation X" shall mean Regulation X promulgated by the Board of
Governors of the Federal Reserve System, 12 C.F.R. Part 224, or any successor or
other regulation hereafter promulgated by said Board to replace the prior
Regulation X and having substantially the same function.
"Reportable Event" shall mean a reportable event as defined in Section
4043(b) of ERISA and the regulations thereunder.
"Revolving Line of Credit" shall mean and refer to the revolving credit
facility from Lender to the Borrowers in the aggregate principal amount of up to
$28,000,000.00 as contemplated by this Agreement.
"Revolving Line of Credit Note" shall mean the promissory note dated
the date hereof and issued by the Borrowers to the Lender in the principal
amount of up to $28,000,000.00, a copy of which is attached as Exhibit B.
"Stock" shall mean all shares, options, interests or other equivalents
(howsoever designated) of or in a corporation, whether voting or non-voting,
including, without limitation, common stock, warrants, preferred stock,
convertible debentures and all agreements, instruments and documents
convertible, in whole or in part, into any one or more or all of the foregoing,
except for phantom share units allocable to participants under Borrowers'
Long-Term Incentive Plan.
"Subsidiary" shall mean any corporation, domestic or foreign, whether
now existing or hereafter formed or acquired, of which more than fifty percent
(50%) of the outstanding Stock having ordinary voting power to elect a majority
of the board of directors is at the time, directly or indirectly, owned by a
Borrower, Subsidiary or Affiliate of any Borrower or Subsidiary or any
combination thereof (irrespective of whether, at the time, Stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) and specifically includes, without
limitation, the Subsidiaries of Krispy Kreme and Thornton's listed on Schedule
6.1.
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"Swap Rate" shall mean the five (5)-year, seven (7)-year or ten (10)-
year Interbank interest rate swap rate that Lender is able to obtain from
Lender's third party dealer at the time of the making of a Conversion Loan or
any other relevant time.
"Termination Date" shall mean the earliest of: (i) July 10, 2002; (ii)
the date of termination of the Revolving Line of Credit by the Lender after the
occurrence of an Event of Default; (iii) such date of termination of the
Revolving Line of Credit as is mutually agreed upon by the Lender and the
Borrowers; or (iv) the date after all Obligations have been paid in full and
Lender is no longer obligated to make advances hereunder.
"Term Loan" shall mean and refer to the term loan from Lender to the
Borrowers in the original principal amount of $12,000,000.00, dated July 12,
1996, the approximate current outstanding principal balance of which is
$6,600,000.00.
"Term Note" shall mean the promissory note dated July 12, 1996 and
issued by the Borrowers to the Lender in the principal amount of $12,000,000.00,
a copy of which is attached as Exhibit C, as amended of even date herewith.
"Total Liabilities" shall mean, at any date, the aggregate of all
liabilities of the Borrowers and their Subsidiaries on a consolidated basis
appearing on the liability side of their consolidated balance sheet, determined
in accordance with Generally Accepted Accounting Principles.
1.2 Accounting Terms. Any accounting terms used in this Agreement that
are not specifically defined shall have the meanings customarily given them in
accordance with Generally Accepted Accounting Principles; provided, however,
that, in the event that changes in Generally Accepted Accounting Principles
shall be mandated by the Financial Accounting Standards Board, or any similar
accounting body of comparable standing, or shall be recommended by the
Borrowers' certified public accountants and accepted by the Borrowers and
Lender, to the extent that such changes would modify or could modify such
accounting terms or the interpretation or computation thereof, such changes
shall be followed in defining such accounting terms only from and after the date
the Borrowers and the Lender shall have amended this Agreement to the extent
necessary to reflect any such changes in the financial covenants and other terms
and conditions of this Agreement.
1.3 Singular/Plural. Unless the context otherwise requires, words used
herein in the singular include the plural and words in the plural include the
singular. Reference to "Borrower" or "Borrowers" shall be deemed to refer to
each Borrower, both collectively and individually, as the context requires.
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ARTICLE II
REVOLVING CREDIT FACILITY
2.1 Revolving Loan.
(a) The Lender hereby establishes, subject to the terms and conditions
of this Agreement and in reliance upon the representations and warranties made
herein by the Borrowers, a revolving line of credit in favor of the Borrowers,
as a group and not individually, in the aggregate principal amount of up to
TWENTY-EIGHT MILLION AND 00/100 DOLLARS ($28,000,000.00); provided, however,
Lender shall retain as a non-disbursed reserve from the Revolving Line of Credit
an amount equal to the sum of the Letter of Credit Reserve and Credit Card
Obligations, and agrees to make and remake advances thereunder to the Borrowers,
upon the terms and conditions set forth in this Agreement, from time to time on
any Business Day during the period from the date hereof through the Termination
Date. Subject to Section 2.6 and Article III, the Borrowers may borrow, repay
and reborrow any amount of the Revolving Line of Credit at any time prior to the
Termination Date. The Borrowers shall give the Lender prior notice of the amount
of any desired advance and the date the funds are to be received by any
Borrower. In the event that the Borrowers desire to receive the proceeds of an
advance of the Revolving Line of Credit on the same banking day of its request
therefor, the Borrowers must give the Lender notice of such advance not later
than 12:00 noon, North Carolina time. Notwithstanding the foregoing, the Lender
shall have no obligation to lend funds at any time when (i) a Default has
occurred and the Borrowers have not commenced with diligence all efforts to
remedy such Default; (ii) an Event of Default exists, or (iii) the making of
such advance would or could result in the occurrence of a Default or an Event of
Default.
(b) Requests for an advance under the Revolving Line of Credit may be
oral or written. The Borrowers hereby irrevocably authorize the Lender to
disburse the proceeds of each draw under this Agreement in accordance with the
terms of any (i) written instructions received by the Lender from any duly
authorized officer of any Borrower, or (ii) telephone instructions from any
Borrower's duly authorized officers or other authorized persons. The Borrowers
shall designate from time to time in writing to Lender which of its officers or
other representatives shall be duly authorized to request advances pursuant to
this Agreement. Such notification shall be pursuant to the disbursement
authorization attached as Exhibit D.
(c) The Lender shall not charge any interest, fee or other charge for
the unadvanced portion of the Revolving Line of Credit.
2.2 Term.
The term of the Revolving Line of Credit will be from the date hereof
to and including the Termination Date, unless terminated sooner in accordance
with the terms and conditions of this Agreement.
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2.3 Interest.
(a) The Borrowers, jointly and severally, covenant and agree to pay to
the Lender interest on the unpaid principal amount of the advances under the
Revolving Line of Credit outstanding from time to time at the Note Rate,
determined as described below. Provided no Default shall have occurred and be
continuing or no Event of Default shall have occurred which has not been
expressly waived in writing by Lender, the Borrowers, acting jointly, shall have
the right, on a monthly basis during the term of the Revolving Line of Credit,
to designate the computation of the Note Rate from the following two
alternatives:
(i) Prime Rate Based. The Lender's Prime Rate less 110 basis
points. As the Prime Rate increases or decreases, the Note Rate shall
increase (up to but never in excess of the maximum amount allowed by
law) or decrease, as of the opening of business on the effective date
of such change, by an amount equal to the change in the Prime Rate.
(ii) Interbank Rate Based. The one-month Interbank Rate plus
100 basis points. As the Interbank Rate increases or decreases, the
Note Rate shall increase (up to but never in excess of the maximum
amount allowed by law) or decrease, by an amount equal to the change in
the Interbank Rate as of the opening of business on the Business Day
which is or is closest to the tenth day of each month from the
Interbank Rate effective for the immediately preceding month. The
Interbank Rate shall change only once each month, if at all. The
parties may modify the one-month Interbank Rate plus 100 basis points
to the three, six or twelve-month Interbank Rate plus such number of
basis points added thereto as the parties shall mutually agree to in
writing.
The Borrowers, acting jointly, shall provide written or oral notice of their
election as to the computation of interest on the Revolving Line of Credit on
the Business Day which is or is closest to the tenth day of each month. Any
notice given after the Business Day which is or is closest to the tenth day of
each month shall only be effective as of the tenth day of the following month.
Following the Borrowers' election concerning the computation of the Note Rate,
the Note Rate shall continue to be computed upon the same basis until the
Borrowers give written or oral notice of any election to change.
(b) All interest accrued on the Revolving Line of Credit shall be due
and payable on the tenth day of each month or the Business Day which is or is
closest to the tenth day of each calendar month, in arrears.
(c) Interest on the Revolving Line of Credit shall be computed on the
basis of the actual days elapsed in a year consisting of 360 days.
2.4 Repayment. The Borrowers shall repay the Revolving Line of Credit:
(a) In full, on the Termination Date;
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(b) In full, upon the occurrence of any Event of Default and
acceleration of the Revolving Line of Credit by the Lender pursuant to Article
X; and
(c) In part, immediately in the event that the total principal amount
outstanding at any time under the Revolving Line of Credit exceeds the maximum
amount permitted under Section 2.1 (taking into consideration the Letter of
Credit Reserve, the reserve for the Credit Card Obligations and as adjusted
pursuant to Article III) at such time, in the amount of such excess.
2.5 The Revolving Line of Credit Note. At the Closing, each of the
Borrowers shall execute and deliver to the Lender the Revolving Line of Credit
Note payable to the order of the Lender. The Revolving Line of Credit Note shall
be in the form of Exhibit B attached hereto and dated as of the Closing Date.
The amount of principal owing on the Revolving Line of Credit Note at any given
time shall be the aggregate amount of all advances made under the Revolving Line
of Credit, less all payments of principal theretofore paid by the Borrowers,
less any principal amount thereof which has been converted to a Conversion Loan.
2.6 Voluntary Commitment Reductions. Upon at least five (5) Business
Days' prior notice, the Borrowers, acting jointly, may cause the Lender to
ratably reduce the unutilized portion of the Revolving Line of Credit in part in
amounts of $100,000.00. After any such reduction, the Revolving Line of Credit
may not thereafter be increased without the prior written consent of the Lender.
2.7 Letter of Credit and Credit Card Obligations. The Borrowers
authorize Lender to effect reimbursement of all amounts due and payable to
Lender with regard to the Letter of Credit Obligations and/or the Credit Card
Obligations by drawing an amount equal to all such amounts from the Revolving
Line of Credit, in which event Lender shall provide written notice thereof to
the Borrowers within thirty (30) days thereafter. This right shall be in
addition to any other rights available to Lender for reimbursement of such
amounts.
ARTICLE II
THE TERM LOAN
2A.1 Term Loan.
(a) Loan Amount. The Lender established, subject to the terms
and conditions of the Prior Loan Agreement, a term loan in favor of the
Borrowers, as a group and not individually, in the principal amount of
TWELVE MILLION AND 00/100 DOLLARS ($12,000,000.00). The Term Loan shall
remain outstanding and be governed by the terms of this Agreement from
and after the date hereof.
2A.2 Interest.
(a) The Borrowers, jointly and severally, covenant and agree
to pay to Lender interest on the unpaid principal amount of the Term
Loan at the Note Rate, determined in
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the same fashion as described in Section 2.3, including the right to
designate the computation of the Note Rate from the two alternatives
specified therein. Notwithstanding anything to the contrary set forth
in this Agreement, the Note Rate with respect to the Term Loan shall
not exceed 8.125%, nor be less than 5.5%, regardless of the alternative
computation of the Note Rate chosen by the Borrowers.
(b) All interest accrued on the Term Loan shall be due and
payable on the twentieth (20th) day of each month or the Business Day
which is or is closest to the twentieth (20th) day of each calendar
month, in arrears.
(c) Interest on the Term Loan shall be computed on the basis
of the actual days elapsed in a year consisting of 360 days.
2A.3 Repayment. The Borrowers shall repay the principal balance of the
Term Loan in fifty-nine (59) equal monthly installments of TWO HUNDRED THOUSAND
AND 00/100 DOLLARS ($200,000.00), which installments commenced on July 20, 1996,
or the Business Day which was or was closest to the twentieth (20th) day of
July, 1996, with succeeding installments continuing thereafter and being due on
the twentieth (20th) day of each such month, with one final payment of all
remaining principal and accrued, but unpaid, interest due on June 20, 2001 (or
the Business Day which is or is closest to the twentieth (20th) day of such
month).
2A.4 Prepayment. The Borrowers may prepay the Term Loan at anytime,
without penalty or premium.
2A.5 Term Note. The Term Note is in the form of Exhibit C attached
hereto and dated as of July 12, 1996, and shall be amended of even date by the
form of Amendment attached as Exhibit C.
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ARTICLE III
CONVERSION OF REVOLVING LINE OF CREDIT TO TERM LOAN(S)
3.1 Conversion Privilege. At any time or times on or before the
Termination Date, provided no Default shall have occurred and be continuing or
no Event of Default shall have occurred which has not been expressly waived in
writing by Lender, the Borrowers, acting jointly, shall have the right to
convert all or any portion of the outstanding principal balance of the Revolving
Line of Credit to a term loan or loans for a period or periods of 60, 84 or 120
months from the date of conversion pursuant to the provisions of this Article.
Each Borrower shall be jointly and severally liable on each Conversion Loan.
Upon the conversion of any portion of the principal balance outstanding under
the Revolving Line of Credit and the Revolving Line of Credit Note, the maximum
amount available under the Revolving Line of Credit and the outstanding
principal sum of the Revolving Line of Credit Note shall be decreased by an
amount equal to the principal sum of such Conversion Loan. Notwithstanding any
other provision of this Agreement to the contrary, in the event a Conversion
Loan is outstanding as of the Termination Date, and such Conversion Loan shall
continue following the Termination Date, then with respect to each such
outstanding and continuing Conversion Loan, this Agreement shall remain in full
force and effect as to the Borrowers until all Obligations of the Borrowers to
Lender have been paid in full, but, except with respect to such outstanding
Conversion Loans, Lender shall have no further obligations hereunder.
Notwithstanding the foregoing, in the event the parties desire to extend or
renew the Revolving Line of Credit, and a new loan agreement or an amendment to
this Agreement is entered into between the parties in connection with such
extension or renewal, the parties agree that such new loan agreement or this
Agreement as amended, rather than this Agreement, shall control each such
outstanding and continuing Conversion Loan. Upon the conversion of all or any
portion of the outstanding principal balance of the Revolving Line of Credit to
any Conversion Loan, the Borrowers shall either pay all accrued, but unpaid,
interest on such portion of the Revolving Line of Credit subject to such
Conversion Loan, or Borrower may roll such accrued, but unpaid, interest into
the principal balance of such Conversion Loan.
3.2 Interest Rate. The Borrowers, acting jointly, at the time of
conversion, shall select either an Interbank Rate based or Swap Rate based
method for the computation of the Note Rate on any such Conversion Loan, which
election shall continue for the term of such Conversion Loan. Interest on each
Conversion Loan shall be computed on the basis of the actual number of days
elapsed in a year consisting of 360 days. The interest rate options are as
follows:
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Fixed Interbank
Term Interbank Rate Swap Rate
---- -------------- ---------
60 months The one-month Interbank Swap Rate plus 125 basis points
Rate plus 100 basis points
84 months The one-month Interbank Swap Rate plus 135 basis points
Rate plus 110 basis points
120 months The one-month Interbank Swap Rate plus 155 basis points
Rate plus 130 basis points
As the Interbank Rate increases or decreases, the Note Rate shall increase (up
to but never in excess of the maximum amount allowed by law) or decrease on the
Business Day of each month which is or is closest to the tenth day of such
month, by an amount equal to the change in the Interbank Rate from that
effective for the immediately preceding month. The parties may modify the
interest rate based on the one-month Interbank Rate plus applicable basis points
to an interest rate based on the three, six or twelve-month Interbank Rate plus
such number of basis points added thereto as the parties shall mutually agree to
in writing. If the Swap Rate is chosen, the Note Rate shall be fixed for the
term of such Conversion Loan. Lender recommends a minimum block of TWO MILLION
FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($2,500,000.00) for pricing purposes
when selecting the fixed Swap Rate option described above; provided, however,
the Borrowers may enter into a Conversion Loan of more or less than the
foregoing amount if they so choose. The Borrowers acknowledge that Lender's
recommendation is based on the fact that a Conversion Loan of less than the
recommended minimum will incur a higher Swap Rate based on pricing practices in
the marketplace for interest rate swap arrangements on such smaller amounts.
3.3 Payment. All interest accrued on any Conversion Loan shall be due
and payable on the Business Day of each calendar month which is or is closest to
the tenth day of such month, in arrears. The principal sum of each Conversion
Loan shall be paid in equal monthly installments in an amount sufficient to
amortize the principal sum thereof over the term of such Conversion Loan, and
payments of principal shall be due and payable with payments of interest on the
Business Day of each month which is or is most closest to the tenth day of each
month. The Borrowers shall have no right to re-amortize the principal sum of any
Conversion Loan. The Lender shall submit a statement to the Borrowers each month
as to the payment of interest due for such month. Except as set forth below, any
Conversion Loan may be prepaid at any time without penalty or premium. Any
prepayment of the principal amount of any Conversion Loan shall be applied to
principal in the inverse order of maturity. In the event the Borrowers select
the fixed Swap Rate for a Conversion Loan, the Borrowers acknowledge that Lender
will be entering into either an interest rate swap or matched funds agreement
with a third party dealer, and the Borrowers agree to execute such additional
documentation as Lender shall reasonably request in connection with such
Conversion Loan, including a rate lock agreement. In the event of any prepayment
on any such Conversion Loan, Borrowers shall be subject to a termination
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fee/prepayment penalty equal to Lender's cost to terminate the interest rate
swap or matched funds agreement or other similar agreement with its third party
dealer.
3.4 Conversion Note. Upon the closing of each Conversion Loan, the
Borrowers shall execute and deliver to the Lender a Conversion Note payable to
the order of the Lender for the full amount of the Conversion Loan. The
Conversion Note shall be in substantially the form of either Exhibit A-1
(Conversion Interbank Rate Promissory Note) or Exhibit A-2 (Fixed Swap Rate
Promissory Note), as appropriate, and shall be dated as of the effective date of
such conversion, subject to such necessary modifications as are required due to
changes in the law.
ARTICLE IV
PROVISIONS APPLICABLE TO THE REVOLVING LINE OF CREDIT,
THE TERM LOAN AND ANY CONVERSION LOAN
4.1 Default Rate; Post Petition Interest. Notwithstanding any other
provision of this Agreement, following the occurrence of any Event of Default
which has not been expressly waived in writing by Lender, all outstanding
principal amounts under any Loan shall bear interest at the Default Rate, and
shall be payable on demand. To the fullest extent permitted by applicable law,
interest shall continue to accrue on any Loan after the filing by or against any
Borrower of a petition seeking relief in bankruptcy or under any act or law
pertaining to insolvency or debtor relief, whether state, federal or foreign.
4.2 Maximum Interest Rate. Nothing contained in this Agreement, in the
Revolving Line of Credit Note, the Term Note or any Conversion Note shall be
deemed to establish or require the payment of interest to Lender at a rate in
excess of the maximum rate permitted in the jurisdiction of enforcement of this
Agreement, the Revolving Line of Credit Note, the Term Note or any Conversion
Note. In the event that the rate of interest required to be paid under the
provisions of this Agreement, the Revolving Line of Credit Note, the Term Note
or any Conversion Note exceeds the maximum rate permitted in such jurisdiction,
the rate of interest required to be paid hereunder and thereunder shall be
automatically reduced to the maximum rate permitted in such jurisdiction and any
amounts collected in excess of the permissible amount shall be deemed a
prepayment of principal thereon.
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4.3 Payment.
(a) All payments (including prepayments) by the Borrowers on
account of principal, interest, costs and expenses on each Loan shall
be made in immediately available funds to the Lender, at its principal
office at Winston-Salem, North Carolina, prior to 2:00 P.M., North
Carolina time on the date payment is due, or at such other place as is
designated in writing by the Lender. Any payments received by the
Lender later than 2:00 P.M. shall be deemed to have been made on the
next banking day. If any payment of principal or interest falls due on
a day that is not a Business Day, then such due date shall be extended
to the next succeeding Business Day, and interest shall continue to
accrue on the outstanding principal for such period of extension, but
interest for the period of extension shall not be due or payable until
the next payment date.
(b) The Borrower hereby irrevocably authorizes the Lender to
pay all interest and principal, and after the occurrence of an Event of
Default all costs and expenses, payable by the Borrowers or any of them
pursuant to this Loan Agreement by drafting such amounts from any
Borrower's accounts with Lender (other than fiduciary accounts) if such
funds are available or by drawing such amounts under the Revolving Line
of Credit as of the respective due dates of such interest, principal,
costs and expenses, but the failure of the Lender to so draft or draw
will not affect the Borrowers' obligation to pay such interest,
principal, costs and expenses.
(c) All payments made by the Borrowers shall be applied (i)
first, to the payment of accrued and unpaid fees, if applicable, and
interest on the Revolving Line of Credit Note, the Term Note and each
Conversion Note, as applicable and (ii) second, to the payment of
unpaid principal on the Revolving Line of Credit Note, the Term Note or
the Conversion Note(s), as applicable; provided, however, that,
following the occurrence of an Event of Default which has not been
expressly waived in writing by Lender, the Lender may apply all such
payments to the Obligations in any amounts and in any fashion or
priority as the Lender in its sole discretion may determine.
4.4 Use of Proceeds. The proceeds of the Loans will be used by the
Borrowers solely (i) to retire Borrowers' existing credit facilities with Lender
except for the Term Loan; (ii) to provide financing for the expansion of stores;
(iii) to provide working capital for the Borrowers; (iv) to provide financing
for the acquisition of Capital Assets of the Borrowers; and (v) for any other
lawful corporate purpose; provided, however, that no proceeds of any Loan shall
be loaned, distributed or advanced to Subsidiaries which are not Borrowers.
4.5 Disbursement of Loan Proceeds. The Borrowers hereby authorize and
direct the Lender to disburse, for and on behalf of the Borrowers and for each
of the Borrowers' accounts, the proceeds of any Loan made by the Lender pursuant
to this Agreement to such Person or Persons as the President, Chief Executive
Officer, Executive Vice President - Corporate Development, Finance and
Administration or Senior Vice President - Finance of Krispy Kreme shall direct
in writing.
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4.6 [Intentionally Omitted]
4.7 Taxes.
(a) The Borrowers agree to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or
similar levies of the United States or any state or political
subdivision thereof or any applicable foreign jurisdiction that may
arise from any payment made hereunder or from the execution, delivery
or registration of, or otherwise with respect to, this Agreement
(hereinafter referred to as "Taxes").
(b) The Borrowers hereby agree, jointly and severally, to
indemnify the Lender for the full amount of Taxes (including without
limitation, any Taxes imposed by any jurisdiction on amounts payable
under this Section) paid by the Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect
thereto. This indemnification shall be made within thirty (30) days
from the date the Lender makes written demand therefor.
4.8 Register. The Lender may maintain a register on which it may record
the advances made by it to the Borrowers from time to time, and each payment in
respect thereof. If Lender maintains such a register, such recordation shall be
conclusive, absent error therein. Failure to make any such recordation, or any
error in such recordation, shall not affect the Borrowers' obligations with
respect to the Loans.
4.9 Release of Collateral, Parties Liable, etc. Each Borrower agrees
that the whole or any part of the security, if any, now or hereafter held for
the Obligations, or any part thereof, may be exchanged, compromised or
surrendered from time to time; that Lender shall have no obligation to protect,
perfect, secure or insure any such security interest, liens or encumbrances now
or hereafter held for the Obligations, or any part thereof, or the properties
subject thereto; that the time or place of payment of the Obligations, or any
part thereof, may be changed or extended, in whole or in part, to a time certain
or otherwise, and may be renewed or accelerated by agreement among Lender and
any Borrower, in whole or in part; any Borrower may be granted indulgences
generally; that any of the provisions of any of the Obligations may be modified,
amended or waived; that any party liable for the payment thereof, including,
without limitation, any co-obligor and guarantors, may be granted indulgences or
released; all without notice to or further assent by any other Borrower, and
each of the other Borrower(s) shall remain bound thereon, notwithstanding any
such exchange, compromise, surrender, extension, renewal, acceleration,
modification, indulgence or release.
4.10 Waiver of Rights. Each Borrower expressly waives: (a) notice of
extensions of credit to any other Borrower by Lender; (b) presentment and demand
for payment of any of the Obligations; (c) protest and notice of dishonor or of
default to such Borrower or to any other party with respect to the Obligations
or with respect to any security therefor; (d) notice of Lender obtaining,
amending, substituting for, releasing, waiving or modifying any security
interest, liens
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or encumbrances now or hereafter securing the Obligations or any part thereof,
or Lender's subordinating, compromising, discharging or releasing any such
security interests, liens or encumbrances; (e) all other notices to which each
such Borrower might otherwise be entitled; (f) demand for payment hereunder and
under the other Loan Documents; and (g) any right to assert against Lender, as a
defense, counterclaim (excluding mandatory counterclaims), set-off or
cross-claim, any defense (legal or equitable), set-off, counterclaim or claim
which each such Borrower may now or hereafter have against Lender or any other
Borrower, but such waiver shall not prevent such Borrower from asserting against
Lender in a separate action, any claim, action, cause of action or demand that
such Borrower might have, whether or not arising out of this Agreement; the
Borrowers acknowledging and agreeing that their obligations to pay and perform
under and pursuant to the Loans and each of the Loan Documents are obligations
independent of any and all claims and defenses which any Borrower may now or
hereafter have against Lender or any other Borrower.
4.11 Primary Liability of Borrowers. Each Borrower agrees that this
Agreement and the other Loan Documents may be enforced by Lender without the
necessity at any time of resorting to or exhausting any security and without the
necessity at any time of having recourse to the Revolving Line of Credit Note,
the Term Note, any Conversion Note, any other Loan Document or any co-obligor,
guarantor or any security, if any, held with respect to the Obligations. Each
Borrower waives the right to require Lender to proceed against any co-obligor or
guarantor or to require Lender to pursue any other remedy or enforce any other
right. Each Borrower further agrees that it shall not exercise any right of
subrogation, reimbursement or indemnity whatsoever, nor any right of recourse to
security, if any, for the Obligations of any Borrower to Lender, unless and
until all of the Obligations of the Borrowers and their respective Subsidiaries
to Lender have been paid in full. Each Borrower further agrees that nothing
contained herein shall prevent Lender from suing on or proceeding under this
Agreement, the Revolving Line of Credit Note, the Term Note or any Conversion
Note, or exercising any other rights available to it under any other Loan
Document if the Borrowers do not timely perform their obligations hereunder and
thereunder, and the exercise of any of the aforesaid rights and the completion
of any proceedings thereunder shall not constitute a discharge of any Borrower's
obligations hereunder; it being the purpose and intent of each Borrower that its
obligations hereunder and thereunder shall be primary, absolute, independent and
unconditional under any and all circumstances. The Borrowers' obligations under
this Agreement, the Revolving Line of Credit, the Term Loan, any Conversion Loan
or any Loan Document, or any remedy for the enforcement thereof, shall not be
impaired, modified, changed or released in any manner whatsoever by an
impairment, modification, change, release or limitation of the liability of any
Borrower or any other co-obligor or guarantor or by reason of any Borrower's or
any co-obligor's or guarantor's bankruptcy or insolvency. Each Borrower
acknowledges that the term "Obligations" as used herein includes any payments
made by it or any other Borrower or other co-obligor or guarantor to Lender and
subsequently recovered by such Borrower, any other Borrower, co-obligor or
guarantor or a trustee for any of them pursuant to any bankruptcy, insolvency or
other proceedings. Lender may, in its sole and reasonable discretion, elect to
demand payment or performance at any time Lender is entitled to exercise such
remedies hereunder or under any other Loan Documents. In the event Lender elects
to demand performance, it shall at all times thereafter have the right to demand
payment until all of the
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Obligations have been paid in full. In the event Lender elects to demand
payment, it shall at all times thereafter have the right to demand performance
until all of the Obligations have been paid in full.
4.12 Subrogation and Subordinating. Nothing herein contained shall
operate as a release or discharge, in whole or in part, of any claim of any
Borrower against any other Borrower, by subrogation or otherwise, by reason of
any act done or payment made by any Borrower pursuant to the provisions of this
Agreement; but all such claims shall be subordinate to the Obligations of the
Borrowers or any of them to Lender.
ARTICLE V
CLOSING; CONDITIONS OF CLOSING AND BORROWING
5.1 Closing. The Closing of this transaction shall take place at the
offices of Krispy Kreme, Winston-Salem, North Carolina at 10:00 p.m. on December
17, 1998, or at such other time as the parties shall mutually agree.
5.2 Conditions of Loans and Advances at Closing. The obligations of the
Lender to make the Loans available to the Borrowers and to make advances
thereunder at the Closing, are subject to the: (a) accuracy and correctness of
the representations and warranties of the Borrowers contained herein and in the
other Loan Documents and in any certificate delivered pursuant to this Agreement
or the other Loan Documents, in all respects as if made on the date of such Loan
or advance; and (b) satisfaction of each of the following conditions:
5.2.1 Executed Loan Documents. This Agreement and all Loan Documents
required by this Agreement by the Lender shall have been duly authorized,
executed and delivered to the Lender by the Borrowers and shall be in full force
and effect and no Default or Event of Default shall exist hereunder or
thereunder.
5.2.2 Closing Certificates, etc.
(a) Certificate of the Borrowers. The Lender shall have
received a certificate at Closing from the Presidents of the Borrowers
and the Executive Vice President - Corporate Development, Finance and
Administration of Krispy Kreme and the Vice President or Treasurer of
each other Borrower, in form and substance satisfactory to the Lender,
to the effect that, to the best of their knowledge: (i) all
representations and warranties of the Borrowers contained in this
Agreement and the other Loan Documents are true, correct and complete;
(ii) neither the Borrowers nor their Subsidiaries are in violation of
any of the covenants contained in this Agreement or the other Loan
Documents; (iii) after giving effect to the transactions contemplated
by this Agreement, no Default or Event of Default has occurred; and
(iv) the Borrowers and their Subsidiaries, if applicable, have
satisfied each of the other closing conditions set forth in this
Agreement.
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(b) Certificates of Secretaries of the Borrowers. The Lender
shall have received, at Closing, a certificate in form and substance
satisfactory to the Lender, from the Secretary or Assistant Secretary
of each of the Borrowers, certifying: (1) that attached thereto is a
true and complete copy of the bylaws of the Borrowers as in effect on
the date of such certification; (2) that attached thereto is a true and
complete copy of resolutions adopted by the Board of Directors of the
Borrowers authorizing the execution, delivery and performance of this
Agreement and the other Loan Documents, as applicable; (3) as to the
incumbency and genuineness of the signature of each officer of the
Borrowers executing this Agreement or any of the other Loan Documents;
and (4) that, to the best of the Borrowers' knowledge as of the time
delivered, all written information, copies of documents, agreements and
contracts, and any other written material furnished or made available
to Lender in connection with the making of any Loan or the negotiation,
preparation or execution of this Agreement and the other Loan Documents
are true, correct and complete and did not or do not contain any untrue
statement of a material fact or omit a material fact necessary to make
the statements contained therein not misleading, and with respect to
each agreement or contract, a copy of which was provided to Lender,
each such contract and agreement is in full force and effect, no party
thereto has delivered any notice of default thereunder which remains
uncured and to the best of the Borrowers' knowledge, there exists no
default or event of default which, with the giving of notice or the
passage of time or both, would constitute a default of any of the
terms, conditions or provisions of any such contract or agreement, and
no other agreements relate thereto, whether oral, written, expressed or
implied, between the parties thereto or any other Person which could
materially adversely affect the rights, duties and obligations of any
Borrower.
(c) Articles of Incorporation. The Lender shall have received,
at Closing, a copy of the articles or certificate of incorporation and
all amendments thereto (excluding statements of change of registered
office and/or agent) of each Borrower and Subsidiary, certified as of a
recent date by the Secretary of State of the state of incorporation of
each such Borrower and Subsidiary, together with a certification by the
Secretary or Assistant Secretary of each Borrower and Subsidiary that
such articles or certificate of incorporation have not been amended
since such date.
(d) Certificates of Good Standing. The Lender shall have
received, at Closing, long-form (or short form if long forms are not
provided by the certifying authority) certificates as of a recent date
of either the good standing, existence or authorization (as may be
provided by the certifying authority) of each Borrower and each of its
Subsidiaries under the laws of each such corporation's state of
incorporation, which certificates shall be in form and content
reasonably satisfactory to Lender.
(e) Opinions of Counsel to the Borrower and the Borrower. The
Lender shall have received, at Closing, favorable legal opinion(s) as
to such matters as Lender may require.
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5.2.3 Consents; No Adverse Change.
(a) Governmental Approvals. All necessary approvals,
authorizations and consents, if any, which are required, of all
governmental bodies (including courts) having jurisdiction with respect
to the transactions contemplated by this Agreement shall have been
obtained.
(b) No Injunction, Etc. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or
proposed before any court, governmental agency or legislative body to
enjoin, restrain or prohibit, or to obtain substantial damages in
respect of, or which is related to or arises out of this Agreement or
the consummation of the transactions contemplated hereby or which, in
the Lender's sole and reasonable discretion, would make it inadvisable
to consummate the transactions contemplated by this Agreement.
(c) No Material Adverse Change. There shall not have occurred,
in the reasonable judgment of the Lender, any material adverse change
in the business, business prospects, condition (financial or otherwise)
or results of operations of any Borrower or Subsidiary, or any event,
condition or state of facts that could materially and adversely affect
the business, business prospects, financial condition or results of
operations of any Borrower or any Subsidiary.
(d) Event of Default. No Event of Default nor any Default
shall have occurred which has not been expressly waived in writing by
Lender.
5.2.4 Financial Matters. The Borrowers shall have delivered to the
Lender the Financial Statements specifically described in the definition of
"Financial Statements" appearing in Section 1.1 and, with respect to the
Financial Statements that have been audited by independent certified public
accountants, the Financial Statements shall be accompanied by a report thereon
containing an opinion that is not qualified, and such Financial Statements shall
be in a form satisfactory to the Lender in its sole and reasonable discretion.
5.2.5 Miscellaneous.
(a) Disbursement Instructions. The Lender shall have received
written or oral instructions from the Borrower directing the payment of
any proceeds of the Revolving Line of Credit made under this Agreement.
(b) Proceedings and Documents. All opinions, certificates and
other instruments and all proceedings in connection with the
transactions contemplated by this Agreement shall be satisfactory in
form and substance to the Lender. The Lender shall have received copies
of all other documents, instruments and opinions as the Lender may
reasonably request, in form and substance satisfactory to the Lender,
with respect to the transactions contemplated by this Agreement and the
taking of all actions in connection therewith.
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(c) Litigation Review. There shall not be any material pending
or threatened litigation against any Borrower or Subsidiary, and the
Borrowers shall have provided the Lender with access to all
documentation relating to any litigation involving any Borrower or
Subsidiary.
5.3 Loan Payoffs. Except as set forth on Schedule 8.6, all Indebtedness
not permitted by this Agreement shall be paid and satisfied in full prior to
Closing or shall be paid with a draw on the Revolving Line of Credit on the
Closing Date. In addition, each Borrower shall, and shall cause each of its
Subsidiaries to, terminate and cancel all arrangements and agreements with
respect to money borrowed (by which any Borrower or Subsidiary is a debtor) with
any Persons other than Lender, except as set forth on Schedule 8.6.
5.4 Conditions of Closing Conversion Loans. The obligations of the
Lender to close any Conversion Loan are subject to: (a) the condition that no
representation or warranty of the Borrowers contained herein or in the other
Loan Documents or in any certificate or Schedule delivered pursuant to this
Agreement or the other Loan Documents has become incorrect or inaccurate in any
respect which would have a material adverse effect on the Borrowers and their
Subsidiaries considered together; (b) all Loan Documents required by this
Agreement by the Lender shall have been duly authorized, executed and delivered
to the Lender by the Borrowers and shall be in full force and effect and no
Default shall have occurred and be continuing or no Event of Default shall have
occurred hereunder or thereunder which has not been expressly waived in writing
by Lender; and (c) the satisfaction of each of the following conditions: (i) the
Lender shall have received the certificate called for in Section 5.2.2(a)(i)
(subject to the standard of Section 5.4(a) above), (ii), (iii) and (iv) above
and the certificates called for in Section 5.2.2(d) above, (ii) the conditions
set forth in Sections 5.2.3, 5.2.4 and 5.2.5, and (iii) Lender shall have
received a certificate in form and substance satisfactory to Lender, from the
Secretary or Assistant Secretary of each of the Borrowers, certifying: (1) that
attached thereto is a true and complete copy of resolutions adopted by the Board
of Directors of the Borrowers authorizing the execution, delivery and
performance of the Loan Documents with respect to such Conversion Loan and that
such resolutions have not been altered, amended or rescinded; and (2) as to the
incumbency and genuineness of the signature of each officer of the Borrowers
executing any of the Loan Documents to be executed in connection with such
Conversion Loan.
5.5 Conditions of Making the Revolving Line of Credit Available to the
Borrowers and Making Advances Thereunder. The obligations of the Lender to make
the Revolving Line of Credit available to the Borrowers and to make advances
(other than any advance made at Closing) thereunder are subject to: (a) the
condition that no representation or warranty of the Borrowers contained herein
or in the other Loan Documents or in any certificate or Schedule delivered
pursuant to this Agreement or the other Loan Documents has become incorrect or
inaccurate in any respect which would have a material adverse effect on the
Borrowers and their Subsidiaries considered together; (b) all Loan Documents
required by this Agreement by the Lender shall have been duly authorized,
executed and delivered to the Lender by the Borrowers and shall be in full force
and effect and no Default shall have occurred and be continuing or no Event of
Default shall have occurred hereunder or thereunder which has not been expressly
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waived in writing by Lender; and (c) the satisfaction of each of the following
conditions: (i) the Lender shall have received the certificate called for in
5.2.2(a)(i) (subject to the standard of Section 5.5(a) above), and (ii) the
conditions set forth in Sections 5.2.3, 5.2.4 and 5.2.5. Each request for an
advance under the Revolving Line of Credit and each advance made by Lender to
the Borrowers pursuant to this Agreement shall constitute the certification
under Section 5.5(c)(i) above as of the date of such request or advance.
5.6 Waiver of Conditions Precedent. If the Lender makes any advance
hereunder prior to the fulfillment of any of the conditions precedent set forth
in this Article, the making of such advance shall constitute only an extension
of time for the fulfillment of such condition and not a waiver thereof, and the
Borrowers shall thereafter use their best efforts to fulfill each such condition
promptly unless the Lender otherwise indicates in writing.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Loan Agreement and to
make available (or continue to make available) to Borrowers the Revolving Line
of Credit, the Term Loan and any Conversion Loan, the Borrowers, jointly and
severally, make the following representations, warranties and covenants to the
Lender, each of which shall be true and correct as of the Closing Date, and as
of the date of each advance under the Revolving Line of Credit and as of the
date of any Conversion Loan (in which case the standard for advances under the
Revolving Line of Credit [other than the advance thereof made at Closing] and
Conversion Loans shall be as set forth in Sections 5.4(a) and 5.5(a)), and each
of which shall survive the execution of this Agreement and the making of the
initial or any other advance or loan hereunder.
6.1 Corporate Organization and Power. Each of the Borrowers and each of
their Subsidiaries (i) is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation as set forth on
Schedule 6.1; (ii) is qualified to do business and is in good standing in every
jurisdiction as set forth on Schedule 6.1; and (iii) has no Subsidiaries and is
not a partner or joint venturer in any partnership or joint venture except as
set forth on Schedule 6.1. Each of the Borrowers and each of their Subsidiaries
has the power to own its properties and to engage in the transactions
contemplated hereby; and each Borrower has the full power, authority and legal
right to execute and deliver this Agreement and the Loan Documents executed by
it and to perform and observe the terms and provisions hereof and thereof. No
Borrower or Subsidiary has, during the preceding five (5) years, been known as
or used any other corporate, fictitious or trade names (which was material to
its business) in the United States except as set forth on Schedule 6.15.
6.2 Litigation; Government Regulation. Except as set forth on Schedule
6.2, there are no material actions, suits, investigations or proceedings pending
or, to the knowledge of the Borrowers, threatened against or affecting any
Borrower or Subsidiary, or that question the validity of this Agreement or any
of the Loan Documents, at law or in equity before any court or administrative
officer or agency and, to their knowledge, neither the Borrowers nor any of
their
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Subsidiaries is in violation of or in default under any applicable statute,
rule, order, decree, writ, injunction or regulation of any governmental body
(including any court) where such violation may have a material adverse effect
upon the business, property, assets, operations or condition, financial or
otherwise, of any Borrower or Subsidiary.
6.3 Taxes. Except as set forth on Schedule 6.3, no Borrower or
Subsidiary is delinquent in the payment of any taxes in an aggregate amount that
would have a material adverse effect upon the business, property, assets,
operations or condition, financial or otherwise of any Borrower or Subsidiary
that have been levied or assessed by any governmental authority against it or
its assets. Except as set forth on Schedule 6.3, each Borrower and Subsidiary
has timely filed all tax returns that are required by law to be filed prior to
the date hereof where failure to file would have a material adverse affect upon
any Borrower or Subsidiary, and they have paid all taxes shown on said returns
and all other assessments or fees levied upon any Borrower or Subsidiary or upon
any of their respective properties to the extent that such taxes, assessments or
fees have become due and, if not due, such taxes have been adequately provided
for and sufficient reserves therefor have been established on such Borrower's or
Subsidiary's books of account. No material controversy in respect of income
taxes of any Borrower or Subsidiary is pending, or to the knowledge of the
Borrowers, threatened.
6.4 Enforceability of Loan Documents; Compliance With Other
Instruments. Each of the Loan Documents is the legal, valid and binding
obligation of each Borrower, enforceable against each Borrower in accordance
with its terms assuming the exercise by the Lender of commercial reasonableness
in the exercise of the remedies thereunder and except as enforceability may be
limited by bankruptcy, insolvency and other similar laws affecting creditor's
rights generally or by general equitable principles. Except as set forth on
Schedule 6.4, no Borrower or Subsidiary is in default in any material respect
with respect to any indenture, loan agreement, mortgage, lease, deed or similar
agreement related to the borrowing of monies to which any Borrower or Subsidiary
is a party or by which it, or any of its property, is bound. Neither the
execution, delivery or performance of this Agreement and of the Loan Documents
by the Borrowers, nor compliance by the Borrowers herewith or therewith (a)
conflicts or will conflict with or results or will result in any breach of, or
constitutes or will constitute with the passage of time or the giving of notice
or both, a default under, (i) the articles or certificate of incorporation or
bylaws of any Borrower or Subsidiary, (ii) except as set forth on Schedule 6.4,
any indenture, loan agreement, mortgage, lease or similar agreement, or (iii)
any law, order, writ, injunction or decree of any court or governmental
authority, or (b) results or will result in the creation or imposition of any
lien, charge or encumbrance upon the properties of any Borrower or Subsidiary
pursuant to any such agreement or instrument.
6.5 Governmental Authorization. No authorization, consent or approval
of, or declaration or filing with, any governmental authority is required for
the valid execution, delivery and performance by the Borrowers of this Agreement
and the Loan Documents or the consummation by the Borrowers of the transactions
contemplated hereby and thereby. Each of the Borrowers and Subsidiaries has, and
is in good standing with respect to, all material governmental approvals,
permits, certificates, inspections, consents and franchises necessary to
continue to conduct business as heretofore conducted and to own or lease and
operate its
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respective properties as now owned or leased by it. To their knowledge, none of
such approvals, permits, certificates, consents or franchises contain any term,
provision, condition or limitation more burdensome than such as are generally
applicable to Persons engaged in the same or similar business as any Borrower or
Subsidiary.
6.6 Event of Default. No Default shall have occurred and be continuing
or no Event of Default shall have occurred which has not been expressly waived
in writing by Lender.
6.7 Margin Securities. No Borrower or Subsidiary owns any "margin
stock" as such term is defined in Regulation U. None of the proceeds of the
Loans will be used, directly or indirectly, for the purpose of purchasing or
carrying any margin stock or for the purposes of maintaining, reducing or
retiring any Indebtedness that was originally incurred to purchase or carry
margin stock or for any other purpose that might constitute the transactions
contemplated hereby as a "purpose credit" within the meaning of Regulation U,
Regulation X or Regulation G or any other regulations of the Board of Governors
of the Federal Reserve System.
6.8 Franchise Matters. To the Borrowers' knowledge, Krispy Kreme is the
exclusive franchisor of the "Krispy Kreme" concept for the operation of retail
doughnut and coffee shops utilizing certain of the trademarks and service marks
listed on Schedule 6.15. Attached as Schedule 6.8 is a listing of each of Krispy
Kreme's franchisees, together with their mailing address and the address of the
physical location of their franchise(s). Also attached as a part of Schedule 6.8
is a copy of Krispy Kreme's most recently prepared Uniform Franchise Offering
Circular or other disclosure statement of similar import (the "Disclosure
Statement"). To the Borrowers' knowledge, neither the Disclosure Statement nor
any statements (whether oral or written) furnished by the Borrowers or by any
Person acting on the Borrowers' behalf in connection with the sale, management,
administration or termination of a franchise contains or contained any untrue
statement of a material fact or omits or omitted a material fact necessary to
make the statements made or contained therein or made in connection therewith
not misleading. None of the Borrowers are aware of any fact, circumstance or
condition related to franchising activities which might materially adversely
affect any Borrower or Subsidiary, their assets, business, prospects or
condition (financial or otherwise), or the ability of any Borrower to perform
any of its obligations hereunder or under any of the Loan Documents. Each
agreement between Krispy Kreme and its franchisees is valid, subsisting and in
full force and effect, and, to the Borrowers' knowledge, Krispy Kreme is not in
default with respect to any material term or condition thereof, nor has any
event occurred which, through the passage of time or the giving of notice, or
both, would constitute a default by Krispy Kreme thereunder.
6.9 Principal Places of Business. The chief executive office and
principal place of business of each Borrower (with the exception of HD Capital
and HD Development) is currently 370 Knollwood St., Suite 500, Winston-Salem,
North Carolina 27103. The chief executive office and principal place of business
of HD Capital is Suite 11, Fourth St. Plaza, 2500 W. Fourth St., Wilmington,
Delaware 19805. The chief executive office and principal place of business of HD
Development is 7303 Turfway Rd., Florence, Kentucky 41042. The Borrowers shall
promptly notify Lender of the relocation thereof by a party hereto.
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6.10 ERISA.
(a) None of the Borrowers maintains or has ever maintained a
defined benefit plan subject to ERISA. Except as set forth on Schedule
6.10, the present value of all accrued benefits under each Employee
Plan (based on those assumptions used to fund such Employee Plan) did
not, as of the most recent valuation date, exceed the then current
value of the assets of such Employee Plan allocable to such benefits.
Except as set forth on Schedule 6.10, full payment has been made on or
before the due date thereof of all amounts that any Borrower or
Subsidiary is required under the terms of each Employee Plan to have
paid as contributions to such plan.
(b) Borrowers' Profit-Sharing and 401(k) plan is tax qualified
pursuant to a currently effective determination letter issued by the
Internal Revenue Service (the "Service"), and is not under
investigation by either the Service or the United States Department of
Labor.
(c) No Borrower or Subsidiary has participated in any
Prohibited Transaction, which has subjected, or may subject, it to any
material civil penalty or tax imposed by Section 502(i) of ERISA or
Section 4975 of the Internal Revenue Code, respectively.
(d) To the knowledge of the Borrowers and based on actuarial
reports, the present value (determined using actuarial and other
assumptions that are reasonable in respect of the benefits provided and
the employees participating) of the liability of any Borrower or
Subsidiary for post-retirement benefits to be provided to its current
and former employees under all welfare benefit plans (as defined in
Section 3(1) of ERISA) does not, in the aggregate, exceed the assets
under all such plans allocable to such benefits by an amount which
would materially and adversely affect the financial condition of any
Borrower or Subsidiary or its ability to perform its obligations
hereunder.
(e) The execution and delivery of this Agreement will not
involve any transaction that is subject to the prohibitions of Section
406 of ERISA or in connection with which a tax could be imposed
pursuant to Section 4975 of the Internal Revenue Code.
(f) Neither the Borrowers nor any Subsidiary is making or has
ever made or been required to make any contributions to a Multiemployer
Plan.
(g) All of the Employee Plans of each of the Borrowers and
their Subsidiaries are listed on Schedule 6.10.
