<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2000
REGISTRATION NO. 333-92909
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
KRISPY KREME DOUGHNUTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NORTH CAROLINA 5812 56-2169715
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
SCOTT A. LIVENGOOD
CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
370 KNOLLWOOD STREET 370 KNOLLWOOD STREET
WINSTON-SALEM, NORTH CAROLINA 27103 WINSTON-SALEM, NORTH CAROLINA 27103
(336) 725-2981 (336) 725-2981
(Address, including zip code, and telephone (Name, address, including zip code, and telephone
number, number,
including area code, of registrant's principal including area code, of agent for service)
executive offices)
</TABLE>
---------------------
COPIES TO:
<TABLE>
<S> <C>
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 10005
(404) 815-6500 (212) 701-3000
(404) 815-6555 (FAX) (212) 269-5420 (FAX)
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act of 1933, check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON A DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, Dated March 30, 2000
(Krispy Kreme Doughnuts Logo)
- --------------------------------------------------------------------------------
3,000,000 Shares
Common Stock
- --------------------------------------------------------------------------------
This is the initial public offering of Krispy Kreme Doughnuts, Inc. and we are
offering 3,000,000 shares of our common stock. We anticipate that the initial
public offering price will be between $18.00 and $20.00 per share.
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol KREM.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
Underwriting
Public Discounts and Proceeds to
Offering Price Commissions Krispy Kreme
------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
450,000 shares to cover any over-allotments.
Deutsche Banc Alex. Brown J.P. Morgan & Co.
Dain Rauscher Wessels
BB&T Capital Markets
The date of this prospectus is , 2000
<PAGE> 3
OUTSIDE FOLD-OUT FRONT COVER
[PICTURE, TEXT, AND LOGO]
[The graphic on this page is a centered, circular picture of a young boy wearing
a Krispy Kreme hat and eating a doughnut. The following text is set forth
underneath the picture in four lines: "Krispy Kreme [using trademark font] has
been making doughnuts from a secret recipe since 1937 when the business was
founded in Winston-Salem, NC. Today, the taste of our doughnuts remains true to
the still-secret recipe." Between each of the first and second and second and
third lines is a picture of a doughnut. Between the third and fourth line is the
Krispy Kreme Doughnut Company logo.]
INSIDE FOLD-OUT FRONT COVER
[PICTURE, TEXT, AND LOGO]
[The graphic on this page is a table, the title of which is "OUR PEOPLE DO THE
THINGS THAT MAKE THE DIFFERENCE." The first row, first column of the table
begins with a circular picture of a Krispy Kreme employee working in the Krispy
Kreme mix plant. To the right of the picture is the caption, "WE MAKE THE MIX."
To the right of the caption is the sentence, "To ensure premium quality, we make
our own proprietary mix in our own mix plant." To the right of the sentence,
there are two square pictures. The first depicts two Krispy Kreme employees
holding a baking sheet of freshly-made doughnuts. The second picture shows
Krispy Kreme doughnut mix on the assembly line in the mix plant.
The second row, first column of the table begins with a circular picture of a
Krispy Kreme employee sautering Krispy Kreme doughnutmaking equipment. To the
right of the picture is the caption, "WE MAKE THE EQUIPMENT." To the right of
the caption is the sentence, "We engineer and manufacture our own doughnutmaking
equipment." To the right of the sentence, there are two square pictures of
Krispy Kreme employees involved in the engineering and manufacturing process.
The third row, first column of the table begins with a circular picture of a
Krispy Kreme employee working at the Krispy Kreme distribution center. To the
right of the picture is the caption, "WE DISTRIBUTE THE GOODS." To the right of
the caption is the sentence, "Our own distribution center offers store operators
one-stop shopping for key supplies." To the right of the sentence, there are two
square pictures depicting the Krispy Kreme distribution center.
The fourth row, first column of the table begins with a circular picture of a
Krispy Kreme employee working in a Krispy Kreme store. To the right of the
picture is the caption, "WE MAKE AND SELL DOUGHNUTS IN OUR STORES." To the right
of the caption is the sentence, "Our stores are doughnut factories that produce
over 1.3 billion doughnuts a year." To the right of the sentence, there is a
square picture of a Krispy Kreme employee boxing freshly-made doughnuts. To the
right of the picture is the Krispy Kreme "HOT DOUGHNUTS NOW" logo.
Between the fourth and fifth rows of the first column is a graphic showing the
actual number of Krispy Kreme doughnuts produced each year, the zeros of
which are pictures of doughnuts. To the right of the number is a bag of Krispy
Kreme doughnut mix.
The fifth and final row of the table's first column begins with the Krispy Kreme
Fundraising logo. To the right of the logo is the caption, "WE SELL OFF
PREMISES." To the right of the caption is the sentence, "Our customers can also
purchase our doughnuts at locations off premises from our store." To the right
of the sentence, there is a picture of a Krispy Kreme doughnut case and there
are two square pictures. The first depicts a Krispy Kreme sign and the second
depicts a Krispy Kreme doughnut case in an off premises store.
The second column of the table contains two rows. The first row begins with the
caption, "WE HAVE A HERITAGE." Underneath the caption are the sentences, "We
were founded in 1937. In 1997, Krispy Kreme artifacts were inducted into the
Smithsonian Institution." Underneath these sentences is a picture of a box of
Krispy Kreme doughnuts with the old-fashion "KK" logo.
The second row, second column of the table begins with a triangular arrangement
of three pictures of children wearing Krispy Kreme hats while enjoying the
Krispy Kreme experience. Underneath the pictures is the Krispy Kreme Doughnuts
logo and web site address.]
<PAGE> 4
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because it
is a summary, it does not contain all the information that you should consider
before investing. You should read the entire prospectus carefully, including the
section entitled "Risk Factors" and our consolidated financial statements and
the accompanying notes included elsewhere in this prospectus. Information in
this prospectus related to the performance of franchised stores is based solely
on information provided by our franchisees.
KRISPY KREME DOUGHNUTS, INC.
Krispy Kreme is a leading branded specialty retailer of premium quality
doughnuts which are made throughout the day in our stores. We opened our first
store in 1937 and there were 144 Krispy Kreme stores nationwide, consisting of
58 company-owned and 86 franchised stores, as of January 30, 2000. Our principal
business is the high volume production and sale of over 20 varieties of premium
quality doughnuts, including our signature Hot Original Glazed. We have
established Krispy Kreme as a leading consumer brand with a loyal customer base
through our longstanding commitment to quality and consistency. Our place in
American society was recognized in 1997 with the induction of Krispy Kreme
artifacts into the Smithsonian Institution's National Museum of American
History. We differentiate ourselves by combining quality ingredients, vertical
integration and a unique retail experience featuring our stores' fully displayed
production process, or doughnutmaking theater.
The combination of our well-established brand, our one-of-a-kind doughnuts and
our strong franchise system creates significant opportunities for continued
growth. Our sales growth has been driven by new store openings, as well as
systemwide comparable store sales growth of 12.7% in fiscal 1998, 9.7% in fiscal
1999 and 14.1% in fiscal 2000. Our success is based on the strengths described
below.
COMPETITIVE STRENGTHS
Our goal is to become the nation's leading branded specialty retailer of premium
quality doughnuts. To achieve this objective, we intend to capitalize on the
following strengths:
- UNIVERSAL APPEAL OF OUR PRODUCT. The taste, quality and simplicity of
our doughnuts, which we believe our customers view as an affordable
indulgence, appeal across major demographic groups, including age and
income.
- PROVEN CONCEPT. Our stores, which are designed to create a multi-sensory
retail experience featuring our doughnutmaking theaters, serve both as
our primary retail outlets and as platforms to distribute our products
through off-premises sales channels.
- SIGNIFICANT GROWTH POTENTIAL. With only 144 stores as of January 30,
2000, we believe that we have significant new store expansion
opportunities, with an initial emphasis on markets of over 100,000
households.
- INGREDIENTS FOR MARKET LEADERSHIP. We believe that the combination of
our strong brand, highly differentiated product, high-volume production
capability and multiple sales channels provides us with the ability to
establish Krispy Kreme as the recognized leader in every market we enter.
1
<PAGE> 5
- STRONG FRANCHISE SYSTEM. We are committed to growth through franchising
and intend to continue to strengthen our franchise system by attracting
experienced and well-capitalized area developers who have the management
capacity to develop multiple stores. In the future, we intend to acquire
minority equity positions in selected franchisee businesses.
- DIRECT STORE DELIVERY CAPABILITIES. We have developed a highly effective
direct store delivery system, or DSD, for executing off-premises sales
whereby we deliver fresh doughnuts, both packaged and unpackaged, to a
variety of supermarkets and convenience stores.
- CONTROLLED PROCESS ENSURING CONSISTENT HIGH QUALITY. We produce our
proprietary mixes, manufacture our custom doughnutmaking equipment and
test all key ingredients through our vertically integrated, highly
automated system designed to create quality, consistency and efficiency.
- BALANCED FINANCIAL MODEL. Krispy Kreme generates sales and income from
three distinct sources -- company stores, franchise fees and royalties
and our vertically integrated supply chain -- which we believe provides
increased stability to our revenues and earnings and improves our return
on investment.
GROWTH STRATEGY
We believe there are significant opportunities to expand our business by further
penetrating existing markets and entering new markets. After establishing our
brand in a new market through our retail stores, we attempt to maximize store
productivity by selling off-premises to grocery and convenience stores,
institutional customers and select co-branding customers. Key elements of our
growth strategy include:
- OPEN NEW STORES. We plan to expand primarily through franchising with
area developers and have existing agreements with franchisees to open
approximately 22 new stores in fiscal 2001 and over 100 new stores
between fiscal 2002 and fiscal 2005. This represents 15% store growth in
fiscal 2001 and an increase in our store base to over 260 stores by the
end of fiscal 2005. We depend upon our franchisees to execute our store
expansion strategy. If they cannot finance new stores, build them on
suitable sites or open them on schedule, our growth strategy may be
impeded.
- IMPROVE OUR EXISTING STORES' ON-PREMISES SALES. To improve our
on-premises sales, we plan to remodel and, in certain instances, close
and relocate selected older company-owned stores to emulate the format of
our new, highly successful stores in new markets.
- INCREASE OUR OFF-PREMISES SALES. We intend to expand our off-premises
customer base, as well as increase sales to our existing off-premises
customers by continuing to offer premium quality products, category
management and superior customer service.