6.11 Financial Statements. The Financial Statements delivered to the
Lender have been prepared in accordance with Generally Accepted Accounting
Principles by the Borrowers and, in the case of the annual Financial Statements,
audited by independent certified public accountants. The Financial Statements
contain no material misstatement or omission and fairly
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present the financial condition, assets and liabilities of the Borrowers and
their Subsidiaries on a consolidated basis, as of the respective dates thereof
and the results of operations of the Borrowers and their Subsidiaries on a
consolidated basis, as of the respective dates thereof and the results of
operations of the Borrowers and their Subsidiaries on a consolidated basis, for
the respective periods then ended. Except as disclosed on Schedule 6.11, since
the date of the most recent of the Financial Statements, there has been no
material adverse change in the assets, liabilities or financial condition of any
Borrower or Subsidiary or in the results of the operations of any Borrower or
Subsidiary, and no Borrower or Subsidiary has incurred any obligation or
liability that could materially and adversely affect its financial condition,
business operations or properties, or has entered into any material contracts
not contemplated by this Agreement and not in the ordinary course of business
consistent with past practice.
6.12 Title to Assets. Except as set forth on Schedule 6.12, the
Borrowers and their Subsidiaries have good, indefeasible and merchantable title
in fee simple (or its equivalent under applicable law) to, and ownership of, the
assets reflected in the most recent Financial Statements, and all of their other
assets, free and clear of all liens, claims, security interests and
encumbrances. Except as set forth on Schedule 6.12, to the Borrowers' knowledge,
no financing statement that names any Borrower or any Subsidiary as debtor has
been filed and is still in effect, other than those evidencing any of the
Permitted Liens, and no Borrower or Subsidiary has signed any financing
statement or any security agreement authorizing any secured party thereunder to
file any such financing statement.
6.13 Solvency. The Borrowers and each of their Subsidiaries is solvent.
6.14 Use of Proceeds. Subject to Section 4.4, the Borrowers' use of the
proceeds of the Revolving Line of Credit, the Term Loan and any Conversion Loan
made by the Lender to the Borrowers pursuant to this Agreement are, and will
continue to be, legal and proper corporate uses and such uses are and will be
consistent with all applicable laws and statutes, as in effect from time to
time.
6.15 Assets for Conduct of Business. The Borrowers and each of their
Subsidiaries possess adequate assets, licenses, patents, patent applications,
copyrights, trademarks, service marks and trade names to continue to conduct
their respective businesses as heretofore conducted, without any material
conflict with the rights of others. Schedule 6.15 lists all patents, copyrights,
trademarks, service marks and trade names, registrations thereof or any
applications therefor, owned by any Borrower or Subsidiary and lists the owner
thereof.
6.16 Trade Relations. There exists no actual or, to the Borrowers'
knowledge, threatened termination, cancellation or limitation of, or any
modification or change in, the business relationship of any Borrower or
Subsidiary with any customer or any group of customers whose purchases
individually or in the aggregate are material to the business of a Borrower or
Subsidiary, or with any material supplier, and there exists no present condition
or state of facts or circumstances that would materially adversely affect any
Borrower or Subsidiary or prevent any Borrower or Subsidiary from conducting
such business after the consummation of
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the transactions contemplated by this Agreement in substantially the same manner
in which it has heretofore been conducted.
6.17 Compliance With Laws. Except as set forth on Schedules 6.17 and
6.18, each Borrower and Subsidiary has duly complied in all material respects
with, and their assets, properties, business operations and leaseholds are in
compliance in all material respects with, the provisions of all federal, state
and local laws, rules and regulations applicable to such Borrower or Subsidiary,
their assets and properties or the conduct of their businesses, including,
without limitation, all federal and state securities laws, business opportunity
and franchise laws, ERISA and OSHA, the violation of which would have a material
adverse impact on a Borrower or Subsidiary and there have been no material
citations, notices or orders of noncompliance issued to any Borrower or
Subsidiary under any such law, rule or regulation.
6.18 Environmental Matters. To the Borrowers' knowledge, and except as
may be set forth on Schedule 6.18:
(a) (i) No dangerous, hazardous or toxic substances,
pollutants, contaminants, chemicals, wastes or materials, within the
meaning of any applicable federal, state or local laws, regulations or
orders (collectively "Hazardous Substances"), and including without
limitation urea-formaldehyde, polychlorinated byphenyls (PCB's),
nuclear fuel or waste, and petroleum, including but not limited to
crude oil, natural gas, natural gas liquids, gasoline and synthetic
gas, are unlawfully stored or located on the Realty, and no part of the
Realty, including the groundwater located thereon and thereunder, is
presently contaminated by any such substance; (ii) no improvements on
the Realty contain any friable asbestos or substances containing
asbestos and deemed hazardous by any federal, state or local laws,
regulations or orders respecting such material; and (iii) there were no
releases of any Hazardous Substances, materials or wastes on any Realty
previously owned by any Borrower or any Subsidiary.
(b) The Realty has never been used during the period of
ownership or lease by any Borrower or Subsidiary as or for a mine, a
landfill, a dump or other disposal facility, industrial or
agricultural, a gasoline service station or a petroleum products
storage facility and has never been used for such purposes prior to the
period of ownership or lease by any Borrower or Subsidiary; and none of
the Realty is located on a site which, pursuant to CERCLA or any
similar state law, has been placed on the "National Priorities List" or
"CERCLIS List" (or any similar state list) of hazardous wastes;
(c) There are no underground storage tanks situated on any of
the Realty and no underground storage tanks have ever been situated on
any of the Realty;
(d) All activities and operations of the Borrowers and each of
their Subsidiaries meet the requirements of all applicable
environmental laws and regulations of all federal, state and local
governmental or regulatory bodies having jurisdiction over any Borrower
or Subsidiary or their properties, including without limitation, RCRA
and CERCLA;
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(e) No Borrower or Subsidiary has ever sent a Hazardous
Substance to a site which, pursuant to CERCLA or any similar state law,
(i) has been placed on the "National Priorities List" or "CERCLIS List"
of hazardous wastes (or any similar state list) and (ii) is subject to
a pending claim, administrative order or other request to take
"removal" or "remedial" action (as defined under CERCLA) or to pay for
the costs of cleaning up such a site;
(f) No Borrower or Subsidiary is involved in any suit or
proceeding or has received any notice from any governmental agency with
respect to a release of Hazardous Substances or has received notice of
any claims from any Person relating to personal injuries from exposure
to Hazardous Substances; and
(g) Each Borrower and Subsidiary has timely filed all reports
required to be filed, has acquired all necessary certificates,
approvals and permits and has generated and maintained in all material
respects all required data, documentation and records under any
applicable state, federal or local environmental laws, regulations or
rules.
For purposes of this Section 6.18, "knowledge" means the knowledge of Larry
Roscana, Director of Safety and Environmental Services, for Krispy Kreme.
6.19 Authorization. The execution, performance and delivery of this
Agreement and the Loan Documents by the Borrowers are within the corporate
powers of each of the Borrowers and have been duly authorized by all necessary
and appropriate corporate action and validly executed and delivered.
6.20 Withholding Taxes. The Borrowers and each of their Subsidiaries
are, and at all times shall remain, current in respect to payment of all federal
and state withholding taxes, social security taxes and other payroll taxes in an
aggregate amount that, if were unpaid, would have a material adverse effect upon
a Borrower or Subsidiary and, upon the Lender's request, the Borrowers shall
promptly deliver to the Lender satisfactory evidence of such payments. The
Borrowers and each of their Subsidiaries currently accrue, and will continue to
accrue, their respective payroll tax obligations and maintain sufficient
available funds (which may include available funds under the Revolving Line of
Credit), to satisfy their payroll tax liabilities.
6.21 Realty. Schedule 6.21 lists all real property owned by any
Borrower as of the Closing Date, and gives the address thereof.
6.22 Leased Property. Schedule 6.22 lists, as of the Closing Date, all
real property leased by any Borrower and lists the name of the lessors of such
property. The Borrowers enjoy peaceful and undisturbed possession of all of
their leased property and all such leases are valid and subsisting and in full
force and effect.
6.23 Contracts; Labor Disputes. No Borrower or Subsidiary is a party to
any collective bargaining contract or agreement with its employees. No Borrower
or Subsidiary is a party to,
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and there is not pending or, to their knowledge, threatened, any labor dispute,
strikes, lock-out, grievance, work stoppage or walkouts relating to any labor
contracts to which any Borrower or Subsidiary is a party. The Borrowers and each
of their Subsidiaries have, to their knowledge, complied with, and will continue
to comply with, the provisions of the Fair Labor Standards Act of 1938, as
amended, and no Borrower or Subsidiary, or any of their officers, directors or
employees, has committed any unfair labor practice, as defined in the National
Labor Relations Act of 1947, as amended.
6.24 Full Disclosure. Neither this Agreement nor any of the Loan
Documents, nor any statements furnished to the Lender by or on behalf of any
Borrower or Subsidiary in connection with the Revolving Line of Credit, the Term
Loan, any Conversion Loan or the Loan Documents, contain any untrue statement of
a material fact or omit a material fact necessary to make the statements
contained therein or herein not misleading. To the knowledge of the Borrowers,
there is no fact (as opposed to hypothetical situations based on current facts)
that the Borrowers have not disclosed to the Lender in writing that materially
adversely affects or will materially adversely affect the assets, business,
profits, prospects or conditions (financial or otherwise) of the Borrowers and
any of their Subsidiaries, considered together, or the ability of the Borrowers
to perform their obligations hereunder or under any of the Loan Documents.
ARTICLE VII
AFFIRMATIVE COVENANTS
Until payment in full of all the Obligations, each Borrower covenants
and agrees that, unless the Lender otherwise consents in writing:
7.1 Repayment of Obligations. The Borrowers will, jointly and
severally, promptly repay the Obligations when due, including without limitation
the amounts due under the Revolving Line of Credit Note, the Term Note and each
Conversion Note according to their respective terms and the terms of this
Agreement and the other Loan Documents.
7.2 Performance Under Loan Documents. The Borrowers will perform, or
cause their Subsidiaries to perform, all obligations required to be performed by
them, or any of them under the terms of this Agreement and the other Loan
Documents.
7.3 Financial and Business Information about the Borrower. The
Borrowers shall deliver to the Lender:
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(a) As soon as practicable and in any event within thirty (30)
days after the end of each fiscal month, beginning with the close of
the current month, a consolidated and consolidating balance sheet of
the Borrowers and their Subsidiaries as of the close of such fiscal
month and statements of income, retained earnings and cash flows for
the fiscal month then ended and for that portion of the fiscal year
then ended, prepared on a basis consistent with that of the preceding
month or containing disclosure of the effect on the results of
operations of any change in the application of accounting principles
and practices during the month, and certified by the President or
Senior Vice President- Finance of Krispy Kreme to present fairly in all
material respects the financial condition of the Borrowers and their
Subsidiaries as of their respective dates and the results of operations
of the Borrowers and their Subsidiaries for the respective periods then
ended, subject to normal year-end adjustments;
(b) As soon as practicable and in any event within 120 days
after the close of each fiscal year of the Borrowers, beginning with
the close of the current fiscal year, an audited consolidated and
consolidating balance sheet of the Borrowers and their Subsidiaries as
of the close of such fiscal year and audited statements of income,
retained earnings and cash flows for the fiscal year then ended,
audited by Price Waterhouse or another independent certified public
accountant acceptable to the Lender in accordance with Generally
Accepted Accounting Principles applied on a basis consistent with those
of the preceding year or containing disclosure of the effect on the
financial position or results of operation of any change in the
application of accounting principles and practices during the year, and
accompanied by a report thereon by such certified public accountants,
containing an opinion that is not qualified with respect to scope
limitations imposed by the Borrowers or with respect to accounting
principles followed by the Borrowers not in accordance with Generally
Accepted Accounting Principles;
(c) Concurrently with the delivery of the financial statements
described in subsection (b) above, a certificate from the independent
certified public accountants that, in making their examination of the
financial statements of the Borrowers and their Subsidiaries, they
obtained no knowledge of the occurrence or existence of any Default or
any Event of Default, or a statement specifying the nature and period
of existence of any such condition or event disclosed by their
examination, in a form satisfactory to the Lender;
(d) Concurrently with the delivery of the financial statements
described in subsection (b) above, a certificate from the President or
Senior Vice President - Finance of Krispy Kreme certifying to the
Lender, that to such officer's knowledge after such inquiry as such
officer deems appropriate, the Borrowers have kept, observed, performed
and fulfilled in all material respects each and every covenant,
obligation and agreement binding upon them that is contained in this
Agreement or the other Loan Documents, and that no Default or Event of
Default has occurred or specifying any such Default or Event of
Default, together with a financial covenant compliance worksheet, in a
form satisfactory to the Lender, reflecting the computation of the
financial covenants set forth
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in Sections 8.9 through 8.13 as of the end of the period covered by
such financial statements;
(e) If prepared and promptly upon completion, an annual
operating budget and cash flow projections for the current fiscal year,
indicating projected earnings and significant cash sources and uses for
the Borrowers and their Subsidiaries on a consolidated basis, in the
form presently prepared and utilized by the Borrowers, accompanied by a
certificate from the President or Senior Vice President - Finance of
Krispy Kreme to the effect that the financial projections are good
faith estimates of the financial condition and operations of the
Borrowers and their Subsidiaries for such periods;
(f) Written notice at the end of each fiscal quarter of the
Borrowers, beginning with the close of the current fiscal quarter, of
the preparation or modification of any material strategic business,
operational or financial plan, not addressed in subsection (e) above,
and Lender shall have the right, in accordance with the provisions of
Section 7.8, to review and examine any such plan; and
(g) Promptly upon completion or modification, the Disclosure
Statement if it involves any material change thereto or in the content
thereof.
7.4 Notice of Certain Events. The Borrowers shall promptly, but in no
event later than five (5) Business Days after any Borrower obtains knowledge
thereof, give written notice to the Lender of any:
(a) Default or Event of Default; or
(b) Matter, including litigation or any investigation,
government regulation or enforcement, that has resulted in, or might
reasonably be expected to result in, a material adverse change in the
financial condition, prospects, operations or business affairs of any
Borrower or Subsidiary.
7.5 Corporate Existence and Maintenance of Properties.
(a) The Borrowers shall, and shall cause each of their
Subsidiaries to, maintain and preserve their corporate existence and
all rights, privileges and franchises now enjoyed.
(b) The Borrowers shall, and shall cause each of their
Subsidiaries to, conduct their business in an orderly, efficient and
customary manner, and keep their assets and properties in good working
order and condition (normal wear and tear excepted).
(c) The Borrowers shall, and shall cause each of their
Subsidiaries to, file or cause to be filed in a timely manner, all
reports, applications and licenses that shall be
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required by any governmental authority and that, if not timely filed,
might have a material adverse effect on any Borrower or Subsidiary.
7.6 Payment of Indebtedness; Performance of Other Obligations. The
Borrowers shall, and shall cause each of their Subsidiaries to, pay all
Indebtedness when due and all other obligations in accordance with customary
trade practices, and to comply with all acts, rules, regulations and orders of
any legislative, administrative or judicial body or official applicable to any
Borrower or Subsidiary, or their assets or properties, or any part thereof or to
the operation of any Borrower's or Subsidiary's business; provided, however,
that the Borrowers or any Subsidiary may, in good faith, by appropriate
proceedings and with due diligence contest any such Indebtedness, rules,
regulations, orders and directions, and against which the Borrowers will
establish and maintain such reserves as may be required, and in such amounts, as
provided for in Section 11.15. The Borrowers shall, and shall cause each of
their Subsidiaries to, observe and remain in compliance with all laws,
ordinances, governmental rules and regulations to which they are subject and
obtain all licenses, permits, franchises or other governmental authorizations
necessary to the ownership of their properties or the conduct of their
businesses, and all covenants and conditions of all agreements and instruments
to which any Borrower or Subsidiary is a party.
7.7 Maintenance of Insurance. The Borrowers currently maintain the
policies of insurance (which include deductibles and levels of self insurance)
set forth on Schedule 7.7 which are satisfactory to the Lender and the Borrowers
agree to, and shall cause each of their Subsidiaries to, maintain in the future
worker's compensation insurance, liability insurance and insurance on their
properties, assets and business, now owned or hereafter acquired against such
casualties, risks and contingencies and in such types and amounts and with such
insurance companies as are comparable to that set forth on Schedule 7.7 and
satisfactory to the Lender, and shall deliver to the Lender, upon its request
therefor, a certificate from the President or Senior Vice President - Finance of
Krispy Kreme certifying to the Lender the existence of all of such policies and
which summarizes all of such policies. Each policy of insurance shall contain a
clause requiring the insurer to give not less than thirty (30) days prior
written notice to the Lender before any cancellation of any of such policies for
any reason whatsoever, except for nonpayment in which case there shall be ten
(10) days prior written notice. If any Borrower or Subsidiary fails to obtain
and maintain any of the policies of insurance required to be maintained
hereunder or to pay any premium in whole or in part, then the Lender may, at the
Borrowers' expense, without waiving or releasing any obligation or default by
the Borrowers hereunder, procure the same, but the Lender shall have no
obligation to do so. All sums so disbursed by the Lender, including reasonable
attorney's fees, court costs, expenses and other charges related hereto, shall
be payable, jointly and severally, by the Borrowers to the Lender on demand and
shall be additional Obligations hereunder.
7.8 Maintenance of Books and Records; Inspection. The Borrowers shall,
and shall cause each of their Subsidiaries to, maintain adequate books, accounts
and records, and prepare all financial statements required under this Agreement
in accordance with Generally Accepted Accounting Principles and in compliance,
in all material respects, with the regulations of any governmental regulatory
body having jurisdiction over any Borrower or Subsidiary. The
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Borrowers shall permit employees or agents of the Lender, upon reasonable notice
and during normal business hours, to inspect the properties of any Borrower or
Subsidiary and to examine or audit the books, records and accounts of any
Borrower or Subsidiary and make copies of and memoranda of the same in
connection with the administration of the Loans and this Agreement and the other
Loan Documents and to monitor compliance herewith and therewith, and to discuss
the affairs, finances and accounts of any Borrower or Subsidiary with its
officers and employees and, upon notice to such Borrower or Subsidiary, the
independent public accountants of the Borrowers or any Subsidiary (and by this
provision the Borrowers authorize, and shall cause each of their Subsidiaries to
authorize, such accountants to discuss the finances and affairs of any such
Borrower or Subsidiary), all at such reasonable times and as often as may be
reasonably requested. Any confidential information made available to the Lender
shall be kept confidential by the Lender, its employees and agents; provided,
however, that the Lender may disclose any such information (i) to the extent
deemed necessary by Lender in connection with the enforcement by Lender of this
Loan Agreement or any of the other Loan Documents, which disclosure may only be
made in appropriate proceedings and not otherwise publicly, (ii) if it is
otherwise publicly available, or (iii) if Lender is required by law to make
disclosure thereof.
7.9 Compliance with ERISA. The Borrowers shall, and shall cause each of
their Subsidiaries to: (i) make timely payment of contributions required to meet
the minimum funding standards set forth in ERISA with respect to any Employee
Plan; and (ii) promptly after the filing thereof, furnish to the Lender, upon
its request, copies of any annual report required to be filed under ERISA in
connection with each Employee Plan. The Borrowers shall not, nor shall they
permit any of their Subsidiaries to, participate in any Prohibited Transaction
that could subject any Borrower or Subsidiary to any material civil penalty
under ERISA or material tax under the Internal Revenue Code. The Borrowers shall
furnish to the Lender, upon the Lender's request, such additional information
about any Employee Plan or other employee benefit plan as may be reasonably
requested by the Lender.
7.10 COBRA. The Employee Plans of each Borrower and Subsidiary shall be
operated in such a manner that no Borrower or Subsidiary will incur any material
tax liability under Section 4980B of the Internal Revenue Code or any material
liability to any qualified beneficiary as defined in Section 4980B of the
Internal Revenue Code.
7.11 Payment of Taxes. The Borrowers shall, and shall cause each of
their Subsidiaries to, pay and discharge all taxes, assessments and governmental
charges or levies imposed upon them or upon their income or profits, or upon any
properties belonging to any of them, prior to the date on which penalties attach
thereto, and all lawful claims which, if unpaid, might become a lien or charge
upon any assets or properties of any Borrower or Subsidiary; provided, however,
that the Borrowers or any Subsidiary may, in good faith and with due diligence
in appropriate proceedings contest any such tax, assessment, charge, levy or
claim, and against which the Borrowers will establish and maintain such reserves
as may be required, and in such amounts, as provided for in Section 11.15.
7.12 Compliance with Statutes, etc. The Borrowers shall, and shall
cause each of their Subsidiaries to, comply in all material respects with all
applicable statutes, regulations and orders
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of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign, the noncompliance with which would be materially adverse to
the conduct of their business and the ownership of their property (including
applicable statutes, regulations, orders and restrictions relating to
environmental standards and controls and Krispy Kreme's franchising activities)
except where any Borrower contests such compliance in good faith and with due
diligence in appropriate proceedings, and against which the Borrowers will
establish and maintain such reserves as may be required, and in such amounts, as
provided for in Section 11.15.
7.13 Assets in Borrowers. Except as otherwise permitted herein, all
assets relating to the business of the Borrowers shall continue to be owned by
the Borrowers during the term hereof as presently owned.
7.14 Primary Deposit Relationship. Each Borrower shall, and shall cause
each of its Subsidiaries to, maintain its primary deposit relationship with
Lender. Notwithstanding the foregoing, neither Thornton's, HD Capital nor HD
Development shall be required to maintain its primary deposit relationship with
Lender.
ARTICLE VIII
NEGATIVE COVENANTS
Until payment in full of all the Obligations, the Borrowers covenant
and agree that, unless the Lender otherwise consents in writing, the Borrowers
will not, and the Borrowers will not permit any of their Subsidiaries to,
individually or in the aggregate:
8.1 Merger and Dissolution. (a) Wind-up, liquidate or dissolve;
provided, however, that a Subsidiary may wind-up, liquidate or dissolve into the
corporation owning and controlling such Subsidiary, (b) except with respect to a
merger, consolidation or reorganization in which a Borrower or Subsidiary is the
surviving corporation, enter into any consolidation, merger, syndicate or other
combination, provided that the number of voting shares of capital stock of such
Borrower or Subsidiary, outstanding immediately after any such consolidation,
merger, syndicate or other combination, plus the number of voting shares of
capital stock issuable as a result of such transaction by such Borrower or
Subsidiary, will not exceed by more than twenty percent (20%) the total number
of voting shares of capital stock of such Borrower or Subsidiary outstanding
immediately prior to such transaction, or (c) sell, lease or dispose of, in a
single transaction or a series of related transactions, its business or assets
as a whole or such part as in the opinion of the Lender constitutes a
substantial portion of a Borrower's or Subsidiary's business or assets.
8.2 Acquisitions. Acquire the business or all or a substantial portion
of the assets of any Person, whether by purchase of stock, assets or otherwise,
except for acquisitions of bakery and franchise operations.
8.3 Indebtedness. Be liable, directly or indirectly, contingently
(whether or not pursuant to any suretyship arrangement, endorsement or guaranty)
or otherwise, in respect of any
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obligation for money borrowed or owed, including Capital Lease Obligations,
except for: (a) the Obligations owed under this Agreement, the other Loan
Documents and other credit arrangements with the Lender; (b) business expenses
and current trade accounts payable incurred or accrued by a Borrower or a
Subsidiary in the ordinary course of its business, including liabilities under
operating leases (but not Capital Leases) of real or personal property, and
non-extraordinary expenses and payables; provided that the same shall be paid
when due in accordance with customary trade terms unless contested by
appropriate proceedings and against which the Borrowers will establish and
maintain such reserves as may be required, and in such amounts, as provided for
in Section 11.15, (c) indebtedness secured by Permitted Liens; (d) vehicle
financing; (e) the liabilities and obligations set forth on Schedule 8.6; (f)
unsecured obligations for money borrowed after the Termination Date, except for
intercompany obligations between the Borrowers and Subsidiaries as addressed in
(g) below; and (g) unsecured obligations for money borrowed from a Subsidiary
(which is not a Borrower) in connection with which the rights of such Subsidiary
with respect to such obligations are subordinated in full to Lender and Lender's
rights to receive payment in full of all of the Obligations.
8.4 Liens and Encumbrances. Except for Permitted Liens, create, assume
or suffer to exist any deed of trust, mortgage, encumbrance or other lien
(including a lien of attachment, judgment or execution) or security interest
(including the interest of a conditional seller of goods), securing a charge or
obligation on any of its property, real or personal, whether now owned or
hereafter acquired.
8.5 Disposition of Assets. Sell, lease, transfer, convey or otherwise
dispose of any of its assets or properties, including, without limitation, the
Realty, except for (a) sales of inventory and other assets in the ordinary
course of business; (b) the trade-in or disposition of used equipment for
replacement equipment or the disposition of obsolete equipment, regardless of
its replacement; (c) sales or leases of surplus Realty and other surplus assets
from time to time, in connection with the closing and/or relocation of doughnut
shops and other facilities or otherwise; (d) sales or leases of Realty and other
assets to franchisees in connection with its franchising practices in effect
from time to time; and (e) sales of Realty, signage, equipment, fixtures and
other assets in connection with the immediate leaseback of each such item so
sold from the party to whom such items were sold, but only if each such lease
shall be treated under Generally Accepted Accounting Principles as an operating
lease rather than a Capital Lease; provided, however, that the sales or other
dispositions permitted in subparts (a) through (e) above shall not be a part of
or related to (1) a plan or a series of related plans by which any Borrower is
closing, in the opinion of Lender, a substantial portion of its doughnut shops
or other facilities, or transferring such to another Person, or (2) the
cessation of business operations by such Borrower or Subsidiary. Lender reserves
the right, with respect to the sale/leaseback transactions referred to in
subpart (e) above, to review all such transactions from the standpoint of the
asset base of the Borrowers and the overall leverage of each such Borrower, and
to modify or eliminate subpart (e) above.
8.6 Restricted Loans. Make loans or advances to, or guaranty or
otherwise become liable for the obligations of, any Person except for: (i) loans
or advances to employees, directors or franchisees not exceeding $3,000,000.00
in the aggregate amount outstanding which loans are
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contemporaneously properly documented and are reflected in such Borrower's or
Subsidiary's records, or for reasonable travel and business expenses incurred in
the ordinary course of business; (ii) deposits and prepaid expenses incurred in
the ordinary course of business; (iii) equipment and stock repurchase agreements
not exceeding $10,000,000.00 in the aggregate amount outstanding, without the
consent of Lender, with respect to which the Borrowers' shall provide monthly
detailed reporting as to such matters related thereto as Lender shall require;
and (iv) in addition to the repurchase agreements described in (iii), other
guaranties not exceeding $7,000,000.00 in the aggregate amount outstanding,
without the consent of Lender, with respect to which the Borrowers' shall
provide monthly detailed reporting as to such matters related thereto as Lender
shall require. Notwithstanding the foregoing, the $10,000,000.00 limitation
described in subpart (iii) above may be increased by the amount by which the
$7,000,000.00 limitation described in subpart (iv) above exceeds the actual
amount of all such guaranties described in such subpart outstanding from time to
time, in which event the amount over $10,000,000.00 shall be used in determining
compliance with the $7,000,000.00 limitation in (iv). The limitations described
in subparts (iii) and (iv) above shall apply to any and all loans or other
advances made by Lender (other than pursuant to this Agreement), in addition to
loans and advances by third parties. The amounts of permitted loans, advances or
guaranties described in this Section shall not serve to reduce availability
under the Revolving Line of Credit. Schedule 8.6 sets forth a detailed listing
of all such loans, advances, guaranties and other obligations as of the date
thereof.
8.7 Restrictions on Dividends. Except as set forth below, declare or
pay any dividends (other than dividends payable solely in its own Stock) upon
any of its Stock, except that annual cash dividends in the aggregate amount of
up to fifty percent (50%) of the Borrowers' Net Income (after tax) for the
immediate preceding fiscal year may be distributed annually to Krispy Kreme's
shareholders.
8.8 Restrictions on Redemptions. Purchase, redeem, retire or otherwise
acquire, directly or indirectly, any shares of its Stock or, except as provided
in Section 8.7, make any distribution of cash, property or assets among the
holders of shares of its Stock or make any material change in its capital
structure except that Krispy Kreme may redeem, retire, purchase or otherwise
acquire any shares of its Stock pursuant to (i) the Stock Purchase Agreement
dated July 1, 1984, as amended, by and among Krispy Kreme and all of its current
shareholders, a copy of which is attached as Exhibit E, or (ii) any similar
agreement by and among Krispy Kreme and any permitted transferee of shares of
Stock of Krispy Kreme which was or will be entered into after the execution of
the Stock Purchase Agreement described in subpart (i), so long as such
additional agreements or arrangements serve the same principal purpose as the
Stock Purchase Agreement described above.
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8.9 Capital Expenditures. Until the Termination Date, make any
expenditure for Capital Assets during any fiscal year if, after giving effect to
such expenditures, the aggregate amount of all such expenditures on a
consolidated basis during such fiscal year shall exceed the sum of
$12,000,000.00; provided however, that any such expenditures financed
exclusively with the proceeds of the Revolving Line of Credit, the Term Loan or
a Conversion Loan shall be unrestricted; and, after the Termination Date, make
any expenditure for Capital Assets in any fiscal year in an amount in excess of
175% of the amount of charges to operations during the immediately preceding
fiscal year for depreciation of fixed assets and amortization of improvements.
8.10 Consolidated Tangible Net Worth. Permit Consolidated Tangible Net
Worth as of the last day of any fiscal month of the Borrowers during the
following periods to be less than the following amounts:
Period Amount
------ ------
As of Closing $36,000,000
As of 1/31/1999 - 1/29/2000 $41,000,000
As of 1/30/2000 - 1/27/2001 $48,000,000
As of 1/28/2001 - 1/26/2002 $54,000,000
As of 1/27/2002 and through $60,000.000
the term of this Agreement
8.11 Cash Flow. Permit the ratio of Operating Cash Flow to Debt Service
Requirements at the end of any fiscal year to be less than 1.5 to 1.0.
8.12 Current Ratio. Permit the ratio of Current Assets to Current
Liabilities as of the last day of any fiscal month to be less than 1.25 to 1.0.
8.13 Total Liabilities to Net Worth. Permit the ratio of Total
Liabilities to Consolidated Tangible Net Worth as of the last day of any fiscal
month to be greater than 1.25 to 1.0.
8.14 New Business. Except for the development and sale of new products
and the sale and leasing of doughnut shops and equipment to franchisees and
others, engage in any business other than the business in which the Borrowers
are currently engaged or a business reasonably related thereto, change its name
or do business under any other name other than its corporate name except for
those set forth on Schedule 6.15 and new tradenames, trademarks and service
marks adopted by the Borrowers or any of them.
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8.15 Subsidiaries or Partnerships. Except as set forth below, become a
partner or joint venturer in any partnership or joint venture or create or
acquire any Subsidiary or transfer any assets to a Subsidiary which does not
become a party to this Agreement and the other Loan Documents as a joint and
several co-obligor with the Borrowers. The foregoing restriction shall not apply
to (i) any partnership, joint venture or other similar arrangement pursuant to
which new doughnut shops are developed or alliances are made with either
existing or future franchisees, or (ii) Brumley Enterprises, Inc. The Borrowers
shall promptly notify Lender of the formation or acquisition of any Subsidiary.
At the time any new Subsidiary becomes a party to this Agreement and the other
Loan Documents, the Subsidiary's liability hereunder shall be primary and
unconditional (as described in Section 4.11) as to all Obligations, whether such
Obligations were incurred prior to the formation or acquisition of such
Subsidiary and it becoming a party to this Agreement and the other Loan
Documents or thereafter, as if such Subsidiary was an original party to this
Agreement and the other Loan Documents. All representations and warranties made
in this Agreement and in any other Loan Document shall be deemed to refer to any
such new Subsidiary as if it were an original party hereto and to the other Loan
Documents.
8.16 Material Adverse Transactions. Enter into any transaction that
materially and adversely affects or would or could materially adversely affect
the ability of any Borrower to repay any Indebtedness or the Obligations.
8.17 Hazardous Wastes. Permit any Hazardous Substances, the removal of
which is required or the maintenance of which is restricted, prohibited or
penalized by any federal, state or local agency, authority or governmental unit,
to be brought on to or located on the Realty or any other real property owned or
leased by any Borrower or Subsidiary, except in full compliance with all
applicable laws; and if any such material is brought or found located thereon in
violation of any applicable law, it shall be immediately removed, with proper
disposal, and all required environmental cleanup procedures shall be diligently
undertaken pursuant to all such laws, ordinances and regulations except where
contested in good faith and with due diligence in appropriate proceedings, and
against which the Borrowers will establish and maintain such reserves as may be
required, and in such amounts, as provided for in Section 11.15; provided,
however, nothing in the Loan Documents shall require any Borrower to undertake
remediation activities with respect thereto unless required by applicable law.
8.18 Change in Management. Allow any material change to occur in the
composition of the executive management personnel of Krispy Kreme as set forth
on Schedule 8.18.
8.19 Share Ownership of Subsidiaries. Allow the issued and outstanding
Stock of any Borrower (other than Krispy Kreme) to be owned by any Person other
than a Borrower.
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ARTICLE IX
EVENTS OF DEFAULT
9.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(a) Any Borrower fails to pay when due any principal of,
interest on or any other costs or fees relating to the Obligations as
and when the same become due and payable and the same is not cured
within ten (10) Business Days after written notice from the Lender of
such failure;
(b) Any Borrower or Subsidiary fails or neglects to observe,
perform or comply with any term, provision, condition or covenant
contained in Section 7.4 or Article VIII (with the exception of Section
8.4) of this Agreement upon written notice from the Lender;
(c) Any Borrower or Subsidiary fails or neglects to observe,
perform or comply, in any material respect, with any other term,
provision, condition or covenant contained in this Agreement or the
Loan Documents, and the same is not cured to the Lender's satisfaction
within thirty (30) days after written notice from the Lender;
(d) If any representation or warranty made in writing by or on
behalf of the Borrowers in this Agreement, the other Loan Documents or
any certificate, financial statement or instrument or document
delivered in connection therewith, or in any other agreement now
existing or hereafter executed between any Borrower and the Lender, or
in connection with the transactions contemplated hereby or thereby,
shall prove to have been false or incorrect in any material respect;
(e) The occurrence of any default or event of default on the
part of any Borrower or Subsidiary under the terms of any agreement or
contract that is material to the affairs, financial or otherwise, of
such Borrower or Subsidiary and such agreement or contract is
terminated as a result of such default or event of default;
(f) The occurrence of a default under any of the Loan
Documents or in any other agreement between Lender and any Borrower or
Subsidiary, now existing or hereafter executed;
(g) The filing by any Borrower or Subsidiary of any voluntary
petition seeking liquidation, reorganization, arrangement, readjustment
of debts or for any other relief under the Bankruptcy Code or under any
other act or law pertaining to insolvency or debtor relief, whether
state, federal or foreign, now or hereafter existing;
(h) The filing against any Borrower or Subsidiary of any
involuntary petition seeking liquidation, reorganization, arrangement,
readjustment of debts or for any other
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relief under the Bankruptcy Code or under any other act or law
pertaining to insolvency or debtor relief, whether state, federal or
foreign, now or hereafter existing, which petition is not dismissed
within sixty (60) days of the date of filing;
(i) Any Borrower or Subsidiary is enjoined, restrained or in
any way prevented by court order from conducting all or any material
part of its business affairs;
(j) A notice of lien, levy or assessment is filed of record
against any material portion of the assets of any Borrower or
Subsidiary by the United States, or any department, agency or
instrumentality thereof, or by any state, county, municipal or other
governmental agency, and such lien, levy or assessment is not
dismissed, released or discharged within seventy-five (75) days, or if
any taxes (in the amount of $100,000 or greater) or debts owing at any
time or times hereafter by any one of them becomes a lien or
encumbrance upon any asset of any Borrower or Subsidiary and the same
is not dismissed, released or discharged within thirty (30) days after
the same becomes a lien or encumbrance or, in the case of ad valorem
taxes, prior to the last day when payment may be made without penalty,
except with respect to liens, levies, assessments, taxes or debts being
contested in good faith and with due diligence, and with respect
thereto the Borrowers have established such reserves, if any, as may be
required by this Agreement;
(k) The entry of a judgment or the issuance of a warrant of
attachment, execution or similar process against any Borrower or
Subsidiary or involving or respecting any material asset or material
portion of the assets of any Borrower or Subsidiary, which shall not be
dismissed, discharged or bonded within forty-five (45) days;
(l) A custodian, trustee, receiver or assignee for the benefit
of creditors is appointed or takes possession of any material asset or
material portion of the assets of any Borrower or Subsidiary;
(m) The transfer, pledge or other disposition of any of the
Stock of any Subsidiary by Krispy Kreme or any Subsidiary which is the
owner thereof after the Closing;
(n) Any Borrower or Subsidiary shall be required under
applicable federal, state or local laws, rules, regulations or orders
to clean-up or cause to be cleaned up or bear the cost of cleaning up,
any Hazardous Substance, the cost of which may reasonably be expected
to exceed five percent (5%) of Consolidated Tangible Net Worth; or
(o) Except as set forth below, the occurrence of any "change
of control" of Krispy Kreme. For purposes of this provision, the term
"change of control" shall mean the occurrence of a change in the power
to direct the voting rights of greater than fifty percent (50%) of any
class of outstanding voting shares of Stock of Krispy Kreme, which
includes a sale, exchange, transfer or other disposition of the Stock
of Krispy Kreme. Excluded from the foregoing definition shall be (i)
inter vivos and testamentary transfers
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to lineal decedents of existing shareholders, and (ii) any change of
control which results solely by virtue of a public distribution of
Stock by Krispy Kreme in compliance with the Securities Act of 1933, as
amended, and all applicable state "blue sky" laws, the primary purpose
of which is to increase Krispy Kreme's working capital and to provide
liquidity to its shareholders, provided that the Borrowers remain in
compliance with all other terms and conditions of this Agreement
following any such change of control.
ARTICLE X
RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT
10.1 Rights and Remedies. Following the occurrence of any Event of
Default which has not been expressly waived in writing by Lender:
(a) Termination of Commitment. The Lender may terminate its
obligation to make continued credit available to the Borrowers
hereunder; and upon the occurrence of an Event of Default pursuant to
Sections 9.1(g), (h) or (l), the Lender's obligation to make Loans or
advances hereunder shall automatically be deemed terminated.
(b) Acceleration of Indebtedness. The Lender may declare all
or any part of the Obligations immediately due and payable, whereupon
such Obligations shall become immediately due and payable without
presentment, demand, protest, notice or legal process of any kind, all
of which are hereby expressly waived by the Borrowers; provided,
however, that all Obligations shall automatically become due and
payable upon the occurrence of an Event of Default pursuant to Sections
9.1(g), (h) or (l).
(c) Rights of Collection. The Lender shall have the right to
exercise all of its rights and remedies under this Agreement, the other
Loan Documents and applicable law, in order to satisfy the Obligations.
(d) Right of Set-Off. The Lender may, and is hereby authorized
by the Borrowers, and the Borrowers shall cause each of their
Subsidiaries to authorize the Lender to, at any time and from time to
time, to the fullest extent permitted by applicable laws, without
advance notice to any Borrower or Subsidiary (any such notice being
expressly waived by each Borrower and Subsidiary), set-off and apply
any and all deposits (general or special, time or demand, provisional
or final) at any time held in other than a fiduciary account and any
other indebtedness at any time owing by Lender to or for the credit or
the account of any Borrower or Subsidiary against any or all of the
Obligations of any Borrower or Subsidiary now or hereafter existing,
whether or not such Obligations have matured. The Lender agrees
promptly to notify the applicable Borrower or Subsidiary after the
occurrence of any such setoff, provided that the failure to give such
notice shall not affect the validity of such setoff.
10.2 Rights and Remedies Cumulative; Non-Waiver, etc. The enumeration
of the Lender's rights and remedies set forth in this Agreement is not intended
to be exhaustive and the
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exercise by the Lender of any right or remedy shall not preclude the exercise of
any other rights or remedies, all of which shall be cumulative, and shall be in
addition to any other right or remedy given hereunder, under the Loan Documents
or under any other agreement between any Borrower and the Lender, which may now
or hereafter exist, or at law or in equity or by suit or otherwise. No delay or
failure to take action on the part of the Lender in exercising any right, power
or privilege shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or privilege preclude any other or further
exercise thereof or the exercise of any other right, power or privilege or shall
be construed to be a waiver of any Event of Default. No course of dealing
between any Borrower and the Lender or their agents or employees shall be
effective to change, modify or discharge any provision of this Agreement or to
constitute a waiver of any Event of Default.
ARTICLE XI
MISCELLANEOUS
11.1 Survival of Agreements. All agreements, representations and
warranties contained herein or made in writing by or on behalf of the parties in
connection with the transactions contemplated hereby shall survive the execution
and delivery of this Agreement and the other Loan Documents. No termination or
cancellation (regardless of cause or procedure) of this Agreement shall in any
way affect or impair the powers, obligations, duties, rights and liabilities of
the parties hereto in any way with respect to (a) any transaction or event
occurring prior to such termination or cancellation, or (b) the Borrowers' (on
their own behalf and on behalf of their Subsidiaries) undertakings, agreements,
covenants, warranties and representations contained in this Agreement and the
other Loan Documents and all such undertakings, agreements, covenants,
warranties and representations shall survive such termination or cancellation
until payment in full of the Obligations. Each Borrower further agrees that to
the extent any Borrower makes a payment or payments to the Lender, which payment
or payments or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to a trustee,
receiver or any other party under any bankruptcy, insolvency or similar state or
federal law, common law or equitable cause, then, to the extent of such payment
or repayment, the Obligation or part thereof intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
received by the Lender. Notwithstanding any other provision of this Agreement to
the contrary, in the event any Letter of Credit Obligation or Credit Card
Obligation is outstanding as of the Termination Date, and such Letter of Credit
Obligation or Credit Card Obligation shall remain outstanding, then with respect
to each such outstanding and continuing Letter of Credit Obligation or Credit
Card Obligation, this Agreement shall remain in full force and effect as to the
Borrowers until all such Letter of Credit Obligations, Credit Card Obligations
and other Obligations of the Borrowers to Lender have been paid in full, and in
the event that there are no other Obligations of the Borrowers to Lender
remaining outstanding as of such time except for the Letter of Credit
Obligations or Credit Card Obligations, Lender shall have no further obligations
hereunder. All Letter of Credit Obligations and Credit Card Obligations shall be
subject to the terms and conditions of this Agreement, in addition to the terms
and conditions of any other agreement, document or instrument entered into
between Lender and any such Borrower with respect thereto.
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11.2 Governing Law; Jurisdiction. THIS AGREEMENT HAS BEEN EXECUTED,
DELIVERED AND ACCEPTED AT, AND SHALL BE DEEMED TO HAVE BEEN MADE IN, NORTH
CAROLINA AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES
HERETO DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS
OF LAW PROVISIONS) OF THE STATE OF NORTH CAROLINA. AS PART OF THE CONSIDERATION
FOR NEW VALUE THIS DAY RECEIVED, THE BORROWERS CONSENT TO THE JURISDICTION OF
ANY STATE COURT WITHIN FORSYTH COUNTY, NORTH CAROLINA OR ANY FEDERAL COURT
LOCATED WITHIN THE MIDDLE DISTRICT OF THE STATE OF NORTH CAROLINA, FOR ANY
PROCEEDING TO WHICH THE LENDER IS A PARTY, AND CONSENTS THAT ALL SERVICE OF
PROCESS BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO THE BORROWERS OR ANY
OF THEM AT THE ADDRESS STATED IN SECTION 11.3 BELOW AND SERVICE SO MADE SHALL BE
DEEMED TO BE COMPLETED UPON THE ACTUAL RECEIPT THEREOF. NOTHING IN THIS SECTION
SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR AFFECT THE RIGHT OF THE LENDER TO BRING ANY ACTION OR
PROCEEDING AGAINST ANY BORROWER OR ANY BORROWER'S PROPERTY IN THE COURTS OF ANY
OTHER JURISDICTION THAT HAS JURISDICTION OVER ANY BORROWER OR ITS PROPERTY OR
THE RIGHT OF ANY SUCH BORROWER TO CONTEST SUCH JURISDICTION.
11.3 Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been validly served, given or delivered
three (3) Business Days after deposit in the United States mail, certified mail,
return receipt requested, with postage prepaid, and addressed to the party to be
notified as follows:
To Any Borrower: 370 Knollwood St., Suite 500
Winston-Salem, NC 27103
Attn: President
With Copies To: Krispy Kreme Doughnut Corporation (if Krispy
Kreme is not the Borrower to whom the
original notice was intended)
370 Knollwood St., Suite 500
Winston-Salem, NC 27103
Attn: Randy S. Casstevens, Sr. Vice-President - Finance
48
<PAGE> 49
To Lender: Branch Banking and Trust Company
110 South Stratford Road
Winston-Salem, NC 27104
Attn: Steven G. Bullard
or to such other address as each party may designate for itself by like notice,
or shall be deemed to have been validly served, given or delivered on the date
of delivery to such party at such address if notice is given or delivered by
overnight delivery service or by hand delivery.
11.4 Indemnification of the Lender. From and at all times after the
date of this Agreement, and in addition to all of the Lender's other rights and
remedies against the Borrowers or any Subsidiary, the Borrowers, jointly and
severally, agree to indemnify and hold harmless the Lender and each director,
officer, employee, agent and Affiliate of the Lender against any and all claims,
losses, damages, liabilities, costs, and expenses of any kind or nature
whatsoever (including without limitation attorneys' fees, costs and expenses)
incurred by or asserted against the Lender or any such director, officer,
employee, agent or Affiliate of the Lender, from and after the date hereof, as a
result of or arising from or any way relating to (a) any breach or violation of
this Agreement or any other Loan Document by any Borrower or Subsidiary; (b) any
breach of any of the representations, warranties or covenants made in this
Agreement or any other Loan Document by any Borrower; (c) any breach of any of
the representations, warranties or covenants made in this Agreement or any other
Loan Document by any Borrower in connection with the closing of any Conversion
Loan or the making of any advance, other than any advances to be made at Closing
under the Revolving Line of Credit, subject to the standards set forth in
Sections 5.4(a) and 5.5(a); or (d) any inaccuracy or misrepresentation in any of
the Schedules attached to this Agreement or in any other Loan Document delivered
in connection with this Agreement (whether delivered at Closing or thereafter).
11.5 Fees and Expenses. Whether or not the transactions contemplated by
this Agreement shall be consummated, the Borrowers shall, jointly and severally,
be obligated:
(a) Fees and Expenses. As provided below, to pay or reimburse
the Lender upon demand for all expenses (including, without limitation,
attorneys' fees) incurred or paid by the Lender (except salaries of the
Lender's regularly employed personnel) in connection with: (i) the
preparation, execution, delivery, modification or amendment of this
Agreement or the other Loan Documents; (ii) following an Event of
Default, charges for appraisers, examiners, environmental consultants,
auditors or similar Persons whom the Lender may engage with respect to
rendering opinions concerning the financial condition of the Borrowers
and their Subsidiaries or the condition of any of their assets; (iii)
any attempt to enforce, or the enforcement of, any rights of the Lender
against any Borrower or any other Person that may be obligated to the
Lender by virtue of this Agreement or the other Loan Documents; and (v)
any refinancing or restructuring of the credit arrangements provided
under this Loan Agreement in the nature of a "work-out" or in any
insolvency or bankruptcy proceeding. Lender will submit invoices to
Borrowers for all such fees and expenses which will be mutually agreed
upon and paid by the Borrowers.
49
<PAGE> 50
(b) Brokerage Fees. To hold the Lender harmless from and
against any and all finder's or brokerage fees and commissions that may
be payable in connection with the transactions contemplated by this
Agreement other than any fees or commissions of finders or brokers
engaged by the Lender.
11.6 Waivers by the Borrower. Except as otherwise provided for in this
Agreement or the other Loan Documents, each Borrower hereby waives (a)
presentment, demand and protest and notice of presentment, protest, default,
non-payment, maturity, intent to accelerate and all other notices; and (b) the
benefit of all valuation, appraisement and exemption laws.
11.7 Assignment and Sale. No Borrower may sell, assign or transfer this
Agreement, or the other Loan Documents or any portion thereof, including without
limitation, any Borrower's rights, title, interests, remedies, powers and duties
hereunder or thereunder.
11.8 Amendment. This Agreement and the other Loan Documents may only be
amended, changed, discharged or terminated, by an instrument in writing signed
by the Lender and each of the Borrowers. Any provision hereof or thereof may be
waived by an instrument signed by the party to be charged.