---------------------------------------------
Our principal executive offices are located at 370 Knollwood Street,
Winston-Salem, North Carolina 27103 and our telephone number is (336) 725-2981.
Our web site address is http://www.krispykreme.com. Information on our web site
is not a part of this prospectus.
2
<PAGE> 6
THE OFFERING
Common Stock Offered by Krispy
Kreme.............................. 3,000,000 shares
Common Stock to be Outstanding
after the Offering................. 12,484,957 shares
Use of Proceeds.................... - Repayment of borrowings under our loan
agreement
- A distribution to our existing
shareholders as part of our
pre-offering corporate reorganization
- Remodeling and relocation of selected
older company-owned stores
- Additional mix production capacity to
support expansion
- Joint venture investments in area
developer stores
- General corporate purposes, including
working capital needs
Dividend Policy.................... We do not anticipate paying any cash
dividends in the foreseeable future.
Proposed Nasdaq National Market
Symbol............................. KREM
The table above excludes 1,821,000 shares of common stock issuable upon exercise
of stock options outstanding under our stock option plan on January 30, 2000, of
which 91,000 were exercisable, and includes 144,737 shares to be contributed to
our stock bonus plans contemporaneously with this offering.
---------------------------------------------
Except as otherwise indicated or required by the context, references to we, our,
us, Krispy Kreme or the company refer to Krispy Kreme Doughnuts, Inc. and its
subsidiaries and predecessors.
Currently, all of the stock of Krispy Kreme Doughnuts, Inc. is owned by Krispy
Kreme Doughnut Corporation, which was incorporated in 1982. Krispy Kreme
Doughnuts, Inc., the issuer of the common stock offered by this prospectus, was
incorporated in North Carolina in 1999 to be the holding company for Krispy
Kreme Doughnut Corporation and its other subsidiaries. This will be effected
through a corporate reorganization in the form of a merger in which each
outstanding share of common stock of Krispy Kreme Doughnut Corporation will be
converted into the right to receive 20 shares of common stock of Krispy Kreme
Doughnuts, Inc. and $15.00 in cash. This merger will occur prior to the closing
of this offering. See "Business -- Our Pre-Offering Reorganization and Other
Matters."
Except as otherwise indicated, all information in this prospectus assumes that
the reorganization has been effected and assumes no exercise of the
underwriters' over-allotment option.
---------------------------------------------
We own or have rights to various trademarks and trade names used in our
business. These include "Krispy Kreme" and the Krispy Kreme logo and "Hot
Doughnuts Now" and the Hot Doughnuts Now logo. This prospectus also includes
trademarks, service marks and trade names owned by other companies.
3
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table shows our summary financial data which you should read
together with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our consolidated financial
statements and accompanying notes and the other financial data included
elsewhere in this prospectus.
Per share amounts reflect an exchange ratio in the merger in connection with our
holding company formation of 20-for-one, which will have the effect of a
20-for-one stock split. Systemwide sales includes the sales of both our
company-owned and franchised stores and excludes the sales of our Support
Operations business segment. Our consolidated financial statements appearing
elsewhere in this prospectus exclude franchised store sales and include
royalties and fees received from our franchisees. The as adjusted balance sheet
data give effect to this offering and the merger as if they had occurred on
January 30, 2000.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED
-------------------------------------------------------------------
JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, JANUARY 30,
1996 1997 1998 1999 2000
In thousands, except per share data and store ----------- ----------- ----------- ----------- -----------
numbers
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................... $118,550 $132,614 $158,743 $180,880 $220,243
Provision for restructuring.............. 3,000 -- -- 9,466 --
Income (loss) from operations............ 1,230 5,136 5,420 (3,702) 10,838
Net income (loss)........................ 180 2,427 2,714 (3,167) 5,956
Net income (loss) per share:
Basic.................................. $ .02 $ .33 $ .37 $ (.38) $ .64
Diluted................................ $ .02 $ .33 $ .37 $ (.38) $ .61
Shares used in calculation of net income
(loss) per share:
Basic.................................. 7,284 7,284 7,284 8,249 9,340
Diluted................................ 7,284 7,284 7,284 8,249 9,820
OPERATING DATA:
Systemwide sales......................... $151,693 $167,592 $203,439 $240,316 $318,854
Number of stores at end of period:
Company-owned.......................... 53 61 58 61 58
Franchised............................. 42 55 62 70 86
-------- -------- -------- -------- --------
Systemwide............................. 95 116 120 131 144
======== ======== ======== ======== ========
Average weekly sales per store:
Company-owned.......................... $ 39 $ 39 $ 42 $ 47 $ 54
Franchised............................. 23 22 23 28 38
</TABLE>
<TABLE>
<CAPTION>
----------------------
AS OF JANUARY 30, 2000
----------------------
ACTUAL AS ADJUSTED
In thousands -------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 11,452 $ 35,755
Total assets................................................ 104,958 126,861
Long-term debt, including current maturities................ 22,902 --
Total shareholders' equity.................................. 47,755 92,560
</TABLE>
4
<PAGE> 8
RISK FACTORS
You should carefully consider the risks and uncertainties described below and
all other information contained in this prospectus before deciding to purchase
shares of our common stock.
RISKS PARTICULAR TO KRISPY KREME
OUR GROWTH STRATEGY DEPENDS ON OPENING NEW KRISPY KREME STORES. OUR ABILITY TO
EXPAND OUR STORE BASE IS INFLUENCED BY FACTORS BEYOND OUR CONTROL, WHICH MAY
SLOW STORE DEVELOPMENT AND IMPAIR OUR STRATEGY.
Our growth strategy includes, among other things, opening additional franchised
stores. The opening and success of these stores is dependent in part on a number
of factors, which neither we nor our franchisees can control. If we are not able
to address these factors successfully, we may not be able to expand at the rate
currently contemplated by our strategy. These factors are discussed below and in
"Business."
IF OUR FRANCHISEES CANNOT DEVELOP OR FINANCE NEW STORES OR BUILD THEM ON
SUITABLE SITES, OUR GROWTH AND SUCCESS WILL BE IMPEDED.
Our business is dependent upon our franchisees developing new franchised stores.
Our franchisees consist of associates who operate under our original franchising
program developed in the 1940s and area developers who operate under our
franchising program developed in the mid-1990s. We anticipate most new store
growth will be from area developers. Although associates have the exclusive
rights to develop their assigned geographic territories, most are not
contractually obligated to develop additional stores. Area developers are
generally required under development agreements they enter into with us to
develop a predetermined number of stores in their areas over the term of their
development agreements. Area developers may not have access to the financial
resources that they need to open the stores required by their development
schedules, or be able to find suitable sites to develop them on. They may not be
able to negotiate acceptable lease or purchase terms for the sites, obtain the
necessary permits and approvals or meet construction schedules. Any of these
problems could slow our growth, impair our strategy and reduce our franchise
revenues.
IF OUR FRANCHISEES CANNOT OPEN NEW STORES ON SCHEDULE, OUR GROWTH AND SUCCESS
WILL BE IMPEDED.
Delays in store openings could adversely affect our future operations by slowing
new store growth and reducing our franchise revenues. Most area development
agreements specify a schedule for opening stores in the territory covered by the
agreement. These schedules form the basis for our expectations regarding the
number and timing of new store openings. In the past, we have agreed to extend
or modify development schedules for certain area developers, and we may do so in
the future.
WE MAY BE HARMED BY ACTIONS TAKEN BY OUR FRANCHISEES THAT ARE OUTSIDE OF OUR
CONTROL.
Area developers and associates are generally independent contractors and are not
our employees. We provide training and support to area developers and
associates, but the quality of franchised store operations may be diminished by
any number of factors beyond our control. Consequently, area developers and
associates may not successfully operate stores in a manner consistent with our
standards and requirements, or may not hire and train qualified managers and
other store personnel. If they do not, our image and reputation may suffer, and
systemwide sales could decline.
5
<PAGE> 9
WE ARE THE EXCLUSIVE SUPPLIER OF DOUGHNUT MIXES, OTHER KEY INGREDIENTS AND
FLAVORS TO ALL KRISPY KREME STORES. IF WE HAVE ANY PROBLEMS SUPPLYING THESE
INGREDIENTS, OUR STORES' ABILITY TO MAKE DOUGHNUTS WILL BE NEGATIVELY AFFECTED.
We are the exclusive supplier of doughnut mixes and other key ingredients and
flavors to all of our company-owned and franchised stores. If our business
expands according to our growth strategy, we will require additional capacity to
produce our doughnut mixes and other ingredients. In addition, as our business
continues to expand on the West Coast and in other geographic areas which are
located at greater distances from our sole manufacturing facility in
Winston-Salem, North Carolina, we may incur greater costs in supplying our
doughnut mixes and other ingredients to these areas and may need to establish
one or more additional manufacturing plants. Although we have a backup source to
manufacture our doughnut mixes in the event of the loss of our Winston-Salem
plant, this facility does not regularly produce our doughnut mixes. Any
interruption of existing or planned production capacity at our manufacturing
plant could impede our ability or that of our franchisees to make doughnuts.
In addition, because we generally enter into long-term purchase agreements with
our suppliers, in the event that any of these relationships terminate
unexpectedly, even where we have multiple suppliers for the same ingredient, we
may not be able to obtain adequate quantities of the same high-quality
ingredient at competitive prices.
WE ARE THE ONLY MANUFACTURER OF OUR DOUGHNUTMAKING EQUIPMENT. IF WE HAVE ANY
PROBLEMS PRODUCING THIS EQUIPMENT, OUR STORES' ABILITY TO MAKE DOUGHNUTS WILL BE
NEGATIVELY AFFECTED.
Our Winston-Salem facility is the only location where we manufacture our custom
doughnutmaking equipment. Although we have limited backup sources for our
equipment, obtaining our equipment quickly in the event of the loss of our
Winston-Salem plant would be difficult, and would jeopardize our ability to
supply equipment to new stores or new parts for the maintenance of existing
equipment in established stores on a timely basis.
ANY INTERRUPTION IN THE DELIVERY OF GLAZE FLAVORING FROM OUR ONLY SUPPLIER COULD
IMPAIR OUR ABILITY TO MAKE OUR TOP PRODUCT.
We are dependent on a sole supplier for our glaze flavoring. Although we are in
the process of identifying an alternative source to produce our glaze flavoring,
we have not currently identified such a source, and any interruption in the
distribution from our current supplier could affect our ability to produce our
signature Hot Original Glazed.
WE ARE SUBJECT TO FRANCHISE LAWS AND REGULATIONS THAT GOVERN OUR STATUS AS A
FRANCHISOR AND REGULATE SOME ASPECTS OF OUR FRANCHISEE RELATIONSHIPS. OUR
ABILITY TO DEVELOP NEW FRANCHISED STORES AND TO ENFORCE CONTRACTUAL RIGHTS
AGAINST FRANCHISEES MAY BE ADVERSELY AFFECTED BY THESE LAWS AND REGULATIONS,
WHICH COULD CAUSE OUR FRANCHISE REVENUES TO DECLINE AND ADVERSELY AFFECT OUR
GROWTH STRATEGY.
Krispy Kreme, as a franchisor, is subject to both regulation by the Federal
Trade Commission and state laws regulating the offer and sale of franchises. Our
failure to obtain or maintain approvals to sell franchises would cause us to
lose franchise revenues. If we are unable to sell new franchises, our growth
strategy will be significantly harmed. In addition, state laws that regulate
substantive aspects of our relationships with franchisees may limit our ability
to terminate or otherwise resolve conflicts with our franchisees. Because we
plan to grow primarily through franchising, any impairment of our ability to
develop new franchised stores will negatively affect us and our growth strategy
more than if we planned to develop additional company-owned stores.
6
<PAGE> 10
OUR QUARTERLY RESULTS MAY FLUCTUATE AND COULD FALL BELOW EXPECTATIONS OF
SECURITIES ANALYSTS AND INVESTORS DUE TO SEASONALITY AND OTHER FACTORS,
RESULTING IN A DECLINE IN OUR STOCK PRICE.
Our quarterly and yearly results have varied in the past, and we believe that
our quarterly operating results will vary in the future. For this reason, you
should not rely upon our quarterly operating results as indications of future
performance. In some future periods, our operating results may fall below the
expectations of securities analysts and investors. This could cause the trading
price of our common stock to fall. Factors, such as seasonality, which may cause
our quarterly results to fluctuate are discussed in this section and in
"Business."
A NUMBER OF OUR DIRECTORS OWN AND SOME OFFICERS HAVE A FINANCIAL INTEREST IN
SOME OF OUR FRANCHISES. THE INTERESTS OF THESE INDIVIDUALS MAY THEREFORE BE
POTENTIALLY IN CONFLICT WITH OUR INTERESTS.
Some of our directors own and some officers have a financial interest in some of
our franchises. As directors and officers of Krispy Kreme, these individuals
influence the way our business is managed and the formulation of business
strategies. The interests of these individuals may therefore potentially be in
conflict with our interests. In addition, we have made guaranties, entered into
collateral repurchase agreements and provided other financial assistance to some
directors and one officer. You should read "Related Party Transactions" for
descriptions of these relationships.
OUR FAILURE OR INABILITY TO ENFORCE OUR TRADEMARKS COULD ADVERSELY AFFECT THE
VALUE OF OUR BRAND.
We own certain common law trademark rights and a number of federal trademark and
service mark registrations. We believe that our trademarks and other proprietary
rights are important to our success and our competitive position. We therefore
devote appropriate resources to the protection of our trademarks and proprietary
rights. The protective actions that we take, however, may not be enough to
prevent imitation by others which might harm our image or our brand position.
Although we are not aware of anyone else who is using "Krispy Kreme" or "Hot
Original Glazed" or "Hot Doughnuts Now," as a trademark or service mark, we are
aware that some businesses are using "Krispy" or a phonetic equivalent as part
of a trademark or service mark associated with retail doughnut stores. We
believe that, in the instances where "Krispy" or a phonetic equivalent is used,
we have superior rights and are taking the necessary legal actions. There may,
however, be similar uses we are unaware of which could arise from prior users.
These uses could limit our operations and possibly cause us to incur litigation
costs or pay damages or licensing fees to a prior user or registrant of similar
intellectual property.
RISKS RELATING TO THE FOOD SERVICE INDUSTRY
THE FOOD SERVICE INDUSTRY IS AFFECTED BY CONSUMER PREFERENCES AND PERCEPTIONS.
CHANGES IN THESE PREFERENCES AND PERCEPTIONS MAY LESSEN THE DEMAND FOR OUR
DOUGHNUTS, WHICH WOULD REDUCE SALES AND HARM OUR BUSINESS.
Food service businesses are often affected by changes in consumer tastes;
national, regional and local economic conditions; and demographic trends.
Individual store performance may be adversely affected by traffic patterns, the
cost and availability of labor, purchasing power, availability of products and
the type, number and location of competing stores. Our sales 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
7
<PAGE> 11
healthy. Moreover, because we are dependent on a single
product -- doughnuts -- if consumer demand for doughnuts should decrease, our
business would suffer more than if we had a more diversified menu, as many food
service businesses do.
THE FOOD SERVICE INDUSTRY IS AFFECTED BY LITIGATION AND PUBLICITY CONCERNING
FOOD QUALITY, HEALTH AND OTHER ISSUES, WHICH CAN CAUSE CUSTOMERS TO AVOID OUR
PRODUCTS AND RESULT IN LIABILITIES.
Food service businesses can be adversely affected by litigation and complaints
from customers or government authorities resulting from food quality, illness,
injury or other health concerns or operating issues stemming from one store or a
limited number of stores, including stores operated by our franchisees. Adverse
publicity about such allegations may negatively affect us and our franchisees,
regardless of whether the allegations are true, by discouraging customers from
buying our products. Because one of our competitive strengths is the taste and
quality of our doughnuts, adverse publicity relating to food quality or other
similar concerns affects us more than it would food service businesses that
compete primarily on other factors. We could also incur significant liabilities
if a lawsuit or claim results in a decision against us, or litigation costs
regardless of the result.
OUR SUCCESS DEPENDS ON OUR ABILITY TO COMPETE WITH MANY FOOD SERVICE BUSINESSES.
We compete with many well-established food service companies. At the retail
level, we compete with other doughnut retailers and bakeries, specialty coffee
retailers, bagel shops, fast-food restaurants, delicatessens, take-out food
service companies, supermarkets and convenience stores. At the wholesale level,
we compete primarily with grocery store bakeries, packaged snack foods and
vending machine dispensers of snack foods. Aggressive pricing by our competitors
or the entrance of new competitors into our markets could reduce our stores'
sales and profit margins. Moreover, many of our competitors are less dependent
on a single, primary product than we are.
Many of our competitors or potential competitors have substantially greater
financial and other resources than us which may allow them to react to changes
in pricing, marketing and the quick service restaurant industry better than us.
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.
RISKS RELATING TO THE OFFERING
WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING AND
MAY NOT USE THEM EFFECTIVELY.
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds we will receive from this offering. We
currently intend to use the net proceeds from the offering as described under
"Use of Proceeds" in this prospectus, but our management will have broad
discretion in the use of the net proceeds. If our management fails to apply
these funds effectively, we may not be successful in our efforts to grow our
business and revenues.
8
<PAGE> 12
OUR CHARTER, BYLAWS AND SHAREHOLDER RIGHTS AGREEMENT CONTAIN ANTI-TAKEOVER
PROVISIONS THAT MAY MAKE IT MORE DIFFICULT OR EXPENSIVE TO ACQUIRE US IN THE
FUTURE OR MAY NEGATIVELY AFFECT OUR STOCK PRICE.
Our articles of incorporation, bylaws and shareholder rights agreement contain
several provisions that may make it more difficult for a third party to acquire
control of us without the approval of our board of directors. These provisions
may make it more difficult or expensive for a third party to acquire a majority
of our outstanding voting common stock. They may also delay, prevent or deter a
merger, acquisition, tender offer, proxy contest or other transaction that might
otherwise result in our shareholders receiving a premium over the market price
for their common stock. Our stock price could also be negatively affected. See
"Description of Capital Stock -- Anti-Takeover Provisions of Krispy Kreme's
Articles of Incorporation, Bylaws and Shareholder Rights Plan."
9.3 MILLION, OR 74.8%, OF OUR TOTAL OUTSTANDING SHARES ARE RESTRICTED FROM
IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE FUTURE, WHICH COULD
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
After this offering, we will have outstanding approximately 12.5 million shares
of common stock, or 12.9 million shares if the underwriters fully exercise their
over-allotment option. This includes the 3 million shares that we are selling in
this offering, which may be resold in the public market immediately, unless held
by one of our affiliates or purchased by certain participants in our directed
share program, and the 144,737 shares to be contributed to our stock bonus
plans. The remaining 74.8%, or 9.3 million shares, of our total outstanding
shares will become available for resale in the public market one year after this
offering. However, it is possible that these shares may be sold sooner if they
are registered under the Securities Act of 1933. For a more detailed
description, see "Shares Eligible for Future Sale."
As restrictions on resale end, the prevailing market price of our common stock
could drop significantly if the holders of these restricted shares sell them or
are perceived by the market as intending to sell them. Our ability to raise
additional capital through future issuances of equity securities could also be
impaired.
As soon as practicable after this offering, we intend to register for resale
2,153,000 shares of common stock reserved under our stock option plan, of which
options exercisable into 1,821,000 shares of common stock were outstanding as of
January 30, 2000. Options for 91,000 shares were exercisable as of that date.
OUR EXISTING SHAREHOLDERS WILL CONTINUE TO CONTROL US AFTER THIS OFFERING, AND
THEY MAY MAKE DECISIONS WITH WHICH YOU MAY DISAGREE.
After this offering, our existing shareholders will beneficially hold
approximately 74.8% of our outstanding common stock, or approximately 72.2% if
the underwriters' over-allotment option is exercised in full. Our executive
officers and directors as a group -- currently 16 persons -- will beneficially
hold approximately 41.7% of our outstanding common stock after this offering,
including currently exercisable stock options, or 40.2% if the over-allotment
option is fully exercised. Consequently, our existing shareholders will continue
to control us after this offering is completed, and our officers and directors
will continue to be significant holders. Through their voting power, these
persons may make decisions regarding Krispy Kreme with which you may disagree.