11.9 Severability. To the extent any provision of this Agreement is
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
11.10 Entire Agreement. This Agreement and the other documents,
certificates and instruments referred to herein constitute the entire
understanding and agreement between the parties and supersede and rescind any
prior agreements relating to the subject matter hereof.
11.11 Binding Effect. All of the terms of this Agreement and the other
Loan Documents, as the same may from time to time be amended, shall be binding
upon, inure to the benefit of and be enforceable by the successors and assigns
of the Lender and the successors and permitted assigns of the Borrowers.
11.12 Captions. The captions to the various sections and subsections of
this Agreement have been inserted for convenience only and shall not limit or
affect any of the terms hereof.
11.13 Conflicts of Terms. The provisions of the Exhibits and Schedules
hereto and the other Loan Documents are incorporated in this Agreement by this
reference thereto. Except as otherwise provided in this Agreement and except as
otherwise provided in the other Loan Documents, if any provision contained in
this Agreement is in conflict with, or inconsistent with, any provision of the
other Loan Documents, the provisions contained in this Agreement shall control.
50
<PAGE> 51
11.14 Injunctive Relief. The Borrowers recognize that in the event any
of them fail to perform, observe or discharge any of their obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to the Lender. Each Borrower therefore agrees that Lender, if the Lender
so requests, shall be entitled to temporary and permanent injunctive relief in
any case where a remedy at law may prove to be inadequate relief.
11.15 Reserves. Whenever this Agreement requires the establishment and
maintenance of reserves by a Borrower or Subsidiary, such reserves shall be
reasonable and adequate under the circumstances and may, at the Borrower's
option, include available funds under the Revolving Line of Credit.
11.16 Third Parties Not Benefited. All conditions to the obligations of
Lender, including the obligation to make advances, are imposed solely and
exclusively for the benefit of the Borrowers and no other person or entity shall
have standing to require satisfaction of such conditions in accordance with
their terms or be entitled to assume that Lender will refuse to make advances in
the absence of strict compliance with any or all thereof, and no other person or
entity shall, under any circumstances, be deemed to be a beneficiary of such
conditions, any and all of which may be freely waived in whole or in part by
Lender at any time if in its sole discretion it deems it desirable to do so.
11.17 No Agency. Lender is not the agent or representative of any
Borrower or Subsidiary, and no Borrower or Subsidiary is the agent or
representative of Lender, and nothing in this Agreement shall be construed to
make Lender liable to anyone with whom any Borrower or Subsidiary deals.
11.18 No Partnership or Joint Venture. Nothing herein nor the acts of
the parties hereto shall be construed to create a partnership or joint venture
between any Borrower or Subsidiary and Lender.
51
<PAGE> 52
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in their corporate names by their duly authorized corporate officers as
of the date first above written.
LENDER:
BRANCH BANKING AND TRUST COMPANY
By: /s/ Steven G. Bullard
-------------------------------------------
Steven G. Bullard, Vice President
BORROWERS:
KRISPY KREME DOUGHNUT CORPORATION
By: /s/ J. Paul Breitbach
-------------------------------------------
Name: J. Paul Breitbach
Title: Executive Vice President - Corporate
Development, Finance and Administration
THORNTON'S FLAV-O-RICH BAKERY,
INCORPORATED
By: /s/ Thomas C. McNeil
-------------------------------------------
Name: Thomas C. McNeil
Title: Vice President
KRISPY KREME DISTRIBUTING COMPANY,
INCORPORATED
By: /s/ Thomas C. McNeil
-------------------------------------------
Name: Thomas C. McNeil
Title: Vice President
KRISPY KREME DOUGHNUTS COMPANY
By: /s/ Faye Gaddy
-------------------------------------------
Name: Faye Gaddy
Title: President
52
<PAGE> 53
HD CAPITAL CORPORATION
By: /s/ Faye Gaddy
-------------------------------------------
Name: Faye Gaddy
Title: President
HDN DEVELOPMENT CORPORATION
By: /s/ Faye Gaddy
-------------------------------------------
Name: Faye Gaddy
Title: President
53
<PAGE> 54
FIRST AMENDMENT
TO
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDMENT is made effective as of the 28th day of April, 1999, by
and among BRANCH BANKING AND TRUST COMPANY, a North Carolina banking corporation
("Lender"), KRISPY KREME DOUGHNUT CORPORATION, a North Carolina corporation,
THORNTON'S FLAV-O-RICH BAKERY, INCORPORATED, a North Carolina corporation,
KRISPY KREME DISTRIBUTING COMPANY, INCORPORATED, a North Carolina corporation,
KRISPY KREME DOUGHNUTS COMPANY, a North Carolina corporation, HD CAPITAL
CORPORATION, a Delaware corporation, and HDN DEVELOPMENT CORPORATION, a Kentucky
corporation (collectively, the "Borrowers").
R E C I T A L S:
A. Lender has extended to the Borrowers certain credit facilities as
described in and governed by that certain Amended and Restated Loan Agreement by
and among the parties dated December 21, 1998 (the "Loan Agreement").
B. The parties desire to amend the Loan Agreement as set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties amend the Loan Agreement as
follows:
1. Section 8.6 of the Loan Agreement, entitled "Restricted Loans," is
amended by deleting the reference to $3,000,000 in subclause (i) and
substituting in lieu thereof the sum of $5,000,000.
2. Except as otherwise specifically set forth herein, all of the other
terms and conditions of the Loan Agreement shall remain in full force and
effect, as amended hereby, and are ratified and affirmed by the parties.
54
<PAGE> 55
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date written above.
LENDER:
BRANCH BANKING AND TRUST COMPANY
By: /s/ Steven G. Bullard
-------------------------------------------
Steven G. Bullard, Vice President
BORROWERS:
KRISPY KREME DOUGHNUT CORPORATION
By: /s/ J. Paul Breitbach
-------------------------------------------
Name: J. Paul Breitbach
Title: Executive Vice President - Corporate
Development, Finance and Administration
THORNTON'S FLAV-O-RICH BAKERY,
INCORPORATED
By: /s/ Thomas C. McNeil
-------------------------------------------
Name: Thomas C. McNeil
Title: Vice President
KRISPY KREME DISTRIBUTING COMPANY,
INCORPORATED
By: /s/ Thomas C. McNeil
-------------------------------------------
Name: Thomas C. McNeil
Title: Vice President
55
<PAGE> 56
KRISPY KREME DOUGHNUTS COMPANY
By: /s/ Faye Gaddy
-------------------------------------------
Name: Faye Gaddy
Title: President
HD CAPITAL CORPORATION
By: /s/ Faye Gaddy
-------------------------------------------
Name: Faye Gaddy
Title: President
HDN DEVELOPMENT CORPORATION
By: /s/ Faye Gaddy
-------------------------------------------
Name: Faye Gaddy
Title: President
56
<PAGE> 1
EXHIBIT 10.2
FORM OF
ASSOCIATE'S LICENSE AGREEMENT
FOR MAKING AND SELLING
KRISPY KREME
DOUGHNUTS
NORTH CAROLINA )
) ASSOCIATE'S LICENSE AGREEMENT
FORSYTH COUNTY )
THIS AGREEMENT ("Agreement"), made and entered into as of the date and
year set forth below, by and between KRISPY KREME DOUGHNUT CORPORATION ("Krispy
Kreme"), a North Carolina corporation, having its principal office at
Winston-Salem, North Carolina and ________________________ ("Associate").
WHEREAS, Krispy Kreme has established successfully over a period of
years a reputation, demand and goodwill for fresh and distinctive doughnuts and
related products, as set forth in the Krispy Kreme Associates' Manuals as
amended from time to time, under the name "Krispy Kreme," which signifies the
highest standards of management, supervision, merchandising and freshness,
uniformity and quality of products; and
WHEREAS, Krispy Kreme has developed and maintained over a period of
years, by expending time, effort and money, a unique system for the production,
marketing and sale of its products (the "System") and has been and is currently
engaged, among other things, in the business of licensing its System; and
WHEREAS, the System is one unique and highly developed product
consisting of the Krispy Kreme's mixes (the "Mix"), its Production Equipment
System, which consists of equipment manufactured by Krispy Kreme, its federally
registered trademarks and service marks (the "Marks") and the reputation and
goodwill established and associated therewith, its unique doughnut shops with
their distinctive architectural style and motif, properly located to yield the
greatest public acceptance, and high standards and quality of products and
service, and its knowledge, technology and manner of doing business in the field
of production and sales, all of which are designed to produce Krispy Kreme
Doughnuts that are fresh and uniform in taste; and
WHEREAS, Associate recognizes the benefit of being identified with
Krispy Kreme and desires to be licensed to utilize the unique System, to
produce, market, package and sell Krispy Kreme Doughnuts in the manner set forth
in the Krispy Kreme Associates' Manuals as amended from time to time (the
"Manual"), to operate a doughnut shop(s) and a doughnut producing facility or
facilities at the location(s) defined in Exhibit A attached (the "Location"), to
have the only license with Krispy Kreme to utilize the System in an exclusive
geographical area defined in
<PAGE> 2
Exhibit B attached (the "Area"), and to do all of the foregoing under the Krispy
Kreme name and Marks; and
WHEREAS, Krispy Kreme is willing to grant such license to Associate
upon the terms and conditions herein set forth;
NOW, THEREFORE, it is mutually agreed by Krispy Kreme and Associate as
follows:
ARTICLE I
GRANT OF LICENSE BY KRISPY KREME TO ASSOCIATE
Subject to the continuing good faith performance by Associate in the
use and application of the System and in consideration of payment by Associate
of royalties defined below and purchase of Mix and Production Equipment System,
Krispy Kreme hereby grants a license to Associate strictly limited to the
following:
A. USE OF SYSTEM. To produce and sell Krispy Kreme Doughnuts
using the System in accordance with standards set forth in the
Manual.
B. PACKAGING. To package Krispy Kreme Doughnuts so produced in
containers and boxes of a quality, size, type and design and
strictly in accordance with the instructions set out in the
Manual.
C. LOCATION OF PRODUCTION, PACKAGING AND DOUGHNUT SHOP SALES. To
operate a doughnut producing facility and doughnut shop for
retail sale of Krispy Kreme Doughnuts at the Location, and to
conduct the business of producing, marketing, packaging and
selling at retail or both retail and wholesale, over the
counter and by truck distribution, from the Location. Since
location is vitally important to successful marketing of
Krispy Kreme Doughnuts, if Associate desires to relocate or
establish an additional location within the Area, he shall
obtain prior written approval of Krispy Kreme.
D. SIGNIFICANCE OF FRESHNESS. To sell, at retail or wholesale,
Krispy Kreme Doughnuts only if such doughnuts are "fresh," as
that term is defined in the Manual. Associate acknowledges
that "freshness," as defined in the Manual, is a key element
of the System and essential to maintenance of Krispy Kreme's
high standards of quality and uniformity and covenants to sell
Krispy Kreme Doughnuts only if they are fresh. For purposes of
this Agreement, the words "Krispy Kreme Doughnuts" mean FRESH
doughnuts (but not frozen doughnuts) and related products that
are uniform in taste and that are produced under the System in
accordance with the Manual and this Agreement.
2
<PAGE> 3
E. TRADEMARKS. To use Krispy Kreme's Marks in selling of Krispy
Kreme Doughnuts only as authorized in this Agreement and the
Manual.
F. NAME. To use the words "Produced under the Authority of Krispy
Kreme Doughnut Corporation" on containers and packages for
Krispy Kreme Doughnuts produced by Associate.
G. TERM. Unless terminated under the provisions of Article VIII
hereof, the term of this Agreement shall be for a period of 15
years commencing upon the date hereof and ending on _____,
____ ("Original Term"), such Original Term (or any subsequent
five (5) year renewal term) to be automatically extended for a
five (5) year period thereafter, subject to the right of
either party to terminate the Agreement upon giving written
notice to the other party not less than six (6) months prior
to date of termination of the Original Term (or any subsequent
five (5) year renewal term).
ARTICLE II
KRISPY KREME'S COVENANTS
A. EXCLUSIVE AREA. Notwithstanding anything else in the Agreement
to the contrary, during the term hereof, Krispy Kreme shall
not grant to any other person a license to utilize the System
in the Area to make wholesale, retail, special order and fund
raising sales. During such term, Krispy Kreme shall not itself
produce, package, distribute or sell fresh Krispy Kreme
Doughnuts in the Area through retail, wholesale and special
order and fund raising sales. Krispy Kreme may produce and
sell products not sold under Krispy Kreme Marks, within the
Area regardless of whether or not such products shall be
deemed to be competitive with Associate.
Associate shall not sell Krispy Kreme Doughnuts or
utilize the System to sell any products outside the Area.
Associate shall not deliver or solicit orders for sales of
Krispy Kreme Doughnuts or other products outside the Area.
B. FOOD, DRUG AND COSMETIC ACT AND OTHER GUARANTEES. Krispy Kreme
guarantees that all articles and goods shipped or delivered to
Associate shall be properly branded and labeled at the time of
delivery and shall comply with the provisions of the Federal
Food, Drug and Cosmetic Act. Krispy Kreme shall use its best
efforts to see that all said articles and goods comply with
and are produced and shipped under and in accordance with all
other applicable federal, state and local laws, rules and
regulations.
C. INDEMNIFICATION. Krispy Kreme hereby agrees to indemnify and
save harmless Associate from and against any loss, claim or
damage, including reasonable attorneys' fees, resulting from
any impurity, adulteration, or misbranding of the Mix and
other products produced by Krispy Kreme and delivered to
3
<PAGE> 4
Associate which may be due to negligence of Krispy Kreme or
breach by Krispy Kreme of any provision of this Agreement.
D. TRADEMARKS AND SERVICE MARKS.
1. Krispy Kreme warrants:
(a) that it or one of its subsidiary
corporations is owner of the Marks set forth
in the Manual;
(b) that said Marks are duly registered in the
United States Patent Office as trademarks
and service marks for goods and services set
forth in the Manual; and
(c) that Krispy Kreme has the right to grant
this license.
2. Krispy Kreme agrees that, in respect of all actions
or claims by third parties, it will indemnify and
hold Associate harmless from all costs (including
reasonable attorneys' fees), losses and liabilities
arising out of or resulting from the use by Associate
of Krispy Kreme's Marks, distinctive markings,
designs, labels and other marks pursuant to this
Agreement. Both parties agree that Krispy Kreme shall
have the exclusive right to defend any such claim,
suit, action or proceeding by any third party against
Associate arising out of or resulting from such use
and that Associate shall promptly and timely notify
Krispy Kreme of all such claims, actions, suits and
proceedings.
E. PURPOSE OF LICENSE. Krispy Kreme covenants, and Associate
agrees, that the purpose of this Agreement is to generate
revenue for Associate through his active participation in the
licensed business and for Krispy Kreme as compensation for its
licensing of the System; and they further agree that the
purpose of such compensation and revenue is not to raise
capital for Krispy Kreme or to provide Associate with a
monetary return on his investment solely from the efforts of
others.
F. TECHNICAL ASSISTANCE. Krispy Kreme shall make available to
Associate such technical assistance and services as it may be
providing Associates from time to time upon such terms and
conditions as may be established by Krispy Kreme.
G. FINANCIAL ASSISTANCE. If Krispy Kreme provides financial
assistance of any kind to Associate, it will charge Associate
a service fee and interest, or either, for such financial
assistance.
4
<PAGE> 5
ARTICLE III
ASSOCIATE'S COVENANTS
A. BEST EFFORTS IN AREA. Associate shall exert his best efforts
to maximize the permitted sales potential for Krispy Kreme
Doughnuts in the Area.
B. TERM. Associate shall have the right to utilize the System and
to produce, distribute, market and sell, at such price or
prices as Associate in his sole discretion shall determine,
Krispy Kreme Doughnuts under Krispy Kreme's Marks for so long
as this Agreement remains in full force and effect and no
longer.
C. DOUGHNUT PRODUCING FACILITY. Associate shall maintain and
operate a doughnut producing facility, where all production
shall be done, at the Location with delivery and production
equipment adequate to supply Krispy Kreme Doughnuts through
both wholesale and retail sales in the Area, and he shall
comply with all applicable laws, regulations and ordinances
pertaining to its operation and shall at all times maintain
the doughnut producing facility in a clean, wholesome and
sanitary condition.
D. PRODUCTION. Associate shall comply with all instructions,
formulae, specifications and quality control guidelines for
the production of, and the procedures for packaging of, Krispy
Kreme Doughnuts as set forth in the Manual. If Associate fails
to comply with these provisions of the Manual, (or has not
received written approval for deviation from Manual standards)
after written notice thereof by Krispy Kreme, Associate shall
immediately cease all further production, distribution and
sale of Krispy Kreme Doughnuts or such portions thereof as
Krispy Kreme shall direct until such failure is corrected (or
until such deviation from Manual standards is approved in
writing by Krispy Kreme).
E. USE OF MIX AND PRODUCTION EQUIPMENT SYSTEM. Associate
recognizes the importance of the Krispy Kreme name and agrees
to use his best efforts to maintain the high standards of the
System. In connection with the license of the System,
Associate recognizes that the Mix is an essential ingredient
of the Krispy Kreme Doughnut and a key element and important
factor in the uniqueness and uniformity of the System.
Associate also recognizes that the Mix (1) is distinctive, (2)
is made from a secret formula, (3) has been developed after
many years of experimentation, (4) is considered a trade
secret by Krispy Kreme and (5) is the result of careful
blending of the ingredients under strict quality control to
produce its unique texture and taste. Associate also
recognizes that Krispy Kreme will make a profit on the sale of
Mix to Associate and that the price of the Mix may be changed
upon written notification of Krispy Kreme.
Associate shall purchase from Krispy Kreme and from
no other source and Krispy Kreme shall sell to Associate, such
quantities of Krispy Kreme's Mix as shall be needed to produce
and sell Krispy Kreme Doughnuts under this Agreement.
Associate shall order and pay for all shipments of Mix on
terms and prices currently
5
<PAGE> 6
in effect at the time of the sale. Each shipment by Krispy
Kreme to Associate shall constitute a separate sale.
Associate recognizes that the use of Krispy Kreme's
Production Equipment System is essential to the uniqueness and
uniformity of the System and is a key element in the
production of Krispy Kreme Doughnuts; that the Production
Equipment System (1) is the product of years of research and
development by Krispy Kreme, (2) is being continually improved
and (3) is considered a trade secret by Krispy Kreme; and that
Krispy Kreme will make a profit or return from the sale or
lease of the Production Equipment System to Associate.
Associate shall purchase or lease, as shall be
determined by Krispy Kreme, from Krispy Kreme and from no
other source, and Krispy Kreme shall sell or lease to
Associate, such numbers and components of its Production
Equipment System of such size and capacity as in the opinion
of Krispy Kreme shall be needed by Associate to produce and
sell Krispy Kreme Doughnuts under this Agreement. If the
Production Equipment System is sold to Associate, Associate
shall order and pay for it on terms, conditions (which
conditions include Krispy Kreme's right or option to
repurchase on the termination of this Agreement) and prices as
specified by Krispy Kreme. If the Production Equipment System
is leased to Associate, the monthly rental therefor shall be
the current rate then being charged to Krispy Kreme associates
on similar new equipment leases at the time of the inception
of Associate's lease. The Associate shall maintain the
Production Equipment System in proper working order so that he
can fulfill all obligations under this Agreement. The lease of
the Production Equipment System shall terminate upon
termination of this Agreement for any reason, and Associate
shall surrender it to Krispy Kreme immediately upon
termination.
F. QUALITY CONTROL SAMPLING. Associate shall promptly comply with
the sampling and reporting procedures required by Krispy
Kreme.
G. PROHIBITIONS. Associate shall not:
1. Produce a substandard product of Krispy Kreme
Doughnuts which do not fully comply with standards
set forth in this Agreement and the Manual.
2. Produce Krispy Kreme Doughnuts other than in
accordance with the formulae and standards set forth
in this Agreement and the Manual.
3. Use Krispy Kreme's System or its Mix or its
Production Equipment System to produce and sell any
product other than Krispy Kreme Doughnuts, including
but not limited to private label product, without
prior written approval of Krispy Kreme.
6
<PAGE> 7
4. Use Krispy Kreme's Marks or name on any doughnut or
other product of any kind other than Krispy Kreme
Doughnuts.
H. INDEMNIFICATION. Associate shall indemnify and save harmless
Krispy Kreme from any loss, claim or damage, including
reasonable attorney's fees, resulting from any impurity,
adulteration or misbranding of Krispy Kreme Doughnuts due to
negligence of Associate or any breach by Associate of any
provisions of this Agreement.
I. INSURANCE. Associate will maintain for the benefit of both
parties product liability insurance covering bodily injury and
property damage with such limits as may be prescribed in the
Manual from time to time. Associate shall furnish Krispy Kreme
a Certificate of Insurance indicating that such insurance is
in effect and that such insurance shall not be cancelled or
modified on less than ten (10) days' written notice to Krispy
Kreme.
J. ADVICE OF INDEPENDENT COUNSEL. Associate covenants that he
has sought advice of independent counsel (attorney, accountant
or financial advisor) in connection with the review and
execution of this Agreement.
K. ACTIVE PARTICIPATION. Associate covenants that he will
actively participate in the management and operation of the
licensed business by devoting a substantial amount of time and
will not be a passive investor.
L. FINANCIAL STATUS AND RECORDS. Associate shall operate his
business on a sound financial basis and shall have sufficient
funds in the business (not making excessive withdrawals
therefrom) for Associate to meet his current obligations to
Krispy Kreme under this Agreement and to others, to produce
and sell Krispy Kreme Doughnuts in sufficient quantity to meet
the demand therefor in the Area and to conduct his business in
a proper manner. Associate shall submit to Krispy Kreme such
financial reports as may be stipulated in the Manual from time
to time and shall permit Krispy Kreme to examine his financial
books and records to assure Krispy Kreme that Associate is
complying with this Agreement and provisions of the Manual.
M. TRADEMARKS, TRADE NAMES AND TRADE SECRETS. Associate agrees
that
1. Krispy Kreme has the sole and exclusive right (except
for certain rights granted under existing and future
license agreements) to use the Marks, trade names and
trade secrets set forth herein and Associate
represents, warrants and agrees that, neither during
the term of this Agreement nor after the expiration
or other termination hereof, shall Associate directly
or indirectly
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contest or aid in contesting the validity or
ownership of the Marks, trade names or trade secrets
or take any action whatsoever in derogation of Krispy
Kreme's claimed rights therein.
2. Nothing contained in this Agreement shall be
construed to vest in Associate any right, title or
interest in or to Krispy Kreme's Marks, the goodwill
now or hereafter associated therewith, or any right
in the design of the doughnut producing facility,
doughnut shop, signs and other distinctive equipment,
other than the rights and license expressly granted
herein. Any and all goodwill associated with the use
of Krispy Kreme's Marks and name shall inure directly
and exclusively to the benefit and is the property of
Krispy Kreme.
3. Associate shall advertise and promote the licensed
business only under Krispy Kreme Marks; and his
advertising or other use of Krispy Kreme's Marks
shall not contain any statement or material which, in
the judgment of Krispy Kreme, may be in bad taste or
inconsistent with Krispy Kreme's public image. Krispy
Kreme reserves the right to preview and edit any of
Associate's television and radio advertisements prior
to Associate's commitment thereto.
4. Associate shall use the business name "Krispy Kreme
Doughnut Company" during the term of this Agreement
and no longer. Such business name may be changed upon
prior written approval by Krispy Kreme. Associate
shall not use the words "Krispy Kreme" or similar
words in any corporate name.
5. Krispy Kreme is the owner of all proprietary rights
in and to the System and all material pertaining to
the use of the System which are described in the
Manual. The System and the contents of the Manual
constitute trade secrets of Krispy Kreme which are
revealed to the Associate in confidence, and no right
is given to or shall be acquired by Associate to
disclose, duplicate, license, sell or reveal any
portion thereof to any person other than an employee
of Associate required by his work to be familiar with
relevant portions thereof. Associate agrees to keep
and respect the confidence extended hereby and that
the Manual and other similar materials furnished to
Associate hereunder are and will remain the property
of Krispy Kreme and must be returned to Krispy Kreme
immediately upon termination of this Agreement.
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ARTICLE IV
STANDARDS OF UNIFORMITY AND OPERATION OF
DOUGHNUT PRODUCING FACILITY AND DOUGHNUT SHOP
Associate agrees that Krispy Kreme's special architectural design,
color and decor of doughnut producing facility and doughnut shop buildings,
uniformity of layout, equipment, supplies, and containers, and adherence to the
Manual are essential to the System. In recognition of the mutual benefits
accruing from maintaining uniformity of appearance, service, products and
marketing procedures, it is mutually covenanted and agreed:
A. BUILDINGS AND PREMISES. Except as specifically authorized by
Krispy Kreme, the exterior and interior of the doughnut
producing facility and doughnut shop building shall conform to
the architectural style and motif and layout previously,
currently or hereafter approved by Krispy Kreme. Associate
shall not alter the appearance of the doughnut producing
facility or doughnut shop as approved. If Krispy Kreme shall
determine that the doughnut shop and doughnut producing
facility do not meet Krispy Kreme standards as to sanitation,
cleanliness, maintenance, painting and general state of
repair, Associate will, within a reasonable period of time not
exceeding 45 days, make, or make arrangements for, all such
repairs, maintenance, cleaning and painting as may be required
by Krispy Kreme.
B. SIGNS. Associate agrees to display Krispy Kreme's name and
Marks at the Location and to maintain and display signs
reflecting current image of Krispy Kreme in accordance with
standards established by Krispy Kreme.
C. LAYOUT AND USE OF VENDING MACHINE, ETC. The standards for the
exterior and interior layout of the doughnut producing
facility and doughnut shop and use or nonuse of items such as
telephone booths, newspaper and magazine racks, jukeboxes, gum
machines, games, rides or coin vending machines shall be
established by Krispy Kreme.
D. MENU AND SERVICE AT DOUGHNUT SHOP. The limited menu of Krispy
Kreme doughnut shop is an essential and necessary element of
the System, having been designed to contribute to the fine
public image of Krispy Kreme and the uniformity of all the
Krispy Kreme doughnut shops. Associate agrees that he will
operate his doughnut shop in accordance with the standards,
specifications and procedures set forth in the Manual, will
serve at the doughnut shop only items of food and drink
specified in the Manual and will follow all specifications and
formulae in the Manual as to quality of products produced at
the plant and served in the doughnut shop. Associate agrees
that all food and drink items will be served in containers
bearing accurate reproductions of Krispy Kreme's Marks.
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E. ALTERNATE SUPPLIERS. Except for the Mix and Production
Equipment System, Associate may purchase through Krispy Kreme
or any other source (1) any other ingredients for Krispy Kreme
Doughnuts and other products permitted to be sold in the
doughnut shop; (2) any other doughnut plant equipment; (3)
packages and containers for his products; and (4) other
supplies, if the items supplied meet specifications set forth
in the Manual. Krispy Kreme will not unreasonably withhold
prompt approval of such purchases provided sufficient notice
is given by Associate for Krispy Kreme to determine that such
items conform to the standards and specifications set forth in
the Manual. In return for services and expertise provided by
Krispy Kreme, it will charge a service fee in the form of a
markup for any purchase of supplies made through the
Purchasing Department of Krispy Kreme.
F. RIGHT OF ENTRY AND INSPECTION. To ensure that Associate is
complying with the provisions of this Agreement and the Manual
in his utilization of the System, any officer of Krispy Kreme
Doughnut Corporation or a representative designated by the
President or Vice President - Associate Division of Krispy
Kreme Doughnut Corporation shall have the right to enter and
inspect the doughnut producing facility and doughnut shop at
any time and test the Associate's finished products and
ingredients thereof, his Product Equipment System and other
equipment, packages and supplies. Associate shall diligently
correct any such deficiencies detected during such
inspections. If written notice of such deficiency is given,
Associate shall immediately desist and refrain from a
continuation of any deficiency set forth in the notification.
ARTICLE V
ROYALTY
A. ROYALTY. As part of the total consideration for Krispy Kreme's
licensing of its System to Associate, Associate agrees to pay
weekly a royalty of three percent (3%) of Associate's gross
retail sales and one percent (1%) of all other sales (not
including sales tax) or as otherwise set forth in the Manual
as it may be changed from time to time. Associate's check
covering the royalty for the preceding seven days shall be
mailed to Krispy Kreme on Friday of each week.
B. ACCOUNTING PROCEDURES AND RIGHT TO AUDIT. Associate agrees to
keep complete records of his business, maintain such records
for the same period of time as required by federal and local
income tax laws, and submit to Krispy Kreme such financial
reports as prescribed in the Manual. Associate agrees that
Krispy Kreme or its agents shall have the right to examine or
audit the books and accounts of Associate.
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ARTICLE VI
COVENANTS OF BOTH PARTIES
A. FORCE MAJEURE. Neither Krispy Kreme nor Associate shall be
held liable for the failure of either to comply with any terms
of this Agreement if such failure is caused solely by fire,
strike, union or other labor problems, war (whether or not
declared), riots, insurrection, government restrictions, acts
of God, or other causes beyond its or his control and without
its or his fault; provided, however, that Associate shall
continue to be obligated to pay to Krispy Kreme all amounts on
which he shall have duly become obligated prior to the
occurrence of any event referred to in this section.
B. INDEPENDENT CONTRACTOR. Associate is an independent contractor
and neither party shall have the power to incur or be liable
for any debts, accounts, obligations or other liabilities of
the other party or its or his agents or employees except as
specifically authorized in writing.
C. NO AGENCY. Associate shall not represent or hold himself out
as an agent, legal representative, partner, subsidiary, joint
venturer or employee of Krispy Kreme and he shall exhibit on
his premises in a place designated by Krispy Kreme, a
notification that he is an Associate of Krispy Kreme. In all
public records, in his relationship with other persons and on
letterheads, calling cards and business forms, he shall
indicate his independent ownership of said business and that
he is an Associate of Krispy Kreme.
ARTICLE VII
TRANSFER OF LICENSE
A. ASSIGNABILITY. Except as provided in Sections B, C and D of
this Article, Associate acknowledges that this Agreement is
personal to him and made with him as an individual; and he
shall neither sell, assign, transfer, sublicense, pledge,
mortgage, hypothecate, encumber nor otherwise dispose of this
Agreement or any right or interest therein, nor suffer or
permit any such assignment, transfer or disposition to occur
by operation of law unless the prior written consent of Krispy
Kreme be first had and obtained. Assignment of any interest,
other than as provided in this Article, shall constitute a
material breach of this Agreement; and, upon such assignment,
Krispy Kreme shall have the right to terminate this Agreement
immediately upon written notice to Associate.
B. TRANSFER OF LICENSE IN EVENT OF ASSOCIATE'S DEATH, DISABILITY
AND RETIREMENT. Upon the death or disability of Associate or
if Associate desires to retire, Krispy Kreme shall give
consideration to the transfer of his interest herein to the
Associate's spouse, issue or any other person so designated by
Associate to assume operation of the licensed business if in
the sole discretion and judgment of Krispy Kreme, such person
obtaining said interest is in all respects acceptable to
Krispy Kreme and shall be capable of conducting said
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business in a manner satisfactory to Krispy Kreme, shall
satisfy the requirements of Section D of this Article and
shall assume in writing all obligations under this Agreement.
Krispy Kreme agrees to exert its best efforts to assist
Associate in planning the transfer of the license granted
hereunder upon his retirement, death or disability, including
counseling with the Associate at Associate's expense, training
the designated successor to the license and satisfying the
requirements of Section D below. Upon the death of Associate,
Krispy Kreme shall have the right to continue the operation of
the System at Associate's Location and assist his heirs or
personal representatives in the transfer of the license as
provided herein.
C. ASSOCIATE RECEIVES OFFERS TO PURCHASE FROM UNRELATED THIRD
PARTIES. If Associate, his heirs or personal representatives
receive a bona fide acceptable offer to purchase his business
or any portion thereof, the real property which is the situs
of the Location or any portion thereof, or any offer to
acquire his license granted hereunder or any portion thereof,
he or they shall within forty-eight (48) hours of such offer
notify Krispy Kreme in writing. Krispy Kreme shall have for a
period of sixty (60) days the first refusal to purchase upon
the same terms and conditions as offered by the prospective
buyer. If Krispy Kreme does not accept the offer within sixty
(60) days, Associate may conclude the sale to the prospective
purchaser at the price and upon such terms and conditions as
offered to Krispy Kreme; provided that the requirements of
Section D of this Article must be met if the license granted
herein is to be transferred.
D. TRANSFER REQUIREMENTS. Krispy Kreme may impose reasonable
conditions on any assignment of the license granted hereunder
which may include, without limitation, the following:
1. Associate must satisfy fully all obligations to
Krispy Kreme and others arising out of this Agreement
and the operation of the licensed business unless
Krispy Kreme otherwise agrees in writing.
2. Assignee must satisfactorily (a) demonstrate to
Krispy Kreme's sole and complete satisfaction that he
meets the financial and managerial criteria required
by Krispy Kreme, (b) agree to avail himself of such
training as Krispy Kreme shall, in its sole
discretion, specify, and (c) shall pay to Krispy
Kreme One Hundred Dollars ($100) as an assignment
fee. If more than one doughnut producing facility and
doughnut shop location granted under this Agreement
is assigned, there shall be a charge of Fifty Dollars
($50) for each additional location included in the
same transaction.
E. CONDUCT OF BUSINESS IN CORPORATE FORM. If Associate desires to
conduct business as a corporation, Krispy Kreme will consent
to the sublicensing of this Agreement to a corporation
approved by Krispy Kreme provided Associate shall remain the
primary licensee, guaranteeing all obligations of such
corporation
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to Krispy Kreme under this Agreement and shall comply with the
provisions hereinafter specified and any other condition that
Krispy Kreme may require, including a limitation on the number
of stockholders of the sublicensee corporation. Such
corporation shall be closely held and shall not engage in any
business activity other than those directly related to the
production, marketing, distribution and sale of Krispy Kreme
Doughnuts pursuant to the terms and conditions of Associate's
Agreement with Krispy Kreme. There shall be no sublicensing
fee imposed by Krispy Kreme if such sublicense is made within
ninety (90) days after the execution of this Agreement.
Associate shall be and remain the legal and
beneficial owner of the stock in such corporation and shall
act as such corporation's principal officer. Provided
Associate retains in excess of fifty percent (50%) ownership
of the voting stock ("controlling interest") of the
corporation, he may transfer or assign stock in such
corporation only to his spouse, issue or operating managers.
If Associate ceases to act as principal officer or own
controlling interest through death or otherwise, the
sublicense to such corporation shall terminate immediately.
Associate may not otherwise transfer, assign, bequeath,
pledge, hypothecate, encumber or mortgage his stock without
the prior written consent of Krispy Kreme. The transfer or
assignment of any stock interest of such corporation, other
than as herein provided, without the prior written consent of
Krispy Kreme, shall constitute a material breach of this
Agreement permitting Krispy Kreme, at its sole option, to
terminate same immediately upon written notice.
The corporation shall have sufficient equity capital
in the business to result in a debt-to-equity ratio of one (1)
to one and a half (1-1/2), or such other debt-to-equity as may
be approved in writing by Krispy Kreme.
Associate agrees to furnish to Krispy Kreme certified
copies of its Articles of Incorporation, By-Laws, a specimen
stock certificate and any other documents required by Krispy
Kreme to enable it to determine if Associate and his
corporation are meeting the requirements of this Section E,
and further agrees that Krispy Kreme or its agents shall have
the right to examine the Articles of Incorporation, By-Laws,
Minute Book, Stock Ledger and other Corporate records of such
Corporation to verify compliance with this Article.
ARTICLE VIII
TERMINATION OF LICENSE
A. TERMINATION WITHOUT NOTICE. In the event of any of the
following:
1. The cessation by Associate of his business; or
2. The insolvency of Associate; or
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3. The filing by or against Associate of a voluntary or
involuntary petition pursuant to any present or
future act of the Federal Congress on the subject of
bankruptcy, including the Federal Wage Earner Plan,
which petition has not been dismissed within thirty
(30) days after such filing;
4. The institution of any proceeding by or against
Associate arising from any insolvency, bankruptcy or
assignment for the benefit of creditors, which
proceeding has not been dismissed within thirty (30)
days after the institution of such proceeding; the
foreclosure by a creditor of the Associate on any
obligation due such creditor, or attempt of any
governmental agency to collect taxes owed by or money
due from the Associate;
5. The making of any assignment for the benefit of
creditors or the appointment of a receiver of
Associate or of substantially all of the property of
Associate;
6. Death or any declaration of incompetency of
Associate, regardless of whether Associate has
sublicensed this Agreement to a sublicensee
Corporation under ARTICLE VIII, Section E in which
event, this Agreement shall automatically and
immediately be terminated.
B. TERMINATION FOR VIOLATION OF ARTICLE VII. Termination of this
Agreement for Associate's violation of ARTICLE VII above is
governed by the provisions of that Article.
C. TERMINATION UPON NOTICE FOR CAUSE. This Agreement may be
terminated at any time by either party, if the other party
shall fail to perform ("for cause") any of the covenants
herein contained to be performed by the other party (except as
provided in ARTICLES VI-A and VII hereof), by written notice
of the failure, stating the nature and character thereof and
allowing the other party sixty (60) consecutive days from the
date of the notice to correct the failure. If the failure is
not corrected within the period of sixty (60) consecutive
days, the party who shall have given the notice may terminate
this Agreement forthwith without need of any additional notice
to that effect.
D. WAIVER. The failure of either party to give notice of
performance or of termination shall not constitute a waiver of
the covenants, terms or conditions herein, or of the rights of
either party thereafter to enforce such covenants, terms or
conditions or to terminate this Agreement for any subsequent
breach thereof.
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ARTICLE IX
POST TERMINATION
A. TERMINATION OF GRANT. Upon the termination of this Agreement,
except as may otherwise be provided herein, all rights and
privileges granted under this Agreement shall immediately
cease and terminate and Associate shall thereupon discontinue
forever the use of Krispy Kreme's Marks in connection with
Associate's business except the right to sell its inventory of
finished product.
B. USE OF KRISPY KREME MATERIALS. Upon the termination of this
Agreement for any reason, Associate shall cease his use of
Krispy Kreme's System. Associate shall deliver to Krispy
Kreme, and Krispy Kreme shall repurchase from Associate, the
following items which in Krispy Kreme's opinion are in usable
condition and in current use at Associate's depreciated cost
or fair market value whichever is less but in no event less
than 20% of Associate's original cost: all of the Mix,
Production Equipment System, packaging materials, and supplies
which bear the Krispy Kreme Marks. With respect to Krispy
Kreme's signs, menu boards and other items of tangible
personal property which bear Krispy Kreme's Marks or are
representative of Krispy Kreme's public image, Associate shall
either sell such items to Krispy Kreme at Associate's
depreciated cost value or fair market value whichever is less
but in no event less than 20% of Associate's original cost, or
alter and remodel such items in such way so that they shall no
longer be representative of Krispy Kreme's public image or be
deemed a use of Krispy Kreme's Marks, as shall be determined
solely by Krispy Kreme. Associate shall remove all Krispy
Kreme Marks from his motor vehicles.
C. INJUNCTION AND OTHER LEGAL AND EQUITABLE REMEDIES. The
provisions of this Article may be enforced by injunction, but
the use of such injunction by Krispy Kreme shall not prevent
it from seeking any other legal or equitable remedy available.
ARTICLE X
MISCELLANEOUS
A. NOTICE. Any notice to be given pursuant to the provisions of
this Agreement shall be in writing and shall be sent by
registered mail addressed in the case of Krispy Kreme to:
Krispy Kreme Doughnut Corporation
Attention: Vice President - Associate's Division
P O Box 83
Winston-Salem, North Carolina 27102-0083
and in the case of notice to Associate, to:
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or to such other place as the receiving party shall have given
in writing to the sending party.
B. ONLY AGREEMENT. Except as otherwise stated herein, this
Agreement contains the complete agreement between the parties
in respect of the subject matter of the licensing of the
System, and all other prior agreements are superseded. Except
for the Manual, this Agreement (together with its Exhibits)
shall not be amended or supplemented except in writing signed
by Associate and Krispy Kreme.
C. GOVERNING LAW. This Agreement shall be interpreted and
governed by the laws of the State of North Carolina.
D. INVALIDITY. If any term or provision of this Agreement shall
be or become invalid under any applicable law; then the
remainder of this Agreement shall not be affected thereby, and
the remaining terms and provisions hereof shall remain in
effect as if the invalid portion were not a part hereof.
E. NON-WAIVER. The failure of Krispy Kreme to exercise any right,
power or option given to it hereunder, or to insist upon
strict compliance with the terms hereof by Associate shall not
constitute a waiver of the terms and conditions of this
Agreement with respect to any other or subsequent breach
thereof, nor a waiver by Krispy Kreme of its right at any time
thereafter to require exact and strict compliance with all the
terms hereof. The rights and remedies hereunder are cumulative
to any other rights or remedies which may be granted by law.
F. RIGHT OF KRISPY KREME TO HAVE OTHER PARTIES FULFILL ITS
OBLIGATIONS. Krispy Kreme shall have the right to have the
services it provides to Associate or its obligations to
Associate hereunder performed or fulfilled by Krispy Kreme,
its subsidiary corporations or such agents, employees and
representatives as it shall designate.
G. MERGER OR CONSOLIDATION. If Krispy Kreme shall at any time be
merged or consolidated into or with another corporation or if
substantially all of its assets are transferred to another
corporation or business entity, the provisions of this
Agreement shall be binding upon and inure to the benefit of
the corporation or business entity resulting from such merger
or consolidation or to which such assets shall be transferred,
and this provision shall apply in the event of any subsequent
merger, consolidation or transfer.
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H. THE WORD "ASSOCIATE." The word "Associate" and all pronouns
relative thereto as used in this Agreement include the
masculine, feminine and neuter gender as the case may be and
shall mean the Associate, his Assignee, his sublicensee or
successors in interest where the context so indicates.
I. HEADINGS TO ARTICLES AND SECTIONS. The headings or captions of
Articles and Sections of this Agreement are merely descriptive
and not substantive and have no meaning in the interpretation
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this License
Agreement as of the ____ day of __________________, _____.
KRISPY KREME DOUGHNUT CORPORATION
By
---------------------------------------
President
ATTEST:
- ------------------------------------
Secretary
[CORPORATE SEAL]
ASSOCIATE
By (SEAL)
---------------------------------------
17
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EXHIBIT 10.3
FORM OF
KRISPY KREME DOUGHNUT CORPORATION
DEVELOPMENT AGREEMENT
________________________________________________________________________________
DEVELOPER
________________________________________________________________________________
DATE OF DEVELOPMENT AGREEMENT
________________________________________________________________________________
DEVELOPMENT AREA
<PAGE> 2
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. PREAMBLES............................................................1
2. CERTAIN DEFINITIONS..................................................2
3. DEVELOPMENT RIGHTS AND OBLIGATIONS...................................4
A. GRANT OF DEVELOPMENT RIGHTS; OWNERS' GUARANTY...............4
B. YOUR TERRITORIAL RIGHTS.....................................4
C. YOUR DEVELOPMENT OBLIGATIONS................................5
D. RIGHTS RETAINED BY US.......................................5
4. GRANT OF FRANCHISES..................................................6
A. SITE AND SITE PLAN REVIEW AND APPROVAL......................6
B. LEASE OR PURCHASE OF APPROVED SITES.........................6
C. EXECUTION OF FRANCHISE AGREEMENTS...........................7
D. FRANCHISE FEES AND ROYALTIES................................7
5. DEVELOPMENT FEE......................................................7
6. CONFIDENTIAL INFORMATION.............................................7
7. EXCLUSIVE RELATIONSHIP..............................................10
8. YOUR OBLIGATIONS....................................................11
A. MANAGING OWNER AND GENERAL MANAGER.........................11
B. MANAGEMENT PERSONNEL TRAINING..............................11
C. BUSINESS AND FINANCING PLAN................................11
D. INSURANCE..................................................12
E. RECORDS AND REPORTS........................................12
F. COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES...........13
9. TRANSFER............................................................13
A. BY US......................................................13
B. YOU AND YOUR OWNERS MAY NOT TRANSFER WITHOUT OUR APPROVAL..14
C. DEATH OF YOU OR AN OWNER OF A CONTROLLING INTEREST.........15
D. EFFECT OF OUR APPROVAL OF A TRANSFER.......................15
E. OUR RIGHT OF FIRST REFUSAL.................................15
F. OWNERSHIP STRUCTURE AND INITIAL CAPITALIZATION.............16
G. DELEGATION BY US...........................................17
10. TERMINATION OF AGREEMENT............................................17
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<PAGE> 3
11. OUR RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION OF
THIS AGREEMENT......................................................18
A. CONFIDENTIAL INFORMATION/DE-IDENTIFICATION.................18
B. COVENANT NOT TO COMPETE....................................18
C. OUR RIGHT TO PURCHASE STORES...............................19
D. CONTINUING OBLIGATIONS.....................................19
12. INDEMNIFICATION.....................................................19
13. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS...................20
14. WAIVER OF OBLIGATIONS...............................................21
15. RIGHTS OF PARTIES ARE CUMULATIVE....................................22
16. ARBITRATION.........................................................22
17. COSTS AND ATTORNEYS' FEES...........................................24
18. GOVERNING LAW AND JURISDICTION......................................24
19. CONSENT TO JURISDICTION AND VENUE...................................24
20. WAIVER OF PUNITIVE DAMAGES..........................................25
21. WAIVER OF JURY TRIAL................................................25
22. LIMITATIONS OF CLAIMS...............................................25
23. BINDING EFFECT......................................................26
24. CONSTRUCTION........................................................26
25. NOTICES AND PAYMENTS................................................26
EXHIBITS AND ATTACHMENTS
EXHIBIT A - DEVELOPMENT AREA(S)
EXHIBIT B - DEVELOPMENT SCHEDULE
EXHIBIT C - FORM FRANCHISE AGREEMENT
EXHIBIT D - DEVELOPER ACKNOWLEDGEMENTS AND REPRESENTATIONS STATEMENT
EXHIBIT E - GUARANTY AND ASSUMPTION OF YOUR OBLIGATIONS
EXHIBIT F - CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
EXHIBIT G - BUSINESS ORGANIZATION, OWNERS, GENERAL MANAGER AND MANAGING OWNER
EXHIBIT H - COMMISSARY RIDER
ii
<PAGE> 4
KRISPY KREME DOUGHNUT CORPORATION
DEVELOPMENT AGREEMENT
THIS AGREEMENT is made and entered into this _____ day of ____________,
19___ (the "EFFECTIVE Date"), by and between KRISPY KREME DOUGHNUT CORPORATION,
a North Carolina corporation, with its principal address at P. O. Box 83,
Winston-Salem, North Carolina 27102 (referred to in this Agreement as "we", "us"
or "our"), and _________________________________________________________________
_________________whose principal address is ____________________________________
referred to in this Agreement as "you", "your" or "Developer").
1. PREAMBLES.
We and our subsidiaries have expended considerable time and effort in
developing store facilities that offer and serve a variety of fresh doughnuts
(including among others, yeast raised doughnuts, cake doughnuts, miniature
doughnuts and doughnut holes (some of which have various types and flavors of
fillings, glazes or other coatings), certain other food products and beverages
and food services (collectively referred to in this Agreement as "Products").
The store concept is a building of stick-built construction with a single
drive-thru corridor and an indoor dining facility known as a KRISPY KREME STORE
which operates under distinctive business formats, methods, procedures, designs,
layouts, standards and specifications, all of which we may improve, further
develop or otherwise modify from time to time. Our subsidiary, HDN CORPORATION,
owns and has licensed us and our affiliates to use, promote and sublicense
certain trademarks, service marks and other commercial symbols in the operation
of KRISPY KREME STORES (including the trade and service marks "KRISPY KREME" and
"HOT DOUGHNUTS NOW" and associated logos), which have gained and continue to
gain public acceptance and goodwill, and we may hereafter create, use and
license additional trademarks, service marks and commercial symbols in
conjunction with the operation of a KRISPY KREME STORE (collectively, the
"Marks"). KRISPY KREME STORES sell Products at retail to customers for their
consumption; Deli-Bakery Sales and DSD Sales to food wholesalers, convenience
stores, grocery stores, other institutions and other chain stores for resale
and, to charitable, educational and other nonprofit organizations that resell
Products in various kinds of fund raising activities; and Products and items
bearing the Marks to retail establishments and to national accounts we have
agreed to serve.
We grant to certain qualified persons who meet our qualifications and
who are willing to undertake the investment and effort, the right to develop and
operate KRISPY KREME STORES within a defined geographic area offering the
Products and approved services and utilizing our business formats, methods,
procedures, signs, designs, layouts, equipment, mixes, standards, specifications
and the Marks (the "System"). This Agreement governs your rights and obligations
to develop KRISPY KREME STORES within the Development Area (defined below) in
accordance with the Development Schedule (defined below). The operation of each
KRISPY KREME STORE will be governed by a separate Franchise Agreement (defined
below).
<PAGE> 5
2. CERTAIN DEFINITIONS.
For purposes of this Agreement, the terms listed below have the
meanings that follow them. Other terms used in this Agreement are defined and
construed in the context in which they occur.
"APPROVED SITE" - A site that we have approved as meeting our minimum
criteria for the development and operation of a KRISPY KREME STORE.
"COMMISSARY" - A facility for the preparation of Products that (1)
procures and receives Products, ingredients and materials used in the
production, preparation and packaging of Products, and other materials and
supplies used in the operation of KRISPY KREME STORES as we may specify from
time to time; (2) prepares and packages Products in accordance with recipes,
methods, procedures, standards and specifications we establish, in our sole
discretion, from time to time; (3) distributes to KRISPY KREME STORES Products
and other materials and supplies used in the operation of KRISPY KREME STORES;
and (4) distributes Deli Bakery Sales and DSD Sales to food wholesalers
convenience stores, grocery stores and other stores and organizations for
resale.
"COMPETITIVE BUSINESS" - A business, other than a KRISPY KREME STORE,
that:
(1) sells yeast raised doughnuts, cake doughnuts, any other
types of customary or large size doughnut, miniature doughnuts,
doughnut holes in any distribution channels to any customer for
consumption or resale and such sales comprise five percent (5%) or more
of such business' revenues; or
(2) grants or has granted franchises or licenses, or
establishes or has established joint ventures, for the development
and/or operation of a business that offers such food products in any
such channel of distribution.
"COMPUTER SYSTEM" - The computer hardware and software designated by us
from time to time for use in the operation of KRISPY KREME STORES.
"CONTROLLING INTEREST" - An Ownership Interest in you equal to or
greater than twenty percent (20%).
"DELI BAKERY SALES" - Sales of unpackaged products which may be
delivered by you or sold on site to food wholesalers, convenience stores,
grocery stores, other institutions and other chain stores for resale by them
under our Marks or the marks of the purchasing entity.
"DSD SALES" - Direct store delivery sales of packaged products which
may be delivered by you or sold on site to food wholesalers, convenience stores,
grocery stores, other institutions and other chain stores for resale by them
under our Marks or the marks of the purchasing entity.
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"DEVELOPMENT AREA" - The geographic area described in EXHIBIT A to this
Agreement.
"DEVELOPMENT PERIOD" - as set forth in EXHIBIT B to this Agreement.
"DEVELOPMENT SCHEDULE" - as set forth in EXHIBIT B.
"DEVELOPMENT TERM" - The period during which you are authorized and
required to develop KRISPY KREME STORES pursuant to this Agreement, which will
commence on the date of this Agreement and will expire, unless terminated
earlier in accordance with the terms of this Agreement, on the last day of the
last Development Period set forth in EXHIBIT B.
"FRANCHISE" - The right to operate a KRISPY KREME STORE at a specific
location within the Development Area and to use the Marks and the System in the
operation thereof.
"FRANCHISE AGREEMENT" - The form of franchise agreement (including all
exhibits, riders, guarantees and other agreements used in connection therewith)
attached hereto as Exhibit C which is and will be used by us in the offer and
sale of franchises to you pursuant to the terms of this Agreement.
"GOOD STANDING" - You are current with all payments due to us, our
Affiliates and suppliers, you have met your Development Schedule, you are not in
default of any Franchise Agreement and you have passed the most recent QSC test.
"IMMEDIATE FAMILY" - (1) The spouse of a person; and (2) the natural
and adoptive parents and natural and adopted children of such person and their
spouses.
"NATIONAL ACCOUNTS" - Supermarket, convenience store and retail store
chains and regional and/or national organizations with whom we may sign
agreements to sell products bearing the Marks or identified by the National
Account's marks.
"OWNER" - Each Person holding a direct or indirect, legal or beneficial
Ownership Interest in you, and each person who has other direct or indirect
property rights in you or this Agreement.
"OWNERSHIP INTERESTS" - In relation to a: (1) corporation, the shares
of capital stock of the corporation; (2) limited liability company, the
memberships or other ownership interests of such company; or (3) partnership,
the general and limited partnership interests in such partnership.
"PERSON" - a natural person and a corporation, limited liability
company and general or limited partnership.
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3. DEVELOPMENT RIGHTS AND OBLIGATIONS.
A. GRANT OF DEVELOPMENT RIGHTS; OWNERS' GUARANTY .
You have applied to us for, and we have agreed to grant to you, the
right to develop and own KRISPY KREME STORES and to develop Deli Bakery
Sales/DSD Sales in the Development Area. Your application has been approved by
us in reliance upon all of the representations and warranties made by you and
your Owners in such application and your Acknowledgements and Representations
Statement, a copy of which is attached to this Agreement as EXHIBIT D and which
is signed by you and your Owners concurrently with this Agreement. Provided that
you are in full compliance with all of the terms and conditions of this
Agreement, including, without limitation, the development obligations described
in Subsection 3.C. and EXHIBIT B and you are in full compliance with all of your
obligations under all Franchise Agreements with us, we will grant to you during
the Development Term and in accordance with Section 4 hereof, Franchises to
develop and operate the number of KRISPY KREME STORES set forth in EXHIBIT B.
This Agreement and our obligation to grant you franchises will expire upon the
expiration of the Development Term. If you are in full compliance with this
Agreement and all Franchise Agreements with us, at your option, commencing not
less than one hundred and eighty (180) days before the expiration of the
Development Term, we agree to negotiate with you in good faith the grant to you
of rights to develop additional KRISPY KREME STORES and to continue to develop
Deli Bakery Sales/DSD Sales in the Development Area and the terms of a successor
development agreement.
You agree to cause all Owners to execute and deliver to us concurrently
with the execution of this Agreement, and all Persons who become Owners
thereafter, to promptly execute and deliver to us, the form of Guaranty and
Assumption of Developer's Obligations ("GUARANTY") attached hereto as EXHIBIT E.
B. YOUR TERRITORIAL RIGHTS
Except as otherwise provided in Subsection 3.D. of this Section 3, and
provided that you are in full compliance with this Agreement and all Franchise
Agreements with us, we will not during the Development Term own or operate, or
grant franchises for the ownership or operation of, KRISPY KREME STORES located
within the Development Area or sell any products identified by the Marks or made
utilizing the recipes of the products. You are not granted any rights to
develop, own or operate, and you agree that you will not develop, own or
operate, a greater number of KRISPY KREME STORES than is set forth in Schedule B
or any KRISPY KREME STORES outside the Development Area, except pursuant to
rights granted to you under other agreements entered into with us. Upon the
termination or expiration of this Agreement, we will have the right to own and
operate or sell any products identified by the Marks or made utilizing the
recipes of the products, and to grant to others development rights and
franchises to own and operate, KRISPY KREME STORES located within the
Development Area, provided that we agree that we will not own or operate, or
grant to others development rights or franchises to own or operate, a KRISPY
KREME STORE at a location if such KRISPY KREME STORES
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would be prohibited by the franchise agreement to which we and you are parties,
except that these protected areas will not extend beyond the borders of the
Development Area.
C. YOUR DEVELOPMENT OBLIGATIONS
You agree that during the Development Term, you will continuously exert
your best efforts to promote and enhance the development of KRISPY KREME STORES
within the Development Area. Without limiting the foregoing obligation, you
agree to promote Deli Bakery Sales/DSD Sales in the Development Area as we
require and to have open and in operation in the Development Area during the
Development Period and at the end of each Development Period the minimum number
of KRISPY KREME STORES set forth in the Development Schedule in EXHIBIT B. We
may require you at any time to participate in any program we establish to
provide Products to National Accounts. You acknowledge and agree that a KRISPY
KREME STORE that closes for more than five (5) days (not counting holidays on
which food service businesses are generally closed in the Development Area)
during a Development Period (and you have not developed a substitute site which
we have approved) will not be counted as open and in operation as of the last
day of that Development Period for purposes of determining your compliance with
the Development Schedule. If an operating KRISPY KREME STORE is closed during a
Development Period due to casualty, condemnation, loss of lease or other reason,
without your fault, or with our written approval, such KRISPY KREME STORE shall
be deemed open and in operation as of the end of such Development Period, but
not thereafter. You acknowledge that we make no assurances, guarantees,
representations or warranties that the Development Area can support, or there
are sufficient sites for, the number of KRISPY KREME STORES specified in the
Development Schedule. In the event we grant you the right to operate a
Commissary in the Development Area, you will sign a Commissary Rider to this
Agreement, the current form of which is attached as Exhibit H, and will be
obligated to develop and operate such Commissary in accordance with the terms of
the Commissary Rider.
D. RIGHTS RETAINED BY US
Except as expressly limited by Paragraph 3.B., we retain all rights
with respect to KRISPY KREME STORES, the Marks, and the sale of Products,
including, without limitation:
(1) the right to establish STORES, and grant to other franchisees the
right to establish KRISPY KREME STORES at any location, without regard
to proximity to the STORES and, on such terms and conditions as we deem
appropriate provided, however, that we will not own, operate or grant a
franchise for a STORE within the Development Area; and
(2) the right to acquire and operate, or be acquired by, any company,
including, without limitation, a company operating one or more food
service businesses (including food service businesses selling
doughnuts), located or operating within the Development Area.
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4. GRANT OF FRANCHISES.
A. SITE AND SITE PLAN REVIEW AND APPROVAL.
You agree to comply with our specifications and requirements regarding
site selection. You agree to submit to us a complete site approval request
package (a "SITE PACKAGE") on our specified forms (containing such demographic,
commercial, and other information and photographs as we may require from time to
time) for each site in the Development Area at which you propose and intend in
good faith to establish a KRISPY KREME STORE and which you reasonably believe to
conform to the site selection criteria established by us from time to time. In
approving or disapproving a proposed site, we will consider such matters as we
deem material from time to time, including, without limitation, demographic
characteristics, traffic patterns, allowed design and building, parking,
visibility, allowed signage, the predominant character of the neighborhood,
competition from other businesses selling similar products and services within
the area (including other KRISPY KREME STORES), the proximity to other
businesses, the nature of other businesses in proximity to the site, zoning
restrictions, soil and environmental issues, other commercial characteristics
(including the purchase price or rental obligations and other lease terms for
the proposed site), the size, appearance, and other physical characteristics of
the proposed site and the exclusivity granted to other franchisees or developers
of KRISPY KREME STORES.
We will approve or disapprove sites by delivery of written notice to
you. We agree to exert our reasonable best efforts to deliver such notification
to you within thirty (30) days after we receive a complete Site Package and such
other materials requested by us from time to time, containing all information
that we require provided, however, we have no liability to you if the timing of
our response or our failure to respond results in your inability to obtain any
particular site. We will have the right to approve or disapprove a site, and you
acknowledge and agree that we will have no liability therefor. Notwithstanding
any other provision of this Agreement, our failure to provide you with notice of
our approval or disapproval of one or more proposed sites will not constitute a
waiver of our right to approve or disapprove other sites or extend the
Development Schedule.
You must also cause to be prepared and submit for written approval by
us a site plan and any modifications to our basic architectural plans and
specifications for a KRISPY KREME STORE, including requirements for dimensions,
exterior design, materials, interior layout, equipment, fixtures, furniture,
signs and decorating. You understand that you may modify our basic plans and
specifications only to the extent required to comply with applicable ordinances,
building codes and permit requirements and only with our prior written approval.
B. LEASE OR PURCHASE OF APPROVED SITES.
Upon receipt by you of our approval of a site, you agree to promptly
sign a purchase agreement or lease for the Approved Site and to deliver to us a
complete copy thereof within fifteen (15) days after it is signed by you and the
seller or lessor of the Approved Site. If you fail to enter into a binding
purchase agreement or lease for an Approved Site within one hundred
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twenty (120) days after delivery of our approval of the Approved Site, we may
withdraw approval of such site.
C. EXECUTION OF FRANCHISE AGREEMENTS.
Provided that (1) you are then in full compliance with all of the terms
and conditions of this Agreement and with all Franchise Agreements with us and
are otherwise in good standing with us, and (2) you have obtained the right to
develop an Approved Site, we agree to offer to you a Franchise to develop and
operate a KRISPY KREME STORE at such Approved Site by delivering to you a
Franchise Agreement in form for signing by you and your Owners. You agree to
sign and return the Franchise Agreement to us within fifteen (15) days after it
is delivered to you, together with the fees required to be paid at the time of
signing of the Franchise Agreement. If the ownership of a KRISPY KREME STORE
will be different from the ownership of you, we will have the right to approve
such differences in ownership and may decline to grant a Franchise for the
KRISPY KREME STORE if we disapprove of such differences in ownership. Your
Owners agree to guaranty your obligations under each Franchise Agreement entered
into by you. We may withdraw our offer to grant a Franchise for a KRISPY KREME
STORE at an Approved Site and withdraw its approval thereof if you fail to
deliver to us a fully signed Franchise Agreement, together with all required
payments, within such fifteen (15) day period. In no event may a KRISPY KREME
STORE developed hereunder be opened for business prior to your receipt of
written notice from us authorizing its opening.
D. FRANCHISE FEES AND ROYALTIES.
For each Franchise granted to you pursuant to this Agreement during the
Development Term: (1) the Franchise Fee (defined in the Franchise Agreement)
will be Fifteen Thousand Dollars ($15,000) (if the Development Fee has been paid
in accordance with Paragraph 5 of this Agreement); and (2) Royalties (defined in
the Franchise Agreement) will be four and one-half percent (4.5%) of the Gross
Sales of the KRISPY KREME STORE (defined in the Franchise Agreement).
5. DEVELOPMENT FEE.
Concurrently with the signing of this Agreement, you will pay to us a
nonrefundable development fee (the "DEVELOPMENT FEE") in the amount of
_______________ Dollars ($__________). The Development Fee will be deemed fully
earned by us upon execution of this Agreement. The Development Fee will equal
the sum derived by multiplying the number of KRISPY KREME STORES to be developed
under this Agreement, as set forth on EXHIBIT B by Ten Thousand Dollars
($10,000).
6. CONFIDENTIAL INFORMATION.
We possesses and will further develop and acquire certain confidential
and proprietary information and trade secrets, including, but not limited to,
the following categories of information, methods, techniques, procedures and
knowledge developed or to be developed by
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us, our subsidiaries, consultants, contractors, licensees, franchisees and
developers (the "CONFIDENTIAL INFORMATION"):
(1) methods, techniques, equipment, specifications, standards,
policies, procedures, information, concepts and systems relating to and
knowledge of and experience in the development, operation and
franchising of KRISPY KREME STORES;
(2) marketing and promotional programs for KRISPY KREME STORES,
including but not limited to, information regarding our National
Accounts Program;
(3) knowledge concerning the logic, structure and operation of computer
software programs which we authorize for use in connection with the
operation of KRISPY KREME STORES and all additions, modifications and
enhancements, and all data generated from use of such programs;
(4) specifications and standards for, and sources of, store buildings
of modular and "stick built" construction, equipment, furnishings,
fixtures, signs, products, materials, supplies and services utilized in
the development and operation of KRISPY KREME STORES;
(5) ingredients, formulas, mixes, recipes for and methods of
preparation, cooking, serving, packaging, and delivery of, Products
sold at KRISPY KREME STORES;
(6) information concerning Product sales, operating results, financial
performance, consumer preferences, inventory requirements for Products,
materials and supplies and other financial data of KRISPY KREME STORES;
(7) customer lists;
(8) employee selection procedures, training and staffing levels; and
(9) our expansion, growth and development plans and prospects.
We will disclose to you such parts of the Confidential Information as
we deem necessary or advisable from time to time for the development of KRISPY
KREME STORES. You acknowledge and agree that you and Owners will not acquire any
interest in or right to use the Confidential Information, other than the right
to use it in the development and operation of KRISPY KREME STORES pursuant to
this Agreement, and that the use or duplication of the Confidential Information
in any other business would constitute an unfair method of competition with us
and with other developers and franchisees of KRISPY KREME STORES. You agree to
disclose the Confidential Information to Owners and to your employees only to
the extent reasonably necessary for the development of KRISPY KREME STORES
pursuant to this Agreement.
You acknowledge and agree that the Confidential Information is
confidential, is our proprietary and valuable asset, includes trade secrets
owned by us and our affiliates and is disclosed to you solely on the condition
that you, your Owners and employees who have access
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to the Confidential Information agree, and you agree that, during and after the
Agreement Term, you, your Owners and your employees:
(1) will not use the Confidential Information in any other
business or capacity;
(2) will maintain the absolute confidentiality of the
Confidential Information (provided, however, that we will not deem you
in default of this Agreement as a result of isolated incidents of
disclosure of Confidential Information by an employee other than an
Owner, provided you have taken reasonable steps to prevent such
disclosure, including, but not limited to, the steps a reasonable and
prudent owner of confidential and proprietary information would take to
prevent disclosure of such information by his employees, and further
provided that you pursue all reasonable legal and equitable remedies
against such employee for such disclosure of such Confidential
Information);
(3) will not make unauthorized copies of any portion of the
Confidential Information disclosed in written or other tangible form;
and
(4) will adopt and implement all reasonable procedures
prescribed from time to time by us to prevent unauthorized use or
disclosure of the Confidential Information, including, without
limitation, requiring employees and Owners who will have access to such
information to execute non-competition and confidentiality agreements
in the form attached hereto as EXHIBIT F (the "CONFIDENTIALITY AND
NON-COMPETITION AGREEMENT"). You will provide us, at our request,
executed originals of each such Confidentiality and Non-Competition
Agreement.
Notwithstanding anything to the contrary contained in this Agreement
and provided you have obtained our prior written consent, the restrictions on
your disclosure and use of the Confidential Information will not apply to the
following:
(1) information, methods, procedures, techniques and knowledge
which are or become generally known in the food service business within
the Development Area, other than through disclosure (whether deliberate
or inadvertent) by you, your Owners or employees; and
(2) the disclosure of the Confidential Information in
judicial, arbitration or administrative proceedings to the extent that
you are legally compelled to disclose such information, provided you
have notified us prior to disclosure and have used our best efforts to
obtain, and have afforded us the opportunity to obtain assurance
satisfactory to us of confidential treatment for the information
required to be so disclosed.
You agree to disclose to us all ideas, concepts, methods, techniques
and products conceived or developed by you, your Owners, and your employees
relating to the development and operation of KRISPY KREME STORES. You hereby
grant to us and agree to procure from your Owners and employees a perpetual,
exclusive and worldwide right to use such ideas,
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concepts, methods, techniques and products in all food service businesses
operated by us, our subsidiaries, developers and franchisees. We will have no
obligation to make payments to you or any other Person with respect to any such
idea, concept, method, technique or product. You agree that you will not use or
allow any other Person to use any such concept, method, technique or product
without obtaining our prior written approval.
7. EXCLUSIVE RELATIONSHIP.
You acknowledge and agree that we would be unable to protect
confidential information against unauthorized use or disclosure or to encourage
a free exchange of ideas and information among KRISPY KREME STORES if developers
of KRISPY KREME STORES were permitted to hold interests in or perform services
for a Competitive Business. You also acknowledge that we have granted the
development rights to you in consideration of and reliance upon your agreement
that you and your Owners will deal exclusively with us. You therefore agree
that, during the term of this Agreement, neither you, any of your Owners or any
member of the Immediate Family of you or your Owners will:
(1) have any direct or indirect interest as a disclosed or beneficial
owner in a Competitive Business, located or operating:
(a) within 25 miles of the Development Area;
(b) within 5 miles of any other KRISPY KREME STORE in
operation or under construction during the term of this
Agreement; or
(c) within the United States of America;
(2) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for a Competitive
Business, wherever located or operating; or
(3) recruit or hire any person who is our employee or the employee of
any KRISPY KREME STORE or who has been our employee or the employee of
any KRISPY KREME STORE within the past six (6) months without obtaining
the prior written permission by us or that person's employer. If we
permit you to hire any person who is our employee, then you agree to
pay us a non-refundable Management Development Fee in the amount of
$25,000 as of the date of hire.
The restrictions of this section will not be applicable to the
ownership of publicly traded Ownership Interests that constitute less than three
percent (3%) of a class of Ownership Interests issued and outstanding.
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8. YOUR OBLIGATIONS.
A. MANAGING OWNER AND GENERAL MANAGER.
Concurrently with the execution of this Agreement, you will designate a
Managing Owner (the "MANAGING OWNER") and General Manager (the "GENERAL
MANAGER") of your business pursuant to this Agreement. The Managing Owner and
General Manager may be the same person. The General Manager and Managing Owner
will be identified in EXHIBIT G of this Agreement. You agree that you, the
Managing Owner or General Manager will exert full-time efforts to fulfill your
obligations under this Agreement and will not engage in any other business or
other activity, directly or indirectly, that requires any significant management
responsibility or time commitments, or that may otherwise conflict with your
obligations under this Agreement. If the relationship of the Managing Owner or
General Manager to you terminates or materially changes, you agree to promptly
designate replacements. If you have designated a Managing Owner or a General
Manager, the Managing Owner or the General Manager will work with us to develop
KRISPY KREME STORES in the Development Area. You agree to vest the Managing
Owner or the General Manager with sufficient decision making authority to
expedite the determinations and decisions that are essential to effective and
efficient development of KRISPY KREME STORES in the Development Area.
B. MANAGEMENT PERSONNEL TRAINING.
A management training program will be available at no charge to your
Managing Owner and/or your General Manager who will be required to complete our
management training program to our satisfaction. You shall be responsible for
all travel and living expenses and compensation of its personnel who attend our
training programs.
C. BUSINESS AND FINANCING PLAN.
You must maintain sufficient financial resources to fulfill your
obligations under this Agreement and under Franchise Agreements executed
pursuant to this Agreement. You agree to submit for review and approval by us, a
written business plan for the development and financing of KRISPY KREME STORES
in the Development Area in accordance with the Development Schedule, including
details of the sources and terms of financing and such other information or
documents required by us. Your business plan and financing plan are subject to
our approval and if we do not approve them both, you agree that you will revise
them both as necessary to meet our requirements for approval. Among other
factors, we will consider your proposed debt/equity ratio, cash flow and your
debt service. If not already submitted, the first business plan is due within
sixty (60) days after the signing of this Agreement. The business plan for each
fiscal year thereafter must be submitted to us for annual review prior to the
end of the previous fiscal year. You agree to consider modifications to your
business plan recommended by us, to implement the business plan approved by us
and to advise us of any material modifications to your business plan.
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D. INSURANCE.
During the Development Term, in addition to insurance required to be
maintained in connection with the development and operation of each KRISPY KREME
STORE, you agree to maintain commercial general liability insurance and
automobile liability insurance against claims for bodily and personal injury,
death and property damage caused by or occurring in conjunction with the conduct
of business by you pursuant to this Agreement, under one or more policies of
insurance acceptable to us and containing minimum liability coverage prescribed
by us from time to time. Each such commercial general liability and automobile
liability insurance policy will name us as an additional insured and provide for
thirty (30) days' prior written notice to us of any material modification,
cancellation, or expiration of such policy. Within thirty (30) days after the
execution of this Agreement, you will provide us with evidence of such
insurance; thereafter, you will furnish to us annually and upon the replacement
or material modification of any insurance policy providing coverage required
under this Agreement, a copy of the certificate of insurance or other evidence
requested by us that such insurance coverage is in force. The maintenance of
sufficient insurance coverage (both as to the type and limits of coverage) for
your business is your responsibility.
E. RECORDS AND REPORTS.
You agree to install, use and transmit information to, or allow the
electronic collection of information by us through the Computer System, in such
form as is specified by us from time to time in accordance with and subject to
the limitations set forth in any Franchise Agreement between you or your
affiliates and us. You agree to maintain and preserve at your principal office,
full, complete and accurate records and reports and, if required by us, computer
diskettes and databases in the form specified by us from time to time pertaining
to the development and operation of KRISPY KREME STORES and the performance by
you of your obligations under this Agreement. We will have the right, at any
reasonable time to inspect, audit and copy any books, records, reports, computer
data bases and documents pertaining to your obligations hereunder and to
determine whether you are in Good Standing. You agree to cooperate fully with us
in connection with any such inspection or audit.
You agree to furnish to us in the form from time to time prescribed by
us (including, without limitation, via computer diskette) and restated in
accordance with our financial reporting periods:
(1) within thirty (30) days after the end of each month, an operating
income statement for such month and fiscal year to date;
(2) within forty-five (45) days after the end of each quarter, a
balance sheet and income statement for such quarter and fiscal year to
date;
(3) within one hundred twenty (120) days after the end of your fiscal
year, a consolidated fiscal year end balance sheet of all KRISPY KREME
STORES owned by you, a consolidated income statement for such fiscal
year, and a consolidated statement of
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changes in cash flow, reflecting all year-end adjustments, prepared in
accordance with generally accepted accounting principles, and in the
format prescribed by us from time to time; and
(4) upon request by us, such other data, reports, information and
supporting records as we may from time to time prescribe.
You will immediately report to us any events or developments that may
have a material adverse impact on the operation of any KRISPY KREME STORE, your
performance under this Agreement, or the goodwill associated with the Marks and
KRISPY KREME STORES. Each such report and financial statement submitted by you
will be signed by you and verified as correct in the manner prescribed by us.
F. COMPLIANCE WITH LAWS AND GOOD BUSINESS PRACTICES.
You will secure and maintain in force in your name all required
licenses, permits, and certificates relating to the conduct of its business
pursuant to this Agreement. You will remain in Good Standing during the term of
this Agreement. You will comply with all applicable laws, ordinances and
regulations, including, without limitation, laws and regulations relating to the
preparation, purchase and handling of food products, occupational hazards,
health, safety and sanitation, labor, and withholding and payment of all taxes.
All advertising by you will be subject to approval by us, completely factual, in
good taste in our judgment, and conform to high standards of ethical
advertising. You will in all dealings with sellers and lessors of real property,
customers, suppliers, employees, us and public officials adhere to high
standards of honesty, integrity, fair dealing and ethical conduct. You agree to
refrain from any business or advertising practice that may be injurious to our
business and the goodwill associated with the Marks and KRISPY KREME STORES. You
agree to notify us in writing:
(1) within three (3) business days after the commencement of any
administrative, judicial or arbitration proceeding, and of the issuance
of any order, writ, injunction, award, or decree of any court, agency,
or other governmental instrumentality, which may adversely affect your
operation or your financial condition or the business or operation of
any KRISPY KREME STORE; or
(2) immediately after receipt of any notice of violation of any law,
ordinance or regulation relating to the health, sanitation or safety of
or the operation of any KRISPY KREME STORE.
9. TRANSFER.
A. BY US.
This Agreement is fully transferable by us and will inure to the
benefit of any assignee or other legal successor to our interests.
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B. YOU AND YOUR OWNERS MAY NOT TRANSFER WITHOUT OUR APPROVAL.
You understand and acknowledge (and hereby represent and warrant that
your Owners understand) that the rights and duties created by this Agreement are
personal to you and your Owners and that we have entered into this Agreement in
reliance upon the individual or collective character, skill, aptitude, attitude,
business ability, and financial capacity of you and your Owners. Therefore, your
obligations under this Agreement and any Ownership Interest or other interest in
(1) you, (2) this Agreement, (3) a Franchise Agreement executed pursuant to this
Agreement, (4) a KRISPY KREME STORE, or (5) the lease for or ownership of the
site of a KRISPY KREME STORE, may not be transferred without our prior approval
which approval shall not be unreasonably withheld. We will not approve a
transfer of this Agreement except in conjunction with a transfer of all
Franchise Agreements for KRISPY KREME STORES located in the Development Area to
which we and you are parties. If we approve a transfer, we will have the right
to charge a transfer fee in the amount of Five Thousand Dollars ($5,000.00)
(increased from time to time to reflect increases in the Metropolitan Area
Consumer Index for Urban Consumers--All Items (1982-1984 = 100) from the date of
this Agreement, as published by the U.S. Department of Labor or in a successor
index) to cover our expenses. Any transfer in violation of this Section will
constitute a breach of this Agreement and convey no rights to or interests in
this Agreement or any Franchise Agreement.
As used in this Agreement, the term "TRANSFER" will include, without
limitation, the following, whether voluntary or involuntary, direct or indirect:
(1) an assignment, sale, gift or pledge;
(2) the grant of a mortgage, lien or security interest in this
Agreement, including, without limitation, the grant of a collateral
assignment;
(3) a merger or consolidation, or issuance of additional Ownership
Interests or interests convertible to Ownership Interests;
(4) a sale of voting Ownership Interests or any interest that is
convertible to voting Ownership Interests, or an agreement granting the
right to exercise or control the exercise of voting rights of any
holder of an Ownership Interest or to control your operation or
affairs; and
(5) a transfer that occurs as a result of your insolvency or
dissolution or upon death of you or an Owner, by will, trust or other
transfer by operation of law.
The term "transfer" shall not include the grant of a lien or security
interest in the equipment, fixtures or supplies of one or more KRISPY KREME
STORES.
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If the proposed transfer is among your Owners or Immediate Family or to
us pursuant to an exercise of our right of First Refusal, the transfer fee in
Section 9.B will not apply, although the transferee is required to reimburse us
for any administrative costs we incur in connection with the transfer; provided
that this amount will not exceed Five Hundred Dollars ($500.00).
C. DEATH OF YOU OR AN OWNER OF A CONTROLLING INTEREST.
Upon your death or the death of an Owner, all of such Person's interest
in this Agreement, or such interest in you will be transferred to a transferee
approved by us. Such disposition of this Agreement or such interest in you
(including, without limitation, transfer by bequest or inheritance), will be
completed within a reasonable time, not to exceed nine (9) months from the date
of death and will be subject to all the terms and conditions applicable to
transfers contained in this Section.
D. EFFECT OF OUR APPROVAL OF A TRANSFER.
Our consent to a transfer of this Agreement or any interest subject to
the restrictions of this Section will not constitute a waiver of any claims we
may have against you (or your Owners), nor will it be deemed a waiver of our
right to demand full compliance with any of the terms or conditions of this
Agreement by the transferee.
E. OUR RIGHT OF FIRST REFUSAL.
If you or any of your Owner(s) determine to make a transfer of an
interest that is permitted under this Agreement, you or your Owner(s) will
obtain a bona fide, arms length executed written offer (and any proposed
ancillary agreements) in complete and definitive form and not subject to any
financing or other material, substantive contingency and an earnest money
deposit (in the amount of five percent (5%) or more of the purchase price) from
a qualified, responsible, bona fide and fully disclosed offeror. A true and
complete copy of such offer (conditioned on our first refusal rights) and any
proposed ancillary agreements will immediately be submitted to us by you, your
Owner(s), or both. The offer may apply only to an interest that is permitted to
be transferred under this Agreement, may not include the purchase of any other
property or rights of you (or your Owner(s) other than incident to the operation
of Krispy Kreme Stores) and the price and terms of purchase offered to you (or
your Owner(s)) in the offer for such interests will reflect the bona fide price
offered therefor and will not reflect any value for any other property or
rights.
We will have the right, exercisable by written notice delivered to you
(or your Owner(s)) within thirty (30) days from the date of receipt by us of an
exact copy of such offer (and any ancillary agreements) and a completed executed
application for our approval of the transfer, to purchase such interest for the
price and on the terms and conditions contained in such offer, provided that:
(1) we may substitute cash for any other form of payment proposed in such offer;
(2) our credit will be deemed equal to the credit of any proposed purchaser; (3)
we will have not less than ninety (90) days after giving notice to prepare for
closing; and (4) we will be entitled to all customary representations and
warranties given by the seller of a business, including, without
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limitation, representations and warranties as to: (a) ownership, condition and
title to Ownership Interests and/or assets; (b) liens and encumbrances relating
to the Ownership Interests and/or assets; and (c) validity of contracts and
liabilities, contingent or otherwise, of any corporation, limited liability
company or partnership whose Ownership Interests are purchased.
If we do not exercise our right of first refusal, you (or your
Owner(s)) may complete the sale to such offerer pursuant to and on the exact
terms of the offer, subject to approval by us and subject to your payment of the
applicable transfer fee, provided that if the sale to such offeror is not
completed within one hundred twenty (120) days after receipt of such offer by
us, or there is a change in the terms of the sale (in which case you will
promptly furnish copies of the modified offer and ancillary documents to us), we
will again have an additional right of first refusal for thirty (30) days as set
forth in this Agreement on the modified or initial terms and conditions of sale.
Notwithstanding the foregoing, if you determine to make a transfer of
an interest of this Agreement, you may submit an offer to us to purchase your
interest in the Agreement. The purchase price may apply only to an interest that
is permitted to be transferred under this Agreement, may not include the
purchase of any other property or rights of you (or your Owner(s)) and the price
and terms of purchase offered to us must reflect a bona fide price and may not
reflect any value for any other property or rights. We will have the right,
exercisable by written notice delivered to you (or your Owner(s)) within sixty
(60) days from the date of receipt by us of your written offer, to purchase such
interest for the price and on the terms and conditions contained in such offer
and we will have not less than sixty (60) days to prepare for closing. We shall
also be entitled to all customary representations and warranties described in
this Section 9.E. If we do not exercise our right to purchase, you (or your
Owner(s)) may make this offer to a third party, subject to approval by us,
provided that the sale must be on comparable terms as those offered to us but at
a price equal or greater to the price offered to us and provided that if the
sale to such purchaser is not completed within one hundred twenty (120) days
after receipt of such offer by us or there is a change in the terms of sale, we
will again have a right to purchase for thirty (30) days as set forth in this
Agreement on the modified or initial terms and conditions of a sale.
Section E above will not apply if the transfer is among your Owners,
employees or Immediate Family members of your Owners; or constitutes a transfer
of less than ten percent (10%) interest in you as long as such transfer in
conjunction with transfers during the Development Term and then-contemplated
transfers does not constitute a transfer equal to or greater than twenty percent
(20%) interest in you.
F. OWNERSHIP STRUCTURE AND INITIAL CAPITALIZATION.
You represent and warrant that your Owners are as set forth on EXHIBIT
G and covenant that you will not vary from that ownership structure without our
prior written approval.
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G. DELEGATION BY US.
You agree that we will have the right, from time to time, to delegate
the performance of any portion or all of our obligations and duties under this
Agreement to designees, whether the same are our agents or independent
contractors with which we have contracted to provide these services.
10. TERMINATION OF AGREEMENT.
We may terminate this Agreement, effective upon delivery of notice of
termination to you or, where expressly applicable, upon failure to cure to our
satisfaction any breach of this Agreement before the expiration of any period of
time within which such breach may be cured in accordance with the provisions set
forth below, if:
(1) you (or any of your Owners) have made any material
misrepresentation or omission in your application for this Agreement or
in connection with any transfer of this Agreement or are convicted by a
trial court of, plead guilty to or do not contest the charge of a
felony, or of any other crime or offense that may adversely affect the
reputation of KRISPY KREME STORES, or the goodwill associated with the
Marks, or engage in any misconduct that may adversely affect the
reputation of KRISPY KREME STORES or the goodwill associated with the
Marks;
(2) you fail on three (3) or more occasions, or on two (2) or more
consecutive occasions to satisfy the development obligations (either
for the development period and/or cumulatively), or you fail at the end
of the first, second or third development period to satisfy your
cumulative development obligations as set forth in Paragraph 3.C. of
this Agreement and EXHIBIT B;
(3) you or any other Person makes an assignment or transfer in
violation of this Agreement;
(4) you (or any of your Owners) makes any unauthorized use of the
Marks, (including, but not limited to, unauthorized use of the Marks as
part of a website domain name or electronic address or as part of
information available on such website) or unauthorized use, disclosure
or duplication of the Confidential Information, or challenges or seeks
to challenge the validity of the Marks. For purposes of this Agreement,
a "website" is an interactive electronic document contained in a
network of computers linked by communications software;
(5) you, any of your Owners, or members of your or any of your Owners'
Immediate Families violate the restrictions on holding interests in or
performing services for Competitive Businesses set forth in Section 7
of this Agreement or Owners who have access to the Confidential
Information violate the covenants concerning competition and
confidentiality contained in the form of Confidentiality and
Non-Competition Agreement
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attached hereto as EXHIBIT F (notwithstanding that such Person has not
signed this Agreement or a Confidentiality and Non-Competition
Agreement);
(6) you (or any of your Owners) fail to: (a) comply with any other
provision of this Agreement, and do not correct such failure within
thirty (30) days after your receipt of our written notice of such
failure to comply; or (b) if such failure cannot reasonably be
corrected within the thirty (30) day period but can be corrected within
a reasonably short time (not to exceed an additional thirty (30) days),
undertake within ten (10) days after your receipt of our written
notice, and continue until completion, best efforts to correct such
failure within such reasonably short time (not to exceed an additional
thirty (30) days) and furnish proof acceptable to us, upon our request,
of such efforts and the date full compliance will be achieved;
(7) you (or any of your Owners) fail on three (3) or more separate
occasions within any period of twenty four (24) consecutive months to
comply with this Agreement, whether or not such failures to comply are
corrected after written notice thereof are delivered to you; or
(8) we have delivered a notice of termination of a Franchise Agreement
executed pursuant to this Agreement in accordance with its terms and
conditions or you have terminated a Franchise Agreement with us without
cause.
11. OUR RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION OF THIS AGREEMENT
A. CONFIDENTIAL INFORMATION/DE-IDENTIFICATION.
You agree that upon termination or expiration of this Agreement, you,
your Owners and your employees, will immediately cease to use and will maintain
the absolute confidentiality of any Confidential Information disclosed to or
otherwise learned or acquired by you or your Owners or employees, will refrain
from using such Confidential Information in any business or otherwise and will
return to us all copies of confidential materials that have been loaned or made
available to you by us pursuant to this Agreement. You must cease using the
Marks and identifying yourself directly or indirectly with KRISPY KREME STORES,
including, but not limited to, cancelling any website, electronic address and/or
domain name which displays any Mark or that identifies you with KRISPY KREME
STORES.
B. COVENANT NOT TO COMPETE.
Upon termination of this Agreement in accordance with its terms and
conditions or your termination of this Agreement without cause, neither you nor
any of your Owners will directly or indirectly (through a member of the
Immediate Family of you or an Owner of you, or otherwise) for a period of two
(2) years commencing on the effective date of such termination or the date on
which you cease to conduct your activities under this Agreement, whichever is
later:
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(1) have any interest as a disclosed or beneficial owner in any
Competitive Business located or operating in the Development Area on
the effective date of termination of this Agreement;
(2) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for any Competitive
Business located or operating or under development in the Development
Area on the effective date of termination of this Agreement; or
(3) employ or seek to employ any Person who is employed (as an employee
or independent contractor) by us, our subsidiaries or by any other
developer or franchisee of KRISPY KREME STORES, nor induce nor attempt
to induce any such Person to leave his or her employment without the
prior written consent of that Person's employer.
The restrictions of Subparagraph (1) of this Paragraph 11.B. will not
be applicable to the ownership of publicly traded Ownership Interests that
constitute less than three percent (3%) of a class of Ownership Interests issued
and outstanding, nor will they be construed to prohibit you, any of your Owners
or any member of your Immediate Family or member of the Immediate Family or any
Owner from having a direct or indirect Ownership Interest in KRISPY KREME
STORES, development agreement or franchise agreement for the development or
operation of KRISPY KREME STORES or from providing services to KRISPY KREME
STORES pursuant to other agreements with us.
C. OUR RIGHT TO PURCHASE STORES.
Upon our termination of this Agreement in accordance with its terms and
conditions or your termination of this Agreement without cause, we have the
option, exercisable by giving written notice thereof to you within sixty (60)
days from the date of such termination, to purchase any or all of the KRISPY
KREME STORES operated by you or other Persons under Franchises granted by us
pursuant to this Agreement. Our right to purchase includes the leasehold rights
to or ownership of sites, in accordance with the terms set forth in the
Franchise Agreements for your KRISPY KREME STORES.
D. CONTINUING OBLIGATIONS.
All obligations under this Agreement of us and you, your Owners, or
members of your Immediate Family or members of the Immediate Family of an Owner,
which expressly or by their nature survive or are intended to survive the
termination or expiration of this Agreement, will continue in full force and
effect subsequent to and notwithstanding its termination or expiration and until
they are satisfied in full or by their nature expire.
12. INDEMNIFICATION.
We are independent contractors. We will not be obligated by or have any
liability under any agreements, representations, or warranties made by you that
are not expressly authorized un-
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der this Agreement, nor will we be obligated for any damages to any person or
property directly or indirectly arising out of the operation of your business
conducted pursuant to this Agreement or the development or operation of KRISPY
KREME STORES by you, whether or not caused by your negligent or willful action
or failure to act. We will have no liability for any value added, sales,
service, excise, income, gross receipts, property, payroll or other taxes levied
upon you or your property, or upon us, in connection with your business. You
agree to defend and hold us, our subsidiaries and our respective owners,
directors, officers, employees, agents and assignees harmless against and to
reimburse them for:
(1) all claims, losses, obligations and damages described in this
Section, any and all claims and liabilities of your customers and
others with whom you deal directly or indirectly arising out of this
Agreement, the development or operation of any KRISPY KREME STORES
pursuant to this Agreement, including, without limitation, your breach
or violation of any representation, warranty, agreement, contract or
commitment resulting from your signing of this Agreement or performance
of any of your obligations under this Agreement, unauthorized
activities conducted in association with the Marks, or the transfer of
any interest in this Agreement or a KRISPY KREME STORE, to the extent
that such claims, obligations, damages, losses or liabilities do not
arise solely from our gross negligence or wrongful conduct; and
(2) all value added, sales, service, occupation, excise, gross
receipts, income, property, payroll or other taxes, whether levied upon
you, a KRISPY KREME STORE, your property or upon us (except any taxes
we are required by law to collect from you with respect to purchases
from us).
For purposes of this indemnification, "claims" will mean and include all
obligations, actual, consequential, special, and punitive damages and costs
reasonably incurred in the defense of any such claim against us, including,
without limitation, legal and accounting fees, arbitrators' and expert witness
fees, cost of investigation and proof of facts, court costs, other litigation
expenses, and travel and living expenses. We will have the right to defend any
such claim against us. This indemnity will continue in full force and effect
subsequent to and notwithstanding the termination or expiration of this
Agreement.
Notwithstanding the foregoing, your indemnification obligation under
this Section 12 shall not extend to claims arising from proprietary products and
proprietary equipment manufactured by us and sold by us to you, provided that
such products are used in accordance with the standard operating procedures and
all applicable manuals and instructions provided to you from time to time.
13. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.
Except as expressly provided to the contrary herein, each section,
subsection, paragraph, term and provision of this Agreement, and any portion
thereof, will be considered severable, and if, for any reason, any such
provision is held to be invalid or contrary to or in conflict with any
applicable present or future law or regulation in a final, unappealable ruling
issued by any court,
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agency or tribunal with competent jurisdiction in a proceeding to which we are a
party, that ruling will not impair the operation of, or have any other effect
upon, such other portions of this Agreement as may remain otherwise
intelligible, which will continue to be given full force and effect and bind the
parties hereto, although any portion held to be invalid will be deemed not to be
a part of this Agreement from the date the time for appeal expires, if you are a
party thereto, otherwise upon your receipt from us of a notice of
non-enforcement thereof.
If any covenant herein which restricts competitive activity is deemed
unenforceable by virtue of its scope in terms of area, business activity
prohibited and/or length of time, but would be enforceable by reducing any part
or all thereof, you and we agree that such covenant will be enforced to the
fullest extent permissible under the laws and public policies applied in the
jurisdiction whose law is applicable to the validity of such covenant.
If any applicable and binding law or rule of any jurisdiction requires
a greater prior notice than is required hereunder of the termination of this
Agreement or the taking of some other action not required hereunder, or if,
under any applicable and binding law or rule of any jurisdiction, any provision
of this Agreement is invalid or unenforceable, the prior notice and/or other
action required by such law or rule will be substituted for the comparable
provisions hereof, and we will have the right to modify such invalid or
unenforceable provision to the extent required to be valid and enforceable. You
agree to be bound by any promise or covenant imposing the maximum duty permitted
by law which is subsumed within the terms of any provision hereof, as though it
were separately articulated in and made a part of this Agreement, that may
result from striking any of the provisions hereof, or any portion or portions
which a court or arbitrator may hold to be unenforceable in a final decision to
which we are a party, or from reducing the scope of any promise or covenant to
the extent required to comply with such a court order or arbitration award. Such
modifications to this Agreement will be effective only in such jurisdiction,
unless we elect to give them greater applicability, and will be enforced as
originally made and entered into in all other jurisdictions.
14. WAIVER OF OBLIGATIONS.
We and you may by written instrument unilaterally waive or reduce any
obligation of or restriction upon the other under this Agreement, effective upon
delivery of written notice thereof to the other or such other effective date
stated in the notice of waiver. Any waiver we grant will be without prejudice to
any other rights we may have, will be subject to our continuing review and may
be revoked, in our sole discretion, at any time and for any reason, effective
upon delivery to you of ten (10) days' prior written notice.
We and you will not be deemed to have waived or impaired any right,
power or option reserved by this Agreement (including, without limitation, the
right to demand exact compliance with every term, condition and covenant herein
or to declare any breach thereof to be a default and to terminate this Agreement
prior to the expiration of its term) by virtue of any custom or practice at
variance with the terms hereof; our or your failure, refusal or neglect to
exercise any right under this Agreement or to insist upon exact compliance by
the other with our and your
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obligations under this Agreement; our waiver, forbearance, delay, failure or
omission to exercise any right, power or option, whether of the same, similar or
different nature, with respect to KRISPY KREME STORES operated by others or with
respect to other developers or franchisees of KRISPY KREME STORES; the existence
of other franchise agreements or development agreements for KRISPY KREME STORES
which contain different provisions from those contained herein; or our
acceptance of any payments due from you after any breach of this Agreement. No
special or restrictive legend or endorsement on any check or similar item given
to us will constitute a waiver, compromise, settlement or accord and
satisfaction. We are authorized to remove or obliterate any legend or
endorsement, and such legend or endorsement will have no effect.
Neither we nor you will be liable for loss or damage or deemed to be in
breach of this Agreement if our or your failure to perform our or your
obligations results from:
(1) transportation shortages, inadequate supply of equipment, products,
supplies, labor, material or energy or the voluntary foregoing of the
right to acquire or use any of the foregoing in order to accommodate or
comply with the orders, requests, regulations, recommendations or
instructions of any federal, state or municipal government or any
department or agency thereof;
(2) acts of God;
(3) fires, strikes, embargoes, war or riot; or
(4) any other similar event or cause.
15. RIGHTS OF PARTIES ARE CUMULATIVE.
Our and your rights hereunder are cumulative and no exercise or
enforcement by us or you of any right or remedy hereunder will preclude the
exercise or enforcement by us or you of any other right or remedy hereunder or
to which we or you are entitled by law.
16. ARBITRATION.
ALL CONTROVERSIES, DISPUTES OR CLAIMS BETWEEN US AND OUR SUBSIDIARIES,
SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES AND YOU (YOUR OWNERS,
GUARANTORS, SUBSIDIARIES, AFFILIATES AND EMPLOYEES, IF APPLICABLE) ARISING OUT
OF OR RELATED TO:
(1) THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN YOU AND US
OR ANY PROVISION OF ANY SUCH AGREEMENT;
(2) OUR RELATIONSHIP WITH YOU; OR
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(3) THE VALIDITY OF THIS AGREEMENT OR ANY OTHER AGREEMENT
BETWEEN YOU AND US OR ANY PROVISION OF ANY SUCH AGREEMENT;
WILL BE SUBMITTED FOR BINDING ARBITRATION TO THE CHARLOTTE, NORTH CAROLINA
OFFICE OF THE AMERICAN ARBITRATION ASSOCIATION ON DEMAND OF EITHER PARTY. SUCH
ARBITRATION PROCEEDING WILL BE CONDUCTED IN WINSTON SALEM, NORTH CAROLINA AND,
EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, WILL BE HEARD BY ONE ARBITRATOR
IN ACCORDANCE WITH THE THEN CURRENT FRANCHISING ARBITRATION RULES, IF ANY,
OTHERWISE THE THEN CURRENT COMMERCIAL ARBITRATION RULES OF THE AMERICAN
ARBITRATION ASSOCIATION. ALL MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY
THE FEDERAL ARBITRATION ACT (9 U.S.C. SS.SS. 1 ET SEQ.) AND NOT BY ANY STATE
ARBITRATION LAW.