9
<PAGE> 13
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 $11.50 less than the initial
public offering price, assuming an initial public offering price of $19.00 per
share, which is the mid-point of the range shown on the cover page of this
prospectus. Future issuances of our common stock, including issuances in
connection with stock option exercises, could cause further dilution.
10
<PAGE> 14
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations which
are characterized as forward-looking statements. Forward-looking statements are
based on management's beliefs, assumptions and expectations of our future
economic performance, taking into account the information currently available to
them. These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to differ materially from the expectations of
future results, performance or financial condition we express or imply in any
forward-looking statements. Factors that could contribute to these differences
include those discussed in "Risk Factors" and in other sections of this
prospectus. The words believe, may, will, should, anticipate, estimate, expect,
intend, objective, seek, strive or similar words, or the negatives of these
words, identify forward-looking statements. We qualify any forward-looking
statements entirely by these cautionary factors.
11
<PAGE> 15
USE OF PROCEEDS
Krispy Kreme is offering for sale 3,000,000 shares of common stock by this
prospectus. Based on an assumed initial public offering price of $19.00 per
share, the mid-point of the range shown on the cover page of this prospectus, we
estimate that our net proceeds from the sale of these shares will be
approximately $51.8 million after deducting the underwriting discounts and
estimated offering expenses. Our estimated net proceeds will be approximately
$59.8 million if the underwriters exercise their option to purchase an
additional 450,000 shares from us to cover over-allotments.
We expect to use our net proceeds for the following purposes in the following
approximate amounts:
- Repayment of $30 million in borrowings under our loan agreement, which we
anticipate will be outstanding when we consummate this offering
- A distribution of $7 million to our existing shareholders as part of our
pre-offering corporate reorganization
- $10 million for remodeling and relocation of selected older company-owned
stores
The remainder will be used for:
- 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:
- A variable prime rate method
- A variable LIBOR method
- 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
January 30, 2000, our revolving line of credit and term loan both bore interest
rates of 6.823%.
As of January 30, 2000, $3.6 million was outstanding under the term loan and
$19.3 million under the revolving line of credit. On January 31, 2000, we
repurchased the New York City territory from an area developer for $6.9 million
using funds available under our line of credit. We intend to refranchise this
territory to a new area developer, but expect to retain a minority interest. If
we do not prepay it, indebtedness under our revolving credit facility matures in
July 2002, and under our term loan, in June 2001.
Pending application of the net proceeds as described above, we will invest the
net proceeds in short-term, interest-bearing investment grade or government
securities.
12
<PAGE> 16
DIVIDEND POLICY
We intend to retain our earnings to finance the expansion of our business and do
not anticipate paying cash dividends in the foreseeable future. Any future
determination regarding cash dividend payments will be made by our board of
directors and depends upon the following factors:
<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
------------------------------------------------------
FEBRUARY 1, 1998 JANUARY 31, 1999 JANUARY 30, 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total cash dividends declared.................. $1,179,562 $1,517,787 $ --
Per share...................................... $ 0.16 $ 0.16 $ --
</TABLE>
13
<PAGE> 17
CAPITALIZATION
The following table shows, as of January 30, 2000, our cash and cash
equivalents, short-term debt and capitalization, both actual and as adjusted.
The adjustment gives effect to:
- The merger in connection with our holding company formation
- The sale of 3,000,000 shares of common stock in this offering, assuming
an initial public offering price of $19.00 per share, which is the
mid-point of the range shown on the cover page of this prospectus
- The application of a portion of the estimated net proceeds from that
sale, after deducting underwriting discounts and estimated offering
expenses, to repay bank debt and pay a distribution to our existing
shareholders
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>
---------------------
JANUARY 30, 2000
---------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
In thousands, except share data
Cash and cash equivalents................................... $ 3,183 $25,086
======= =======
Short-term debt:
Current maturities of long-term debt...................... $ 2,400 $ --
======= =======
Long-term debt, excluding current maturities................ $20,502 $ --
------- -------
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized after the merger; none issued and
outstanding............................................ -- --
Common stock, $10.00 par value; 1,000,000 shares
authorized before the merger; 467,011 and 0 shares
issued and outstanding................................. 4,670 --
Common stock, no par value; 100,000,000 shares authorized
after the merger; 0 and 12,484,957 shares issued and
outstanding............................................ --
Paid-in capital........................................... 10,805 67,285
Notes receivable.......................................... (2,547) (2,547)
Retained earnings......................................... 34,827 27,822
------- -------
Total shareholders' equity............................. 47,755 92,560
------- -------
Total capitalization................................... $68,257 $92,560
======= =======
</TABLE>
The table above excludes 1,821,000 shares of common stock issuable upon the
exercise of stock options outstanding under our stock option plan on January 30,
2000, of which 91,000 were exercisable, and includes 144,737 shares to be
contributed to our stock bonus plans contemporaneously with this offering.
14
<PAGE> 18
DILUTION
Our net tangible book value as of January 30, 2000 was $47,755,000, or $5.11 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
January 30, 2000 would have been $92,560,000, or $7.50 per share, after giving
effect to the sale of 3,000,000 shares of common stock offered by this
prospectus at an assumed initial offering price of $19.00 per share, the
midpoint of the range shown on the cover page of this prospectus, and after
deducting estimated underwriting discounts and estimated offering expenses and
the distribution to be paid to existing shareholders as part of the corporate
reorganization in connection with this offering. This represents an immediate
increase in the net tangible book value of $2.39 per share to existing
shareholders, in addition to the cash distribution they will receive, and an
immediate dilution of $11.50 per share to new investors. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
--------------
Assumed initial public offering price....................... $19.00
Net tangible book value per share as of January 30,
2000................................................... $5.11
Increase attributable to the sale of shares offered
hereby................................................. $2.39
-----
Adjusted net tangible book value after this offering........ $ 7.50
------
Dilution in the net tangible book value to new
investors.............................................. $11.50
======
</TABLE>
The following table shows, as of January 30, 2000, the number of shares of
common stock purchased from us, the total consideration paid to us and the
average price per share paid to us by existing shareholders, reduced to reflect
the cash distribution the existing shareholders will receive, and by new
investors in this offering at an assumed initial offering price of $19.00 per
share, the midpoint of the range shown on the cover page of this prospectus:
<TABLE>
<CAPTION>
------------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................... 9,340,220 75.7% $15,474,673 21.4% $ 1.66
New investors........................... 3,000,000 24.3 57,000,000 78.6 $19.00
---------- ----- ----------- -----
Total......................... 12,340,220 100.0% $72,474,673 100.0%
========== ===== =========== =====
</TABLE>
All information above reflects an exchange ratio in the merger in connection
with our holding company formation of 20-for-one, which will have the effect of
a 20-for-one stock split, excludes 144,737 shares to be contributed to our stock
bonus plans contemporaneously with this offering and assumes no exercise of
stock options outstanding as of January 30, 2000 under our stock option plan. If
any of the options are exercised, there will be further dilution to new
investors.
15
<PAGE> 19
SELECTED FINANCIAL DATA
The following table shows selected financial data for Krispy Kreme. The selected
historical statement of operations data for each of the years ended, and the
selected historical balance sheet data as of January 28, 1996, February 2, 1997,
February 1, 1998, January 31, 1999 and January 30, 2000 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.
Per share amounts reflect an exchange ratio in the merger in connection with our
holding company formation of 20-for-one, which will have the effect of a
20-for-one stock split. Systemwide sales includes the sales of both our
company-owned and franchised stores and excludes the sales of our Support
Operations business segment. Our consolidated financial statements appearing
elsewhere in this prospectus exclude franchised store sales and include
royalties and fees received from our franchisees.
You should read the following selected financial data in conjunction with "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the consolidated financial statements and accompanying
notes and the other financial data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED
-------------------------------------------------------------------
JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, JANUARY 30,
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
In thousands, except per share data
STATEMENT OF OPERATIONS DATA:
Total revenues........................................... $118,550 $132,614 $158,743 $180,880 $220,243
Operating expenses....................................... 104,717 116,658 140,207 159,941 190,003
General and administrative expenses...................... 6,804 7,630 9,530 10,897 14,856
Depreciation and amortization expenses................... 2,799 3,189 3,586 4,278 4,546
Provision for restructuring.............................. 3,000 -- -- 9,466 --
-------- -------- -------- -------- --------
Income (loss) from operations............................ 1,230 5,137 5,420 (3,702) 10,838
Interest expense, net, and other......................... 930 1,091 895 1,577 1,232
-------- -------- -------- -------- --------
Income (loss) before income taxes........................ 300 4,046 4,525 (5,279) 9,606
Provision (benefit) for income taxes..................... 120 1,619 1,811 (2,112) 3,650
-------- -------- -------- -------- --------
Net income (loss)........................................ $ 180 $ 2,427 $ 2,714 $ (3,167) $ 5,956
======== ======== ======== ======== ========
Net income (loss) per share:
Basic.................................................. $ .02 $ .33 $ .37 $ (.38) $ .64
Diluted................................................ .02 .33 .37 (.38) $ .61
Shares used in calculation of net income (loss) per
share:
Basic.................................................. 7,284 7,284 7,284 8,249 9,340
Diluted................................................ 7,284 7,284 7,284 8,249 9,820
Cash dividends declared per common share................. $ .16 $ .16 $ .16 $ .16 $ --
In thousands, except store numbers
OPERATING DATA:
Systemwide sales......................................... $151,693 $167,592 $203,439 $240,316 $318,854
Number of stores at end of period:
Company-owned.......................................... 53 61 58 61 58
Franchised............................................. 42 55 62 70 86
-------- -------- -------- -------- --------
Systemwide............................................. 95 116 120 131 144
======== ======== ======== ======== ========
Average weekly sales per store:
Company-owned.......................................... $ 39 $ 39 $ 42 $ 47 $ 54
Franchised............................................. 23 22 23 28 38
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------
AS OF
-------------------------------------------------------------------
JANUARY 28, FEBRUARY 2, FEBRUARY 1, JANUARY 31, JANUARY 30,
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
In thousands
BALANCE SHEET DATA:
Working capital.......................................... $ 5,742 $ 10,148 $ 9,151 $ 8,387 $ 11,452
Total assets............................................. 72,888 78,005 81,463 93,312 104,958
Long-term debt, including current maturities............. 18,311 20,187 20,870 21,020 22,902
Total shareholders' equity............................... 35,033 36,516 38,265 42,247 47,755
</TABLE>
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read together with the financial statements and the accompanying notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in those forward-looking statements as a
result of certain factors, including, but not limited to, those described under
"Risk Factors" and included in other portions of the prospectus.