THE ARBITRATOR WILL HAVE THE RIGHT TO AWARD OR INCLUDE IN HIS AWARD ANY
RELIEF WHICH HE DEEMS PROPER IN THE CIRCUMSTANCES, INCLUDING, WITHOUT
LIMITATION, MONEY DAMAGES (WITH INTEREST ON UNPAID AMOUNTS FROM THE DATE DUE),
SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF AND ATTORNEYS' FEES AND COSTS, PROVIDED
THAT THE ARBITRATOR WILL NOT HAVE THE RIGHT TO DECLARE ANY MARK GENERIC OR
OTHERWISE INVALID OR, EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION, TO AWARD
EXEMPLARY OR PUNITIVE DAMAGES. THE AWARD AND DECISION OF THE ARBITRATOR WILL BE
CONCLUSIVE AND BINDING UPON ALL PARTIES HERETO, AND JUDGMENT UPON THE AWARD MAY
BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION.
WE AND YOU AGREE TO BE BOUND BY THE PROVISIONS OF ANY LIMITATION ON THE
PERIOD OF TIME IN WHICH CLAIMS MUST BE BROUGHT UNDER APPLICABLE LAW OR THIS
AGREEMENT, WHICHEVER EXPIRES EARLIER. WE AND YOU FURTHER AGREE THAT, IN
CONNECTION WITH ANY SUCH ARBITRATION PROCEEDING, EACH MUST SUBMIT OR FILE ANY
CLAIM WHICH WOULD CONSTITUTE A COMPULSORY COUNTERCLAIM (AS DEFINED BY RULE 13 OF
THE FEDERAL RULES OF CIVIL PROCEDURE) WITHIN THE SAME PROCEEDING AS THE CLAIM TO
WHICH IT RELATES. ANY SUCH CLAIM WHICH IS NOT SUBMITTED OR FILED AS DESCRIBED
ABOVE WILL BE FOREVER BARRED.
WE AND YOU AGREE THAT ARBITRATION WILL BE CONDUCTED ON AN INDIVIDUAL,
NOT A CLASS-WIDE, BASIS, AND THAT AN ARBITRATION PROCEEDING BETWEEN US AND OUR
SUBSIDIARIES, SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES AND YOU
(AND/OR YOUR
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OWNERS, GUARANTORS, SUBSIDIARIES AND EMPLOYEES, IF APPLICABLE) MAY NOT BE
CONSOLIDATED WITH ANY OTHER ARBITRATION PROCEEDING BETWEEN US AND ANY OTHER
PERSON, CORPORATION, LIMITED LIABILITY COMPANY OR PARTNERSHIP.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS SECTION, WE
AND YOU EACH HAVE THE RIGHT IN A PROPER CASE TO OBTAIN TEMPORARY RESTRAINING
ORDERS AND TEMPORARY OR PRELIMINARY INJUNCTIVE RELIEF FROM A COURT OF COMPETENT
JURISDICTION; PROVIDED, HOWEVER, THAT WE AND YOU MUST CONTEMPORANEOUSLY SUBMIT
OUR DISPUTE FOR ARBITRATION ON THE MERITS AS PROVIDED HEREIN.
THE PROVISIONS OF THIS SECTION ARE INTENDED TO BENEFIT AND BIND CERTAIN
THIRD PARTY NON-SIGNATORIES AND WILL CONTINUE IN FULL FORCE AND EFFECT
SUBSEQUENT TO AND NOTWITHSTANDING THE EXPIRATION OR TERMINATION OF THIS
AGREEMENT.
17. COSTS AND ATTORNEYS' FEES.
If we incur expenses in connection with your failure to pay when due
amounts owed to us, to submit when due any reports, information or supporting
records or otherwise to comply with this Agreement, you agree to reimburse us
for costs and expenses incurred by us, including, without limitation,
accounting, attorneys', arbitrators' and related fees.
18. GOVERNING LAW AND JURISDICTION.
ALL MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL
ARBITRATION ACT (9 U.S.C. SS.SS. 1 ET SEQ.). EXCEPT TO THE EXTENT GOVERNED BY
THE FEDERAL ARBITRATION ACT AS REQUIRED HEREBY, THE UNITED STATES TRADEMARK ACT
OF 1946 (LANHAM ACT, 15 U.S.C. SECTIONS 1051 ET SEQ.) OR OTHER FEDERAL LAW, THIS
AGREEMENT AND ALL CLAIMS ARISING FROM THE RELATIONSHIP BETWEEN US AND YOU WILL
BE GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD TO ITS
CONFLICT OF LAWS PRINCIPLES, EXCEPT THAT ANY NORTH CAROLINA LAW REGULATING THE
SALE OF FRANCHISES OR BUSINESS OPPORTUNITIES OR GOVERNING THE RELATIONSHIP OF A
FRANCHISOR AND ITS FRANCHISEE WILL NOT APPLY UNLESS ITS JURISDICTIONAL
REQUIREMENTS ARE MET INDEPENDENTLY WITHOUT REFERENCE TO THIS SECTION.
19. CONSENT TO JURISDICTION AND VENUE.
YOU AND YOUR OWNERS AGREE THAT ALL JUDICIAL ACTIONS BROUGHT BY US
AGAINST YOU OR YOUR OWNERS OR BY YOU OR YOUR
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OWNERS AGAINST US OR OUR SUBSIDIARIES, SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS
OR EMPLOYEES MUST BE BROUGHT IN THE SUPERIOR COURT OF FORSYTH COUNTY, NORTH
CAROLINA OR FEDERAL DISTRICT COURT OF THE MIDDLE DISTRICT OF NORTH CAROLINA,
WINSTON SALEM, DIVISION AND YOU (AND EACH OWNER) IRREVOCABLY SUBMIT TO THE
JURISDICTION OF SUCH COURTS AND WAIVE ANY OBJECTION YOU, HE OR SHE MAY HAVE TO
EITHER THE JURISDICTION OF OR VENUE IN SUCH COURTS. NOTWITHSTANDING THE
FOREGOING, WE MAY BRING AN ACTION TO OBTAIN A RESTRAINING ORDER OR TEMPORARY OR
PRELIMINARY INJUNCTION, OR ENFORCE AN ARBITRATION AWARD, IN ANY FEDERAL OR STATE
COURT OF GENERAL JURISDICTION IN THE STATE IN WHICH YOU RESIDE OR IN WHICH THE
DEVELOPMENT AREA IS LOCATED.
20. WAIVER OF PUNITIVE DAMAGES.
EXCEPT WITH RESPECT TO YOUR OBLIGATION TO INDEMNIFY US PURSUANT TO
SECTION 12 AND CLAIMS WE BRING AGAINST YOU FOR YOUR UNAUTHORIZED USE OR
DISCLOSURE OF ANY CONFIDENTIAL INFORMATION, WE AND YOU AND YOUR OWNERS WAIVE TO
THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO OR CLAIM FOR ANY PUNITIVE OR
EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT, IN THE EVENT OF A DISPUTE
BETWEEN US, THE PARTY MAKING A CLAIM WILL BE LIMITED TO EQUITABLE RELIEF AND TO
RECOVERY OF ANY ACTUAL DAMAGES IT SUSTAINS.
21. WAIVER OF JURY TRIAL.
WE AND YOU IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF US.
22. LIMITATIONS OF CLAIMS.
EXCEPT FOR CLAIMS BROUGHT BY US WITH REGARD TO YOUR OBLIGATIONS TO
INDEMNIFY US PURSUANT TO SECTION 12, ANY AND ALL CLAIMS ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE RELATIONSHIP OF YOU AND US PURSUANT TO THIS
AGREEMENT WILL BE BARRED UNLESS AN ACTION IS COMMENCED WITHIN ONE (1) YEAR FROM
THE DATE ON WHICH THE ACT OR EVENT GIVING RISE TO THE CLAIM OCCURRED, OR ONE (1)
YEAR FROM THE DATE ON WHICH YOU OR WE KNEW OR SHOULD HAVE KNOWN, IN THE EXERCISE
OF REASONABLE DILIGENCE, OF THE FACTS GIVING RISE TO SUCH CLAIMS, WHICHEVER
OCCURS FIRST.
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<PAGE> 29
23. BINDING EFFECT.
This Agreement is binding upon us and you and our respective executors,
administrators, heirs, beneficiaries, assigns, and successors in interest and
may not be modified except by written agreement signed by both you and us.
24. CONSTRUCTION.
The preambles and exhibits are a part of this Agreement, which
constitutes the entire agreement of the parties, and there are no other oral or
written understandings or agreements between us and you relating to the subject
matter of this Agreement. Except as otherwise set forth herein, nothing in this
Agreement is intended, nor will be deemed, to confer any rights or remedies upon
any Person not a party hereto. The headings of the several sections and
subsections hereof are for convenience only and do not define, limit, or
construe the contents of such sections or subsections. The term "you" as used in
this Agreement is applicable to one or more Persons. The singular usage includes
the plural and the masculine and neuter usages include each other and the
feminine. If you are two or more Persons at any time, whether or not as partners
or joint venturers, your obligations and liabilities to us will be joint and
several. This Agreement will be executed in multiple copies, each of which will
be deemed an original.
25. NOTICES AND PAYMENTS.
All written notices and reports permitted or required to be delivered
by the provisions of this Agreement will be deemed so delivered:
(1) at the time delivered by hand;
(2) one (1) business day after transmission by electronic mail, by
facsimile or other electronic system;
(3) one (1) business day after being placed in the hands of a
commercial courier service for next business day delivery, or;
(4) three (3) business days after placement the United States Mail by
Registered or Certified Mail, Return Receipt Requested, postage
prepaid,
and addressed to the party to be notified at its most current principal business
address of which the notifying party has been notified. All payments and reports
required by this Agreement will be directed to us at such address, or to such
other Persons and places, as we may direct from time to time. Any required
payment or report not actually received by us during regular business hours on
the date due (or postmarked by postal authorities at least two (2) business days
prior thereto) will be deemed delinquent.
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<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement in on the date dated on the first page hereof.
KRISPY KREME DOUGHNUT CORPORATION
By: _______________________________________
Title: Senior Vice President of Franchising
Dated: ____________________________________
IF OWNER IS A [CORPORATION] IF OWNER IS ONE OR MORE INDIVIDUALS:
LIMITED LIABILITY COMPANY]
[PARTNERSHIP]
By: ____________________________ ___________________________________________
Title: _________________________ Print Name
Dated: _________________________
___________________________________________
Signature
Dated: ____________________________________
___________________________________________
Print Name
___________________________________________
Signature
Dated: ____________________________________
27
<PAGE> 31
EXHIBIT A
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN KRISPY KREME DOUGHNUT CORPORATION
AND ____________________________
DATED ___________________________________________
DEVELOPMENT AREA
The Development Area referred to in Section 2 and other applicable
sections of this Agreement is:
A-1
<PAGE> 32
KRISPY KREME DOUGHNUT COMPANY
CORPORATION
By: ______________________________________ By: _____________________________
Title:Senior Vice President of Franchising Title: __________________________
A-2
<PAGE> 33
EXHIBIT B
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN KRISPY KREME DOUGHNUT CORPORATION
AND _________________________________________
DATED ___________________________________________
DEVELOPMENT SCHEDULE
1. KRISPY KREME STORE DEVELOPMENT. We have granted to you the right to
develop and operate and you agree to develop and operate a total of ____________
(___) KRISPY KREME STORES in accordance with the terms of the Agreement.
2. DEVELOPMENT OBLIGATIONS. You agree to have the minimum number of
KRISPY KREME STORES open in the Development Area during the Development Periods
and in operation at the end of each of the Development Periods listed below:
DEVELOPMENT MARKET/LOCATION NUMBER OF STORES CUMULATIVE
PERIOD --------------- TO BE OPENED NUMBER OF STORES
ENDING ON: DURING THE OPEN AND IN
---------- DEVELOPMENT PERIOD OPERATION
------------------ -----------------
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
__________ __________ __________ __________
KRISPY KREME DOUGHNUT COMPANY
CORPORATION
By: ______________________________________ By: _____________________________
Title:Senior Vice President of Franchising Title: __________________________
B-1
<PAGE> 34
EXHIBIT C
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN KRISPY KREME DEVELOPMENT CORPORATION
AND __________________________________
DATED ___________________________________________
FORM FRANCHISE AGREEMENT
Attached hereto is the current form of Franchise Agreement used by us
in the offer and grant of franchises for the ownership and operation of KRISPY
KREME STORES. This will be the form of Franchise Agreement that you will sign
for all KRISPY KREME STORES to be developed under this Agreement.
KRISPY KREME DOUGHNUT COMPANY
CORPORATION
By: ______________________________________ By: _____________________________
Title:Senior Vice President of Franchising Title: __________________________
C-1
<PAGE> 35
EXHIBIT D
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN KRISPY KREME DOUGHNUT CORPORATION
AND __________________________________
DATED ___________________________________________
ACKNOWLEDGMENTS AND REPRESENTATIONS STATEMENT
1. You acknowledge that you have read the Development Agreement (the
"AGREEMENT") between you and us dated as of the date hereof in its entirety and
that you understand and accept the terms, conditions and covenants contained in
the Agreement as being reasonably necessary to maintain our high standards of
quality and service and the uniformity of those standards at all KRISPY KREME
STORES in order to protect and preserve the goodwill of the Marks. (Capitalized
terms not defined herein will have the respective meanings set forth in the
Agreement.)
2. Attached to the Agreement as Exhibit C is a copy of the current form
of Franchise Agreement. You acknowledge that the Franchise Agreement attached to
the Agreement as Exhibit C is the current form of Franchise Agreement and that
you will sign for each KRISPY KREME STORE that you develop.
3. You acknowledge that the food service business is a competitive
industry, with constantly changing market conditions. You acknowledge that you
have conducted an independent investigation of the business contemplated by the
Agreement and recognize that, like any other business, the nature of the
business conducted by KRISPY KREME STORES may change over time and that an
investment in a KRISPY KREME STORE involves business risks.
4. We recommend that each applicant for development rights be
represented by legal counsel. You acknowledge that you have had ample
opportunity to consult with legal counsel and other professional advisors. You
acknowledge that you have not received or relied on any representations about
the development rights granted in the Agreement made by us, or our officers,
directors, employees or agents, that are contrary to the terms and conditions of
the Agreement.
5. You acknowledge and agree that our approval of a proposed site for a
KRISPY KREME STORE does not constitute an assurance, guarantee, representation
or warranty of any kind, express or implied, as to the suitability of the
proposed site for a KRISPY KREME STORE or the successful operation or
profitability of a KRISPY KREME STORE operated at such site. Our approval of any
such site indicates only that we believe that such site falls within acceptable
D-1
<PAGE> 36
minimum criteria established by us at the time of our approval. Both you and we
acknowledge that application of criteria that have been effective with respect
to other sites may not be predictive of potential for all sites and that,
subsequent to our approval of a proposed site, demographic and/or economic
factors, such as competition from other similar businesses, included in or
excluded from our criteria could change, thereby altering the potential of a
proposed site. Such factors are unpredictable and are beyond our control. We
will not be responsible for the failure of a site approved by us to meet your
expectations as to revenue or operational criteria. You further acknowledge and
agree that your acceptance of a Franchise for the operation of a KRISPY KREME
STORE at any such site is based on your own independent investigation of the
suitability of the site.
6. You acknowledge that our approval of a business and financing plan
for your development and operation of KRISPY KREME STORES under the Agreement
does not constitute any assurance, guaranty, representation or warranty that
such business and financing plan is sufficient or not unduly burdensome, or that
such KRISPY KREME STORES will be successful if the business or financing plan is
implemented by you. Our approval of the business and financing plan indicates
only that such plan meets or that we have waived our then-current minimum
standards established by us solely for our own purposes at the time of approval.
7. You acknowledge that in all of our dealings with you, our officers,
directors, employees and agents act only in a representative capacity and not in
an individual capacity. You further acknowledge that the Agreement, and all
business dealings between you and such individuals as a result of the Agreement,
are solely between you and us. You further represent to us, as an inducement to
our entry into this Agreement, that neither you nor your Owners has made any
misrepresentations in obtaining the rights granted under the Agreement.
8. If you are a corporation, limited liability company or partnership,
you:
A. represent that you are duly organized and validly existing
in good standing under the laws of the jurisdiction of your
organization, are qualified to do business in all jurisdictions in
which your business activities or the nature of properties owned by you
requires such qualification, and have the authority to execute and
deliver the Agreement and perform all of your obligations under the
Agreement; and
B. agree that all certificates representing your Ownership
Interests of you now outstanding or hereafter issued will be endorsed
with a legend in form approved by us reciting that the transfer of your
Ownership Interests are subject to restrictions contained in the
Agreement.
9. You represent and warrant that you are not subject to any
restriction, agreement, contract, commitment, law, judgment or decree which
would prohibit or be breached or violated by your execution and delivery of the
Agreement or performance of your obligations thereunder. At our request, you
will furnish us with an opinion of counsel, in form and substance satisfactory
to us, to the effect that the Agreement is your valid and binding agreement,
enforceable against you in accordance with its terms, and that you are not
subject to any restriction, agreement, law,
D-2
<PAGE> 37
judgment or decree which would prohibit or be breached or violated by your
execution and delivery of the Agreement and performance of your obligations
thereunder.
10. You further represent and warrant that all of your Owners and their
interests in you are completely and accurately listed in EXHIBIT G to the
Agreement and that you will make, sign and deliver to us such revisions thereto
as may be necessary during the term of the Agreement to reflect any changes in
the information contained therein.
11. You represent and warrant that you are a ________________ organized
under the laws of _________________and that your domicile is as set forth below:
________________________________________
Address
________________________________________
City and State
Dated: ____________________________
COMPANY
By: ____________________________________
Title: _________________________________
D-3
<PAGE> 38
EXHIBIT E
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN KRISPY KREME DOUGHNUT CORPORATION
AND __________________________________
DATED ___________________________________________
GUARANTY AND ASSUMPTION OF YOUR OBLIGATIONS
THIS GUARANTY AND ASSUMPTION OF YOUR OBLIGATIONS (the "Guaranty") is
given this ________ day of ______________ of 19___, by the undersigned.
DEVELOPER: _________________________________ ("DEVELOPER")
(NAME)
DATE OF DEVELOPMENT AGREEMENT: ___________________________
In consideration of, and as an inducement to, the execution of the
Development Agreement (the "Agreement") by KRISPY KREME DOUGHNUT CORPORATION
("WE" "US" or "OUR"), each of the undersigned and any other parties who sign
counterparts of this Guaranty (referred to herein individually as a "GUARANTOR"
and collectively as "GUARANTORS") hereby personally and unconditionally
guarantees to us and our successors and assigns, that Developer will punctually
pay its monthly obligations for development fees, royalties, marketing and
promotion fund contributions and purchases of equipment, mixes and other amounts
due under this Agreement and under all franchise agreements entered into
pursuant to the development of Krispy Kreme Stores under this Agreement
Each Guarantor waives:
1. acceptance and notice of acceptance by us of the foregoing
undertakings; and
2. notice of demand for payment of any indebtedness or
nonperformance of any obligations hereby guaranteed; and
3. protest and notice of default to any party with respect to
the indebtedness or nonperformance of any obligations hereby
guaranteed; and
4. any right he or she may have to require that an action be
brought against DEVELOPER or any other person as a condition of
liability; and
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<PAGE> 39
5. all rights to payments and claims for reimbursement or subrogation
which he or she may have against DEVELOPER arising as a result of his or her
execution of and performance under this guaranty by the undersigned (including
by way of counterparts); and
6. any and all other notices and legal or equitable defenses to which
he or she may be entitled; and
7. the provisions of N.C. Gen. Stat. ss. 26-7 et seq.
Each Guarantor consents and agrees that:
(A) his or her direct and immediate liability under this
Guaranty will be joint and several not only with DEVELOPER, but also
among the Guarantors; and
(B) he or she will render any payment or performance required
under the Agreement upon demand if DEVELOPER fails or refuses
punctually to do so; and
(C) such liability will not be contingent or conditioned upon
pursuit by us of any remedies against DEVELOPER or any other person;
and
(D) such liability will not be diminished, relieved or
otherwise affected by any subsequent rider or amendment to the
Agreement or by any extension of time, credit or other indulgence that
we may from time to time grant to DEVELOPER or to any other person,
including, without limitation, the acceptance of any partial payment or
performance, or the compromise or release of any claims, none of which
will in any way modify or amend this Guaranty, which will be continuing
and irrevocable throughout the term of the Agreement and for so long
thereafter as there are any monies or obligations owing by DEVELOPER to
us under the Agreement; and
(E) your written acknowledgment, accepted in writing by us, or
the judgment of any court or arbitration panel of competent
jurisdiction establishing the amount due from you will be conclusive
and binding on the undersigned as Guarantors.
If we are required to enforce this Guaranty in an administrative,
judicial or arbitration proceeding, and prevail in such proceeding, we will be
entitled to reimbursement of our costs and expenses, including, but not limited
to, legal and accounting fees, administrative, arbitrators' and expert witness
fees, costs of investigation and proof of facts, court costs, other expenses of
an administrative, judicial or arbitration proceeding and travel and living
expenses, whether incurred prior to, in preparation for or in contemplation of
the filing of any such proceeding. If we are required to engage legal counsel in
connection with any failure by the undersigned to comply with this Guaranty, the
Guarantors will reimburse us for any of the above-listed costs and expenses
incurred by it.
E-2
<PAGE> 40
IN WITNESS WHEREOF, each Guarantor has hereunto affixed his signature
on the same day and year as the Agreement was executed.
GUARANTOR(S):
Name: _______________________________ Name: __________________________________
Signature: __________________________ Signature: _____________________________
Name: _______________________________ Name: __________________________________
Signature: __________________________ Signature: _____________________________
Name: _______________________________ Name: __________________________________
Signature: __________________________ Signature: _____________________________
Name: _______________________________ Name: __________________________________
Signature: __________________________ Signature: _____________________________
E-3
<PAGE> 41
EXHIBIT F
TO THE DEVELOPMENT AGREEMENT BY AND BETWEEN
KRISPY KREME DOUGHNUT CORPORATION
AND _______________________________
DATED _________________________________
CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
THIS AGREEMENT (the "CNC AGREEMENT") is made and entered into as of
this ______ day of ______________, 19__, by and among KRISPY KREME DOUGHNUT
CORPORATION, ("WE" US" or "OUR"), ______________________________________________
_______________________________________(" DEVELOPER")
Address: ______________________________________________________
______________________________________________________
______________________________________________________
and ____________________________________________________________________________
_________________________________________________________ ("COVENANTOR").
Address: ______________________________________________________
______________________________________________________
______________________________________________________
W I T N E S S E T H:
WHEREAS, pursuant to the terms of the Development Agreement entered
into by and between us and DEVELOPER (the "AGREEMENT"), we have granted to
DEVELOPER the right to develop and own one or more "KRISPY KREME STORES" (the
"KRISPY KREME STORE(S)") (all capitalized terms not defined herein will have the
respective meanings set forth in the Agreement); and
WHEREAS, COVENANTOR is either a member of the Immediate Family of an
Owner of DEVELOPER, a holder of an Ownership Interest in DEVELOPER or an
officer, partner, director, or employee of DEVELOPER who may have access to the
Confidential Information in connection with the development and operation of the
KRISPY KREME STORE(S); and
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<PAGE> 42
WHEREAS, as a condition precedent to allowing COVENANTOR to have access
to the Confidential Information, and as a material term of the Agreement
necessary to protect the System and our proprietary rights in and right to use
the Confidential Information, we and DEVELOPER require that COVENANTOR enter
into this CNC Agreement; and
WHEREAS, to induce us to enter into the Agreement and/or to avoid a
material breach thereof, as the case may be, we, DEVELOPER and COVENANTOR,
desire and deem it to be in COVENANTOR's best interests, that COVENANTOR enter
into this CNC Agreement; and
WHEREAS, due to the nature of our business, any use or disclosure of
the Confidential Information other than in accordance with this CNC Agreement
will cause us and DEVELOPER substantial harm.
NOW, THEREFORE, in consideration of the foregoing and of the covenants
and mutual agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. RECITALS. The recitals set forth above will be deemed to be
incorporated herein as if fully set forth in this CNC Agreement, and this CNC
Agreement will be interpreted in light of such recitals.
2. DEFINITIONS.
a. "CONFIDENTIAL INFORMATION" - Certain of our confidential
and proprietary information and trade secrets including, without
limitation, the following:
(1) methods, techniques, equipment, specifications,
standards, policies, procedures, information, concepts and
systems relating to and knowledge of and experience in the
development, operation and franchising of KRISPY KREME STORES;
(2) marketing and promotional programs for KRISPY
KREME STORES, including but not limited to, information
regarding our National Accounts Program;
(3) knowledge concerning the logic, structure and
operation of computer software programs which we authorize for
use in connection with the operation of KRISPY KREME STORES
and all additions, modifications and enhancements, and all
data generated from use of such programs;
(4) specifications and standards for, and sources of,
store buildings of modular and "stick built" construction,
equipment, furnishings, fixtures, signs, products, materials,
supplies and services utilized in the development and
operation of KRISPY KREME STORES;
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<PAGE> 43
(5) ingredients, formulas, mixes, recipes for and
methods of preparation, cooking, serving, packaging, and
delivery of, Products sold at KRISPY KREME STORES;
(6) information concerning Product sales, operating
results, financial performance, consumer preferences,
inventory requirements for Products, materials and supplies
and other financial data of KRISPY KREME STORES;
(7) customer lists;
(8) employee selection procedures, training and
staffing levels; and
(9) our expansion, growth and development plans and
prospects.
b. "COMPETITIVE BUSINESS" - a business or enterprise, other
than a KRISPY KREME STORE, that:
(1) sells yeast raised doughnuts, cake doughnuts, any
other types of customary or large size doughnut, miniature
doughnuts or doughnut holes in any distribution channels to
any customer for consumption or resale and such sales comprise
five percent (5%) or more of such business' revenues; or
(2) grants or has granted franchises or licenses, or
establishes or has established joint ventures, for the
development and/or operation of a business that offers such
food products in any such channel of distribution.
c. "DEVELOPMENT AREA" - as defined in the Agreement, a copy of
the relevant portions of which may be obtained from DEVELOPER or us.
3. PROTECTION OF CONFIDENTIAL INFORMATION. We have disclosed and will
disclose to DEVELOPER such parts of the Confidential Information as we deem
necessary or advisable from time to time in our sole discretion for the
development of KRISPY KREME STORES pursuant to the Agreement. DEVELOPER will
disclose certain parts of the Confidential Information to COVENANTOR to the
extent that DEVELOPER deems such disclosure reasonably necessary for the
development and operation of KRISPY KREME STORES owned by DEVELOPER, taking into
consideration the confidential nature of the Confidential Information.
COVENANTOR agrees to use the Confidential Information only to the extent
reasonably necessary to perform his or her duties to or on behalf of DEVELOPER,
taking into consideration the confidential nature of the Confidential
Information. COVENANTOR may disclose the Confidential Information only as agent
for DEVELOPER and only on the terms and conditions, and to the extent, DEVELOPER
is permitted to do so under the Agreement. COVENANTOR acknowledges and agrees
that neither COVENANTOR nor any other Person will acquire any interest in or
right to use the Confidential Information under this
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<PAGE> 44
CNC Agreement, the Agreement or otherwise other than the right to utilize it as
authorized in such agreements, and that the unauthorized use or duplication of
the Confidential Information, including, without limitation, in connection with
any other business, would be detrimental to us and would constitute a breach of
COVENANTOR's obligations of confidentiality and an unfair method of competition
with us, DEVELOPER and other KRISPY KREME STORES owned by us or its franchisees.
COVENANTOR acknowledges and agrees that the Confidential Information is
confidential to and a valuable asset of ours, is proprietary to and includes our
trade secrets and is disclosed to COVENANTOR solely on the condition that
COVENANTOR agrees, and COVENANTOR does hereby agree, that COVENANTOR: (a) will
not use the Confidential Information in any other business or capacity; (b) will
maintain the absolute secrecy and confidentiality of the Confidential
Information during and after the term of this CNC Agreement (provided, however,
that we will not deem COVENANTOR in default of this Agreement as a result of
isolated incidents of disclosure of Confidential Information by an employee
other than an Owner, provided COVENANTOR has taken reasonable steps to prevent
such disclosure, including, but not limited to the steps a reasonable and
prudent owner of confidential and proprietary information would take to prevent
disclosure of such information by his employees, and further provided that
COVENANTOR pursues all reasonable legal and equitable remedies against such
employee for such disclosure of such Confidential Information); (c) will not
make unauthorized copies of any portion of the Confidential Information
disclosed or recorded in written or other tangible form; and (d) will adopt and
implement all reasonable procedures prescribed from time to time by us and
DEVELOPER to prevent unauthorized use or disclosure of or access to the
Confidential Information. Nothing contained herein will be construed to prohibit
COVENANTOR from using the Confidential Information in connection with the
development and ownership of KRISPY KREME STORES, where, and to the extent
authorized in other development or franchise agreements with us.
Notwithstanding anything to the contrary contained in this CNC
Agreement, the restrictions on COVENANTOR's disclosure and use of the
Confidential Information will not apply to the following: (a) information,
methods, procedures, techniques and knowledge which are or become generally
known in the food service business, other than through disclosure (whether
deliberate or inadvertent) by COVENANTOR; and (b) the disclosure of the
Confidential Information in judicial, arbitration or administrative proceedings
to the extent that COVENANTOR is legally compelled to disclose such information,
provided COVENANTOR has notified us and DEVELOPER prior to disclosure and has
used its best efforts to obtain, and will have afforded us and DEVELOPER the
opportunity to obtain, assurance satisfactory to us of confidential treatment
for the information required to be so disclosed.
To the extent COVENANTOR is permitted, COVENANTOR agrees to disclose to
us all ideas, concepts, methods, techniques and products which it proposes to
use in relation to the development and operation of KRISPY KREME STORES
conceived or developed by COVENANTOR and COVENANTOR acknowledges and agrees that
we and our subsidiaries will have a perpetual, world-wide, exclusive right
(except that you shall be entitled to use such
F-4
<PAGE> 45
ideas, concepts, techniques or materials without charge by us) to incorporate
same in the System for use in KRISPY KREME STORES owned and operated by us or
our subsidiaries and to authorize our developers and franchisees to use them in
their KRISPY KREME STORES. We will have no obligation to make payments to
COVENANTOR, DEVELOPER or any other Person with respect to any such idea,
concept, method, technique or product developed or suggested by COVENANTOR which
we incorporate into the System. COVENANTOR agrees that COVENANTOR will not use
any such idea, concept, method, technique or product in relation to a KRISPY
KREME STORE without obtaining DEVELOPER'S and our prior written approval.
4. IN-TERM RESTRICTIVE COVENANT. COVENANTOR acknowledges and agrees
that we would be unable to protect the Confidential Information against
unauthorized use or disclosure and would be unable to achieve a free exchange of
ideas and information among franchisees and developers of KRISPY KREME STORES if
persons or entities authorized to use the Confidential Information were
permitted to hold interests in or perform services for a Competitive Business.
COVENANTOR further acknowledges and agrees that the restrictions contained in
this Paragraph 4 will not hinder COVENANTOR's activities in connection with
DEVELOPER'S performance under the Agreement or in general. COVENANTOR therefore
agrees that for as long as COVENANTOR holds an Ownership Interest in DEVELOPER;
is an employee, officer, partner, or director of DEVELOPER; or is a member of
the Immediate Family of an Owner of DEVELOPER, COVENANTOR will not directly or
indirectly (through a member of COVENANTOR's Immediate Family or otherwise):
(a) have any interest as a record or beneficial owner of
Ownership Interests of any Competitive Business (this restriction will
not be applicable to the ownership of publicly traded Ownership
Interests that represent less than three percent (3%) of a class of
Ownership Interests issued and outstanding); or
(b) perform services as a director, officer, manager,
employee, consultant, representative, agent or otherwise for any
Competitive Business.
COVENANTOR furthermore agrees that during the term of the Agreement, neither
COVENANTOR nor a member of COVENANTOR's Immediate Family will directly or
indirectly employ or seek to employ any person who is employed by us, our
subsidiaries or by any other developer or franchisee of KRISPY KREME STORES, nor
induce any such person to leave said employment without the prior written
consent of such person's employer.
If COVENANTOR is an Owner of DEVELOPER or is a member of the Immediate
Family of DEVELOPER or an Owner, the restrictions of this CNC Agreement will not
be construed to prohibit COVENANTOR from having a direct or indirect Ownership
Interest in any KRISPY KREME STORES, development agreements or franchise
agreements for the development or operation of KRISPY KREME STORES, or any
Person owning, controlling or operating KRISPY KREME STORES, or from providing
services to any such KRISPY KREME STORES pursuant to other agreements with us.
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<PAGE> 46
DEVELOPER and COVENANTOR acknowledge and agree that the failure of
COVENANTOR to comply with this Paragraph 4 or Paragraphs 5 or 6 below will, in
addition to giving rise to any remedies under this CNC Agreement, constitute a
breach of the Agreement without regard to whether COVENANTOR has executed the
Agreement on behalf of DEVELOPER.
5. RESTRICTIVE COVENANT UPON TRANSFER OF COVENANTOR'S OWNERSHIP
INTEREST IN DEVELOPER. If (a) COVENANTOR transfers his/her entire Ownership
Interest in DEVELOPER, if any, or (b) DEVELOPER transfers the Agreement (a
transfer described in subparagraph (a) or (b) is referred to herein as a "
DEVELOPER TRANSFER"), COVENANTOR agrees that for a period of two (2) years
commencing on the effective date of the transfer COVENANTOR will not directly or
indirectly (through a member of the Immediate Family of COVENANTOR or
otherwise):
(1) have any interest as a disclosed or beneficial owner in
any Competitive Business located or operating in the Development Area
on the effective date of termination of this Agreement;
(2) perform services as a director, officer, manager,
employee, consultant, representative, agent or otherwise for any
Competitive Business located or operating or under development in the
Development Area on the effective date of termination of this
Agreement; or
(3) employ or seek to employ any Person who is employed (as an
employee or independent contractor) by us, our subsidiaries or by any
other developer or franchisee of KRISPY KREME STORES, nor induce nor
attempt to induce any such Person to leave his or her employment
without the prior written consent of that Person's employer.
(4) own or hold the right to vote any record or beneficial
Ownership Interest of a Competitive Business located or operating:
(a) within five (5) miles of a KRISPY KREME STORE in
operation or under development in the Development Area on the
effective date of a Transfer hereunder; or
(b) within five (5) miles of any other KRISPY KREME
STORE in operation or under development on the effective date
of a Transfer;
(5) perform services as a director, officer, manager,
employee, consultant, representative, agent or otherwise for a
Competitive Business located or operating:
F-6
<PAGE> 47
(a) within five (5) miles of a KRISPY KREME STORE in
operation or under development in the Development Area on the
effective date of a Transfer hereunder; or
(b) within five (5) miles of any other KRISPY KREME
STORE in operation or under development on the effective date
of a Transfer; or
(6) employ or seek to employ any person who is employed by us,
our subsidiaries or by any other developer or franchisee of KRISPY
KREME STORES, nor induce nor attempt to induce any such person to leave
said employment without the prior written consent of such person's
employer.
The restrictions of clause (1) of this Paragraph 5 will not be applicable to the
ownership of publicly traded Ownership Interests that represent less than three
percent (3%) of a class of Ownership Interests issued and outstanding.
COVENANTOR expressly acknowledges and agrees that COVENANTOR possesses
skills and abilities of a general nature and has opportunities for exploiting
such skills. Consequently, enforcement of the covenants made in this Paragraph 5
will not deprive COVENANTOR of an ability to earn a living.
6. RESTRICTIVE COVENANT UPON TERMINATION OR EXPIRATION OF THE AGREEMENT
OR COVENANTOR'S ASSOCIATION WITH DEVELOPER. Upon the first to occur of: (a)
termination or expiration of the Agreement; or (b) the date as of which
COVENANTOR is neither the holder of an Ownership Interest in DEVELOPER, a member
of the Immediate Family or DEVELOPER'S or of an Owner of DEVELOPER, or an
employee, officer or director of DEVELOPER (an event described in subparagraph
(a) or (b) is referred to herein as a "TERMINATION EVENT"), COVENANTOR agrees
that for a period of two (2) years commencing on the effective date of a
Termination Event, COVENANTOR will not directly or indirectly (through an
Immediate Family member of COVENANTOR or otherwise):
(1) have any interest as a disclosed or beneficial owner in
any Competitive Business located or operating in the Development Area
on the effective date of termination of this Agreement;
(2) perform services as a director, officer, manager,
employee, consultant, representative, agent or otherwise for any
Competitive Business located or operating or under development in the
Development Area on the effective date of termination of this
Agreement; or
(3) employ or seek to employ any Person who is employed (as an
employee or independent contractor) by us, our subsidiaries or by any
other developer or franchisee of KRISPY KREME STORES, nor induce nor
attempt to induce any such Person to leave his or her employment
without the prior written consent of that Person's employer.
F-7
<PAGE> 48
(4) own or hold the right to vote any record or beneficial
Ownership Interest of a Competitive Business located or operating:
(a) within five (5) miles of any KRISPY KREME STORE
in operation or under development in the Development Area on
the effective date of a Termination Event; or
(b) within five (5) miles of any other KRISPY KREME
STORE in operation or under development on the effective date
of a Termination Event;
(5) perform services as a director, officer, manager,
employee, consultant, representative, agent or otherwise for a
Competitive Business located or operating:
(a) within five (5) miles of any KRISPY KREME STORE
in operation or under development in the Development Area on
the effective date of a Termination Event; or
(b) within five (5) miles of any other KRISPY KREME
STORE in operation or under development on the effective date
of a Termination Event; or
(6) employ or seek to employ any person who is employed by us,
our subsidiaries or by any other developer or franchisee of KRISPY
KREME STORES, nor induce nor attempt to induce any such person to leave
said employment without the prior written consent of such person's
employer.
The restrictions of clause (1) of this Paragraph 6 will not be applicable to the
ownership of publicly traded Ownership Interests that represent less than three
percent (3%) of a class of Ownership Interests issued and outstanding.
COVENANTOR expressly acknowledges and agrees that COVENANTOR possesses
skills and abilities of a general nature and has opportunities for exploiting
such skills. Consequently, enforcement of the covenants made in Paragraph 5 or
this Paragraph 6 will not deprive COVENANTOR of an ability to earn a living.
7. SURRENDER OF CONFIDENTIAL INFORMATION. COVENANTOR agrees that, as of
the effective date of a Transfer or a Termination Event, as applicable,
COVENANTOR will immediately cease to use the Confidential Information disclosed
to or otherwise learned or acquired by COVENANTOR and return to DEVELOPER (or us
if directed by us) all copies of the Confidential Information loaned or made
available to COVENANTOR.
8. INDEMNIFICATION. COVENANTOR agrees to indemnify and hold us and
DEVELOPER harmless from and against any and all claims, liabilities, obligations
and damages suffered, sustained or incurred by us or DEVELOPER as a result of,
arising out of, or in
F-8
<PAGE> 49
connection with any failure of performance under or breach of this CNC Agreement
by COVENANTOR.
9. COSTS AND LEGAL AND ACCOUNTING FEES. If we and/or DEVELOPER engage
counsel in connection with any failure by COVENANTOR to comply with this CNC
Agreement, COVENANTOR will reimburse us and/or DEVELOPER, as applicable, for
costs and expenses incurred by us and/or DEVELOPER, including, without
limitation, legal fees and accounting, arbitrators' and expert witness fees,
cost of investigation and proof of facts, court costs, other expenses of an
administrative, judicial or arbitration proceeding and travel and living
expenses, whether incurred prior to, in preparation for, in contemplation of or
in connection with the filing of any judicial or arbitration proceeding to
enforce this CNC Agreement.
10. WAIVER. Failure to insist upon strict compliance with any of the
terms, covenants or conditions hereof will not be deemed a waiver of such term,
covenant or condition, nor will any waiver or relinquishment of any right or
remedy hereunder at any one or more times be deemed a waiver or relinquishment
of such right or remedy at any other time or times.
11. SEVERABILITY. The invalidity or unenforceability of any provision
hereof will in no way affect the validity or enforceability of any other
provision of this CNC Agreement and any such provision which is adjudicated to
be invalid or unenforceable will be severed from this CNC Agreement, provided
that such severance is to apply only with respect to the operation of such
provision in the particular jurisdiction in which such adjudication is made. To
the extent any restriction herein is deemed unenforceable by virtue of its scope
in terms of time, geography or business activity prohibited, but may be made
enforceable by modifying, amending or reducing any or all thereof, the parties
agree that any court, judicial or administrative agency or arbitrator may, and
is hereby directed to, revise such language in order to make such restrictions
enforceable to the fullest extent permissible under the laws and public policies
applied in the jurisdiction where enforcement is sought.
12. RIGHTS OF PARTIES ARE CUMULATIVE. The rights of the parties
hereunder are cumulative and no exercise or enforcement by a party hereto of any
right or remedy hereunder will preclude the exercise or enforcement by them of
any other right or remedy hereunder or which they are entitled by law to
enforce.
13. BENEFIT. This CNC Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and assigns. In
the event we do not execute this CNC Agreement (regardless of the reason), we
will be deemed a third party beneficiary hereunder and will have the right to
enforce this Agreement.
14. AMENDMENT. This CNC Agreement may not be modified or rescinded
except by a written agreement to such effect signed by the party against whom
enforcement is sought.
15. GOVERNING LAW AND JURISDICTION. This CNC Agreement and the rights
and obligations of the parties hereunder will be governed by and construed in
accordance with the
F-9
<PAGE> 50
laws of the State of North Carolina and all disputes relating to the
interpretation and enforcement of this CNC Agreement will be adjudicated or
arbitrated in Winston-Salem, North Carolina.
16. COUNTERPARTS. This CNC Agreement may be executed in counterparts,
each of which will be deemed an original.
17. EFFECTIVENESS. This CNC Agreement will be enforceable and effective
when executed by COVENANTOR and DEVELOPER, regardless of whether and when we
execute this CNC Agreement.
F-10
<PAGE> 51
IN WITNESS WHEREOF, the parties hereto have executed this CNC Agreement
as of the day and year first above written.
__________________________________ COMPANY
Name
__________________________________ ______________________________________
Name By: __________________________________
Its: _________________________________
__________________________________
Name
KRISPY KREME DOUGHNUT CORPORATION
__________________________________
Name
By: __________________________________
Its: Senior Vice President of Franchising
F-11
<PAGE> 52
EXHIBIT G
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN KRISPY KREME DOUGHNUT CORPORATION
AND ______________________________
DATED ______________________________
BUSINESS ORGANIZATION, OWNERS, GENERAL MANAGER
AND MANAGING OWNER
1. You are a __________________________________________________________
established under the laws of _________________________________.
2. OWNERS: Listed below are the full name and mailing address of each
Person who is an Owner of you and a description of the nature of such Owner's
direct or indirect Ownership Interest in you (attach an additional page if
required):
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
G-1
<PAGE> 53
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
3. MANAGEMENT: The following Person(s) is (are) the Managing Owner and
General Manager who will exert full-time efforts to fulfill the obligations of
you under this Agreement:
MANAGING OWNER:
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
G-2
<PAGE> 54
GENERAL MANAGER:
Name: _____________________________ Number of Ownership Interests owned: ____
Address: __________________________ % of total Ownership Interests: _________
___________________________________ Number of Ownership Interests Owner
___________________________________ is entitled to vote: __________________
___________________________________ Other Ownership Interests (describe):
___________________________________ _________________________________________
4. INITIAL CAPITALIZATION. You: (a) represent and warrant that you have
developed and previously furnished to us, a description of your initial capital
structure which is a true, correct, complete and detailed description of your
capital structure; (b) covenant that you will not deviate from your initial
capital structure without our prior written consent; and (c) acknowledge that we
have relied on your initial capital structure in entering into this Agreement.
KRISPY KREME DOUGHNUT CORPORATION COMPANY
By: _______________________________________ By: _____________________________
Title: Senior Vice President of Franchising Title: __________________________
G-3
<PAGE> 55
EXHIBIT H
TO THE DEVELOPMENT AGREEMENT
BY AND BETWEEN KRISPY KREME DOUGHNUT CORPORATION
AND ______________________________
DATED ______________________________
COMMISSARY RIDER
H-1
<PAGE> 1
EXHIBIT 10.4
FORM OF
KRISPY KREME DOUGHNUT CORPORATION
FRANCHISE AGREEMENT
____________________________________
OWNER
____________________________________
DATE OF AGREEMENT
____________________________________
ADDRESS OF STORE
STORE NUMBER _______________________
<PAGE> 2
TABLE OF CONTENTS
PAGE
----
1. PREAMBLES, ACKNOWLEDGMENTS AND GRANT OF FRANCHISE....................1
A. PREAMBLES...................................................1
B. ACKNOWLEDGMENTS.............................................2
C. CORPORATION, LIMITED LIABILITY COMPANY OR PARTNERSHIP.......2
D. GRANT OF FRANCHISE..........................................3
E. TERRITORIAL RIGHTS..........................................3
F. RIGHTS WE RESERVE...........................................4
2. SITE SELECTION, LEASE OF SITE AND DEVELOPMENT OF STORE...............4
A. SITE SELECTION..............................................4
B. LEASE OF SITE...............................................5
C. STORE DEVELOPMENT...........................................5
D. BUILDING, EQUIPMENT, FIXTURES, FURNISHINGS, AND SIGNS.......6
E. DOUGHNUT MIXES..............................................6
F. SUPPLY PURCHASE PROGRAM.....................................6
G. COMPUTER SYSTEM.............................................7
H. STORE OPENING...............................................7
I. GRAND OPENING PUBLIC RELATIONS AND MARKETING PROGRAM........8
3. FEES.................................................................8
A. INITIAL FEE.................................................8
B. ROYALTIES...................................................8
C. DEFINITION OF "GROSS SALES".................................9
D. INTEREST ON LATE PAYMENTS...................................9
E. APPLICATION OF PAYMENTS.....................................9
4. TRAINING AND ASSISTANCE.............................................10
A. TRAINING...................................................10
B. GENERAL GUIDANCE...........................................10
C. MANUALS....................................................11
5. MARKS...............................................................11
A. OWNERSHIP AND GOODWILL OF MARKS............................11
B. LIMITATIONS ON YOUR USE OF MARKS...........................11
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS...................12
D. DISCONTINUANCE OF USE OF MARKS.............................12
E. INDEMNIFICATION OF OWNER...................................12
6. CONFIDENTIAL INFORMATION............................................13
i
<PAGE> 3
7. EXCLUSIVE RELATIONSHIP..............................................14
8. SYSTEM STANDARDS....................................................15
A. COMPLIANCE WITH SYSTEM STANDARDS...........................15
B. MODIFICATION OF SYSTEM STANDARDS...........................17
C. MANAGEMENT OF THE STORE....................................18
9. PUBLIC RELATIONS AND ADVERTISING....................................18
A. PUBLIC RELATIONS AND ADVERTISING PROGRAM FUND..............18
B. BY YOU.....................................................20
10. RECORDS, REPORTS AND FINANCIAL STATEMENTS...........................20
11. INSPECTIONS AND AUDITS..............................................22
A. OUR RIGHT TO INSPECT THE STORE.............................22
B. OUR RIGHT TO AUDIT.........................................22
12. TRANSFER............................................................23
A. BY US......................................................23
B. BY YOU.....................................................23
C. CONDITIONS FOR APPROVAL OF TRANSFER........................24
D. TRANSFER TO A WHOLLY-OWNED CORPORATION OR LIMITED
LIABILITY COMPANY..........................................25
E. YOUR DEATH OR DISABILITY...................................26
F. EFFECT OF CONSENT TO TRANSFER..............................27
G. OUR RIGHT OF FIRST REFUSAL.................................27
13. EXPIRATION OF THIS AGREEMENT........................................29
A. YOUR RIGHT TO ACQUIRE A SUCCESSOR FRANCHISE................29
B. GRANT OF A SUCCESSOR FRANCHISE.............................29
C. AGREEMENTS/RELEASES........................................30
14. TERMINATION OF AGREEMENT............................................31
A. BY YOU.....................................................31
B. BY US......................................................31
15. OUR AND YOUR RIGHTS AND OBLIGATIONS UPON TERMINATION OR
EXPIRATION OF THIS AGREEMENT........................................32
A. PAYMENT OF AMOUNTS OWED TO US .............................32
B. MARKS......................................................33
C. CONFIDENTIAL INFORMATION...................................34
D. COVENANT NOT TO COMPETE....................................34
E. OUR RIGHT TO PURCHASE STORE................................35
F. OPTION TO BUY CERTAIN FIXTURES AND EQUIPMENT...............36
G. CONTINUING OBLIGATIONS.....................................37
ii
<PAGE> 4
16. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION.........................37
A. INDEPENDENT CONTRACTORS....................................37
B. NO LIABILITY FOR ACTS OF OTHER PARTY.......................37
C. TAXES......................................................37
D. INDEMNIFICATION............................................38
17. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS...................38
18. WAIVER OF OBLIGATIONS...............................................39
19. COSTS AND ATTORNEYS' FEES...........................................40
20. YOU MAY NOT WITHHOLD PAYMENTS DUE TO US.............................40
21. RIGHTS OF PARTIES ARE CUMULATIVE....................................40
22. MEDIATION...........................................................40
23. ARBITRATION.........................................................41
24. GOVERNING LAW.......................................................43
25. CONSENT TO JURISDICTION.............................................43
26. WAIVER OF PUNITIVE DAMAGES..........................................43
27. WAIVER OF JURY TRIAL................................................44
28. BINDING EFFECT......................................................44
29. LIMITATIONS OF CLAIMS...............................................44
30. CONSTRUCTION........................................................44
31. NOTICES AND PAYMENTS................................................45
EXHIBITS
EXHIBIT A - LISTING OF OWNERSHIP INTERESTS
EXHIBIT B - TERRITORY
EXHIBIT C - EQUIPMENT AND FIXTURES
EXHIBIT D - GRAND OPENING ADVERTISING AND PROMOTION PROGRAM
iii
<PAGE> 5
KRISPY KREME DOUGHNUT CORPORATION
FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT (the "Agreement") is made and entered into
this ____ day of ________________, 199___, by and between KRISPY KREME DOUGHNUT
CORPORATION, a North Carolina corporation, with its principal business address
at P.O. Box 83, Winston-Salem, North Carolina 27102 (referred to in this
Agreement as "we," "us" or "our"), and ________________________________________,
whose principal business address is ____________________________________________
(referred to in this Agreement as "you," "your" or "Owner").