COMPANY OVERVIEW AND INDUSTRY OUTLOOK
Our principal business, which began in 1937, is owning and franchising Krispy
Kreme doughnut stores where we make and sell over 20 varieties of premium
quality doughnuts, including our Hot Original Glazed. Each of our stores is a
doughnut factory with the capacity to produce from 2,400 dozen to over 6,000
dozen doughnuts daily. Consequently, each store has significant fixed or semi-
fixed costs, and margins and profitability are significantly impacted by
doughnut production volume and sales. Our doughnut stores are versatile in that
most can support multiple sales channels to more fully utilize production
capacity. These sales channels are comprised of:
- ON-PREMISES SALES. Sales to customers visiting our stores, including the
drive-through windows, along with deeply discounted sales to community
organizations that in turn sell our products for fundraising purposes.
- OFF-PREMISES SALES. Daily sales of fresh doughnuts on a branded,
unbranded and private label basis to convenience and grocery stores and
select co-branding customers. Doughnuts are sold to these customers on
trays for display and sale in glass-enclosed cases and in packages for
display and sale on both stand-alone display units and on our customers'
shelves. "Branded" refers to products sold bearing the Krispy Kreme brand
name. "Unbranded" products are sold unpackaged from the retailer's
display case. "Private label" products carry the retailer's brand name or
some other non-Krispy Kreme brand.
In addition to our retail stores, we are vertically integrated. Our Support
Operations business unit produces doughnut mixes and manufactures our
doughnutmaking equipment, which all of our stores are required to purchase.
Additionally, it operates a distribution center that provides Krispy Kreme
stores with essentially all supplies for the critical areas of their business.
This business unit is volume-driven, and its economics are enhanced by the
opening of new stores. Our vertical integration allows us to:
- Maintain the consistency and quality of our products throughout our
system
- Utilize volume buying power which helps lower the cost of supplies to
each of our stores
- Enhance our profitability
We expect doughnut industry sales to continue growing. We believe growth in the
fragmented doughnut market will be aided by a variety of factors, including a
shift from food consumed at home to food consumed away from home, increased
snack food consumption and increased doughnut sales through in-store bakeries.
We intend to expand our concept primarily through opening new franchise stores
in territories across the continental United States. We also intend to enter
into joint ventures with some of our franchisees. As of January 30, 2000, there
were a total of 144 Krispy Kreme stores nationwide consisting of 58
company-owned and 86 franchised stores. In fiscal 2001, we anticipate opening
approximately 22 new stores under existing agreements, all of which are expected
to be franchise
17
<PAGE> 21
stores. Additionally, our franchisees are contractually obligated to open over
100 new stores in the period fiscal 2002 through fiscal 2005.
As we expand the Krispy Kreme concept, we will incur infrastructure costs in the
form of additional personnel to support the expansion, and additional facilities
costs to provide mixes, equipment and other items necessary to operate the
various new stores. In the course of building this infrastructure, we may incur
unplanned costs which could negatively impact our operating results.
RESULTS OF OPERATIONS
In order to facilitate an understanding of the results of operations for each
period presented, we have included a general overview along with an analysis of
business segment activities. In addition to this analysis, refer to Note 1,
Nature of Business and Significant Accounting Policies, in our audited
consolidated financial statements. A guide to the discussion for each period is
presented below.
OVERVIEW. Outlines information on total systemwide sales and systemwide
comparable store sales. Systemwide sales includes the sales of both our
company-owned and franchised stores and excludes the sales of our Support
Operations business segment. Our consolidated financial statements appearing
elsewhere in this prospectus exclude franchised store sales and include
royalties and fees received from our franchisees. We believe systemwide sales
data is significant because it shows the overall penetration of our brand,
consumer demand for our products and the correlation between systemwide sales
and our total revenues. A store is added to our comparable store base in its
nineteenth month of operation. A summary discussion of our consolidated results
is also presented.
SEGMENT RESULTS. In accordance with Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
we have three reportable segments. A description of each of the segments
follows.
- COMPANY STORE OPERATIONS. Represents the results of our company-owned
stores. Company stores make and sell doughnuts and complementary products
through the sales channels discussed above. Expenses for this business
unit include store level expenses along with direct general and
administrative expenses.
- FRANCHISE OPERATIONS. Represents the results of our franchise program.
We have two franchise programs: (1) the associate program, which is our
original franchising program developed in the 1940s, and (2) the area
developer program, which was developed in the mid-1990s. Associates pay
royalties of 3.0% of on-premises sales and 1.0% of all other sales, with
the exception of private label sales, for which they pay no royalties.
Area developers pay royalties of 4.5% of all sales, contribute 1.0% of
all sales to our national advertising fund and pay franchise fees ranging
from $20,000 to $40,000 per store. See "Business -- Store Ownership" for
further information on our franchising programs. Expenses for this
business segment include costs incurred to recruit new franchisees and to
monitor and aid in the performance of these stores and direct general and
administrative expenses.
- SUPPORT OPERATIONS. Represents the results of our Support Operations
business unit, located in Winston-Salem, North Carolina. This business
unit buys ingredients used to produce doughnut mixes and manufactures
doughnutmaking equipment which all of our stores are required to
purchase. Additionally, this business unit purchases and sells
essentially all supplies necessary to operate a Krispy Kreme store,
including all food ingredients, juices, Krispy Kreme coffee, signage,
display cases, uniforms and other items.
18
<PAGE> 22
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.
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 1998 (52 weeks ended February 1, 1998), fiscal 1999 (52 weeks
ended January 31, 1999) and fiscal 2000 (52 weeks ended January 30, 2000)
expressed as a percentage of total revenues. Certain operating data are also
shown for the same periods.
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................................. 100.0% 100.0% 100.0%
Operating expenses.......................................... 88.3 88.4 86.3
General and administrative expenses......................... 6.0 6.0 6.7
Depreciation and amortization expenses...................... 2.3 2.4 2.1
Provision for restructuring................................. -- 5.2 --
-------- -------- --------
Income (loss) from operations............................... 3.4 (2.0) 4.9
Interest expense, net, and other............................ 0.6 1.0 0.5
-------- -------- --------
Income (loss) before income taxes........................... 2.8 (3.0) 4.4
Provision (benefit) for income taxes........................ 1.1 (1.2) 1.7
-------- -------- --------
Net income (loss)......................................... 1.7% (1.8)% 2.7%
======== ======== ========
Dollars in thousands
OPERATING DATA:
Systemwide sales............................................ $203,439 $240,316 $318,854
Increase in comparable store sales:
Company-owned............................................. 11.5% 11.1% 12.0%
Systemwide................................................ 12.7% 9.7% 14.1%
</TABLE>
19
<PAGE> 23
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 11 to our audited consolidated financial statements.
Operating expenses exclude depreciation and amortization expenses.
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
In thousands
REVENUES BY BUSINESS SEGMENT:
Company Store Operations.................................... $132,826 $145,251 $164,230
Franchise Operations........................................ 2,285 3,236 5,529
Support Operations.......................................... 23,632 32,393 50,484
-------- -------- --------
Total revenues............................................ $158,743 $180,880 $220,243
======== ======== ========
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations.................................... $117,243 $129,349 $142,925
Franchise Operations........................................ 2,368 2,731 4,012
Support Operations.......................................... 20,596 27,861 43,066
-------- -------- --------
Total operating expenses.................................. $140,207 $159,941 $190,003
======== ======== ========
</TABLE>
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
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES BY BUSINESS SEGMENT:
Company Store Operations.................................... 83.7% 80.3% 74.6%
Franchise Operations........................................ 1.4 1.8 2.5
Support Operations.......................................... 14.9 17.9 22.9
----- ----- -----
Total revenues............................................ 100.0% 100.0% 100.0%
===== ===== =====
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations.................................... 88.3% 89.1% 87.0%
Franchise Operations........................................ 103.6% 84.4% 72.6%
Support Operations.......................................... 87.2% 86.0% 85.3%
Total operating expenses.................................... 88.3% 88.4% 86.3%
</TABLE>
20
<PAGE> 24
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 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
== == ===
YEAR ENDED JANUARY 30, 2000
Beginning count............................................. 61 70 131
Opened...................................................... 2 19 21
Closed...................................................... (5) (3) (8)
Transferred................................................. -- -- --
-- -- ---
Ending count.............................................. 58 86 144
== == ===
</TABLE>
YEAR ENDED JANUARY 30, 2000 COMPARED WITH YEAR ENDED JANUARY 31, 1999
Overview
Systemwide sales increased to $318.9 million in fiscal 2000 from $240.3 million
in fiscal 1999, an increase of 32.7%. This increase was comprised of company
store sales increases of $19.0 million and franchise store sales increases of
$59.6 million. Systemwide comparable store sales increased 14.1%. The overall
systemwide sales increase was driven by comparable store sales improvement and
the opening of new stores.
Total company revenues increased to $220.2 million in fiscal 2000 from $180.9
million in fiscal 1999, an increase of 21.7%. This increase was comprised of
Company Store Operations revenues increases of $19.0 million, Franchise
Operations revenues increases of $2.3 million and Support Operations revenues
increases of $18.0 million. Net income increased to $6.0 million in fiscal 2000
from a loss of $3.2 million in fiscal 1999. Fiscal 1999 included a provision for
restructuring and store closings of $9.5 million. Absent this provision, net
income in fiscal 2000 compared to fiscal 1999 would have been $6.0 million, or
2.7% of total revenues, versus $2.5 million, or 1.4% of total revenues.
Company Store Operations
Company Store Operations revenues. Company Store Operations revenues increased
to $164.2 million in fiscal 2000 from $145.3 million in fiscal 1999, an increase
of 13.1%. Comparable store sales increased by 12.0%. The revenue growth was
primarily due to strong growth in sales from both our on-premises and
off-premises sales channels. On-premises sales increased approximately $3.6
million and off-premises sales increased approximately $15.3 million.
On-premises sales grew principally as a result of more customer visits and an
increase in brand awareness generated by
21
<PAGE> 25
national publicity and our national store expansion. Our company stores
continued to benefit from an increase in the number of stores we serve via our
off-premises sales programs. The revenue increase in off-premises sales is due
primarily to the addition of new convenience store outlets.