1. PREAMBLES, ACKNOWLEDGMENTS AND GRANT OF FRANCHISE.
A. PREAMBLES
We and our subsidiaries have expended considerable time and effort in
developing store facilities that offer and serve a variety of fresh doughnuts
(including among others, yeast raised doughnuts, cake doughnuts, miniature
doughnuts and doughnut holes (some of which have various types and flavors of
fillings, glazes or other coatings), certain other food products and beverages
and food services (collectively referred to in this Agreement as "Products").
The store concept is a building of stick-built construction with a single
drive-thru corridor and an indoor dining facility known as a KRISPY KREME STORE
which operates under distinctive business formats, methods, procedures, designs,
layouts, standards and specifications, all of which we may improve, further
develop or otherwise modify from time to time. Our subsidiary, HDN CORPORATION,
owns and has licensed us or our affiliates to use, promote and sublicense
certain trademarks, service marks and other commercial symbols in the operation
of a KRISPY KREME STORE (including the trade and service marks "KRISPY KREME"
and "HOT DOUGHNUTS NOW" and associated logos), which have gained and continue to
gain public acceptance and goodwill, and we may hereafter create, use and
license additional trademarks, service marks and commercial symbols in
conjunction with the operation of KRISPY KREME STORES (collectively, the
"Marks"). KRISPY KREME STORES sell Products at retail to customers for their
consumption; deli-bakery sales and direct store delivery ("DSD") sales to food
wholesalers, convenience stores, grocery stores, other institutions and other
chain stores for resale and, to charitable, educational and other nonprofit
organizations that resell Products in various kinds of fund raising activities;
and Products and items bearing the Marks to retail establishments and to
national accounts we have agreed to serve.
We grant to persons who meet our qualifications and are willing to
undertake the investment and effort a franchise to own and operate a KRISPY
KREME STORE offering the products and services we authorize and approve and
utilizing our business formats, methods, procedures, signs, designs, layouts,
doughnut mixes, equipment, standards and specifications and the Marks (the
"System"). You have applied for a franchise to own and operate a KRISPY KREME
STORE.
<PAGE> 6
B. ACKNOWLEDGMENTS
You acknowledge that you have read this Agreement and our Franchise
Offering Circular and understand and accept the terms, conditions and covenants
contained in this Agreement as being reasonably necessary to maintain our high
standards of quality and service and the uniformity of those standards at each
KRISPY KREME STORE and thereby to protect and preserve the goodwill of the
Marks. You acknowledge that you have conducted an independent investigation of
the business venture contemplated by this Agreement and recognize that, like any
other business, the nature of the business conducted by a KRISPY KREME STORE may
evolve and change over time, that an investment in a KRISPY KREME STORE involves
business risks and that your business abilities and efforts are vital to the
success of the venture. Any information you acquire from other KRISPY KREME
STORE franchisees relating to their sales, profits or cash flows does not
constitute information obtained from us, nor do we make any representation as to
the accuracy of any such information. You acknowledge that, in all of their
dealings with you, our officers, directors, employees and agents act only in a
representative, and not in an individual, capacity. All business dealings
between you and such persons as a result of this Agreement are solely between
you and us. You further acknowledge that we have advised you to have this
Agreement reviewed and explained to you by an attorney.
You represent to us, as an inducement to our entry into this Agreement,
that all statements you have made and all materials you have submitted to us in
connection with your application for and purchase of the franchise are accurate
and complete and that you have made no misrepresentations or material omissions
in obtaining the franchise. We have approved your application for a franchise
for a KRISPY KREME STORE in reliance upon all of your representations to us.
C. CORPORATION, LIMITED LIABILITY COMPANY OR PARTNERSHIP
If you are at any time a corporation, limited liability company or
partnership, you agree and represent that:
(1) You will have the authority to execute, deliver and perform your
obligations under this Agreement and are duly organized or formed and validly
existing in good standing under the laws of the state of your incorporation or
formation;
(2) Your organizational documents or partnership agreement will recite
that the issuance and transfer of your ownership interests are restricted by the
terms of this Agreement, and all certificates and other documents representing
your ownership interests will bear a legend referring to the restrictions of
this Agreement;
(3) Exhibit A to this Agreement will completely and accurately describe
all of your owners and their interests in you; and
(4) Each of your owners at any time during the term of this Agreement
will sign an agreement in the form that we prescribe undertaking to be bound
jointly and severally by all
2
<PAGE> 7
provisions of this Agreement and any ancillary agreements between you and us.
You and your owners agree to sign and deliver to us such revised Exhibits A as
may be necessary to reflect any changes in the information contained therein and
to furnish such other information about your organization or formation as we may
request.
D. GRANT OF FRANCHISE
You have applied for a franchise to own and operate a KRISPY KREME
STORE at and from _________________________________________________(the "Site").
Subject to the terms of and upon the conditions contained in this Agreement, we
hereby grant you a franchise (the "Franchise") to operate a Krispy Kreme store
(the "STORE") at the Site, and to use the System in the operation thereof, for a
term commencing on the date of this Agreement and expiring fifteen (15) years
from such date, unless sooner terminated in accordance with Section 14 hereof.
You agree that you or your General Manager will at all times
faithfully, honestly and diligently perform your obligations hereunder, operate
the STORE in full compliance with this Agreement and not engage in any other
business or activity that conflicts with your obligations to operate the STORE
in compliance with this Agreement. You may not operate the STORE from any site
other than the Site without our prior written consent. If we consent to the
relocation of the STORE, we have the right to charge you for the expenses we
incur in connection with the relocation. You agree that the STORE will sell
Products only as follows: at retail to consumers for their own consumption; Deli
Bakery Sales to food wholesalers, grocery stores, other institutions or other
chain stores; and to charitable, educational and other nonprofit organizations
that will resell them to raise funds for such organizations. For purposes of
this Agreement, Deli Bakery Sales shall mean sales of packaged or unpackaged
products which may be delivered by you or sold on site to food wholesalers,
convenience stores, grocery stores, other institutions and other chain stores
for resale by them under our Marks or the marks of the purchasing entity. You
will use your best efforts actively to solicit food wholesalers, convenience
stores, grocery stores, other institutions or other chain stores for Deli Bakery
Sales. You will also be required to successfully complete our deli bakery
training program. With the sole exceptions of charitable, educational and other
nonprofit organizations and Deli Bakery Sales, you agree that neither you nor
the STORE will sell Products to any other buyer for resale by such buyer. As
long as you are in full compliance with this Agreement, any Development
Agreement and all other agreements with us, you may make Deli Bakery Sales to
locations outside of the Territory as set forth in Exhibit B, provided that such
locations are not outside of any Development Area previously granted to you or
within the territory or development area of any current or future franchisee or
developer. If at any time you are no longer in compliance with any agreement
with us, you must, among other things, cease all Deli Bakery Sales outside of
the Territory upon our written request.
E. TERRITORIAL RIGHTS.
Provided you are in full compliance with this Agreement, neither we nor
any of our affiliates will during the term of the Agreement own, operate or
grant franchises for the operation of a KRISPY KREME STORE or sell any products
identified by the Marks or made utilizing the
3
<PAGE> 8
recipes of the Products within the Territory described on Exhibit B (the
"Territory") other than the franchise granted to you under this Agreement. As
long as you are in full compliance with this Agreement, any Development
Agreement and all other agreements with us during the term of this Agreement, we
will not solicit or make, and we will contractually prohibit other franchisees
from soliciting or making, Deli Bakery Sales to any account or location to which
you have made sales continuously over the prior 12-month period (subject to the
provisions of Section 1.D. hereof). Accordingly, you shall not make any Deli
Bakery Sales to any account or location to which another franchisee has made
sales continuously over the prior 12-month period.
F. RIGHTS WE RESERVE.
We (and our subsidiaries) retain the right in our sole discretion:
(1) to establish KRISPY KREME STORES, and grant to other persons and
legal entities the right to establish, KRISPY KREME STORES at any location,
without regard to proximity to the KRISPY KREME STORE and, on such terms and
conditions as we deem appropriate provided, however, that we will not own,
operate or grant franchises for the operation of a KRISPY KREME STORE or sell
any products identified by the Marks or made utilizing the recipes of the
Products within the Territory if you are in compliance with this Agreement; and
(2) to acquire and operate, or be acquired by, any company, including,
without limitation, a company operating one or more food service businesses
(including food service businesses selling doughnuts), located or operating
within the Territory.
2. SITE SELECTION, LEASE OF SITE AND DEVELOPMENT OF STORE.
A. SITE SELECTION.
You acknowledge that, prior to signing this Agreement, you (with or
without our assistance) located and we approved the Site. You acknowledge and
agree that our recommendation or approval of the Site, and any information
regarding the Site communicated to you, do not constitute a guarantee,
assurance, representation or warranty of any kind, express or implied, as to the
suitability of the Site for a KRISPY KREME STORE or for any other purpose. Our
recommendation or approval of the Site indicates only that we believe that the
Site falls within the acceptable criteria for sites that we have established as
of the time of our recommendation or approval of the Site. Application of
criteria that have appeared effective with respect to other sites may not
accurately reflect the potential for all sites, and, after our approval of a
site, demographic and/or other factors included in or excluded from our criteria
could change, thereby altering the potential of a site. The uncertainty and
instability of such criteria are beyond our control, and we will not be
responsible for the failure of a site we have recommended or approved to meet
expectations as to potential revenue or operational criteria. You acknowledge
and agree that your acceptance of the Franchise is based on your own independent
investigation of the suitability of the Site.
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You must also cause to be prepared and submit for approval by us a site
plan and any modifications to our basic architectural plans and specifications
for the Store, including requirements for dimensions, exterior design,
materials, interior layout, equipment, fixtures, furniture, signs and
decorating. You understand that you may modify our basic plans and
specifications only to the extent required to comply with applicable ordinances,
building codes and permit requirements and only with our prior written approval.
B. LEASE OF SITE.
You acknowledge that you have purchased the Site, or that we and you
have approved the lease or sublease for the Site, prior to or simultaneously
with the signing of this Agreement. If applicable, you are obligated to deliver
a copy of the signed lease to us within fifteen (15) days after it is signed by
you and the lessor. At our request, you agree that unless you are prohibited by
the terms of the lease from doing so, you will collaterally assign the lease or
sublease for the Site to us as security for your timely performance of all
obligations under this Agreement and secure the lessor's consent to the
collateral assignment. You acknowledge that our approval of the lease or
sublease for the Site does not constitute a guarantee, assurance, representation
or warranty, express or implied, of the successful operation or profitability of
a KRISPY KREME STORE operated at the Site. Such approval indicates only that we
believe that the Site and the terms of the lease or sublease fall within the
acceptable criteria we have established as of the time of our approval. You
further acknowledge that we have advised you to have an attorney review and
evaluate the lease or sublease.
C. STORE DEVELOPMENT.
You are responsible for developing the STORE. We will furnish you with
mandatory and suggested specifications and layouts for a KRISPY KREME STORE,
including requirements for dimensions, design, image, interior layout, decor,
equipment, fixtures, furnishings, buildings of modular construction and signs.
You are obligated to have prepared all required construction plans and
specifications to suit the shape and dimensions of the Site and to insure that
such plans and specifications comply with applicable ordinances, building codes
and permit requirements and with lease or sublease requirements and
restrictions, if any. You are obligated to submit construction plans and
specifications to us for approval before construction of the STORE is commenced
and, at our request, to submit all revised or "as built" plans and
specifications during the course of such construction. We may be willing to
assist you in developing the STORE by recommending engineers and architects and
otherwise furnishing information to assist you in developing the STORE in
accordance with our specifications.
You agree, at your own expense, to do the following with respect to
developing the STORE at the Site:
(1) secure all financing required to develop and operate the STORE;
(2) obtain all building, utility, sign, health, sanitation, business
and other permits and licenses required to construct and operate the STORE;
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(3) construct all required improvements to the Site and decorate the
STORE in compliance with plans and specifications we have approved;
(4) purchase or lease and install all required equipment, fixtures,
furnishings, and signs required for the STORE; and
(5) purchase an opening inventory of authorized and approved materials
and supplies.
D. BUILDING, EQUIPMENT, FIXTURES, FURNISHINGS, AND SIGNS.
You agree to use in developing and operating the STORE only the
buildings, equipment (including production equipment and fixtures, cash
register/computer terminals and a telecopier) fixtures, furnishings, signs and
delivery vehicles (if utilized) that we have approved for KRISPY KREME STORES as
meeting our specifications and standards for quality, design, appearance,
function and performance. You agree to place or display at the Site (interior
and exterior) only such signs, emblems, lettering, logos and display materials
that we approve from time to time. We are the sole supplier to our franchisees
of certain doughnut production equipment and fixtures that we specify for KRISPY
KREME STORES. Such doughnut production equipment and fixtures consist of, but
are not limited to, the items described on Exhibit C. You agree to purchase all
such production equipment from us or such other suppliers that we designate from
time to time. You agree to acquire approved brands, types or models of other
equipment, fixtures, furnishings, signs and delivery vehicles only from
suppliers we have designated or approved (which may include us and/or our
subsidiary). If you purchase supplies or equipment from us, you agree to give us
authorization in the form that we designate, to initiate debit entries and/or
credit correction entries to the STORE bank operating account (the "Account")
for payment for purchases from us and any interest charges due thereon. You
agree to make the funds available in the Account for withdrawal by electronic
transfer no later than the due date for payment thereon.
E. DOUGHNUT MIXES.
We are the sole supplier to our franchisees of certain doughnut mixes
which consist of, but are not limited to, the items described on Exhibit C. You
agree to purchase all such mixes from us or other suppliers that we designate
from time to time.
F. SUPPLY PURCHASE PROGRAM.
You must participate in our supply purchase program, under which you
may only purchase supplies for the STORE from us or from suppliers we have
pre-approved or that you have proposed and we have approved prior to purchasing
supplies from such source. We shall provide you with a list of approved products
and supplies and shall from time to time issue revisions thereto. If you wish to
use any type or brand of product or supply item or wish to purchase products or
supplies from a supplier that is not currently approved by us, you shall notify
us of your desire to do so and submit to us specifications, photographs, samples
and/or other information we request. We shall, within a reasonable time,
determine whether such
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products, supplies or such supplier meets its specifications and standards and
notify you whether you are authorized to use such product or supply item or
purchase from such supplier.
G. COMPUTER SYSTEM.
You agree to use in the development and operation of the STORE the cash
register/computer terminals and operating software ("Computer System") that we
specify from time to time. You acknowledge that we have developed a Computer
System and specifications for certain components of the Computer System and may
modify such specifications and the components of the Computer System from time
to time. As part of the Computer System, we may require you to obtain specified
computer hardware and/or software, including, without limitation, a license to
use proprietary software developed by us or others. Our modification of such
specifications for the components of the Computer System may require you to
incur costs to purchase, lease and/or license new or modified computer hardware
and/or software and to obtain service and support for the Computer System during
the term of this Agreement. You acknowledge that we cannot estimate the future
costs of the Computer System (or additions or modification thereto) and that the
cost to you of obtaining the Computer System (including software licenses) (or
additions or modification thereto) may not be fully amortizable over the
remaining term of this Agreement. Nonetheless, you agree to incur such costs in
connection with obtaining the computer hardware and software comprising the
Computer System (or additions or modification thereto), provided you shall not
be required to spend more than $2,000 annually for such changes. Within sixty
(60) days after you receive notice from us, you agree to obtain the components
of the Computer System that we designate and require. You further acknowledge
and agree that we have the right to charge a reasonable systems fee for software
or systems modifications and enhancements specifically made for us that is
licensed to you and other maintenance and support services that we or our
subsidiary furnish to you related to the Computer System.
H. STORE OPENING.
You agree not to open the STORE for business until:
(1) we approve the STORE and site plan as developed in accordance with
our specifications and standards;
(2) management and store employee training has been completed to our
satisfaction;
(3) the franchise fee and all other amounts then due to us have been
paid;
(4) we have been furnished with copies of all insurance policies
required by this Agreement, or such other evidence of insurance coverage and
payment of premiums as we request or accept; and
(5) other items which we may reasonably require.
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You must properly staff the STORE prior to opening to handle normally high
volumes related to the opening of the STORE. We will supply an operating team
that will assist you for a minimum of seven (7) days in the opening of the
STORE. If you are developing several STORES pursuant to a Development Agreement,
this team will be made available at no charge for the first STORE, one-half of a
team will be made available at no charge for the second STORE, a field
consultant will be made available at no charge for the third STORE and will be
discretionary by us thereafter. "No charge" means we will be responsible for the
team's travel, room and board and salaries but you will be responsible for all
other charges or expenses.
I. GRAND OPENING PUBLIC RELATIONS AND MARKETING PROGRAM.
You agree to conduct a grand opening public relations and marketing
program for the STORE during the period commencing thirty (30) days before and
ending ninety (90) days after its opening and to expend the amount described on
Exhibit D for such program. Such public relation's and advertising will utilize
the public relations and advertising programs and media and advertising
materials we have developed or approved. We will provide you with a grand
opening public relations and marketing program manual that will describe the
grand opening public relations and marketing that you will be required to
perform before opening the STORE. We will provide you with guidelines, lists of
suppliers and consult with you on your grand opening public relations and
marketing program but it will be your sole responsibility to develop and
implement this program.
3. FEES.
A. INITIAL FEE.
Concurrently with the signing of this Agreement, you agree to pay us a
nonrecurring and nonrefundable franchise fee in the amount of Twenty-Five
Thousand Dollars ($25,000.00), which will be fully earned by us when paid. If
you paid a Development Fee, that portion of the Development Fee attributable to
this STORE, will be credited toward the Initial Fee.
B. ROYALTIES.
You agree to pay us royalties ("Royalties") in the amount of four and
one-half percent (4.5%) of the gross sales ("Gross Sales") of the STORE each
week by electronic funds transfer. We will periodically designate the day of the
week (the "Payment Day") for the payment of Royalties. Royalties will be based
on Gross Sales of the STORE for the preceding week. You agree to comply with
procedures specified by us in our Manuals (defined in Subsection 4.C.), and/or
perform such acts and sign and deliver such documents as may be necessary to
assist in or accomplish payment by the method described in this Subsection. On
the Payment Day of each week, you agree to report to us by telephone or
electronic means the true and correct Gross Sales of the STORE for the
immediately preceding week ending on Sunday. You agree to give us authorization,
in the form that we designate, for direct debits from the Account. Under this
procedure you will authorize us to initiate debit entries and/or credit
correction entries to the Account for payments of Royalties and other amounts
payable under this Agreement, including,
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but not limited to, purchases for production equipment, doughnut mixes and other
ingredients, packaging and supplies purchased from us and any interest charges
due thereon. You agree to make the funds available in the Account for withdrawal
by electronic transfer no later than the due date for payment therefor. The
amount actually transferred from the Account to pay Royalties will be based on
the STORE's Gross Sales reported to us or determined by us from the records
contained in the cash register/computer terminals of the STORE. If you have not
reported Gross Sales of the STORE to us for any reporting period as required
above, we will be authorized to debit the Account in an amount equal to the
Royalties transferred from the Account for the last reporting period for which a
report of the Gross Sales of the STORE was provided to us in an amount based on
information retrieved from the cash register/computer terminals of the STORE. If
at any time we determine that you have under reported the Gross Sales of the
STORE, or underpaid Royalties or other amounts due to us under this Agreement,
we will be authorized to initiate immediately a debit to the Account in the
appropriate amount in accordance with the foregoing procedure, including
interest as provided for in this Agreement. Any overpayment will be credited to
the Account through a credit effective as of the first reporting date after we
and you determine that such credit is due.
C. DEFINITION OF "GROSS SALES".
As used in this Agreement, the term "Gross Sales" means all revenue you
derive from sales of Products and operation of the STORE, including, but not
limited to, all amounts you receive at or away from the Site, and whether from
cash, check, credit card or credit transactions, but excluding all federal,
state or municipal sales, use or service taxes collected from customers and paid
to the appropriate taxing authority.
D. INTEREST ON LATE PAYMENTS.
All amounts which you owe us will bear interest after their due date at
the rate no more than one and one-half percent (1.5%) per month or the highest
contract rate of interest permitted by law, whichever is less. You acknowledge
that this Subsection does not constitute our agreement to accept any payments
after they are due or our commitment to extend credit to, or otherwise finance
your operation of, the STORE. Your failure to pay all amounts when due
constitutes grounds for termination of this Agreement, as provided in Section 14
hereof, notwithstanding the provisions of this Subsection.
E. APPLICATION OF PAYMENTS.
Notwithstanding any designation you might make, we have sole discretion
to apply any of your payments to any of your past due indebtedness to us. You
acknowledge and agree that we have the right to set off any amounts you or your
owners owe us against any amounts we might owe you or your owners.
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4. TRAINING AND ASSISTANCE.
A. TRAINING.
Before the STORE begins operating, we will furnish training on the
operation of a KRISPY KREME STORE. A training program for up to two STORE
manager(s) will be furnished at our designated training facility and/or at an
operating KRISPY KREME STORE. The STORE manager(s) are required to complete
training to our satisfaction. Although we will furnish training to these
manager(s) of the STORE at no additional fee or other charge, you will be
responsible for the compensation of the manager(s) during the training period
and the travel and living expenses the manager(s) incur in connection with
training. You agree to replace a manager if we determine that he or she is not
qualified to serve in this capacity at the STORE. We will furnish the same
training program to one additional manager of the STORE per year that you hire
after the STORE is open, without fee or other charge, subject to the schedules
for the training program in effect from time to time. You will be responsible
for the compensation of such managers during the training period and the travel
and living expenses the managers incur in connection with training. We may
require previously trained and experienced managers to attend periodic refresher
training courses at such times and locations that we designate, not to exceed
one such refresher training course during each calendar year. We may request
that you give us reasonable assistance in training other KRISPY KREME STORE
franchisees. If you agree to provide this assistance, we will reimburse you for
your reasonable out-of-pocket expenses in providing such assistance.
B. GENERAL GUIDANCE.
We will advise you from time to time regarding the operation of the
STORE based on reports you submit to us or inspections we make. In addition, we
will furnish guidance to you with respect to:
(1) standards, specifications and operating procedures and methods
utilized by KRISPY KREME STORES;
(2) purchasing required equipment, fixtures, furnishings, signs,
vehicles, materials and supplies;
(3) advertising and marketing programs;
(4) sales and operating data of KRISPY KREME STORES; and
(5) administrative, bookkeeping and accounting procedures.
Such guidance will, at our discretion, be furnished in our manuals ("Manuals"),
bulletins or other written materials and/or during telephone consultations
and/or consultations at our office or the STORE.
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At your request, and if we agree, we will furnish additional guidance
and assistance and, in such a case, may charge the per diem fees and charges we
establish from time to time. If you request or we require additional or special
training for your employees, all of the expenses that we incur in connection
with such training, including per diem charges and travel and living expenses
for our personnel, will be your responsibility.
C. MANUALS.
We will loan you during the term of this Agreement one (1) copy of our
Manuals, consisting of such materials (including, if applicable, audiotapes,
videotapes, magnetic media, computer software and written materials) that we
generally furnish to franchisees from time to time for use in operating a KRISPY
KREME STORE. The Manuals as well as the bulletins and other written materials
provided to you contain mandatory and suggested specifications, standards,
operating procedures and rules ("System Standards") that we prescribe from time
to time for the operation of a KRISPY KREME STORE and information relating to
your other obligations under this Agreement and related agreements. The Manuals
may be modified from time to time to reflect changes in System Standards. You
agree to keep your copy of the Manuals current with all updates and
modifications we furnish to you and in a secure location at the STORE. In the
event of a dispute relating to its contents, the master copy of the Manuals we
maintain at our principal office will be controlling. You may not at any time
copy, duplicate, record or otherwise reproduce any part of the Manuals. If your
copy of the Manuals is lost, destroyed or significantly damaged, you agree to
obtain a replacement copy at our then applicable charge.
5. MARKS.
A. OWNERSHIP AND GOODWILL OF MARKS.
Your right to use the Marks is derived solely from this Agreement and
limited to your operation of the STORE at and from the Site pursuant to and in
compliance with this Agreement and all System Standards we prescribe from time
to time during its term. Your unauthorized use of the Marks will be a breach of
this Agreement and an infringement of our rights in and to the Marks. You
acknowledge and agree that your usage of the Marks and any goodwill established
by such use will be exclusively for our benefit and that this Agreement does not
confer any goodwill or other interests in the Marks upon you (other than the
right to operate the STORE in compliance with this Agreement). All provisions of
this Agreement applicable to the Marks apply to any additional proprietary trade
and service marks and commercial symbols we authorize you to use.
B. LIMITATIONS ON YOUR USE OF MARKS.
You agree to use the Marks as the sole identification of the STORE,
except that you agree to identify yourself as the independent owner thereof in
the manner we prescribe. You may not use any Mark as part of any corporate or
legal business name or with any prefix, suffix or other modifying words, terms,
designs or symbols (other than logos licensed to you hereunder), or in
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any modified form, nor may you use any Mark in connection with the performance
or sale of any unauthorized products or services or in any other manner we have
not expressly authorized in writing. You may not use any Mark as part of a
domain name or electronic address of a website. You agree to display the Marks
prominently in the manner we prescribe at the STORE, on packaging and serving
materials that we designate and in connection with forms and advertising and
marketing materials. You agree to give such notices of trade and service mark
registrations and such other trade and service mark notices as we specify and to
obtain any fictitious or assumed name registrations required under applicable
law.
For purposes of this Agreement, a "website" is an interactive
electronic document contained in a network of computers linked by communications
software.
C. NOTIFICATION OF INFRINGEMENTS AND CLAIMS.
You agree to notify us immediately of any apparent infringement or
challenge to your use of any Mark, or of any claim by any person of any rights
in any Mark, and you agree not to communicate with any person other than us, our
attorneys and your attorneys in connection with any such infringement, challenge
or claim. We have sole discretion to take such action as we deem appropriate and
the right to control exclusively any litigation, U.S. Patent and Trademark
Office proceeding or any other administrative proceeding arising out of any such
infringement, challenge or claim or otherwise relating to any Mark. You agree to
sign any and all instruments and documents, render such assistance and do such
acts and things as, in the opinion of our attorneys, may be necessary or
advisable to protect and maintain our interests in any litigation or Patent and
Trademark Office or other proceeding or otherwise to protect and maintain our
interests in the Marks.
D. DISCONTINUANCE OF USE OF MARKS.
If it becomes advisable at any time in our sole discretion for us
and/or you to modify or discontinue the use of any Mark and/or use one or more
additional or substitute trade or service marks, you agree to comply with our
directions within a reasonable time after receiving notice thereof. We will
reimburse you for your reasonable direct expenses of changing the STORE's signs.
However, we will not be obligated to reimburse you for any loss of revenue or
expenses caused by any modification or discontinuance.
E. INDEMNIFICATION OF OWNER.
We agree to indemnify you against and to reimburse you for all damages
for which you are held liable in any proceeding arising out of your authorized
use of any Mark, pursuant to and in compliance with this Agreement, and for all
costs reasonably incurred by you in the defense of any such claim brought
against you or in any such proceeding in which you are named as a party,
provided that you have timely notified us of such claim or proceeding, have
given us sole control of the defense and settlement of any such claim, and have
otherwise complied with this Agreement.
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6. CONFIDENTIAL INFORMATION.
We possess (and will continue to develop and acquire) certain
confidential information (the "Confidential Information") relating to the
development and operation of KRISPY KREME STORES, which includes (without
limitation):
(1) product recipes and doughnut mixes and the related formulas;
(2) site selection criteria;
(3) methods, formats, specifications, standards, systems, procedures
and sales and marketing techniques used, and knowledge of and experience, in
developing and operating KRISPY KREME STORES;
(4) marketing and advertising programs for KRISPY KREME STORES,
including but not limited to, information regarding our National Accounts
program;
(5) current and concluded research, development and test programs for
products, services and operations of KRISPY KREME STORES;
(6) the contents of the Manuals;
(7) knowledge of specifications for and suppliers of buildings (both
modular and stick built), certain equipment (including our doughnut production
equipment), fixtures, furnishings, signs, vehicles, materials and supplies; and
(8) knowledge of the operating results and financial performance of
KRISPY KREME STORES other than the STORE.
You acknowledge and agree that you will not acquire any interest in
Confidential Information, other than the right to utilize Confidential
Information disclosed to you in operating the STORE during the term of this
Agreement, and that the use or duplication of any Confidential Information in
any other business would constitute an unfair method of competition. You further
acknowledge and agree that Confidential Information is proprietary, includes our
trade secrets and is disclosed to you solely on the condition that you agree,
and you do hereby agree, that you:
(1) will not use Confidential Information in any other
business or capacity;
(2) will maintain the absolute confidentiality of Confidential
Information during and after the term of this Agreement (provided,
however, that we will not deem you in default of this Agreement as a
result of isolated incidents of disclosure of Confidential Information
by an employee other than an owner, provided you have taken reasonable
steps to prevent such disclosure, including, but not limited to the
steps a reasonable and prudent owner of confidential and proprietary
information would take to
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prevent disclosure of such information by his employees, and further
provided that you pursue all reasonable legal and equitable remedies
against such employee for such disclosure of such Confidential
Information);
(3) will not make unauthorized copies of any portion of
Confidential Information disclosed via electronic medium or in written
or other tangible form; and
(4) will adopt and implement all reasonable procedures that we
prescribe from time to time to prevent unauthorized use or disclosure
of Confidential Information, including, without limitation,
restrictions on disclosure thereof to STORE personnel and others.
All ideas, concepts, techniques or materials relating to a KRISPY KREME
STORE, whether or not constituting protectable intellectual property, and
whether created by or on behalf of you or your owners to the extent you are
permitted, will be promptly disclosed to us, deemed to be our sole and exclusive
property and part of the System and deemed to be works made-for-hire for us;
except that you shall be entitled to use all such ideas, concepts, techniques or
materials without charge by us. You and your owners agree to sign whatever
assignment or other documents we request to evidence our ownership or to assist
us in securing intellectual property rights in such ideas, concepts, techniques
or materials.
Notwithstanding anything to the contrary contained in this Agreement
and provided you have obtained our prior written consent, the restrictions on
your disclosure and use of the Confidential Information will not apply to the
following:
(1) information, methods, procedures, techniques and knowledge
which are or become generally known in the food service business within
the Development Area, other than through disclosure (whether deliberate
or inadvertent) by you, your Owners or employees; and
(2) the disclosure of the Confidential Information in
judicial, arbitration or administrative proceedings to the extent that
you are legally compelled to disclose such information, provided you
have notified us prior to disclosure and we have used your best efforts
to obtain, and have afforded us the opportunity to obtain assurance
satisfactory to us of confidential treatment for the information
required to be so disclosed.
7. EXCLUSIVE RELATIONSHIP.
You acknowledge and agree that we would be unable to protect
Confidential Information against unauthorized use or disclosure or to encourage
a free exchange of ideas and information among KRISPY KREME STORES if franchised
owners of KRISPY KREME STORES were permitted to hold interests in or perform
services for a Competitive Business (defined below). You also acknowledge that
we have granted the Franchise to you in consideration of and reliance upon your
agreement to deal exclusively with us. You therefore agree that, during the term
of
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this Agreement, neither you nor any of your owners (nor any of your or your
owners' spouses or children) will:
(1) have any direct or indirect interest as a disclosed or beneficial
owner in a Competitive Business, located or operating:
(a) within 25 miles of the STORE;
(b) within 5 miles of any other KRISPY KREME STORE in
operation or under construction during the term of this
Agreement; or
(c) within the United States of America;
(2) perform services as a director, officer, manager, employee,
consultant, representative, agent or otherwise for a Competitive Business,
wherever located or operating; or
(3) recruit or hire any person who is our employee or the employee of
any KRISPY KREME STORE or who has been our employee or the employee of any
KRISPY KREME STORE within the past six (6) months without obtaining the prior
written permission of that person's employer. If we permit you to hire any such
person, then you agree to pay us a non-refundable Management Development Fee in
the amount of $25,000 as of the date of hire.
The term "Competitive Business" as used in this Agreement means any business
operating, or granting franchises or licenses to others to operate, a food
service business that sells cake doughnuts, yeast raised doughnuts, any other
types of customary or large size doughnut, miniature doughnuts or doughnut holes
in any distribution channels to any consumer for consumption or resale and such
sales comprise five percent (5%) or more of such business' revenues (other than
a KRISPY KREME STORE operated under a franchise agreement with us).
The restrictions of this Section will not be applicable to the
ownership of publicly traded ownership interests that constitute less than three
percent (3%) of a class of ownership interests issued and outstanding.
8. SYSTEM STANDARDS.
A. COMPLIANCE WITH SYSTEM STANDARDS.
You acknowledge and agree that your operation and maintenance of the
STORE in accordance with System Standards are essential to preserve the goodwill
of the Marks and all KRISPY KREME STORES. Therefore, at all times during the
term of this Agreement, you agree to operate and maintain the STORE in
accordance with each and every System Standard, as we periodically modify and
supplement them during the term of this Agreement. System Standards may regulate
any one or more of the following with respect to the STORE:
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(1) design, layout, decor, appearance and lighting; periodic
maintenance, cleaning and sanitation; periodic remodeling; replacement of
obsolete or worn-out leasehold improvements, equipment, fixtures, furnishings,
signs and delivery vehicles; periodic painting; and use of interior and exterior
signs, emblems, lettering and logos and the illumination thereof;
(2) types, models and brands of required fixtures, furnishings,
equipment, signs, delivery vehicles, materials and supplies;
(3) required or authorized Products and Product categories;
(4) participate in our supply program with regard to: (a) purchase of
certain equipment, fixtures, doughnut mixes and other proprietary products,
materials and supplies from us; (b) purchase from designated or approved
suppliers (which may include us) of modular buildings, other equipment,
fixtures, furnishings, signs, delivery vehicles, materials and supplies and (c)
purchase of packaging and serving supplies, cups, straws, plastic utensils,
bags, boxes, uniforms, sugar, shortening, coffee and other products, which we
will warehouse and deliver to the STORE;
(5) production, presentation, packaging and delivery of Products and
Product retention and disposal;
(6) terms and conditions of the sale and delivery of, and terms and
methods of payment for equipment, fixtures, furnishings, signs, delivery
vehicles, materials, supplies and services, that you obtain from us;
(7) sales, marketing, advertising and promotional programs and
materials and media used in such programs;
(8) development and operation of a website in connection with your
operation of the STORE, including requiring you to submit a sample of the
website information for our written approval prior to establishment of the
website as well as requiring additional submissions of such information in the
event you propose to alter an approved website;
(9) use and display of the Marks;
(10) staffing levels for the STORE and matters relating to managing the
STORE; communication to us of the identities of STORE personnel; and
qualifications, training, dress and appearance of STORE employees;
(11) days and hours of operation of the STORE;
(12) participation in market research and testing and product and
service development programs;
(13) implementation and modification of the electronic funds transfer
system and procedures by means of which you will pay Royalties, contributions to
the Marketing and
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Promotion Fund, amounts due for purchases of equipment, other products,
materials and supplies from us and other amounts due us;
(14) the Computer System; bookkeeping, accounting, data processing and
record keeping systems and forms; methods, formats, content and frequency of
reports to us of sales, financial performance and condition, tax returns and
other operating and financial information;
(15) types, amounts, terms and conditions of insurance coverage
required to be carried for the STORE and standards for underwriters of policies
providing required insurance coverage; our protection and rights under such
policies as an additional named insured; required or impermissible insurance
contract provisions; assignment of policy rights to us; periodic verification of
insurance coverage that must be furnished to us; our right to obtain insurance
coverage for the STORE at your expense if you fail to obtain required coverage;
our right to defend claims; and similar matters relating to insured and
uninsured claims;
(16) compliance with applicable laws; obtaining required licenses and
permits; adhering to good business practices; observing high standards of
honesty, integrity, fair dealing, employment practices and ethical business
conduct in all dealings with customers, suppliers, public officials and us; and
notifying us if any action, suit or proceeding is commenced against you or the
STORE;
(17) regulation of such other aspects of the operation and maintenance
of the STORE that we determine from time to time to be useful to preserve or
enhance the efficient operation, image or goodwill of the Marks, the STORE and
other KRISPY KREME STORES; and
(18) service of National Accounts as we identify from time to time, to
which Products and other items we authorize shall be sold at prices not to
exceed the maximum prices we state, and which may change from time to time.
You agree that System Standards prescribed from time to time in the
Manuals, or otherwise communicated to you in writing or other tangible form,
constitute provisions of this Agreement as if fully set forth herein. All
references to this Agreement include all System Standards as periodically
modified.
B. MODIFICATION OF SYSTEM STANDARDS.
We may periodically modify System Standards, which may accommodate
regional or local variations as we determine, and any such modifications may
obligate you to invest additional capital in the STORE ("Capital Modifications")
and/or incur higher operating costs. No such modification will alter your
fundamental status and rights under this Agreement. We will not obligate you to
make any Capital Modifications when such investment cannot reasonably be
amortized during the remaining term of this Agreement and with respect to
Leasehold Improvements over the remaining term of your Lease, unless we agree to
extend the term of this Agreement or unless such investment is necessary in
order to comply with applicable laws. In no event will we require you to spend
in excess of one percent (1%) of the Gross Sales of the STORE, cumulatively, for
Capital Modifications during the term of this Agreement. We
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agree to give you sixty (60) days to comply with a Capital Modification we
require, provided that, if a Capital Modification requires an expenditure of
more than Twenty-Five Thousand Dollars ($25,000) (increased from time to time to
reflect increases in the Metropolitan Area Consumer Index for Urban Consumers
All items (1982-1984=100) from the date of this Agreement, as published by the
U.S. Department of Labor or in a successor index), we agree to give you one
hundred twenty (120) days to comply with such Capital Modification. You are
obligated to comply with all modifications to System Standards, other than
Capital Modifications, within the time period we reasonably specify.
C. MANAGEMENT OF THE STORE.
You agree that the STORE will be under direct, on premises management
by you or your general manager or one of your store managers all of whom have
satisfactorily completed our training program.
9. PUBLIC RELATIONS AND ADVERTISING.
A. PUBLIC RELATIONS AND ADVERTISING PROGRAM FUND.
Recognizing the value of advertising and marketing to the goodwill and
public image of KRISPY KREME STORES, we have the right to establish, upon
written notice to you, a public relations and advertising program fund (the
"Public Relations and Advertising Program Fund") for such advertising,
promotion, marketing and public relations programs and materials we deem
necessary or appropriate. Upon 90 days written notice, you agree to begin
contributing to the Public Relations and Advertising Program Fund the amount we
specify, up to one percent (1%) of the Gross Sales of the STORE, payable by
electronic funds transfer in the same manner as the Royalties.
We will direct all programs financed by the Public Relations and
Advertising Program Fund, with sole discretion over the creative concepts,
materials and endorsements used therein, and the geographic, market and media
placement and allocation thereof. You agree that the Public Relations and
Advertising Program Fund may be used to pay the costs of preparing and producing
video, audio and written advertising materials; administering regional and
multi-regional advertising programs, including, without limitation, purchasing
direct mail and other media advertising and employing advertising, promotion and
marketing agencies to assist therewith; and supporting public relations, market
research and other advertising, promotion and marketing activities. The Public
Relations and Advertising Program Fund periodically will furnish you with
samples of advertising, marketing and promotional formats and materials at no
cost. Multiple copies of such materials will be furnished to you at our direct
cost of producing them, plus any related shipping, handling and storage charges.
The Public Relations and Advertising Program Fund will be accounted for
separately from our other funds and will not be used to defray any of our
general operating expenses, except for such reasonable salaries, administrative
costs, travel expenses and overhead as we may incur in activities related to the
administration of the Public Relations and Advertising Program Fund
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and its programs, including, without limitation, conducting market research,
preparing advertising, promotion and marketing materials and collecting and
accounting for contributions to the Public Relations and Advertising Program
Fund. We may spend, on behalf of the Public Relations and Advertising Program
Fund, in any fiscal year an amount greater or less than the aggregate
contribution of all KRISPY KREME STORES to the Public Relations and Advertising
Program Fund in that year, and the Public Relations and Advertising Program Fund
may borrow from us or others to cover deficits or invest any surplus for future
use. All interest earned on monies contributed to the Public Relations and
Advertising Program Fund will be used to pay advertising costs before other
assets of the Public Relations and Advertising Program Fund are expended. We
will prepare an annual statement of monies collected and costs incurred by the
Public Relations and Advertising Program Fund and furnish the statement to you
upon written request. We have the right to cause the Public Relations and
Advertising Program Fund to be incorporated or operated through a separate
entity at such time as we deem appropriate, and such successor entity will have
all of the rights and duties specified herein. All KRISPY KREME STORES owned by
us contribute to the cost of advertising and promotion programs based on their
retail sales on the same basis as a franchisee under the terms of a standard
franchise agreement for a STORE.
You acknowledge that the Public Relations and Advertising Program Fund
is intended to maximize recognition of the Marks and patronage of KRISPY KREME
STORES. Although we will endeavor to utilize the Public Relations and
Advertising Program Fund to develop advertising and marketing materials and
programs and to place advertising that will benefit all KRISPY KREME STORES, we
undertake no obligation to ensure that expenditures by the Public Relations and
Advertising Program Fund in or affecting any geographic area are proportionate
or equivalent to the contributions to the Public Relations and Advertising
Program Fund by KRISPY KREME STORES operating in that geographic area or that
any KRISPY KREME STORE will benefit directly or in proportion to its
contribution to the Public Relations and Advertising Program Fund from the
development of advertising and marketing materials or the placement of
advertising. We may use a portion of the monies contained in the Public
Relations and Advertising Program Fund to set-up regional marketing funds.
Except as expressly provided in this Section, we assume no direct or indirect
liability or obligation to you with respect to collecting amounts due to, or
maintaining, directing or administering, the Public Relations and Advertising
Program Fund.
We reserve the right to defer or reduce contributions and, upon thirty
(30) days' prior written notice to you, to reduce or suspend contributions to
and operations of the Public Relations and Advertising Program Fund for one or
more periods of any length and to terminate (and, if terminated, to reinstate)
the Public Relations and Advertising Program Fund (and, if suspended, deferred
or reduced, to reinstate such contributions). If the Public Relations and
Advertising Program Fund is terminated, all unspent monies on the date of
termination will be distributed to KRISPY KREME STORES in proportion to their
respective contributions to the Public Relations and Advertising Program Fund
during the preceding twelve (12) month period.
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B. BY YOU.
In addition to the contributions to the Public Relations and
Advertising Program Fund that you are obligated to make under Subsection A of
this Section and the required grand opening local advertising expenditures
described in Section 2.G. above, you agree to spend annually for advertising and
promotion of the STORE not less than two percent (2%) of the Gross Sales of the
STORE. You may credit against your obligation for local advertising and
promotion of the STORE the amount of your contribution to the Public Relations
and Advertising Program Fund, if any. You will not be obligated to spend more
than two percent (2%) of Gross Sales under Sections 4A and 4B of this Agreement.
We have the right to review your books and records from time to time to
determine your expenditures for such advertising and promotion. If we determine
that you have not spent the requisite amounts, we may require you to pay such
unexpended amounts to the Public Relations and Advertising Program Fund.
You agree that any advertising, promotion and marketing (including but
not limited to advertising, promotion and marketing through use of a website)
you conduct will be completely clear and factual and not misleading and conform
to the highest standards of ethical marketing and the promotion policies that we
prescribe from time to time. Samples of all advertising, promotional and
marketing materials (including, but not limited to, website information) that we
have not prepared or previously approved must be submitted to us for approval
before you use them. If you do not receive written disapproval within fifteen
(15) days after our receipt of such materials, we will be deemed to have given
the required approval. You may not use any advertising or promotional materials
that we have disapproved.
10. RECORDS, REPORTS AND FINANCIAL STATEMENTS.
You agree to install and use at the STORE the Computer System in the
form specified by us from time to time and transmit to or permit the electronic
collection of information by us from the Computer System. You agree to install
and maintain at the STORE:
(1) a telephone modem and dedicated line that we may use to access
sales information and data to the Computer;
(2) full, complete and accurate records and reports; and
(3) a bookkeeping, accounting, recordkeeping and records retention
system conforming to the requirements prescribed by us from time to time
(including, without limitation, requirements for a general ledger system which
utilizes the standard chart of accounts prescribed by us from time to time and
for timely entry of information into data bases of the Computer System and
periodic printouts of reports generated by the Computer System); reports
relating to STORE operations; information relating to employee turnover; and
other records, reports and information that we prescribe from time to time.
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Each transaction of the STORE will be processed on the Computer System in the
manner prescribed by us from time to time. We will have, at all times, the right
to access and retrieve sales information from and sales data processed on the
Computer System and you agree to take such action as may be necessary to provide
such access to us.
With respect to the operation and financial condition of the STORE, you
agree to furnish to us in the form prescribed by us from time to time,
including, without limitation, via computer diskette, electronic mail and/or
facsimile transmission, in a form consistent with our then-current accounting
practices and procedures:
(1) weekly reports of the STORE's sales by 12:00 noon on
Tuesday of each week (for the preceding Monday through Sunday period);
(2) within thirty (30) days after the end of each month, an
operating income statement for such month and fiscal year to date;
(3) within forty-five (45) days after each quarter, a balance
sheet and income statement for such quarter and fiscal year to date;
(4) within one hundred twenty (120) days after the end of your
fiscal year, a balance sheet, an income statement of the STORE for such
month or fiscal year (reflecting all year-end adjustments), and a
statement of changes in cash flow of the STORE, prepared in accordance
with generally accepted accounting principles consistently applied and
in the format prescribed by us from time to time; and
(5) upon request by us, such other data, information, and
supporting records for such periods as we from time to time require
(including, without limitation, daily and weekly reports of Product
sales by category).
Each report and financial statement submitted by you to us will be verified as
correct in the manner prescribed by us.
You agree to maintain and to furnish to us upon request complete copies
of all income, sales, value added, use and service tax returns, and employee
withholding, worker's compensation, and similar reports filed by you reflecting
activities of the STORE. We have the right to disclose data derived from such
reports without identifying you or the location of the STORE. We also have the
right to require you to have reviewed financial statements prepared on an annual
basis. Moreover, we have the right as often as we deem appropriate (including on
a daily basis) to access all cash registers/computer terminals and the Computer
System and to retrieve all information relating to the STORE.
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11. INSPECTIONS AND AUDITS.
A. OUR RIGHT TO INSPECT THE STORE.
To determine whether you and the STORE are complying with this
Agreement and all System Standards, we and our designated agents have the right
at any time during your regular business hours, and without prior notice to you,
to:
(1) inspect the STORE;
(2) observe, photograph and videotape the operations of the STORE for
such consecutive or intermittent periods as we deem necessary;
(3) remove samples of any Products, materials or supplies for testing
and analysis;
(4) interview personnel and customers of the STORE; and
(5) inspect and copy any books, records and documents relating to your
operation of the STORE
You agree to cooperate with us fully in connection with any such inspections,
observations, photographing, videotaping, product removal and interviews. You
agree to present to your customers such evaluation forms that we periodically
prescribe and to participate and/or request your customers to participate in any
surveys performed by us or on our behalf.
B. OUR RIGHT TO AUDIT.
We have the right at any time during your business hours, and without
prior notice to you, to inspect and audit, or cause to be inspected and audited,
your (if you are a corporation, limited liability company or partnership) and
the STORE's business, and accounting records, sales and income tax records and
returns and other records. You agree to cooperate fully with our representatives
and independent accountants we hire to conduct any such inspection or audit. Our
right to audit includes the right to access the Computer System as provided in
Section 10. In the event any such inspection or audit discloses an
understatement of the Gross Sales of the STORE, you agree to pay to us, within
fifteen (15) days after receipt of the inspection or audit report, the Royalties
and Marketing and Promotion Fund contributions due on the amount of such
understatement, plus interest (at the rate and on the terms provided for herein)
from the date originally due until the date of payment. Further, in the event
such inspection or audit is made necessary by your failure to furnish reports,
supporting records, other information or financial statements, as herein
required, or to furnish such reports, records, information or financial
statements on a timely basis, or if an understatement of Gross Sales for the
period of any audit or inspection is determined by any such audit or inspection
to be greater than five percent (5%), you agree to reimburse us for the cost of
such inspection or audit, including, without limitation, legal and accounting
fees, and the travel expenses, room and board and applicable per diem charges
for our employees. The foregoing remedies are in addition to our other remedies
and rights under this Agreement and applicable law.
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12. TRANSFER.
A. BY US.
This Agreement is fully transferable by us and will inure to the
benefit of any transferee or other legal successor to our interests herein.
B. BY YOU.
You understand and acknowledge that the rights and duties created by
this Agreement are personal to you (or, if you are a corporation, limited
liability company or partnership, to your owners) and that we have granted the
Franchise to you in reliance upon our perceptions of your (or your owners')
individual or collective character, skill, aptitude, attitude, business ability
and financial capacity. Accordingly, neither this Agreement (or any interest
therein) nor any ownership or other interest in you or the STORE may be
transferred without our prior written approval. Any transfer without such
approval constitutes a breach of this Agreement and is void and of no effect. As
used in this Agreement, the term "transfer" includes your (or your owners')
voluntary, involuntary, direct or indirect assignment, sale, gift or other
disposition of any interest in:
(1) this Agreement;
(2) you; or
(3) the STORE.
An assignment, sale, gift or other disposition includes the following events:
(1) transfer of ownership of capital stock, a partnership
interest or other ownership interest;
(2) merger or consolidation or issuance of additional
securities or interests representing an ownership interest in you;
(3) any issuance or sale of your stock, other ownership
interest or any security convertible to your stock or other ownership
interest;
(4) transfer of an interest in you, this Agreement or the
STORE in a divorce, insolvency or corporate or partnership dissolution
proceeding or otherwise by operation of law;
(5) transfer of an interest in you, this Agreement or the
STORE, in the event of your death or the death of one of your owners,
by will, declaration of or transfer in trust or under the laws of
intestate succession; or
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(6) pledge of this Agreement (to someone other than us) or of
an ownership interest in you as security, foreclosure upon the STORE or
your transfer, surrender or loss of possession, control or management
of the STORE.
If the proposed transfer is among your Owners or members of you or your
Owners's Immediate Family or pursuant to an exercise of our Right of First
Refusal, the transfer fee in Section 12 C.5 shall not apply although the
transferee is required to reimburse us for any administrative cost we incur in
connection with the transfer provided that this amount shall not exceed Five
Hundred Dollars ($500.00).
C. CONDITIONS FOR APPROVAL OF TRANSFER.
If you (and your owners) are in full compliance with this Agreement,
and all Agreements with us, then subject to the other provisions of this Section
12, we will approve a transfer that meets all the applicable requirements of
this Subsection. The proposed transferee and its direct and indirect owners must
be individuals of good character and otherwise meet our then applicable
standards for KRISPY KREME STORE franchisees. A transfer of ownership,
possession or control of the STORE may be made only in conjunction with a
transfer of this Agreement. If you are a party to a development agreement with
us, this Agreement or controlling ownership of you may only be transferred as
part of a transfer, approved by us, of such development agreement and all
franchise agreements with such developer.
If the transfer is of this Agreement or a controlling interest in you,
or is one of a series of transfers which in the aggregate constitute the
transfer of this Agreement or a controlling interest in you, all of the
following conditions must be met prior to or concurrently with the effective
date of the transfer:
(1) the transferee has sufficient business experience, aptitude and
financial resources to operate the STORE;
(2) you have paid all Royalties, Marketing and Promotion Fund
contributions, amounts owed for purchases from us and all other amounts owed to
us, our subsidiaries and designated suppliers and have submitted to us all
required reports and statements;
(3) the transferee (or its managing owner) have agreed to complete our
standard training program;
(4) the transferee has agreed to be bound by all of the terms and
conditions of this Agreement;
(5) you or the transferee pay us a transfer fee equal to Five Thousand
Dollars ($5,000) (increased from time to time to reflect increases in the
Metropolitan Area Consumer Index for Urban Consumers - All Items (1982 - 1984 =
100) from the date of this Agreement, as published by the U.S. Department of
Labor or in a successor index) to defray expenses we incur in
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connection with the transfer, including the costs of training the transferee (or
its managing owner);
(6) you (and your transferring owners) and we have signed mutual
general releases, in form satisfactory to us, of any and all claims against us
and our subsidiaries, shareholders, officers, directors, employees and agents;
(7) we have approved the material terms and conditions of such transfer
and determined that the price and terms of payment will not adversely affect the
transferee's operation of the STORE;
(8) if you or your owners finance any part of the sale price of the
transferred interest, you and/or your owners have agreed that all of the
transferee's obligations pursuant to any promissory notes, agreements or
security interests that you or your owners have reserved in the STORE are
subordinate to the transferee's obligation to pay Royalties, Marketing and
Promotion Fund contributions and other amounts due to us and otherwise to comply
with this Agreement;
(9) you and your transferring owners (and your and your owners' spouses
and children) have signed a non-competition covenant in favor of us and the
transferee agreeing to be bound, commencing on the effective date of the
transfer, by the restrictions contained in Section 15.D. hereof; and
(10) you and your transferring owners have agreed that you and they
will not directly or indirectly at any time or in any manner (except with
respect to other KRISPY KREME STORES you own and operate) promote or market
yourself or your business as a current or former KRISPY KREME STORE, or as one
of our current or former franchisees; use any Mark, any colorable imitation
thereof or other indicia of a KRISPY KREME STORE in any manner or for any
purpose; or utilize for any purpose any trade name, trade or service mark or
other commercial symbol that suggests or indicates a connection or association
with us.
If the proposed transfer is among your Owners or immediate family members of
your owners Subparagraph (5) of the above requirements will not apply, although
the transferee is required to reimburse us for any administrative costs, not to
exceed Five Hundred Dollars ($500), which we incur in connection with the
transfer.
D. TRANSFER TO A WHOLLY-OWNED CORPORATION OR LIMITED LIABILITY
COMPANY.
Notwithstanding Subsection C of this Section, if you are in full
compliance with this Agreement, you may transfer this Agreement to a corporation
or limited liability company which conducts no business other than the STORE or
development of STORES pursuant to a Development Agreement with us and, if
applicable, other KRISPY KREME STORES, in which you maintain management control
and of which you own and control one hundred percent (100%) of the equity and
voting power of all issued and outstanding capital stock or other ownership
interests, and further provided that all assets of the STORE are owned, and the
entire business of the STORE is conducted, by a single corporation or limited
liability company.
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Transfers of ownership interests in such corporation or limited liability
company will be subject to the provisions of Subsection C of this Section.
Notwithstanding anything to the contrary herein, you agree to remain personally
liable under this Agreement as if the transfer to such corporation or limited
liability company had not occurred.
E. YOUR DEATH OR DISABILITY.
(1) TRANSFER UPON DEATH OR DISABILITY. Upon your death or disability
or, if you are a corporation, limited liability company or partnership, the
death or disability of the owner of a controlling interest in you, your or such
owner's executor, administrator, conservator, guardian or other personal
representative must transfer your interest in this Agreement or such owner's
interest in you to a third party or owner. Such disposition of this Agreement or
the interest in you (including, without limitation, transfer by bequest or
inheritance) must be completed within a reasonable time, not to exceed nine (9)
months from the date of death or disability, and will be subject to all of the
terms and conditions applicable to transfers contained in this Section. A
failure to transfer your interest in this Agreement or the ownership interest in
you within this period of time constitutes a breach of this Agreement. For
purposes hereof, the term "disability" means a mental or physical disability,
impairment or condition that is reasonably expected to prevent or actually does
prevent you or an owner of a controlling interest in you from managing and
operating the STORE.
(2) OPERATION UPON DEATH OR DISABILITY. If, upon your death or
disability or the death or disability of the owner of a controlling interest in
you, the STORE is not being managed by a trained managing owner, your or such
deceased or disabled owner's executor, administrator, conservator, guardian or
other personal representative must within a reasonable time, not to exceed
thirty (30) days from the date of death or disability, appoint a manager to
operate the STORE. Such manager will be required to complete training at your
expense. Pending the appointment and training of a manager as provided above or
if, in our judgment, the STORE is not being managed properly any time after your
death or disability, or after the death or disability of the owner of a
controlling interest in you, we have the right, but not the obligation, to
appoint a manager for the STORE. All funds from the operation of the STORE
during the management by our appointed manager will be kept in a separate
account, and all expenses of the STORE, including compensation, other costs and
travel and living expenses of our manager, will be charged to this account. We
also have the right to charge a reasonable management fee (in addition to the
Royalties and Marketing and Promotion Fund contributions payable under this
Agreement) during the period that our appointed manager manages the STORE.
Operation of the STORE during any such period will be on your behalf, provided
that we only have a duty to utilize our best efforts and will not be liable to
you or your owners for any debts, losses or obligations incurred by the STORE or
to any of your suppliers for any products, materials, supplies or services the
STORE purchases during any period it is managed by our appointed manager.
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F. EFFECT OF CONSENT TO TRANSFER.
Our consent to a transfer of this Agreement and the STORE or any
interest in you does not constitute a representation as to the fairness of the
terms of any contract between you and the transferee, a guarantee of the
successful operation of the STORE by the transferee or a waiver of any claims we
may have against you (or your owners) or of our right to demand the transferee's
exact compliance with any of the terms or conditions of this Agreement.
G. OUR RIGHT OF FIRST REFUSAL.
If you (or any of your owners) at any time determine to sell, assign or
transfer for consideration an interest in this Agreement and the STORE or an
ownership interest in you (other than to another owner of you), you (or such
owner) agree to obtain a bona fide arms length, executed written offer and
earnest money deposit (in the amount of five percent (5%) or more of the
offering price) from a responsible and fully disclosed offeror (including lists
of the owners of record and beneficially of any corporate or limited liability
company offeror and all general and limited partners of any partnership offeror
and, in the case of a publicly-held corporation or limited partnership, copies
of the most current annual and quarterly reports and Form 10K) and immediately
submit to us a true and complete copy of such offer, which includes details of
the payment terms of the proposed sale and the sources and terms of any
financing for the proposed purchase price. To be a valid, bona fide offer, the
proposed purchase price must be denominated in a dollar amount. The offer must
apply only to an interest in you or in this Agreement and the STORE although the
offer may include any other KRISPY KREME STORES in which you or any of your
owners have a beneficial interest and any rights you or any of your owners have
in any Development Agreement with us, and may not include an offer to purchase
any of your (or your owners') other property or rights. However, if the offeror
proposes to buy any other property or rights from you (or your owners) under a
separate, contemporaneous offer, such separate, contemporaneous offer must be
disclosed to us, and the price and terms of purchase offered to you (or your
owners) for the interest in you or in this Agreement and the STORE must reflect
the bona fide price offered therefor and not reflect any value for any other
property or rights.
We have the right, exercisable by written notice delivered to you or
your selling owner(s) within thirty (30) days from the date of the delivery to
us of both an exact copy of such offer and all other information we request, to
purchase such interest for the price and on the terms and conditions contained
in such offer, provided that:
(1) we may substitute cash for any form of payment proposed in such
offer;
(2) our credit will be deemed equal to the credit of any proposed
purchaser;
(3) we will have at least sixty (60) days after giving notice of our
election to purchase to prepare for closing;
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(4) we are entitled to receive, and you and your owners agree to make,
all customary representations and warranties given by the seller of the assets
of a business or the capital stock of an incorporated business, as applicable,
including, without limitation, representations and warranties as to:
(a) ownership and condition of and title to stock or other
forms of ownership interest and/or assets;
(b) liens and encumbrances relating to the stock or other
ownership interest and/or assets; and
(c) validity of contracts and the liabilities, contingent or
otherwise, of the corporation or limited liability company whose stock
or other ownership interest is being purchased.
If we exercise our right of first refusal, you and your selling
owner(s) agree that, for a period of two (2) years commencing on the date of the
closing, you and your selling owners will be bound by the noncompetition
covenant contained in Section 15.D. hereof. You and your selling owner(s)
further agree that you and they will, during this same time period, abide by the
restrictions of Section 12.C.(10) of this Agreement.
If we do not exercise our right of first refusal, you or your owners
may complete the sale to such purchaser pursuant to and on the exact terms of
such offer, subject to our approval of the transfer as provided in Subsections B
and C of this Section, provided that, if the sale to such purchaser is not
completed within one hundred twenty (120) days after delivery of such offer to
us, or if there is a material change in the terms of the sale (which you agree
promptly to communicate to us), we will have an additional right of first
refusal during the thirty (30) day period following either the expiration of
such one hundred twenty (120) day period or notice to us of the material
change(s) in the terms of the sale, either on the terms originally offered or
the modified terms, at our option.
Notwithstanding the foregoing, if you determine to make a transfer of
the STORE or of this Agreement, you may submit an offer to us to purchase your
interest in the STORE or this Agreement. The purchase price may apply only to an
interest that is permitted to be transferred under this Agreement, may not
include the purchase of any other property or rights of you (or your Owner(s))
and the price and terms of purchase offered to us must reflect a bona fide price
and may not reflect any value for any other property or rights. We will have the
right, exercisable by written notice delivered to you (or your Owner(s)) within
sixty (60) days from the date of receipt by us of your written offer, to
purchase such interest for the price and on the terms and conditions contained
in such offer and we will have not less than ninety (90) days from your receipt
of such notice to prepare for closing. We shall also be entitled to all
customary representations and warranties described in this Section 9.G. If we do
not exercise our right to purchase, you (or your Owner(s)) may make this offer
to a third party, subject to approval by us, provided that the sale must be on
comparable terms as those offered to us but at a price equal or greater to the
price offered to us and provided that if the sale to such purchaser is not
completed
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within one hundred twenty (120) days after receipt of such offer by us or there
is a change in the terms of sale, we will again have a right to purchase for
thirty (30) days as set forth in this Agreement on the modified or initial terms
and conditions of sale.
Section G above shall not apply if the transfer is among Owners,
employees or immediate family members of your Owners; or constitutes a transfer
of less than ten percent (10%) interest in you as long as such transfer in
conjunction with transfers during the Development Term and then-contemplated
transfers does not constitute a transfer equal to or greater than twenty percent
(20%) interest in you
13. EXPIRATION OF THIS AGREEMENT.
A. YOUR RIGHT TO ACQUIRE A SUCCESSOR FRANCHISE.
Upon expiration of the term of this Agreement, if you (and each of your
owners) have substantially complied with this Agreement during its term, and
provided that:
(1) you maintain possession of and agree to remodel and/or expand the
STORE, add or replace improvements, equipment, fixtures, furnishings, signs and
delivery vehicles and otherwise modify the STORE as we require to bring it into
compliance with specifications and standards then applicable for KRISPY KREME
STORES, or
(2) if you are unable to maintain possession of the Site, or if in our
judgment the STORE should be relocated, and you secure a substitute site we
approve, develop such site in compliance with specifications and standards then
applicable for KRISPY KREME STORES and continue to operate the STORE at the Site
until operations are transferred to the substitute site,
then, subject to the terms and conditions set forth in this Section 13, you will
have the right to acquire a successor franchise to operate the STORE as a KRISPY
KREME STORE on the terms and conditions of the franchise agreement we are then
using in granting successor franchises for KRISPY KREME STORES.
B. GRANT OF A SUCCESSOR FRANCHISE.
You agree to give us written notice of your election to acquire a
successor franchise during the fourteenth (14th) year of the term of this
Agreement. We agree to give you written notice ("Our Notice"), not more than one
hundred eighty (180) days after we receive your notice, of our decision:
(1) to grant you a successor franchise;
(2) to grant you a successor franchise on the condition that
deficiencies of the STORE, and/or in your operation of the STORE, are corrected;
or
(3) not to grant you a successor franchise based on our determination
that you or your owners have not substantially complied with this Agreement
during its term.
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If applicable, Our Notice will:
(1) describe the remodeling and/or expansion of the STORE and
other improvements or modifications required to bring the STORE into
compliance with then applicable specifications and standards for KRISPY
KREME STORES; and
(2) state the actions you must take to correct operating
deficiencies and the time period in which such deficiencies must be
corrected.
If we do not grant a successor franchise, our Notice will describe the reasons
for our decision. Your right to acquire a successor franchise is subject to your
continued compliance with all of the terms and conditions of this Agreement
through the date of its expiration, in addition to your compliance with the
obligations described in Our Notice.
If Our Notice states that you must cure certain deficiencies of the
STORE or its operation as a condition to the grant of a successor franchise, we
will give you written notice of a decision not to grant a successor franchise,
based upon your failure to cure such deficiencies, not less than ninety (90)
days prior to the expiration of this Agreement, provided, however, that we will
not be required to give you such notice if we decide not to grant you a
successor franchise due to your breach of this Agreement during the ninety (90)
day period prior to its expiration. If we fail to give you:
(1) notice of deficiencies in the STORE, or in your operation
of the STORE, within one hundred eighty (180) days after we receive
your timely election to acquire a successor franchise; or
(2) notice of our decision not to grant a successor franchise
at least ninety (90) days prior to the expiration of this Agreement, if
such notice is required,
we may extend the term of this Agreement for such period of time as is necessary
in order to provide you with either reasonable time to correct deficiencies or
the ninety (90) day notice of our refusal to grant a successor franchise
required hereunder.
C. AGREEMENTS/RELEASES
If you satisfy all of the other conditions to the grant of a successor
franchise, you and your owners agree to execute the form of franchise agreement
and any ancillary agreements we are then customarily using in connection with
the grant of successor franchises for KRISPY KREME STORES. You and your owners
further agree to execute general releases, in form satisfactory to us, of any
and all claims against us and our subsidiaries, shareholders, officers,
directors, employees, agents, successors and assigns. Failure by you or your
owners to sign such agreements and releases and deliver them to us for
acceptance and execution within sixty (60) days after their delivery to you will
be deemed an election by you not to acquire a successor franchise.
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14. TERMINATION OF AGREEMENT.
A. BY YOU
If you and your owners are in compliance with this Agreement and we
materially fail to comply with this Agreement and do not correct such failure
within thirty (30) days after written notice of such material failure is
delivered to us, you may terminate this Agreement effective thirty (30) days
after delivery to us of written notice of termination. Your termination of this
Agreement for any other reason or without such notice will be deemed a
termination without cause.
B. BY US
We have the right to terminate this Agreement, effective upon delivery
of written notice of termination to you, if:
(1) you (or any of your owners) have made any material
misrepresentation or omission in connection with your application for and
purchase of the Franchise;
(2) you abandon or fail actively to operate the STORE for five (5) or
more consecutive business days, unless the STORE has been closed for a purpose
we have approved or because of casualty or government order;
(3) you surrender or transfer control of the operation of the STORE
without our prior written consent;
(4) you (or any of your owners) are or have been convicted by a trial
court of, or plead guilty or have pleaded no contest to, a felony or any other
crime or offense that may adversely affect the reputation of KRISPY KREME
STORES, or the goodwill associated with the Marks, or engage in any misconduct
that may adversely affect the reputation of KRISPY KREME STORES or the goodwill
associated with the Marks;
(5) you (or any of your owners) engage in any dishonest or unethical
conduct which may adversely affect the reputation of the STORE or the goodwill
associated with the Marks;
(6) you (or any of your owners) make an unauthorized assignment of this
Agreement or of an ownership interest in you or the STORE;
(7) in the event of your death or disability or the death or disability
of the owner of a controlling interest in you, this Agreement or such owner's
interest in you is not assigned as herein required;
(8) you lose the right to possession of the Site and have not relocated
to another site approved by us;
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(9) you (or any of your owners) make any unauthorized use or disclosure
of any Confidential Information or use, duplicate (other than for use in the
STORE) or disclose any portion of the Manuals in violation of this Agreement;
(10) you (or any of your owners) make any unauthorized use of the
Marks, (including, but not limited to, unauthorized use of the Marks as part of
a website domain name or electronic address or as part of information available
on such website) or challenge or seek to challenge the validity of the Marks;
(11) you violate any health, safety or sanitation law, ordinance or
regulation and do not begin to correct such noncompliance or violation
immediately, and completely correct such noncompliance or violation within
seventy-two (72) hours, after written notice thereof is delivered to you;
(12) you fail to make payments of any amounts due to us and do not
correct such failure within ten (10) days after written notice of such failure
is delivered to you;
(13) you fail to pay when due any federal or state income, service,
sales or other taxes due on the operations of the STORE, unless you are in good
faith contesting your liability for such taxes;
(14) you (or any of your owners) fail to comply with any other
provision of this Agreement or any System Standard and do not correct such
failure within thirty (30) days after written notice of such failure to comply
is delivered to you;
(15) you (or any of your owners) fail on three (3) or more separate
occasions within any period of twelve (12) consecutive months to submit when due
reports or other data, information or supporting records, to pay when due
amounts owed to us or otherwise to comply with this Agreement, whether or not
such failures to comply were corrected after written notice of such failure was
delivered to you; or
(16) you make an assignment for the benefit of creditors or admit in
writing your insolvency or inability to pay your debts generally as they become
due; you consent to the appointment of a receiver, trustee or liquidator of all
or the substantial part of your property; the STORE is attached, seized,
subjected to a writ or distress warrant or levied upon, unless such attachment,
seizure, writ, warrant or levy is vacated within thirty (30) days; or any order
appointing a receiver, trustee or liquidator of you or the STORE is not vacated
within thirty (30) days following the entry of such order.
15. OUR AND YOUR RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION OF THIS
AGREEMENT.
A. PAYMENT OF AMOUNTS OWED TO US
You agree to pay us within fifteen (15) days after the effective date
of termination or expiration of this Agreement, or on such later date that the
amounts due to us are determined,
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such Royalties, Marketing and Promotion Fund contributions, amounts owed for
purchases from us, interest due on any of the foregoing and all other amounts
owed to us which are then unpaid.
B. MARKS
Upon the termination or expiration of this Agreement:
(1) you may not directly or indirectly at any time or in any manner
(except with respect to other KRISPY KREME STORES you own and operate) promote
and market yourself or your business as a current or former KRISPY KREME STORE,
or as one of our current or former franchisees, use any Mark, any colorable
imitation thereof or other indicia of a KRISPY KREME STORE in any manner or for
any purpose or utilize for any purpose any trade name, trade or service mark or
other commercial symbol that indicates or suggests a connection or association
with us, including but not limited to, by use of a website;
(2) you agree to take such action as may be required to cancel all
fictitious or assumed name or equivalent registrations relating to your use of
any Mark, including but not limited to, any electronic address, domain name or
website which displays any Mark or that identifies you as associated with a
KRISPY KREME STORE;
(3) if we do not have or do not exercise an option to purchase the
STORE pursuant to Subsection E of this Section, you agree to deliver to us
within thirty (30) days after, as applicable, the effective date of expiration
of this Agreement or the Notification Date (as defined in Subsection E(1) of
this Section) all signs, marketing materials, forms and other materials
containing any Mark or otherwise identifying or relating to a KRISPY KREME STORE
and allow us, without liability to you or third parties, to remove all such
items from the STORE;
(4) if we do not have or do not exercise an option to purchase the
STORE pursuant to Subsection E of this Section, you agree that, after, as
applicable, the effective date of expiration of this Agreement or the
Notification Date, you will promptly and at your own expense make such
alterations we specify to distinguish the STORE clearly from its former
appearance and from other KRISPY KREME STORES so as to prevent confusion
therewith by the public;
(5) if we do not have or do not exercise an option to purchase the
STORE pursuant to Subsection E of this Section, you agree that, after, as
applicable, the effective date of expiration of this Agreement or the
Notification Date, you will notify the telephone company and all telephone
directory publishers of the termination or expiration of your right to use any
telephone, telecopy or other numbers and any regular, classified or other
telephone directory listings associated with any Mark, authorize the transfer of
such numbers and directory listings to us or at our direction and/or instruct
the telephone company to forward all calls made to your telephone numbers to
numbers we specify; and
(6) you agree to furnish us, within thirty (30) days after, as
applicable, the effective date of expiration of this Agreement or the
Notification Date, written evidence satisfactory to us of your compliance with
the foregoing obligations.
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C. CONFIDENTIAL INFORMATION
You agree that, upon termination or expiration of this Agreement, you
will immediately cease to use any of our Confidential Information in any
business or otherwise and return to us all copies of the Operations Manual and
any other confidential materials that we have loaned to you.
D. COVENANT NOT TO COMPETE
Upon
(1) our termination of this Agreement in accordance with its terms and
conditions, or
(2) your termination of this Agreement without cause,
you and your owners agree that, for a period of two (2) years commencing on the
effective date of termination, neither you nor any of your owners will have any
direct or indirect interest (e.g., through a spouse or child) as a disclosed or
beneficial owner, investor, partner, director, officer, employee, consultant,
representative or agent or in any other capacity in any Competitive Business (as
defined in Section 7 above) located or operating on the effective date of
termination:
(a) at the Site;
(b) within twenty-five (25) miles of the Site; or
(c) within five (5) miles of any other KRISPY KREME STORE in
operation or under construction on the later of the effective date of
the termination or the date on which a person restricted by this
Subsection becomes subject to this Subsection.
If any person restricted by this Subsection refuses voluntarily to
comply with the foregoing obligations, the two (2) year period will commence
with the entry of an order of an arbitrator (or the later date on which such
order is confirmed by a court, if applicable) enforcing this provision. You and
your owners expressly acknowledge that you possess skills and abilities of a
general nature and have other opportunities to exploit such skills.
Consequently, enforcement of the covenants made in this Subsection will not
deprive you of your personal goodwill or ability to earn a living.
The restrictions of this section will not be applicable to the
ownership of publicly traded ownership interests that constitute less than three
percent (3%) of a class of ownership interests issued and outstanding.
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E. OUR RIGHT TO PURCHASE STORE
(1) Exercise of Option.
Upon our termination of this Agreement in accordance with its terms and
conditions or your termination of this Agreement without cause, or upon the
expiration of this Agreement, if we elect not to offer or you elect not to
accept, a successor franchise, we have the option, exercisable by giving written
notice thereof to you within sixty (60) days from the date of such termination,
expiration or the expiration of our offer to you of a successor franchise,
whichever is applicable, to purchase the STORE from you, including the leasehold
rights (subject to any rights of approval retained by the owner of the
leasehold) to or ownership of the Site. The date on which we notify you whether
or not we are exercising our option is referred to in this Agreement as the
"Notification Date." We have the unrestricted right to assign this option to
purchase the STORE. We will be entitled to all customary warranties and
representations in connection with our asset purchase, including, without
limitation, representations and warranties as to ownership and condition of and
title to assets; liens and encumbrances on assets; validity of contracts and
agreements; and liabilities affecting the assets, contingent or otherwise; and a
general release referred to below.
(2) Leasehold Rights to or Ownership of the Site.
You agree at our election:
(a) to sell and assign your leasehold interest in the Site to
us at its fair market value, if any; or
(b) if you are unable to assign your leasehold interest, to
enter into a sublease at a fair market rental for the remainder of the
lease term on the same terms (including renewal options) as the prime
lease; or
(c) if you own the Site, to lease the Site to us at a
reasonable commercial rent and according to terms comparable with
rental terms for similar leased property in the marketplace where the
Site is located.
(3) Purchase Price.
The purchase price for the other assets of the STORE will be the fair
market value of the STORE, determined in a manner consistent with reasonable
depreciation of the STORE's leasehold improvements, equipment, fixtures,
furnishings, signs, delivery vehicles, materials and supplies. The STORE's fair
market value will include the goodwill you have developed in the market of the
STORE that is independent of the goodwill of the Marks and the System. The
length of the remaining term of the lease or sublease for the Site, if any, and
the age and condition of the improvements, equipment, fixtures, furnishings,
decor, signs and delivery vehicles of the STORE, will also be considered in
determining the STORE's fair market value.
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We may exclude from the assets purchased hereunder cash or its
equivalent and any leasehold improvements, equipment, fixtures, furnishings,
signs, delivery vehicles, materials and supplies that are not necessary or
appropriate (in function or quality) to the STORE's operation or that we have
not approved as meeting standards for KRISPY KREME STORES, and the purchase
price will reflect such exclusions.
(4) Appraisal.
If we and you are unable to agree on the fair market value of the STORE
or the Site, or fair rental value of the Site, such fair market value (or fair
rental value) will be determined by three (3) independent appraisers who
collectively will conduct one (1) appraisal. We will appoint one appraiser, you
will appoint one appraiser and the those appraisers will appoint the third
appraiser. You and we agree to select our respective appraisers within fifteen
(15) days after we notify you that we are exercising our option to purchase the
STORE, and we and you agree that we will instruct the two appraisers so chosen
to appoint the third appraiser within fifteen (15) days after the date on which
the last of our appointed appraisers is appointed. You and we will each bear the
cost of our own appraiser and share equally the fees and expenses of the third
appraiser. We and you agree that we will instruct the three (3) appraisers to
complete their appraisal within thirty (30) days after the third appraiser's
appointment.
The purchase price will be paid at the closing of the purchase, which
will take place not later than ninety (90) days after determination of the
purchase price. We have the right to set off against the purchase price, and
thereby reduce the purchase price by, any and all amounts you or your owners owe
to us. At the closing, you agree to deliver instruments transferring to us:
(a) good and merchantable title to the assets purchased, free
and clear of all liens and encumbrances, with all sales and other
transfer taxes paid by you;
(b) all licenses and permits of the STORE which may be
assigned or transferred; and
(c) a leasehold interest in (or unencumbered title to) the
Site and improvements thereon.
If you cannot deliver clear title to all of the purchased assets, or if there
are other unresolved issues, the closing of the sale will be accomplished
through an escrow. As a condition of our purchase of your STORE, you and your
owners further agree to execute general releases, in form satisfactory to us, of
any and all claims against us and our subsidiaries, shareholders, officers,
directors, employees, agents, successors and assigns.
F. OPTION TO BUY CERTAIN FIXTURES AND EQUIPMENT.
In lieu of exercising our option to buy the STORE as provided in
Subsection E of this Section, we will have the option to buy from you all of the
items of equipment and fixtures that you originally purchased from us, our
subsidiary or our designated supplier. You may not sell
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any of these items without waiver of our option to purchase same. The purchase
price for such fixtures and equipment will be their fair market value,
determined in the same manner as is set forth in Section 15E. The closing
purchase of such fixtures and equipment will be accomplished in the same as
provided in Subsection E of this Section.
G. CONTINUING OBLIGATIONS
All of our and your (and your owners' and affiliates') obligations
which expressly or by their nature survive the expiration or termination of this
Agreement will continue in full force and effect subsequent to and
notwithstanding its expiration or termination and until they are satisfied in
full or by their nature expire.
16. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION.
A. INDEPENDENT CONTRACTORS
You and we understand and agree that this Agreement does not create a
fiduciary relationship between you and us, that we and you are and will be
independent contractors and that nothing in this Agreement is intended to make
either you or us a general or special agent, joint venturer, partner or employee
of the other for any purpose. You agree to conspicuously identify yourself in
all dealings with customers, suppliers, public officials, STORE personnel and
others as the owner of the STORE under a franchise we have granted and to place
such notices of independent ownership on such forms, business cards, stationery
and advertising and other materials as we require from time to time.
B. NO LIABILITY FOR ACTS OF OTHER PARTY
You agree not to employ any of the Marks in signing any contract or
applying for any license or permit, or in a manner that may result in our
liability for any of your indebtedness or obligations, and that you will not use
the Marks in any way we have not expressly authorized. Neither we nor you will
make any express or implied agreements, warranties, guarantees or
representations or incur any debt in the name or on behalf of the other,
represent that our respective relationship is other than franchisor and
franchisee or be obligated by or have any liability under any agreements or
representations made by the other that are not expressly authorized in writing.
We will not be obligated for any damages to any person or property directly or
indirectly arising out of the operation of the STORE or the business you conduct
pursuant to this Agreement.
C. TAXES.
We will have no liability for any sales, use, service, occupation,
excise, gross receipts, income, property or other taxes, whether levied upon you
or the STORE, in connection with the business you conduct (except any taxes we
are required by law to collect from you with respect to purchases from us).
Payment of all such taxes are your responsibility.
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D. INDEMNIFICATION
You agree to indemnify, defend and hold harmless us, our subsidiaries
and our and their respective shareholders, directors, officers, employees,
agents, successors and assignees (the "Indemnified Parties") against and to
reimburse any one or more of the Indemnified Parties for all claims, any and all
taxes described in Subsection C of this Section and any and all claims and
liabilities directly or indirectly arising out of the operation of the STORE or
your breach of this Agreement. For purposes of this indemnification, "claims"
includes all obligations, damages (actual, consequential, exemplary or other)
and costs reasonably incurred in the defense of any claim against any of the
Indemnified Parties, including, without limitation, accountants', arbitrators',
attorneys' and expert witness fees, costs of investigation and proof of facts,
court costs, other expenses of litigation, arbitration or alternative dispute
resolution and travel and living expenses. We have the right to defend any such
claim against us. This indemnity will continue in full force and effect
subsequent to and notwithstanding the expiration or termination of this
Agreement.
Under no circumstances will we or any other Indemnified Party be
required to seek recovery from any insurer or other third party, or otherwise to
mitigate our, their or your losses and expenses, in order to maintain and
recover fully a claim against you. You agree that a failure to pursue such
recovery or mitigate a loss will in no way reduce or alter the amounts we or
another Indemnified Party may recover from you.
Notwithstanding the foregoing, your indemnification obligation under
this Section 16 shall not extend to claims arising from proprietary products and
proprietary equipment manufactured by us and sold by us to you, provided that
such products are used in accordance with the standard operating procedures and
all applicable manuals and instructions provided to you from time to time.
17. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS.
Except as expressly provided to the contrary herein, each section,
subsection, paragraph, term and provision of this Agreement, and any portion
thereof, will be considered severable, and if, for any reason, any such
provision is held to be invalid or contrary to or in conflict with any
applicable present or future law or regulation in a final, unappealable ruling
issued by any court, agency or tribunal with competent jurisdiction in a
proceeding to which we are a party, that ruling will not impair the operation
of, or have any other effect upon, such other portions of this Agreement as may
remain otherwise intelligible, which will continue to be given full force and
effect and bind the parties hereto, although any portion held to be invalid will
be deemed not to be a part of this Agreement from the date the time for appeal
expires, if you are a party thereto, otherwise upon your receipt from us of a
notice of non-enforcement thereof.
If any covenant herein which restricts competitive activity is deemed
unenforceable by virtue of its scope in terms of area, business activity
prohibited and/or length of time, but would be enforceable by reducing any part
or all thereof, you and we agree that such covenant will be
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enforced to the fullest extent permissible under the laws and public policies
applied in the jurisdiction whose law is applicable to the validity of such
covenant.
If any applicable and binding law or rule of any jurisdiction requires
a greater prior notice than is required hereunder of the termination of this
Agreement or of our refusal to enter into a successor franchise agreement, or
the taking of some other action not required hereunder, or if, under any
applicable and binding law or rule of any jurisdiction, any provision of this
Agreement or any System Standard is invalid or unenforceable, the prior notice
and/or other action required by such law or rule will be substituted for the
comparable provisions hereof, and we will have the right to modify such invalid
or unenforceable provision or System Standard to the extent required to be valid
and enforceable. You agree to be bound by any promise or covenant imposing the
maximum duty permitted by law which is subsumed within the terms of any
provision hereof, as though it were separately articulated in and made a part of
this Agreement, that may result from striking from any of the provisions hereof,
or any System Standard, any portion or portions which a court or arbitrator may
hold to be unenforceable in a final decision to which we are a party, or from
reducing the scope of any promise or covenant to the extent required to comply
with such a court order or arbitration award. Such modifications to this
Agreement will be effective only in such jurisdiction, unless we elect to give
them greater applicability, and will be enforced as originally made and entered
into in all other jurisdictions.
18. WAIVER OF OBLIGATIONS.
We and you may by written instrument unilaterally waive or reduce any
obligation of or restriction upon the other under this Agreement, effective upon
delivery of written notice thereof to the other or such other effective date
stated in the notice of waiver. Any waiver we grant will be without prejudice to
any other rights we may have, will be subject to our continuing review and may
be revoked, in our sole discretion, at any time and for any reason, effective
upon delivery to you of ten (10) days' prior written notice.
We and you will not be deemed to have waived or impaired any right,
power or option reserved by this Agreement (including, without limitation, the
right to demand exact compliance with every term, condition and covenant herein
or to declare any breach thereof to be a default and to terminate this Agreement
prior to the expiration of its term) by virtue of any custom or practice at
variance with the terms hereof; our or your failure, refusal or neglect to
exercise any right under this Agreement or to insist upon exact compliance by
the other with our and your obligations hereunder, including, without
limitation, any System Standard; our waiver, forbearance, delay, failure or
omission to exercise any right, power or option, whether of the same, similar or
different nature, with respect to other KRISPY KREME STORES; the existence of
other franchise agreements for KRISPY KREME STORES which contain different
provisions from those contained herein; or our acceptance of any payments due
from you after any breach of this Agreement. No special or restrictive legend or
endorsement on any check or similar item given to us will constitute a waiver,
compromise, settlement or accord and satisfaction. We are authorized to remove
or obliterate any legend or endorsement, and such legend or endorsement will
have no effect.
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Neither we nor you will be liable for loss or damage or deemed to be in
breach of this Agreement if our or your failure to perform our or your
obligations results from:
(1) transportation shortages, inadequate supply of equipment, products,
supplies, labor, material or energy or the voluntary foregoing of the right to
acquire or use any of the foregoing in order to accommodate or comply with the
orders, requests, regulations, recommendations or instructions of any federal,
state or municipal government or any department or agency thereof;
(2) acts of God;
(3) fires, strikes, embargoes, war or riot; or
(4) any other similar event or cause.
Any delay resulting from any of said causes will extend performance accordingly
or excuse performance, in whole or in part, as may be reasonable, except that
said causes will not excuse payments of amounts owed to us or our subsidiaries
or designated suppliers at the time of such occurrence or payment of Royalties
and contributions to the Marketing and Promotion Fund due on any sales
thereafter or amounts owed to us or our subsidiaries or designated suppliers for
purchases from us, our subsidiaries or designated suppliers made thereafter.
19. COSTS AND ATTORNEYS' FEES.
If we incur expenses in connection with your failure to pay when due
amounts owed to us, to submit when due any reports, information or supporting
records or otherwise to comply with this Agreement, you agree to reimburse us
for any of the costs and expenses which we incur, including, without limitation,
accounting, attorneys', arbitrators' and related fees.
20. YOU MAY NOT WITHHOLD PAYMENTS DUE TO US.
You agree that you will not withhold payment of any amounts owed to us
on the grounds of our alleged nonperformance of any of our obligations
hereunder. You agree that all such claims will, if not otherwise resolved by us,
be submitted to arbitration as provided in Section 23 of this Agreement.
21. RIGHTS OF PARTIES ARE CUMULATIVE.
Our and your rights hereunder are cumulative, and no exercise or
enforcement by us or you of any right or remedy hereunder will preclude our or
your exercise or enforcement of any other right or remedy hereunder which we or
you are entitled by law to enforce.
22. MEDIATION.
We and you acknowledge that during the term of this Agreement certain
disputes may arise between us that we and you are unable to resolve, but that
may be resolvable through mediation. To facilitate such resolution, we and you
agree that either of us has the right prior to
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<PAGE> 45
commencement of an arbitration proceeding by either of us pursuant to Section
23, to require that a dispute first be submitted for non-binding mediation at a
mutually agreeable location (if we cannot agree on a location, the mediation
will be conducted in Winston-Salem, North Carolina), by a panel consisting of an
equal number of KRISPY KREME STORE franchisees and our management personnel.
Such mediation will be conducted pursuant to procedures and conditions
established by us and set forth in the Manuals. We and you agree that statements
made by either of us in any such mediation proceeding will not be admissible for
any purpose in a subsequent arbitration or other legal proceeding.
Notwithstanding anything to the contrary contained in this Section, we
and you each have the right in a proper case to obtain temporary restraining
orders and temporary or preliminary injunctive relief from a court of competent
jurisdiction, provided, however, that we both agree to contemporaneously submit
our dispute for non-binding mediation as provided herein. If such dispute cannot
be resolved through mediation, the parties agree to submit such dispute to
arbitration, subject to the terms and conditions of Section 23.
23. ARBITRATION.
SUBJECT TO SECTION 22, AND EXCEPT FOR CONTROVERSIES, DISPUTES OR CLAIMS
RELATED TO OR BASED ON YOUR USE OF THE MARKS AFTER THE EXPIRATION OR TERMINATION
OF THIS AGREEMENT, ALL CONTROVERSIES, DISPUTES OR CLAIMS BETWEEN US AND OUR
SUBSIDIARIES, SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES AND YOU
(YOUR OWNERS, GUARANTORS, AFFILIATES AND EMPLOYEES, IF APPLICABLE) ARISING OUT
OF OR RELATED TO:
(1) THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN YOU AND US
OR ANY PROVISION OF ANY SUCH AGREEMENT;
(2) OUR RELATIONSHIP WITH YOU;
(3) THE VALIDITY OF THIS AGREEMENT OR ANY OTHER AGREEMENT
BETWEEN YOU AND US OR ANY PROVISION OF ANY SUCH AGREEMENT; OR
(4) ANY SYSTEM STANDARD RELATING TO THE ESTABLISHMENT OR
OPERATION OF THE STORE
WILL BE SUBMITTED FOR BINDING ARBITRATION TO THE CHARLOTTE, NORTH CAROLINA
OFFICE OF THE AMERICAN ARBITRATION ASSOCIATION ON DEMAND OF EITHER PARTY. SUCH
ARBITRATION PROCEEDING WILL BE CONDUCTED IN WINSTON SALEM, NORTH CAROLINA AND,
EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, WILL BE HEARD BY ONE ARBITRATOR
IN ACCORDANCE WITH THE THEN CURRENT FRANCHISING ARBITRATION RULES, IF ANY,
OTHERWISE THE THEN CURRENT
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<PAGE> 46
COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. ALL
MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL ARBITRATION ACT
(9 U.S.C. SS.SS. 1 ET SEQ.) AND NOT BY ANY STATE ARBITRATION LAW.
THE ARBITRATOR WILL HAVE THE RIGHT TO AWARD OR INCLUDE IN HIS AWARD ANY
RELIEF WHICH HE DEEMS PROPER IN THE CIRCUMSTANCES, INCLUDING, WITHOUT
LIMITATION, MONEY DAMAGES (WITH INTEREST ON UNPAID AMOUNTS FROM THE DATE DUE),
SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF AND ATTORNEYS' FEES AND COSTS, PROVIDED
THAT THE ARBITRATOR WILL NOT HAVE THE RIGHT TO DECLARE ANY MARK GENERIC OR
OTHERWISE INVALID OR, EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION, TO AWARD
EXEMPLARY OR PUNITIVE DAMAGES. THE AWARD AND DECISION OF THE ARBITRATOR WILL BE
CONCLUSIVE AND BINDING UPON ALL PARTIES HERETO, AND JUDGMENT UPON THE AWARD MAY
BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION.
WE AND YOU AGREE TO BE BOUND BY THE PROVISIONS OF ANY LIMITATION ON THE
PERIOD OF TIME IN WHICH CLAIMS MUST BE BROUGHT UNDER APPLICABLE LAW OR THIS
AGREEMENT, WHICHEVER EXPIRES EARLIER. WE AND YOU FURTHER AGREE THAT, IN
CONNECTION WITH ANY SUCH ARBITRATION PROCEEDING, EACH MUST SUBMIT OR FILE ANY
CLAIM WHICH WOULD CONSTITUTE A COMPULSORY COUNTERCLAIM (AS DEFINED BY RULE 13 OF
THE FEDERAL RULES OF CIVIL PROCEDURE) WITHIN THE SAME PROCEEDING AS THE CLAIM TO
WHICH IT RELATES. ANY SUCH CLAIM WHICH IS NOT SUBMITTED OR FILED AS DESCRIBED
ABOVE WILL BE FOREVER BARRED.
WE AND YOU AGREE THAT ARBITRATION WILL BE CONDUCTED ON AN INDIVIDUAL,
NOT A CLASS-WIDE, BASIS, AND THAT AN ARBITRATION PROCEEDING BETWEEN US AND OUR
SUBSIDIARIES, SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES AND YOU
(AND/OR YOUR OWNERS, GUARANTORS, AFFILIATES AND EMPLOYEES, IF APPLICABLE) MAY
NOT BE CONSOLIDATED WITH ANY OTHER ARBITRATION PROCEEDING BETWEEN US AND ANY
OTHER PERSON, CORPORATION, LIMITED LIABILITY COMPANY OR PARTNERSHIP.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS SECTION, WE
AND YOU EACH HAVE THE RIGHT IN A PROPER CASE TO OBTAIN TEMPORARY RESTRAINING
ORDERS AND TEMPORARY OR PRELIMINARY INJUNCTIVE RELIEF FROM A COURT OF COMPETENT
JURISDICTION; PROVIDED, HOWEVER, THAT WE AND YOU MUST CONTEMPORANEOUSLY SUBMIT
OUR DISPUTE FIRST FOR NON-BINDING MEDIATION UNDER SECTION 22 AND THEN FOR
ARBITRATION ON THE
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<PAGE> 47
MERITS AS PROVIDED HEREIN IF SUCH DISPUTE CANNOT BE RESOLVED THROUGH MEDIATION.
THE PROVISIONS OF THIS SECTION ARE INTENDED TO BENEFIT AND BIND CERTAIN
THIRD PARTY NON-SIGNATORIES AND WILL CONTINUE IN FULL FORCE AND EFFECT
SUBSEQUENT TO AND NOTWITHSTANDING THE EXPIRATION OR TERMINATION OF THIS
AGREEMENT.
24. GOVERNING LAW.
ALL MATTERS RELATING TO ARBITRATION WILL BE GOVERNED BY THE FEDERAL
ARBITRATION ACT (9 U.S.C. SS.SS. 1 ET SEQ.). EXCEPT TO THE EXTENT GOVERNED BY
THE FEDERAL ARBITRATION ACT AS REQUIRED HEREBY, THE UNITED STATES TRADEMARK ACT
OF 1946 (LANHAM ACT, 15 U.S.C. SECTIONS 1051 ET SEQ.) OR OTHER FEDERAL LAW, THIS
AGREEMENT, THE FRANCHISE AND ALL CLAIMS ARISING FROM THE RELATIONSHIP BETWEEN US
AND YOU WILL BE GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT
REGARD TO ITS CONFLICT OF LAWS PRINCIPLES, EXCEPT THAT ANY NORTH CAROLINA LAW
REGULATING THE SALE OF FRANCHISES OR BUSINESS OPPORTUNITIES OR GOVERNING THE
RELATIONSHIP OF A FRANCHISOR AND ITS FRANCHISEE WILL NOT APPLY UNLESS ITS
JURISDICTIONAL REQUIREMENTS ARE MET INDEPENDENTLY WITHOUT REFERENCE TO THIS
SECTION.