Company Store Operations operating expenses. Company Store Operations operating
expenses increased to $142.9 million in fiscal 2000 from $129.3 million in
fiscal 1999, an increase of 10.5%. Company Store Operations operating expenses
as a percentage of Company Store Operations revenues were 87.0% in fiscal 2000
compared with 89.1% in fiscal 1999. The decrease in Company Store Operations
operating expenses as a percentage of revenues was due to increased operating
efficiencies resulting from increased sales levels at our stores. These
additional sales have utilized excess production capacity thereby enhancing the
stores' profitability.
We constantly evaluate our store base, not only with respect to our stores'
financial and operational performance, but also with respect to the brand image
being portrayed by each store and how well each store meets our customers'
needs. As a result of this review, we make provisions to cover closing or
impairment costs for stores that perform poorly, and for older stores that need
to be closed and relocated. In fiscal 2000 we recorded a provision of $1.1
million to cover the closing of two older stores that will be replaced on their
existing sites in fiscal 2001. In fiscal 1999, we recorded a charge of $2.3
million as follows: $417,000 related to the write-off of unamortized leasehold
improvements for two stores which were closed in the first quarter of fiscal
2000; $283,000 in remaining lease costs on a potential store site that will not
be used; and $1.6 million related to the write-down of building and equipment of
a facility that will remain open but whose carrying value was determined not to
be fully recoverable.
Franchise Operations
Franchise Operations revenues. Franchise Operations revenues increased to $5.5
million in fiscal 2000 from $3.2 million in fiscal 1999, an increase of 70.9%.
The growth in revenue was primarily due to the opening of 19 franchise stores in
fiscal 2000 and the impact of 14 franchise stores opened in fiscal 1999 being
open for the full year in fiscal 2000. Many of these stores have had company
record-setting opening week on-premises sales levels and their on-premises sales
have remained strong in the months following their openings.
Franchise Operations operating expenses. Franchise Operations operating
expenses increased to $4.0 million in fiscal 2000 from $2.7 million in fiscal
1999, an increase of 46.9%. Franchise Operations operating expenses as a
percentage of Franchise Operations revenues were 72.6% in fiscal 2000 compared
with 84.4% in fiscal 1999. The decrease in Franchise Operations operating
expenses as a percentage of revenues was due to capitalizing upon the
infrastructure we have built in preparing for our expansion. In prior years, we
hired and trained personnel to oversee the expansion of our concept across the
country. In addition to our management training program, they received field
training primarily consisting of working with and learning from existing
personnel who were qualified to oversee store operations. As these personnel
have successfully completed their training, we have been able to open additional
stores without incurring significant incremental personnel costs.
Support Operations
Support Operations revenues. Support Operations sales to franchise stores
increased to $50.5 million in fiscal 2000 from $32.4 million in fiscal 1999, an
increase of 55.8%. The primary reason for the increase in revenues was the
opening of new franchise stores in fiscal 2000, the full-year impact of stores
opened in fiscal 1999 and comparable store sales increases. Increased doughnut
sales through both the on-premises and off-premises sales channels by franchise
stores translated into increased revenues for Support Operations from sales of
mixes, sugar, shortening and other
22
<PAGE> 26
supplies. Also, each of these new stores is required to purchase doughnutmaking
equipment and other peripheral equipment from Support Operations, thereby
enhancing Support Operations sales. An increase in doughnutmaking equipment
prices of approximately 20.0% also contributed.
Support Operations operating expenses. Support Operations operating expenses
increased to $43.1 million in fiscal 2000 from $27.9 million in fiscal 1999, an
increase of 54.6%. Support Operations operating expenses as a percentage of
Support Operations revenues were 85.3% in fiscal 2000 compared with 86.0% in
fiscal 1999. The decrease in Support Operations operating expenses as a
percentage of revenues was due to the increased capacity utilization and
resulting economies of scale of the mix and equipment manufacturing operations
attributable to the increased volume in the facilities. Favorable commodities
prices also contributed.
Other
General and administrative expenses. General and administrative expenses
increased to $14.9 million in fiscal 2000 from $10.9 million in fiscal 1999, an
increase of 36.3%. General and administrative expenses as a percentage of total
revenues were 6.7% in fiscal 2000 compared with 6.0% in fiscal 1999. The primary
reason for the increase in these expenses was our continued investment in
infrastructure to support our expansion. The investment in infrastructure
consisted primarily of the hiring of new personnel in corporate support
departments. Costs incurred in fiscal 2000 for these personnel, including
salaries, benefits and the implementation of our stock bonus plans, increased
approximately $3.3 million.
Depreciation and amortization expenses. Depreciation and amortization expenses
increased to $4.5 million in fiscal 2000 from $4.3 million in fiscal 1999, an
increase of 6.3%. Depreciation and amortization expenses as a percentage of
total revenues were 2.1% in fiscal 2000 compared with 2.4% in fiscal 1999.
Depreciation and amortization expenses increased due to capital asset additions.
Interest expense. Interest expense of approximately $1.5 million in fiscal 2000
was relatively consistent with interest expense in fiscal 1999. Borrowing
amounts were slightly higher in fiscal 2000; however, interest rates were lower
in fiscal 2000 compared with fiscal 1999.
Provision for income taxes. The provision for income taxes is based on the
effective tax rate applied to the respective fiscal year's pre-tax income. The
provision for income taxes was $3.7 million in fiscal 2000 representing a 38.0%
effective rate. The benefit in fiscal 1999 was $2.1 million representing an
effective rate of 40.3%.
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 increased 9.7%. The overall
systemwide sales increase was driven by comparable store sales improvement and
the opening of new stores.
Total company revenues increased to $180.9 million in fiscal 1999 from $158.7
million in fiscal 1998, an increase of 13.9%. This increase was comprised of
Company Store Operations revenues increases of $12.4 million, Franchise
Operations revenues increases of $951,000 and Support Operations revenues
increases of $8.8 million. For fiscal 1999, the net loss was $3.2 million
compared with net income of $2.7 million for fiscal 1998. The net loss in fiscal
1999 was due to a provision for restructuring of $9.5 million, discussed below.
Absent this provision, net income for
23
<PAGE> 27
fiscal 1999 would have been $2.5 million, or 1.4% of total revenues, compared
with $2.7 million, or 1.7% of total revenues, in fiscal 1998.
Company Store Operations
Company Store Operations revenues. Company Store Operations revenues increased
to $145.3 million in fiscal 1999 from $132.8 million in fiscal 1998, an increase
of 9.4%. Comparable store sales increased by 11.1%. The revenue growth was
primarily driven by an increase in the number of off-premises outlets that we
serve. Our sales efforts were particularly directed at convenience stores.
Company Store Operations operating expenses. Company Store Operations operating
expenses increased to $129.3 million in fiscal 1999 from $117.2 million in
fiscal 1998, an increase of 10.3%. Company Store Operations operating expenses
as a percentage of Company Store Operations revenues were 89.1% in fiscal 1999
compared with 88.3% in fiscal 1998. The increase in Company Store Operations
operating expenses as a percentage of revenues was primarily due to a charge of
$2.3 million for store closings and impairment costs in the normal course of
business. The charge consisted of $417,000 related to the write-off of
unamortized leasehold improvements for two stores to be closed and the accrual
of $283,000 in remaining lease costs on a site that will not be used. The
remaining $1.6 million related to the write-down of building and equipment of a
facility that will remain open but whose carrying value we determined was not
fully recoverable.
The impact of this charge was offset by increased operating efficiencies
resulting from increases in the off-premises sales channels discussed above. The
stores' operations benefited from the utilization of excess production capacity.
Additionally, we converted our direct store delivery, or DSD, route system for
packaged products from a daily delivery system to an every other day system
which reduced our route delivery costs.
Franchise Operations
Franchise Operations revenues. Franchise Operations revenues increased to $3.2
million in fiscal 1999 from $2.3 million in fiscal 1998, an increase of 41.6%.
This growth in revenue was primarily due to the opening of 14 new franchise
stores in fiscal 1999 along with the seven franchise stores opened in fiscal
1998 having a full year of operating results in fiscal 1999.
Franchise Operations operating expenses. Franchise Operations operating
expenses increased to $2.7 million in fiscal 1999 from $2.4 million in fiscal
1998, an increase of 15.3%. Franchise Operations operating expenses as a
percentage of Franchise Operations revenues were 84.4% in fiscal 1999 compared
with 103.6% in fiscal 1998. The decrease in Franchise Operations operating
expenses as a percentage of revenues was due to capitalizing upon the
infrastructure we put in place in preparation for additional store openings. In
prior years, we began to hire and train personnel to oversee the expansion of
our concept across the country. Their training consisted primarily of working
with and learning from existing personnel who were qualified to oversee store
operations. As these personnel have successfully completed their training, we
have been able to open additional stores without incurring significant
incremental personnel costs.
Support Operations
Support Operations revenues. Support Operations sales to franchise stores
increased to $32.4 million in fiscal 1999 from $23.6 million in fiscal 1998, an
increase of 37.1%. Support Operations revenues were impacted primarily by the
opening of new stores in fiscal 1999 and a full year of operations for those
franchise stores opened in fiscal 1998. Each of these stores was supplied with
doughnut manufacturing equipment and other equipment necessary to open each
store thereby enhancing Support Operations sales. Additionally, a few existing
franchise stores began to
24
<PAGE> 28
implement off-premises sales programs, thereby increasing the amount of mixes
and other supplies they purchased from Support Operations.
Support Operations operating expenses. Support Operations operating expenses
increased to $27.9 million in fiscal 1999 from $20.6 million in fiscal 1998, an
increase of 35.3%. Support Operations operating expenses as a percentage of
Support Operations revenues was 86.0% in fiscal 1999 compared with 87.2% in
fiscal 1998. The decrease in Support Operations operating expenses as a
percentage of revenues was primarily due to increased sales volumes utilizing
existing capacity in our mix, equipment and distribution operations. Increased
freight costs of approximately $830,000 incurred in delivering products to new
stores opened outside our traditional Southeastern markets partially offset
these efficiency gains.