25. CONSENT TO JURISDICTION.
SUBJECT TO SECTION 17, YOU AND YOUR OWNERS AGREE THAT ALL JUDICIAL
ACTIONS BROUGHT BY US AGAINST YOU OR YOUR OWNERS OR BY YOU OR YOUR OWNERS
AGAINST US OR OUR SUBSIDIARIES, SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES MUST BE BROUGHT IN THE SUPERIOR COURT OF FORSYTH COUNTY, NORTH
CAROLINA ON FEDERAL DISTRICT COURT OF THE MIDDLE DISTRICT OF NORTH CAROLINA,
WINSTON SALEM, DIVISION AND YOU (AND EACH OWNER) IRREVOCABLY SUBMIT TO THE
JURISDICTION OF SUCH COURTS AND WAIVE ANY OBJECTION YOU, HE OR SHE MAY HAVE TO
EITHER THE JURISDICTION OF OR VENUE IN SUCH COURTS. NOTWITHSTANDING THE
FOREGOING, WE MAY BRING AN ACTION FOR A TEMPORARY RESTRAINING ORDER, TEMPORARY
OR PRELIMINARY INJUNCTIVE RELIEF, OR TO ENFORCE AN ARBITRATION AWARD, IN ANY
FEDERAL OR STATE COURT OF GENERAL JURISDICTION IN THE STATE IN WHICH YOU RESIDE
OR IN WHICH THE STORE IS LOCATED.
26. WAIVER OF PUNITIVE DAMAGES.
EXCEPT WITH RESPECT TO YOUR OBLIGATION TO INDEMNIFY US PURSUANT TO
SECTION 16.D. AND CLAIMS WE BRING AGAINST YOU FOR
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<PAGE> 48
YOUR UNAUTHORIZED USE OF THE MARKS OR UNAUTHORIZED USE OR DISCLOSURE OF ANY
CONFIDENTIAL INFORMATION, WE AND YOU AND YOUR RESPECTIVE OWNERS WAIVE TO THE
FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO OR CLAIM FOR ANY PUNITIVE OR
EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT, IN THE EVENT OF A DISPUTE
BETWEEN US, THE PARTY MAKING A CLAIM WILL BE LIMITED TO EQUITABLE RELIEF AND TO
RECOVERY OF ANY ACTUAL DAMAGES IT SUSTAINS.
27. WAIVER OF JURY TRIAL.
WE AND YOU IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF US.
28. BINDING EFFECT.
This Agreement is binding upon us and you and our respective executors,
administrators, heirs, beneficiaries, assigns and successors in interest and may
not be modified except by written agreement signed by you and us and is deemed
to be made when accepted on our behalf at our executive offices in
Winston-Salem, North Carolina.
29. LIMITATIONS OF CLAIMS.
Except for claims arising from your non-payment or underpayment of
amounts you owe us pursuant to this Agreement, any and all claims arising out of
or relating to this Agreement or our relationship with you will be barred unless
a judicial or arbitration proceeding is commenced within one (1) year from the
date on which the party asserting such claim knew or should have known of the
facts giving rise to such claims.
30. CONSTRUCTION.
The preambles and exhibits to this Agreement and your application for
the Franchise are a part of this Agreement which, together with the Manuals and
our other written policies, constitutes our and your entire agreement except as
provided below, and there are no other oral or written understandings or
agreements between us and you relating to the subject matter of this Agreement.
Except as contemplated by the arbitration provisions of Section 23, nothing in
this Agreement is intended, nor will be deemed, to confer any rights or remedies
upon any person or legal entity not a party hereto.
Except where this Agreement expressly obligates us reasonably to
approve or not unreasonably to withhold our approval of any of your actions or
requests, we have the absolute right to refuse any request you make or to
withhold our approval of any of your proposed or effected actions that require
our approval.
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<PAGE> 49
The headings of the several sections and subsections hereof are for
convenience only and do not define, limit or construe the contents of such
sections or paragraphs.
References in this Agreement to "we," "us" and "our," with respect to
all of our rights and all of your obligations to us under this Agreement, will
be deemed to include all of our subsidiaries and affiliates. The terms
"subsidiary" and "affiliate," as used herein with respect to you or us, means
any person directly or indirectly owned or controlled by, under common control
with or owning or controlling you or us. For purposes of this definition,
"control" of a person means ownership or control of a majority of the voting
ownership of the person or combination of voting ownership or one (1) or more
agreements that together afford control of the management and policies of such
person.
If two or more persons are at any time the Owner hereunder, whether as
partners or joint venturers, their obligations and liabilities to us will be
joint and several. References to "owner" means any person holding a direct or
indirect, legal or beneficial ownership interest or voting rights in you (or a
transferee of this Agreement and the STORE or an interest in you), including,
without limitation, any person who has a direct or indirect interest in you (or
a transferee), this Agreement, the Franchise or the STORE and any person who has
any other legal or equitable interest, or the power to vest in himself or
herself any legal or equitable interest, in the revenue, profits, rights or
assets thereof. "Controlling interest" in you means an ownership interest in you
of equal to or greater than twenty percent (20%). "Person" means any natural
person, corporation, limited liability company, general or limited partnership,
unincorporated association, cooperative or other legal or functional entity.
The term "STORE" as used herein includes all of the assets of the
KRISPY KREME STORE you operate pursuant to this Agreement, including its revenue
and income.
This Agreement may be executed in multiple copies, each of which will
be deemed an original.
31. NOTICES AND PAYMENTS.
All written notices, reports and payments permitted or required to be
delivered by the provisions of this Agreement or the Operations Manual will be
deemed so delivered:
(1) at the time delivered by hand;
(2) one (1) business day after transmission by electronic mail,
facsimile or other electronic system;
(3) one (1) business day after being placed in the hands of a
nationally recognized commercial courier service for next business day delivery;
or
(4) three (3) business days after placement in the United States Mail
by Registered or Certified Mail, Return Receipt Requested, postage prepaid;
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<PAGE> 50
and must be addressed to the party to be notified at its most current principal
business address of which the notifying party has been notified. Any required
payment or report which we do not actually receive during regular business hours
on the date due (or postmarked by postal authorities at least two (2) days prior
thereto) will be deemed delinquent.
46
<PAGE> 51
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on the date stated on the first page hereof.
KRISPY KREME DOUGHNUT CORPORATION NAME
By: _______________________________________
Title: Senior Vice President of Franchising By: ___________________________
Title: ________________________
Dated: ____________________________________ Dated: ________________________
47
<PAGE> 52
GUARANTY AND ASSUMPTION OF OBLIGATIONS
THIS GUARANTY AND ASSUMPTION OF OBLIGATIONS (the "Guaranty") is given
this _____ day of ________________, 19__, by ___________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________.
In consideration of, and as an inducement to, the execution of that
certain Franchise Agreement of even date herewith (the "Agreement") by KRISPY
KREME DOUGHNUT CORPORATION ("us," "we" or "our") and ___________________________
("Franchisee"), each of the undersigned hereby personally and unconditionally
(a) guarantees to us and our successors and assigns, for the term of the
Agreement and thereafter as provided in the Agreement, that the Franchisee will
punctually pay and perform each and every monetary undertaking, agreement and
covenant set forth in the Agreement, and (b) agrees to be personally responsible
for, and personally liable for the breach of any monetary obligations under the
Agreement. This is a guaranty both of payment and collection.
Each of the undersigned consents and agrees that: (1) his direct and
immediate liability under this Guaranty will be joint and several; (2) he will
render any payment or performance required under the Agreement upon demand if
Franchisee fails or refuses punctually to do so; (3) such liability will not be
contingent or conditioned upon our pursuit of any remedies against Franchisee or
any other person; and (4) such liability will not be diminished, relieved or
otherwise affected by any extension of time, credit or other indulgence which we
may from time to time grant to Franchisee or to any other person, including,
without limitation, the acceptance of any partial payment or performance or the
compromise or release of any claims, none of which will in any way modify or
amend this Guaranty, which will be continuing and irrevocable during the term of
the Agreement. Each of the undersigned waives the provisions of the North
Carolina General Statute ss. 26-7 et seq.
Each of the undersigned waives all rights to payments and claims for
reimbursement or subrogation which any of the undersigned may have against
Franchisee arising as a result of the undersigned's execution of and performance
under this Guaranty.
IN WITNESS WHEREOF, each of the undersigned has affixed his signature
on the same day and year as the Agreement was executed.
GUARANTOR(S)
______________________________________ ___________________________________
Name Name
______________________________________ ___________________________________
Name Name
<PAGE> 53
AUTHORIZATION AGREEMENT FOR PREARRANGED PAYMENTS
(DIRECT DEBITS)
The undersigned depositor ("DEPOSITOR") hereby (1) authorizes Krispy
Kreme Doughnut Corporation ("COMPANY") to initiate debit entries and/or credit
correction entries to the undersigned's checking and/or savings account
indicated below and (2) authorizes the depository designated below
("DEPOSITORY") to debit such account pursuant to COMPANY's instructions.
_________________________________ __________________________________________
DEPOSITORY Branch
___________________________ ______________________ ___________________
City State Zip Code
________________________________________ __________________________________
Bank Transit/ABA Number Account Number
This authority is to remain in full and force and effect until DEPOSITORY has
received joint written notification from COMPANY and DEPOSITOR of the
DEPOSITOR's termination of such authority in such time and in such manner as to
afford DEPOSITORY a reasonable opportunity to act on it. Notwithstanding the
foregoing, DEPOSITORY shall provide COMPANY and DEPOSITOR with thirty (30) days'
prior written notice of the termination of this authority. If an erroneous debit
entry is initiated to DEPOSITOR's account, DEPOSITOR shall have the right to
have the amount of such entry credited to such account by DEPOSITORY, if (a)
within fifteen (15) calendar days following the date on which DEPOSITORY sent to
DEPOSITOR a statement of account or a written notice pertaining to such entry or
(b) forty-five (45) days after posting, which ever occurs first, DEPOSITOR shall
have sent to DEPOSITORY a written notice identifying such entry, stating that
such entry was in error and requesting DEPOSITORY to credit the amount thereof
to such account. These rights are in addition to any rights DEPOSITOR may have
under federal and state banking laws.
_______________________________________ ___________________________________
DEPOSITOR (Print Name) DEPOSTORY (Print Name)
By: ___________________________________ By: _______________________________
Title: ________________________________ Title: ____________________________
Date: _________________________________ Date: _____________________________
<PAGE> 54
EXHIBIT A
TO THE FRANCHISE AGREEMENT
BETWEEN KRISPY KREME DOUGHNUT CORPORATION
AND ____________________________________
DATED ____________, 199
EFFECTIVE DATE: THIS EXHIBIT A IS CURRENT AND COMPLETE
AS OF ____________, 199
YOU AND YOUR OWNERS
1. FORM OF OWNER.
(a) PROPRIETORSHIP. Your owner(s) (is) (are) as follows:
_______________________________________
_______________________________________
_______________________________________
(b) CORPORATION, LIMITED LIABILITY COMPANY OR PARTNERSHIP. You were
incorporated or formed on ____________, 19__, under the laws of the State of
_________________. You have not conducted business under any name other than
your corporate, limited liability company or partnership name. The following is
a list of your directors, if applicable, and officers as of the effective date
shown above:
NAME OF EACH DIRECTOR/OFFICER POSITION(S) HELD
----------------------------- ----------------
________________________________________ _________________________________
________________________________________ _________________________________
________________________________________ _________________________________
________________________________________ _________________________________
A-1
<PAGE> 55
2. OWNERS. The following list includes the full name and mailing
address of each person who is one of your owners (as defined in the Franchise
Agreement) and fully describes the nature of each owner's interest.
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
OWNER'S NAME AND ADDRESS: DESCRIPTION OF TRUST
------------------------- --------------------
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
KRISPY KREME DOUGHNUT CORPORATION NAME
By: __________________________________ By: __________________________________
Title: Senior Vice President Title: _______________________________
of Franchising
A-2
<PAGE> 56
EXHIBIT B
TERRITORY
The Territory referred to in Section 1.E. of the Franchise Agreement
shall be as follows:
____________ one-eighth (1/8) mile radius from the Site of the
Store in Urban areas
____________ one (1) mile radius from the Site of the STORE in
Suburban areas
KRISPY KREME DOUGHNUT CORPORATION NAME
By: _______________________________________ By: ___________________________
Title: Senior Vice President of Franchising Title: ________________________
B-1
<PAGE> 1
EXHIBIT 10.10
COLLATERAL REPURCHASE AGREEMENT
THIS COLLATERAL REPURCHASE AGREEMENT (the "Agreement") is made and
entered into this 30th day of January, 1998 by and among KRISPY KREME DOUGHNUT
CORPORATION, a North Carolina corporation, with its principal office and place
of business at 370 Knollwood Street, Suite 500, Winston-Salem, North Carolina,
27103 ("Krispy Kreme"), MACKK, L.L.C., an Alabama limited liability company (the
"Borrower") and BRANCH BANKING AND TRUST (the "Bank").
R E C I T A L S :
1. The Borrower has requested a loan from the Bank to finance the
purchase of certain land, buildings, equipment, signage, furniture and
fixtures from Krispy Kreme.
2. The Bank has agreed to lend to Borrower One Million Five
Hundred Thousand and 00/100 Dollars ($1,500,000.00) in the form of an
Acquisition and Term Loan and up to Two Hundred Fifty Thousand and
00/100 Dollars ($250,000.00) in the form of a Line of Credit secured in
part by a security interest in the Equipment (as defined below) (the
"Bank Loans") as evidenced by the Notes (as defined below); and
3. Therefore, the parties desire to enter into this Agreement.
NOW THEREFORE, in consideration of the mutual promises and covenants
herein contained, and in further consideration of one Dollar ($1.00) and other
valuable consideration paid by each party hereto to each other party, the
receipt and adequacy of which is acknowledged by each party hereto, the parties
hereto do agree as follows:
1. Copies of the Notes are attached hereto as EXHIBIT A and
incorporated herein by reference (the "Notes")
2. Bank shall provide Krispy Kreme with a copy of any notice to
Borrower declaring a default under either of the Notes and demanding
payment in full and a copy of any notice to Borrower after which Bank
will exercise its remedies under either of the Notes. Such copies shall
be sent to Krispy Kreme within three (3) business days of the sending
of the same to Borrower.
3. In the event of a default under either of the Notes, as long
as Bank has fully complied with the terms of this Agreement, Bank shall
have the right, but not the obligation, to demand by notice to Krispy
Kreme (the "Notification") that Krispy Kreme repurchase the Equipment
at a price equal to the lesser of (i) Three Hundred Twenty Five
Thousand and no/100 Dollars ($325,000.00) or (ii) the unpaid balance of
the applicable portion of the Bank Loans as of the date of the
Notification (the "Unpaid Balance").
<PAGE> 2
Such lesser amount is sometimes herein referred to as the "Purchase
Price". The parties acknowledge that the Bank Loans are for Borrower's
entire project for the acquisition of three (3) Krispy Kreme Doughnut
Shops and includes, but is not limited to, the purchase of the
Equipment. Consequently, the unpaid balance of the Bank Loans will be
multiplied by a fraction, the numerator of which is $325,000.00 and the
denominator of which is the amount of the Bank Loans ($1,750,000.00),
to determine the "Unpaid Balance" as such term is used in this
Agreement. For example, if the outstanding balance of the Bank Loans is
$1,635,000.00 at the time of the Notification, then the Unpaid Balance,
for purposes of this Agreement, shall be equal to $303,642.71. The
parties agree that the calculations set forth in this Paragraph 3 are
done for the sole reason of determining Krispy Kreme's financial
obligations to the Bank with respect to the matters set forth herein.
4. The parties acknowledge and agree that any default by Borrower
under either of the Notes or any other documents related to the Bank
Loans, whether or not waived by the Bank, shall, at the option of
Krispy Kreme, constitute a default under the Associate's License
Agreement and under any and all other agreements between Borrower and
Krispy Kreme.
5. The liability of Krispy Kreme hereunder shall be subject to,
and conditioned upon, full and complete compliance by Bank with the
following:
(a) Bank shall obtain and perfect a first priority security
interest in the Equipment (the "Security Interest") and shall
continuously maintain such perfected Security Interest from the
moment Borrower acquires any interest in the Equipment. All
filings and indicia of such Security Interest shall state that
they are subject to the terms of this Agreement.
(b) [This Section intentionally left blank.]
(c) [This Section intentionally left blank.]
(d) Any transfer of the Security Interest or any interest
therein to any other party shall provide that it is subject to
the terms of this Agreement and the transferee thereof shall
enter into an agreement with Krispy Kreme agreeing to abide by
the terms hereof.
(e) Bank shall not release the Security Interest in the
Equipment nor shall Bank take any action, or fail to take any
action, which action or failure to act will compromise or
diminish the Security Interest in any way. Provided, however,
Bank may release the Security Interest in portions of the
Equipment if Bank, at Bank's election, either (i) fully releases
Krispy Kreme from liability under this Agreement or (ii)
determines that Borrower reasonably desires to replace the
Equipment with new or different equipment (the "New Equipment")
of value and function comparable to that in which the Security
Interest is to be released and ensures that
<PAGE> 3
the New Equipment is obtained by Borrower prior to such
release and that the Security Interest applies to such New
Equipment as a first priority Security Interest. Upon such
replacement, the New Equipment shall be deemed to be
"Equipment" under this Agreement. Bank shall provide notice to
Krispy Kreme of any such release and shall provide Krispy
Kreme with a list of the New Equipment and evidence that the
Security Interest applies thereto.
6. Upon election by Bank to require repurchase of the Equipment
by Krispy Kreme hereunder, Bank shall assign and transfer the Security
Interest together with an interest in the Notes equal to the Purchase
Price to Krispy Kreme or such entity as Krispy Kreme may designate in
writing, and shall authorize foreclosure by Krispy Kreme or such entity
of the Security Interest in the Equipment. Borrower shall transfer all
of its right, title and interest in the Equipment to Krispy Kreme at
the same time. The Security Interest is agreed by the parties to also
secure all of Borrower's obligations under this Agreement and Borrower
hereby grants to Bank and to Krispy Kreme a security interest (which is
agreed to be a part of the Security Interest) in the Equipment to
secure Borrower's obligations under this Agreement. In no event shall
the Security Interest be permitted to merge with ownership of the
Equipment.
7. Except as permitted under subparagraph 5(e) hereof, Borrower
shall not sell or transfer, and Bank shall not consent to the sale or
transfer, whether by gift or with or without consideration, of all or
any part of the Equipment. Bank shall not sell or transfer the
Equipment or any portion thereof through exercise of its rights under
the Bank Loan and any documents executed in connection therewith, or
otherwise, without first giving Krispy Kreme the option to purchase the
Equipment in an amount equal to the Purchase Price. Bank shall provide
notice to Krispy Kreme of its proposed transfer and thirty (30) days in
which to exercise its right to purchase said Equipment. At the time
Krispy Kreme purchases the Equipment, Bank shall also transfer the
Security Interest as provided under Paragraph 6 above. In no event
shall the Security Interest be permitted to merge with ownership of the
Equipment.
8. As used herein, the term Equipment shall mean all furniture,
fixtures, equipment, doughnut making equipment and signage purchased by
Borrower and reasonably necessary for the operation of the Krispy Kreme
Doughnut Shops located at 1354 Government Street or 3950-A Airport
Boulevard or 3951 Government Boulevard, Mobile, Alabama, and as to
which the Security Interest is effective. Krispy Kreme must approve the
purchase of each item of Equipment.
9. Borrower consents and agrees to the terms of this Agreement
and agrees to transfer the Equipment to Krispy Kreme immediately and at
the same time as Krispy Kreme makes a payment of the Purchase Price to
Bank or at the time Krispy Kreme elects to purchase the Equipment under
Paragraph 7 hereof or as otherwise provided herein. Any such transfer
shall be free and clear of all liens, claims or interests other than
the Security Interest. In no event shall the Security Interest be
permitted to merge with ownership of the Equipment.
<PAGE> 4
10. A partial list of the Equipment is attached as EXHIBIT B
hereto and incorporated herein by reference. The parties agree to amend
such list as each item of Equipment is purchased, upon the completion
of the purchase of the Equipment, and again upon the purchase of any
New Equipment. No New Equipment shall be considered a part of the
Equipment until added to this EXHIBIT B.
11. All notices required or desired to be sent hereunder shall be
sent by certified mail, return receipt requested, postage prepaid, or
by a recognized overnight courier such as Airborne Express, FedEx, etc.
and shall be effective on receipt. Any party may change the address for
notices to it by notice sent in accordance herewith. Notices shall be
sent the parties hereto at their respective addresses set forth below
(or as such address may be changed as permitted herein):
IF TO KRISPY KREME: Krispy Kreme Doughnut Corporation
By Mail: P.O. Box 83
Winston-Salem, NC 27102-0083
Attention: Stephen A. Johnson
By Overnight: 370 Knollwood Street
Suite 500
Winston-Salem, NC 27103
Attention: Stephen A. Johnson
IF TO BORROWER: MACKK, L.L.C.
709 Chippenham Court
Winston-Salem, NC 27104
IF TO BANK: BB&T
110 S. Stratford Road
Winston-Salem, NC 27104
Attention: Steve Bullard
12. No failure of Bank to provide Krispy Kreme with a copy of any
notice sent to Borrower shall relieve Krispy Kreme of its liability
hereunder.
13. This Agreement shall be binding upon, and inure to the
benefit of, the parties hereto and to the successors and assigns of
Bank and Krispy Kreme. Borrower shall not have any right to assign this
Agreement or any interest herein without the prior written consent of
Bank and Krispy Kreme. Bank and Krispy Kreme shall each provide the
other with a copy of any assignment of this Agreement. Any such
assignment by Bank may be whole or partial, shall only be to a holder
of an interest in the Notes, and shall contain an agreement by the
assignee to abide by the terms hereof. No assignment hereof by Krispy
Kreme shall relieve it of its obligations hereunder without Bank's
consent to such release.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective the day and year first above written.
KRISPY KREME DOUGHNUT CORPORATION
BY: /s/ Randy S. Casstevens
-------------------------------------
RANDY S. CASSTEVENS, VICE PRESIDENT
BORROWER:
MACKK, L.L.C.
BY: /s/ J.A. McAleer
-------------------------------------
J.A. MCALEER, JR., MANAGER
BANK:
BRANCH BANKING AND TRUST
BY: /s/ Steven G. Bullard
-------------------------------------
PRINTED NAME: Steven G. Bullard
---------------------------
PRINTED TITLE: Vice President
--------------------------
<PAGE> 1
EXHIBIT 10.11
COLLATERAL REPURCHASE AGREEMENT
THIS COLLATERAL REPURCHASE AGREEMENT (this "Agreement") is made as of
the 30th day of January , 1998, by and among J.A. MCALEER, JR., a resident of
Forsyth County, North Carolina and MACKK, L.L.C., an Alabama limited liability
company (collectively the "Borrower"), KRISPY KREME DOUGHNUT CORPORATION, a
North Carolina corporation (the "Company") and BRANCH BANKING AND TRUST COMPANY,
a national banking institution ("BB&T").
R E C I T A L :
A. BB&T has on this date extended credit to the Borrower in the
aggregate maximum principal sum of One Million Seven Hundred
Fifty Thousand and 00/100 Dollars ($1,750,000.00) consisting
of a term loan in the amount of One Million Five Hundred
Thousand and 00/100 Dollars ($1,500,000.00) (the "Term Loan")
and a line of credit in the maximum principal amount of Two
Hundred Fifty Thousand and no/100 Dollars ($250,000.00) (the
"Line of Credit") (the Term Loan and the Line of Credit are
herein together referred to as the "Indebtedness"), evidenced
by two Promissory Notes of even date herewith executed and
delivered by the Borrower to BB&T (the "Notes").
B. The Indebtedness is secured, in part, by a pledge by J.A.
McAleer, Jr. ("Pledgor") of five thousand two hundred
twenty-six (5,226) shares of the common voting stock of the
Company owned by the Pledgor (the "Pledged Stock"), pursuant
to a Pledge Agreement of even date herewith executed by and
between Pledgor and BB&T (the "Pledge Agreement"; the Pledge
Agreement, and all other documents, instruments and agreements
executed to evidence, create or secure the Indebtedness are
herein called the "Loan Documents").
C. The Pledged Stock is subject to a Stock Purchase Agreement
dated July 1, 1984 executed by and among the Company and its
shareholders (as it may be amended) (the "Stock Purchase
Agreement"), which Stock Purchase Agreement has been consented
and agreed to by Pledgor.
D. In order to induce BB&T to make the loans giving rise to the
Indebtedness, the Company has agreed to purchase all or part
of the Pledged Stock in the event of a default under the Notes
or any of the Loan Documents in accordance with the terms of
this Agreement.
E. BB&T has required the execution and delivery of this Agreement
by the parties hereto as a condition to making the Loans
comprising the Indebtedness.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and for other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. ELECTION BY BB&T TO CAUSE THE COMPANY TO PURCHASE THE PLEDGED STOCK.
Upon a default under the Notes or any of the Loan Documents (hereinafter
referred to as a "Default"), BB&T may give notice to the Company and the
Borrower, requiring the Company to purchase, and the Pledgor to sell, the
Pledged Stock in the following manner and upon the following terms. The notice
shall specify whether the purchase is to be made (a) from the Pledgor prior to
the commencement of proceedings by BB&T to exercise its rights and remedies as a
secured party against the Pledged Stock, or (b) at a private sale ("Private
Sale") conducted pursuant to the terms of the Pledge Agreement and applicable
law. For purposes of determining the time as of which such purchase price is to
be determined, the Pledgor and BB&T agree that such notice shall constitute
written notice of a proposed transfer, disposition or sale of its Pledged Stock
under paragraph 2(a) of the Stock Purchase Agreement. At the Closing (as defined
in paragraph 3 hereof), the Company shall pay to BB&T and not to the Borrower or
Pledgor, in United States dollars and in immediately available funds, a purchase
price determined in accordance with the Stock Purchase Agreement. If the
purchase price of the Pledged Stock is greater than the then outstanding
Indebtedness (including accrued but unpaid interest and all other sums owed by
Borrower to BB&T pursuant to the terms of the Notes and the Loan Documents),
then the Company shall be required to purchase hereunder only so much of the
Pledged Stock as is necessary to pay in full the Indebtedness. In consideration
of the purchase price received by BB&T, the Pledgor shall transfer title to the
Pledged Stock (or so much therefor as shall be purchased) to the Company or in
the event the sale is at a Private Sale, BB&T shall deliver to the Company the
certificates evidencing the Pledged Stock (or so much thereof as shall be
purchased) together with stock powers executed in blank by the Pledgor. In
either case, BB&T shall release its security interest in the Pledged Stock
purchased by the Company upon receipt of the purchase price. The Borrower and
the Company hereby acknowledge that the Pledged Stock is subject to the terms
and provisions of the Stock Purchase Agreement which provides, in part, an
option to purchase the Pledged Stock in favor of the Company and each of its
shareholders in the event Pledgor desires to transfer, sell or dispose of all or
any portion of the Pledged Stock. Accordingly, and given the difficulty of
obtaining a reasonable price for the Pledged Stock at a public sale or auction
and the difficulty of selling the Pledged Stock at a public sale or auction in
compliance with the Stock Purchase Agreement and applicable federal and state
securities laws, the Company, the Pledgor and the Borrower specifically agree
that a Private Sale at which the Company shall purchase any or all of the
Pledged Stock pursuant to the terms of this Agreement shall have been conducted
in a commercially reasonable manner, and, to the extent permitted by applicable
law, the Company, the Pledgor and the Borrower hereby waive any claim or defense
to any such sale arising under any applicable law, including, but not limited
to, under Section 9-504(3) of the Uniform Commercial Code as in effect in the
applicable jurisdiction.
2. OTHER PURCHASERS. In the event of a default under any of the Loan
Documents, BB&T agrees not to purchase all or any part of the Pledged Stock or
allow any other person (other than the Company) to do so, without the prior
written consent of the Company, unless the
-2-
<PAGE> 3
Company shall, within thirty (30) days after BB&T's request for performance
hereunder, fail, refuse or be unable to perform its obligations hereunder.
3. THE CLOSING. If purchase of the Pledged Stock is to be made from the
Pledgor, or the Borrower, as the case may be, the Closing shall take place at a
time and place selected by BB&T within fifteen (15) days after the date of
BB&T's notice to the Company and the Borrower requiring that the Company
purchase the Pledged Stock. If purchase of the Pledged Stock is to take place
pursuant to a Private Sale, Closing shall take place at a time and in the manner
as provided for by applicable law or in the Pledge Agreement, as the case may
be, or as may be provided for in any notice given by BB&T pursuant thereto for
the Private Sale provided, however, that the Closing and delivery of the Pledged
Stock purchased by the Company shall occur at the principal office of BB&T in
Winston-Salem, North Carolina, at no expense to BB&T.
4. SURPLUS. If all proceeds ever received by BB&T, either before or
after the Closing, from any sale or other disposition of any collateral, or part
therefor, for the Indebtedness, or the exercise of any other remedy pursuant to
the Notes or any of the Loan Documents, together with the aggregate purchase
price actually received by BB&T for the Pledged Stock to be purchased pursuant
to this Agreement, shall exceed the aggregate amount of the Indebtedness,
interest thereon, the costs and expenses incurred or other sums thereunder owed
by the Borrower to BB&T pursuant to any of the Notes or the Loan Documents, and
the costs and expenses incurred in the enforcement of the Borrower's obligations
under this Agreement, including reasonable attorneys' fees, the amount of such
excess shall be remitted to or for the account of the Borrower, subject however,
to the rights and claims of others having a prior interest in or a lien upon any
such proceeds.
5. ASSIGNMENT BY BORROWER. Borrower hereby assigns all of its right,
title and interest in and to this Agreement to BB&T as collateral security for
the Indebtedness and agrees to execute and deliver Uniform Commercial Code
Financing Statements with respect thereto as BB&T may request.
6. CONTINUING OBLIGATIONS. The obligations of the Company under this
Agreement shall be continuing, and the Company agrees that its obligations
hereunder shall not be modified, diminished, extinguished or released by reason
that the whole or any part of any security or collateral for the Indebtedness
(other than the Pledged Stock) now or hereafter held may be exchanged,
compromised, impaired, released, or surrendered from time to time, that the time
or place of payment of any Indebtedness or of any security therefor may be
exchanged or extended, in whole or in part, to a time certain or otherwise, and
may be renewed or accelerated, in whole or in part, that the Borrower may be
granted indulgences generally, that any of the provisions of any note or other
instrument evidencing any debt of the Borrower or any security therefor,
including, without limitation, the Notes and the Loan Documents, may be modified
or waived, or that any party liable for the payment thereof (including but not
limited to any guarantor, surety or endorser) may be granted indulgences or
released, all of which are hereby expressly consented to by the Company,
provided, however, that neither the original principal amount of the Notes nor
the interest rate thereunder may be increased except in accordance with the
terms of the Notes, nor may additional amounts be advanced or readvanced under
the Notes except as provided in the Line of
-3-
<PAGE> 4
Credit Note, nor shall the Pledge Agreement be amended, compromised or released,
nor shall the Pledged Stock be compromised or released as collateral for the
Indebtedness. Neither the death, disability, bankruptcy, or insolvency of any
one or more of the Borrower or any guarantor, surety or endorser shall affect
the continuing obligation of the Company. No claim need be asserted against the
personal representative, guardian, custodian, trustee, debtor in bankruptcy, or
receiver of any deceased, incompetent, bankrupt or insolvent borrower,
guarantor, surety or endorser. Any deposit balance to the credit of the Borrower
or any other party liable for the payment of the Indebtedness or liable upon any
security therefor may be released, in whole or in part, at, before and/or after
the stated, extended or accelerated maturity of any Indebtedness. All of the
foregoing may be done without notice to or further assent by the Company, which
shall remain bound hereon notwithstanding any such exchange, compromise,
surrender, extension, renewal, acceleration, modification, indulgence or
release. The Company expressly waives notice of acceptance of this Agreement and
of all extensions of credit to the Borrower, presentment and demand for payment
of the Indebtedness, protest and any notice of dishonor or of default to the
Company or to any other party with respect to any of the Indebtedness or with
respect to any security or collateral therefor and all other notices to which
the Company might otherwise be entitled. The obligations of the Company under
this Agreement shall be direct and immediate and not conditional or contingent
upon either the pursuit of any remedies against the Borrower or any other person
or foreclosure of any security interest or liens available to BB&T, its
successors, endorsees or assigns, other than pursuant to the Pledge Agreement
and this Agreement enabling the Company to purchase the Pledged Stock as
required hereunder, the Company hereby waiving any rights to require that any
action be brought against the Borrower or any other person or to require that
resort be had to any security or to any balance of any deposit account or credit
on the books of BB&T in favor of the Borrower or any other person, and the
Company hereby waiving any rights of the Company pursuant to North Carolina
General Statutes Section 26-7 or any similar or subsequent law. If the
Indebtedness is partially paid through the election of BB&T, its successors,
endorsees or assigns, to pursue any of the remedies mentioned herein, in the
Notes, or in the Loan Documents or if such Indebtedness is otherwise partially
paid, the Company shall nevertheless remain fully liable and obligated under and
pursuant to the terms of this Agreement. The Borrower and BB&T agree to provide
the Company with copies of all Loan Documents and modifications thereof.
7. NO CREDIT; WAIVER OF DEFENSES. The Company shall not be entitled to
provide for the payment of the purchase price either for the Pledged Stock (or
any part thereof) by the issuance of credit or credits to or for the account of
the Borrower, the Pledgor or either of them. Nor shall any portion of any
purchase price for the Pledged Stock be subject to offset, reduction or
diminution by reason of any disputed or undisputed claim, suit or demand which
the Company may have against the Borrower, the Pledgor or either of them, or by
reason of any disputed or undisputed unpaid accounts or liabilities of or
amounts otherwise owed by the Borrower, the Pledgor or either of them to the
Company. Nothing herein shall prohibit the Company from purchasing the Pledged
Stock over and above the amounts necessary to satisfy the Borrower's obligations
to BB&T and applying the proceeds thereof to any obligation of the Borrower to
the Company.
8. NOTIFICATION OF STOCK PURCHASE AGREEMENT. Nothing herein shall
prevent or restrict the Company and the Pledgor from amending or terminating
(and the Company and Pledgor
-4-
<PAGE> 5
shall have the right to amend and/or terminate the Stock Purchase Agreement) the
Stock Purchase Agreement provided that, in the event of the termination or
modification of the Stock Purchase Agreement, the Company and the Pledgor shall
remain obligated to comply with paragraph 1 above as if the Stock Purchase
Agreement remained in force (unmodified) as it is as of the date hereof.
9. CHOICE OF LAW. The parties hereby acknowledge and agree that this
Agreement shall be governed by and construed in accordance with the laws of the
State of North Carolina.
10. MODIFICATION OF COLLATERAL REPURCHASE AGREEMENT. This Agreement may
not be changed, amended or modified orally or by implication but only by a
written instrument signed by each of the parties hereto, and no obligation of
the Company or the Borrower or the Pledgor shall be released, waived or modified
by BB&T or any officer or agent of BB&T except by a writing signed by a duly
authorized officer of BB&T and bearing the seal of BB&T. This Agreement shall be
irrevocable by the Company, the Borrower and the Pledgor until the Indebtedness
has been completely repaid and all other obligations and undertakings of the
Borrower under, or by reason of, or pursuant to the Notes or any of the Loan
Documents have been completely performed and satisfied.
11. NOTICES. Any and all notices or demands permitted or required to
be made under this Agreement shall be in writing, signed by the party giving
such notice or demand, and shall be delivered personally or by a nationally
recognized courier service or sent by registered or certified United States
mail, postage prepaid, to the other party(ies) at the address(es) set forth
below, or at such other address as may have been designated in writing. The
effective date of such notice or demand shall be date of personal service or the
date on which the notice or demand is deposited in the mails.
The address of the Borrower is: J.A. McAleer, Jr.
709 Chippenham Court
Winston-Salem, NC 27104
MACKK, L.L.C.
709 Chippenham Court
Winston-Salem, NC 27104
The address of the Company is: Krispy Kreme Doughnut Corporation
370 Knollwood Street
Suite 500
Winston-Salem, North Carolina 27103
Attn: Stephen A. Johnson
The address of BB&T is: Branch Bank and Trust Company
Post Office Box 15008
Winston-Salem, North Carolina 27150
Attn: Steve Bullard
-5-
<PAGE> 6
12. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but taken together shall
constitute but one Agreement.
13. BENEFIT. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective legal representatives,
heirs, successors and assigns.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
or have otherwise caused this Agreement to be due executed as of the day and
year first above written.
/s/ J.A. McAleer, Jr. (SEAL)
-----------------------------
J.A. MCALEER, JR.
MACKK, L.L.C.
[CORPORATE SEAL] BY: /s/ J.A. McAleer, Jr.
-------------------------------
J.A. MCALEER, JR., MANAGER
ATTEST:
_____________________________________
_________ SECRETARY
KRISPY KREME DOUGHNUT CORPORATION
BY: /s/ Randy S. Casstevens
-------------------------------
[CORPORATE SEAL] RANDY S. CASSTEVENS, VICE PRESIDENT
ATTEST:
Stephan A. Johnson
- ---------------------------------------
STEPHEN A. JOHNSON, ASSISTANT SECRETARY
BRANCH BANKING AND TRUST COMPANY
BY: /s/ Steven G. Bullard
-------------------------------
PRINTED NAME: Steven G. Bullard
---------------------
PRINTED TITLE: Vice President
--------------------
-7-
<PAGE> 1
EXHIBIT 10.16
COLLATERAL REPURCHASE AGREEMENT
THIS COLLATERAL REPURCHASE AGREEMENT (the "Agreement") is made and
entered into this 29th day of May, 1996 by and among KRISPY KREME DOUGHNUT
CORPORATION, a North Carolina corporation, with its principal office and place
of business at 370 Knollwood Street, Suite 500, Winston-Salem, North Carolina,
27103 ("Krispy Kreme"), MIDWEST DOUGHNUTS, L.L.C., a North Carolina limited
liability company (the "Borrower") and THE FIRST NATIONAL BANK OF OLATHE (the
"Bank").
R E C I T A L S :
1. The Borrower has requested a loan from the Bank to finance the
purchase of certain equipment, signage, furniture and fixtures for use
at the Krispy Kreme Doughnut Shop to be established by Borrower at 4242
S. Noland Road, Independence, Missouri.
2. The Bank has agreed to lend to Borrower Nine Hundred Five
Thousand and 00/100 Dollars ($905,000.00) secured in part by a security
interest in the Equipment (as defined below) (the "Bank Loan") as
evidenced by the Note (as defined below); and
3. Therefore, the parties desire to enter into this Agreement.
NOW THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties hereto do agree as follows:
1. A copy of the Note is attached hereto as EXHIBIT A and
incorporated herein by reference (the "Note")
2. Bank shall provide Krispy Kreme with a copy of any notice to
Borrower declaring a default under the Note and demanding payment in
full and a copy of any notice to Borrower after which Bank will
exercise its remedies under the Note. Such copies shall be sent to
Krispy Kreme within three (3) business days of the sending of the same
to Borrower.
3. In the event of a default under the Note, as long as Bank has
fully complied with the terms of this Agreement, Bank shall have the
right, but not the obligation, to demand by notice to Krispy Kreme (the
"Notification") that Krispy Kreme repurchase the Equipment at a price
equal to the lesser of (i) the original purchase price thereof or (ii)
the unpaid balance of the applicable portion of the Bank Loan (the
"Unpaid Balance"). Such lesser amount is sometimes herein referred to
as the "Purchase Price". The parties acknowledge that the Bank Loan is
for Borrower's entire project for purchase of real property and the
construction, equipping and fixturing of a Krispy Kreme Doughnut Shop
thereon and includes, but is not limited to, the purchase of the
Equipment. Consequently,
<PAGE> 2
the unpaid Bank Loan balance will be prorated in relationship to the
amount of the Loan for the purchase of the Equipment to determine the
Unpaid Balance as such term is used in this Agreement. For example, in
the event the purchase price of the Equipment is $300,000 and the Bank
Loan is $900,000, then the Unpaid Balance, for purposes of this
Agreement, shall be equal to one-third (1/3) of the actual unpaid
balance of the Bank Loan at the time of the Notification. Borrower's
equity in its project in the amount of One Hundred Twenty Thousand and
00/100 Dollars ($120,000) will be deemed a down payment on the purchase
of its real estate for purposes of computing the above-referenced
proration.
4. The parties acknowledge and agree that any default by Borrower
under the Note or any other documents related to the Bank Loan, whether
or not waived by the Bank, shall, at the option of Krispy Kreme,
constitute a default under the Franchise Agreement, Development
Agreement and any and all other agreements between Borrower and Krispy
Kreme.
5. The liability of Krispy Kreme hereunder shall be subject to,
and conditioned upon, full and complete compliance by Bank with the
following:
(a) Bank shall obtain and perfect a first priority security
interest in the Equipment (the "Security Interest") and shall
continuously maintain such perfected Security Interest from the
moment Borrower acquires any interest in the Equipment. All
filings and indicia of such Security Interest shall state that
they are subject to the terms of this Agreement.
(b) Bank shall notify Krispy Kreme of each advance under
the Bank Loan for any purchase of Equipment not from Krispy Kreme
within thirty (30) days after such advance is made and Krispy
Kreme's obligations to Bank hereunder shall be reduced by the
amount of any advances for which Krispy Kreme does not receive
such notice.
(c) The Security Interest shall be perfected separate and
apart from any other security interest of Bank in and to any and
all other property of Borrower.
(d) Any transfer of the Security Interest or any interest
therein to any other party shall provide that it is subject to
the terms of this Agreement and the transferee thereof shall
enter into an agreement with Krispy Kreme agreeing to abide by
the terms hereof.
(e) Bank shall not release the Security Interest in the
Equipment nor shall Bank take any action, or fail to take any
action, which action or failure to act will compromise or
diminish the Security Interest in any way. Provided, however,
Bank may release the Security Interest in portions of the
Equipment if Bank, at Bank's election, either (i) fully releases
Krispy Kreme from liability under this Agreement or (ii)
determines that Borrower reasonably desires to replace the
Equipment with
<PAGE> 3
new or different equipment (the "New Equipment") of value and
function comparable to that in which the Security Interest is
to be released and ensures that the New Equipment is obtained
by Borrower prior to such release and that the Security
Interest applies to such New Equipment as a first priority
Security Interest. Upon such replacement, the New Equipment
shall be deemed to be "Equipment" under this Agreement. Bank
shall provide notice to Krispy Kreme of any such release and
shall provide Krispy Kreme with a list of the New Equipment
and evidence that the Security Interest applies thereto.
6. Upon election by Bank to require repurchase of the Equipment
by Krispy Kreme hereunder, Bank shall assign and transfer the Security
Interest to Krispy Kreme or such entity as Krispy Kreme may designate
in writing. In no event shall the Security Interest be permitted to
merge with ownership of the Equipment.
7. Except as permitted under subparagraph 5(e) hereof, Borrower
shall not sell or transfer, and Bank shall not consent to the sale or
transfer, whether by gift or with or without consideration, of all or
any part of the Equipment. Bank shall not sell or transfer the
Equipment or any portion thereof through exercise of its rights under
the Bank Loan and any documents executed in connection therewith, or
otherwise, without first giving Krispy Kreme the option to purchase the
Equipment in an amount equal to the Purchase Price. Bank shall provide
notice to Krispy Kreme of its proposed transfer and thirty (30) days in
which to exercise its right to purchase said Equipment. At the time
Krispy Kreme purchases the Equipment, Bank shall also transfer the
Security Interest as provided under Paragraph 6 above. In no event
shall the Security Interest be permitted to merge with ownership of the
Equipment.
8. As used herein, the term Equipment shall mean all furniture,
fixtures, equipment, doughnut making equipment and signage purchased by
Borrower and reasonably necessary for the operation of a Krispy Kreme
Doughnut Shop to be located at 4242 S. Noland Road, Independence,
Missouri, and as to which the Security Interest is effective. Krispy
Kreme must approve the purchase of each item of Equipment.
9. Borrower consents and agrees to the terms of this Agreement
and agrees to transfer the Equipment to Krispy Kreme immediately and at
the same time as Krispy Kreme makes a payment of the Purchase Price to
Bank or at the time Krispy Kreme elects to purchase the Equipment under
Paragraph 7 hereof or as otherwise provided herein. Any such transfer
shall be free and clear of all liens, claims or interests other than
the Security Interest. In no event shall the Security Interest be
permitted to merge with ownership of the Equipment.
10. A partial list of the Equipment is attached as EXHIBIT B
hereto and incorporated herein by reference. The parties agree to amend
such list as each item of Equipment is purchased, upon the completion
of the purchase of the Equipment, and again upon the purchase of any
New Equipment. No New Equipment shall be considered a part of the
Equipment until added to this EXHIBIT B.
<PAGE> 4
11. All notices required or desired to be sent hereunder shall be
sent by certified mail, return receipt requested, postage prepaid, or
by a recognized overnight courier such as Airborne Express, FedEx, etc.
and shall be effective on receipt. Any party may change the address for
notices to it by notice sent in accordance herewith. Notices shall be
sent the parties hereto at their respective addresses set forth below
(or as such address may be changed as permitted herein):
IF TO KRISPY KREME: Krispy Kreme Doughnut Corporation
By Mail: P.O. Box 83
Winston-Salem, NC 27102-0083
Attention: Stephen A. Johnson
By Overnight: 370 Knollwood Street
Suite 500
Winston-Salem, NC 27103
Attention: Stephen A. Johnson
IF TO BORROWER: Midwest Doughnuts, L.L.C.
620 Staffordshire Road
Winston-Salem, NC 27104
Attention: Philip R.S. Waugh, Jr.
IF TO BANK: The First National Bank of Olathe
By Mail: P.O. Box 1500
Olathe, Kansas 66051-1500
Attention: A.L. Wiley
By Overnight: 444 East Santa Fe Street
Olathe, Kansas 66061
Attention: A.L. Wiley
12. No failure of Bank to provide Krispy Kreme with a copy of any
notice sent to Borrower shall relieve Krispy Kreme of its liability
hereunder.
13. This Agreement shall be binding upon, and inure to the
benefit of, the parties hereto and to the successors and assigns of
Bank and Krispy Kreme. Borrower shall not have any right to assign this
Agreement or any interest herein without the prior written consent of
Bank and Krispy Kreme. Bank and Krispy Kreme shall each provide the
other with a copy of any assignment of this Agreement. Any such
assignment by Bank may be whole or partial, shall only be to a holder
of an interest in the Note, and shall contain an agreement by the
assignee to abide by the terms hereof. No assignment hereof by Krispy
Kreme shall relieve it of its obligations hereunder without Bank's
consent to such release.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective the day and year first above written.
KRISPY KREME DOUGHNUT CORPORATION
BY: /s/ Scott A. Livengood
------------------------------------
PRINTED NAME: Scott A. Livengood
--------------------------
PRINTED TITLE: President
-------------------------
BORROWER:
MIDWEST DOUGHNUTS, L.L.C.
BY: /s/ Jimmy B. Strickland
------------------------------------
JIMMY B. STRICKLAND, MANAGING MEMBER
BANK:
THE FIRST NATIONAL BANK OF OLATHE
BY: /s/ A.L. Wiley
------------------------------------
PRINTED NAME: A.L. Wiley
--------------------------
PRINTED TITLE: Senior Vice President
------------------------
<PAGE> 1
EXHIBIT 21.1 (1)
- --------------------------------------------------------------------------------
Subsidiary State of Doing Business As
Incorporation
- --------------------------------------------------------------------------------
Krispy Kreme Doughnut North Carolina Krispy Kreme Doughnut
Corporation Corporation
- --------------------------------------------------------------------------------
Krispy Kreme Support North Carolina Krispy Kreme Support
Operations Company Operations Company
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Thorton's Flav-O-Rich Bakery, North Carolina Thorton's Flav-O-Rich Bakery,
Incorporated Incorporated
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HD Capital Corporation Delaware HD Capital Corporation
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HDN Development Corporation Kentucky HDN Development Corporation
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(1) Exhibit 21.1 assumes completion of the Company's reorganization.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated March 19, 1999 relating to the financial statements of Krispy Kreme
Doughnut Corporation and our report dated December 3, 1999 relating to the
balance sheet of Krispy Kreme Doughnuts, Inc., which appear in such Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Registration Statement.
/S/ PricewaterhouseCoopers LLP
Greensboro, North Carolina
December 14, 1999