Other
General and administrative expenses. General and administrative expenses
increased to $10.9 million in fiscal 1999 from $9.5 million in fiscal 1998, an
increase of 14.3%. General and administrative expenses as a percentage of total
revenues were 6.0% in both fiscal 1999 and fiscal 1998. The primary reason for
the increase in the dollar amount of these expenses was our continued investment
in infrastructure to support growth and enhance our profitability. The
investment in infrastructure consisted primarily of the hiring of new personnel
in corporate support departments. Costs incurred in fiscal 1999 for these
personnel, including salaries and benefits, increased approximately $700,000
over fiscal 1998.
Depreciation and amortization expenses. Depreciation and amortization expenses
increased to $4.3 million in fiscal 1999 from $3.6 million in fiscal 1998, an
increase of 19.3%. Depreciation and amortization expenses as a percentage of
total revenues were 2.4% in fiscal 1999 compared with 2.3% in fiscal 1998.
Depreciation and amortization expenses increased due to capital asset additions.
Provision for restructuring. In late fiscal 1999, the board of directors
approved a restructuring plan for assets and operations determined either to be
inconsistent with our strategy or whose carrying value may not be fully
recoverable. Of the total restructuring and impairment charge of $9.5 million,
$7.8 million relates to the closing of five double drive-through company-owned
stores and the write-down of five other inactive double drive-through stores and
sites, including provisions to write-down associated land, building and
equipment costs to estimated net realizable value and to cover operating lease
commitments associated with these stores. An additional $700,000 relates to
future lease payments on double drive-through buildings subleased to
franchisees. We determined that the double drive-through stores were
inconsistent with our strategy as the space constraints in these stores did not
allow them to efficiently execute both on-premises and off-premises sales and
these facilities were not producing adequate levels of brand value for the
company. Also included in the charge is a $1.0 million write-down of a facility
that produces fried pies and honey buns. These products are not expected to form
a core part of our expansion strategy.
Of the total provision, $5.6 million represents a charge for future cash
outflows, primarily in the form of lease payments on land and buildings, while
$3.6 million represents a write-down or write-off of land and buildings. Future
cash outflows will be paid over each remaining lease term and we believe that
cash flow from operations will be adequate to fund these cash needs. These
stores are scheduled to be closed by the end of fiscal year 2000. No severance
costs were included as a part of the restructuring provision. We anticipate
future benefits as a result of avoiding the losses incurred each year by the
closed stores, reduced depreciation costs on those assets which we determined
were impaired and a write-off of the carrying value of three double
drive-through
25
<PAGE> 29
buildings which had never been placed in service. As of January 30, 2000, there
have been no material changes in the restructuring plan as it was originally
recorded.
Interest expense. Interest expense decreased to $1.5 million in fiscal 1999
from $1.6 million in fiscal 1998, a decrease of 6.0%. The decrease was due to
slightly lower borrowing levels as a result of improved cash flow during the
year.
Provision for income taxes. The provision (benefit) for income taxes in fiscal
1999 and fiscal 1998 is based on the effective tax rate applied to the
respective year's pre-tax book income (loss) effective tax rate. Our fiscal 1999
income tax benefit was $2.1 million representing a 40% effective tax rate
compared with a provision of $1.8 million representing a 40% effective tax rate
in fiscal 1998. We recorded a deferred tax benefit for the fiscal 1999 pre-tax
book loss as the items which gave rise to these losses will be utilized to
reduce our future taxable income.
26
<PAGE> 30
QUARTERLY RESULTS
The following tables set forth unaudited quarterly information for each of the
eight fiscal quarters in the two year period ended January 30, 2000. Per share
amounts reflect an exchange ratio in the merger in connection with our holding
company formation of 20-for-one, which will have the effect of a 20-for-one
stock split. This quarterly information has been prepared on a basis consistent
with our audited financial statements and, in the opinion of management,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented.
Our quarterly operating results may fluctuate significantly as a result of a
variety of factors, and operating results for any quarter are not necessarily
indicative of results for a full fiscal year.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------------------------------------
MAY 3, AUG. 2, NOV. 1, JAN. 31, MAY 2, AUG. 1, OCT. 31, JAN. 30,
1998 1998 1998 1999 1999 1999 1999 2000
------- ------- ------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In thousands, except per share
data
Total revenues................... $45,070 $42,941 $45,179 $ 47,690 $53,328 $51,356 $56,849 $58,710
Operating expenses............... 38,386 37,999 39,634 43,922 45,724 44,356 48,464 51,459
General and administrative
expenses....................... 2,846 2,469 2,570 3,012 3,139 3,933 3,837 3,947
Depreciation and amortization
expenses....................... 1,116 1,110 1,110 942 1,101 1,159 1,237 1,049
Provision for restructuring...... -- -- -- 9,466 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) from operations.... 2,722 1,363 1,865 (9,652) 3,364 1,908 3,311 2,255
Interest expense, net, and other
expenses....................... 348 350 351 528 308 331 210 383
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... 2,374 1,013 1,514 (10,180) 3,056 1,577 3,101 1,872
Provision (benefit) for income
taxes.......................... 991 395 629 (4,127) 1,163 599 1,178 710
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss).............. $ 1,383 $ 618 $ 885 $ (6,053) $ 1,893 $ 978 $ 1,923 $ 1,162
======= ======= ======= ======== ======= ======= ======= =======
Net income (loss) per share:
Basic.......................... $ .19 $ .08 $ .10 $ (.65) $ .20 $ .10 $ .21 $ .12
Diluted........................ .19 .08 .10 (.65) .20 .10 .20 .11
</TABLE>
Our operating results for these eight quarters expressed as percentages of
applicable revenues were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------------------------------------
MAY 3, AUG. 2, NOV. 1, JAN. 31, MAY 2, AUG. 1, OCT. 31, JAN. 30,
1998 1998 1998 1999 1999 1999 1999 2000
------ ------- ------- -------- ------ ------- -------- --------
<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................... 85.2 88.5 87.7 92.1 85.7 86.4 85.3 87.6
General and administrative
expenses........................... 6.3 5.7 5.7 6.3 5.9 7.6 6.7 6.8
Depreciation and amortization
expenses........................... 2.5 2.6 2.5 2.0 2.1 2.3 2.2 1.8
Provision for restructuring.......... -- -- -- 19.8 -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations........ 6.0 3.2 4.1 (20.2) 6.3 3.7 5.8 3.8
Interest expense, net, and other
expenses........................... 0.7 0.9 0.7 1.2 0.6 0.6 0.3 0.6
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes.... 5.3 2.3 3.4 (21.4) 5.7 3.1 5.5 3.2
Provision (benefit) for income
taxes.............................. 2.2 0.9 1.4 (8.7) 2.2 1.2 2.1 1.2
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).................. 3.1% 1.4% 2.0% (12.7)% 3.5% 1.9% 3.4% 2.0%
===== ===== ===== ===== ===== ===== ===== =====
</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.
27
<PAGE> 31
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 1998, 1999 and 2000 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 $7.1 million in fiscal 1998, $11.7 million in
fiscal 1999 and $9.0 million in fiscal 2000. Operating cash flow has benefited
from an improvement in our net income, net of the impact of the provision for
restructuring in fiscal 1999. Operating cash flow has been negatively impacted
by additional investments in working capital, primarily accounts receivable and
inventories, as a result of the expansion of our off-premises sales programs and
the opening of new stores which we either own or supply.
Net cash used for investing activities was $5.9 million in fiscal 1998, $11.8
million in fiscal 1999 and $10.0 million in fiscal 2000. 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 ($456,000) in fiscal
1998, $1.5 million in fiscal 1999 and ($84,000) in fiscal 2000. Financing
activities in 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 fiscal 2000 have
consisted primarily of borrowings under our line of credit and payment of cash
dividends declared in fiscal 1999.
We entered into a new loan agreement on December 29, 1999. This agreement, which
is unsecured, provides a $40 million revolving line of credit and a $12 million
term loan. The loan agreement expires on July 10, 2002. Under the terms of the
loan agreement, interest on the revolving line of credit is paid monthly and
charged at either the lender's prime rate less 110 basis points or at the
one-month LIBOR rate plus 100 basis points. There is no interest, fee or other
charge for the unadvanced portion of the revolving line of credit. A provision
of the loan agreement allows us to convert, prior to the expiration date of the
agreement, all or a portion of the outstanding principal balance of the
revolving line of credit to a term loan for a period of 60, 84 or 120 months.
Concerning interest on the term loan, we have the option of either a variable
prime rate based method, a variable LIBOR based method or a swap rate based
method with a ceiling tied to the prime rate at the time of conversion. As of
the date of this prospectus, no amounts from the $40 million revolving line of
credit facility have been converted to a term loan. The loan agreement entered
into on December 29, 1999, replaced a previous unsecured agreement which had a
$28 million revolving line of credit and a $12 million term loan. Other than an
increase in the amount of the line of credit facility, all other provisions of
the prior loan agreement were essentially the same as those of the current
agreement. As of January 30, 2000, $19.3 million was outstanding under the line
of credit facility and $3.6 million was outstanding under the term loan. We also
have an outstanding letter of credit as of January 30, 2000, which reduces our
available line of credit by $1.7 million. On January 31, 2000, we repurchased
the New York City territory from an area developer for $6.9 million using funds
available under our line of credit. We intend to refranchise this territory to a
new area developer, but expect to retain a minority interest.
The $12 million term loan entered into on December 29, 1999, was a continuation
of the $12 million term loan contained in the previous loan agreement. Interest
on the $12 million term loan is computed on the same basis as the revolving line
of credit except that the floor and ceiling rates
28
<PAGE> 32
are 5.500% and 8.125%, respectively. Repayment of this loan began on July 20,
1996, in the amount of monthly principal payments of $200,000 plus interest; the
final payment is on June 20, 2001. The term loan may be prepaid without penalty
or premium at any time.
The loan agreement entered into on December 29, 1999, requires us to maintain a
consolidated tangible net worth of $41 million through January 28, 2001. For
each fiscal year thereafter, the agreement requires us to maintain a
consolidated tangible net worth of $41 million plus (1) an amount equal to 75%
of the net proceeds from this offering and (2) 50% of our net income for each
fiscal year. Capital expenditures for each fiscal year are limited to $35
million. The loan agreement also contains covenants which place various
restrictions on sales of properties, our ability to enter into collateral
repurchase agreements and guaranties, the payment of dividends and other
customary financial and nonfinancial covenants.
In the next five years, we will use cash primarily for the following activities:
- Repayment of borrowings under our loan agreement
- A distribution of approximately $7 million to our existing shareholders
as part of our pre-offering corporate reorganization
- Remodeling and relocation of selected older company-owned stores
- Additional mix production capacity to support expansion
- Joint venture investments in area developer stores
- General corporate purposes, including working capital needs
Our capital requirements for the items outlined above may be significant. These
capital requirements will depend on many factors including our overall
performance, the pace of store expansion and company store remodels, the
requirements for joint venture arrangements and infrastructure needs for both
personnel and facilities. To date, we have primarily relied on cash flow
generated from operations and our line of credit to fund our capital needs. We
believe that the proceeds from this offering, cash flow generated from
operations and our borrowing capacity under our line of credit will be
sufficient to meet our capital needs for at least the next 24 months. If
additional capital is needed, we may raise such capital through public or
private equity or debt financings. Future capital funding transactions may
result in dilution to purchasers in this offering. However, there can be no
assurance that additional capital will be available or be available on
satisfactory terms. Our failure to raise additional capital could have one or
more of the following effects on our operations and growth plans over the next
five years:
- Slowing our plans to remodel and relocate older company-owned stores
- Reducing the number and amount of joint venture investments in area
developer stores
- Slowing the building of our infrastructure in both personnel and
facilities
We conduct some of our corporate and store operations from leased facilities and
lease certain equipment under operating leases. Generally, these have initial
lease periods of five to 18 years, and contain provisions for renewal options of
five to ten years.
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.
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YEAR 2000
The "year 2000 issue" refers to the possible failure of many computer systems
that may arise as a result of existing computer software and hardware using only
the last two digits to refer to a year.
We believe that the most significant internal risk posed by the year 2000 issue
was the possibility of a failure of our accounting systems, either at our
corporate offices, at our Winston-Salem manufacturing and distribution facility
or at our stores. Third parties whose potential year 2000 problems could have
had the greatest effect on us are our banks, the company that processes our
payroll and maintains our human resources databases and companies that supply
our key raw materials.
Prior to the year 2000 date change, we completed reviews of the ability of our
hardware and software serving critical internal functions in our stores and in
our corporate offices to accurately handle the transition of dates from 1999 to
2000. As of the date of this prospectus, we estimate that we have spent $1
million for the dual purpose of upgrading the functionality of systems while at
the same time achieving year 2000 compliance. Additionally, we have developed
contingency plans for critical functions in certain corporate departments and
business units to address potential year 2000 issues.
Since entering the year 2000, we have not experienced any significant
disruptions to our business, nor are we aware of any significant year 2000
issues impacting our banks, vendors or customers. We will continue to monitor
our critical systems over the next several months for any delayed effects of the
year 2000 date change, but do not expect any significant exposure from our
internal systems or from the actions of our banks, vendors and customers.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We are exposed to market risk from changes in interest rates on our outstanding
bank debt. Our revolving line of credit bears interest at either our lender's
prime rate minus 110 basis points or a rate equal to LIBOR plus 100 basis
points. We elect the rate on a monthly basis. Additionally, our term loan bears
interest under the same method as our revolving line of credit except that the
rate is capped with a floor of 5.500% and a ceiling of 8.125%. The interest cost
of our bank debt is affected by changes in either prime or LIBOR. Such changes
could adversely impact our operating results.
We have no derivative financial interests or derivative commodity instruments in
our cash or cash equivalents. On any business day that we have excess cash
available, we use it to pay down our revolving line of credit.
We purchase certain commodities such as flour, sugar and soybean oil. These
commodities are usually purchased under long-term purchase agreements, generally
one to three years, at a fixed price. We are subject to market risk in that the
current market price of any commodity item may be below our contractual price.
We do not use financial instruments to hedge commodity prices.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for years beginning after June 15, 2000,
Krispy Kreme's fiscal year 2002. FAS 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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BUSINESS
OVERVIEW
Krispy Kreme is a leading branded specialty retailer of premium quality
doughnuts. We have established Krispy Kreme as a leading consumer brand with a
loyal customer base through our longstanding commitment to quality and
consistency. We differentiate ourselves by combining quality ingredients and a
vertically integrated production process with a unique retail experience
featuring our stores' fully displayed production process, or doughnutmaking
theater.
In the mid-1990s, we began repositioning Krispy Kreme from a wholesale bakery
model to a specialty retail concept. Initiatives supporting the repositioning
included increasing the size of our doughnuts, redesigning our stores to enhance
the total customer experience and adding channels of distribution where our
products are displayed in a manner consistent with our on-premises presentation.
As a result of the success of these initiatives, we began expanding nationwide
primarily through franchising with experienced, well-capitalized area
developers.
We believe that Krispy Kreme has significant opportunities for continued growth.
Our sales growth has been driven by new store openings, as well as systemwide
comparable store sales growth of 12.7% in fiscal 1998, 9.7% in fiscal 1999 and
14.1% in fiscal 2000. Our success is based on the strengths described below.
COMPETITIVE STRENGTHS
THE UNIVERSAL APPEAL OF OUR PRODUCT. Our market research indicates that Krispy
Kreme's breadth of appeal extends across major demographic groups, including age
and income. In addition to their taste, quality and simplicity, our doughnuts
are an affordable indulgence. This has contributed to many of our customers
purchasing doughnuts by the dozen for their office, clubs and family. Demand for
our doughnuts occurs throughout the day, with approximately half of our
on-premises sales occurring in the morning and half in the afternoon and
evening.
A PROVEN CONCEPT. Krispy Kreme is a focused yet versatile concept. Each of our
distinctive Krispy Kreme stores is a doughnutmaking theater with the capacity,
depending on equipment size, to produce from 2,400 dozen to over 6,000 dozen
doughnuts daily. Our stores serve as our primary retail outlets. They are also
designed to create a multi-sensory experience around our unique product and
production process which is important to our brand-building efforts. In addition
to these on-premises sales, we have developed multiple channels of sales outside
our stores, which we refer to as off-premises sales. These sales channels
improve the visibility of our brand, increase the convenience of purchase and
capture sales from a wide variety of settings and occasions. Additionally, the
ability to generate sales outside of our stores, utilizing the stores' existing
production capacity, minimizes the risk of an underperforming on-premises sales
location.
STRONG GROWTH POTENTIAL. With only 144 stores, we believe that we are in the
infancy of our growth. Our highest priority expansion plans focus on markets
with over 100,000 households. These markets are most attractive because of their
dense population characteristics which enable us to achieve economies of scale
in local operations infrastructure and brand building efforts. We also believe
our universal product appeal, combined with our strategy that utilizes multiple
sales channels, will facilitate our expansion into smaller markets.
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THE INGREDIENTS FOR MARKET LEADERSHIP. The doughnut industry, an approximately
$4.7 billion market in 1998, is large, fragmented and characterized by
low-volume outlets with undifferentiated product quality. We believe that we
have the ability to become the recognized leader in every market we enter
through our unique combination of:
- A strong brand
- A highly differentiated product
- High-volume production capacity
- A market penetration strategy using multiple sales channels
A PROVEN FRANCHISE SYSTEM. Krispy Kreme is committed to growth through
franchising. Our franchisees consist of associates who operate under our
original franchising program developed in the 1940s and area developers who
operate under our franchising program developed in the mid-1990s. See "-- Store
Ownership." We intend to continue to strengthen our franchise system by
attracting experienced and well-capitalized area developers who have the
management capacity to develop multiple stores. Our development strategy permits
us to grow in a controlled manner and enables us to ensure that each area
developer strictly adheres to our high standards of quality and service. We
prefer that area developers have ownership and successful operating experience
in multi-unit food operations within the territory they propose for development.
To ensure a consistent high quality product, we require each franchisee to
purchase our proprietary mixes and doughnutmaking equipment. We devote
significant resources to providing our franchisees with assistance in site
selection, store design, employee training and marketing. Many of our
franchisees are also our shareholders. Additionally, in the future, we intend to
acquire minority equity positions in selected franchisee businesses. We believe
that common ownership of equity will serve to further strengthen our
relationships and align our mutual interests.
DIRECT STORE DELIVERY CAPABILITIES. Krispy Kreme has developed a highly
effective direct store delivery system, or DSD, for executing off-premises
sales. We deliver fresh doughnuts, both packaged and unpackaged, to a variety of
retail customers, such as supermarkets and convenience stores. Through our
company-owned and franchised store operations, our route drivers are capable of
taking customer orders and delivering products directly to our customers' retail
locations where they are typically merchandised from Krispy Kreme branded
displays. We have also developed national account relationships and implemented
electronic invoicing and payment systems with some large DSD customers. We
believe these competencies, coupled with our premium products, will provide us
with significant sales opportunities by allowing us to assume the role of
category manager for doughnut products in both the in-store bakery and food
service distribution channels.
A CONTROLLED PROCESS ENSURING CONSISTENT HIGH QUALITY. Krispy Kreme has a
vertically integrated, highly automated system designed to create quality,
consistency and efficiency. Our doughnutmaking process starts well before the
store-level operations with:
- Our owned and operated manufacturing plant which produces our proprietary
mixes
- Our state-of-the-art laboratory that tests all key ingredients and each
batch of mix produced
- Our self-manufactured, custom stainless steel doughnutmaking equipment
Additionally, at the store-level, we provide a 13-week manager training program
covering the critical skills required to operate a Krispy Kreme store and a
comprehensive training program for all positions in the store. We also provide
easy-to-follow procedures for producing and finishing our doughnuts.
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A BALANCED FINANCIAL MODEL. Krispy Kreme generates sales and income from three
distinct sources: company stores, franchise fees and royalties and a vertically
integrated supply chain, which we refer to as Support Operations. In addition to
lowering the cost of goods sold for our stores, Support Operations generates
attractive margins on sales of our mixes and equipment. Our franchising approach
to growth minimizes our capital requirements and provides a highly attractive
royalty stream. We believe this financial model provides increased stability to
our revenues and earnings and improves our return on investment. Our Company
Store Operations, Franchise Operations and Support Operations comprise three
reportable segments under generally accepted accounting principles. You can
review financial data for these segments in Note 11 to our audited consolidated
financial statements.
BUSINESS MODEL
Krispy Kreme is a vertically integrated company structured to support and profit
from the high volume production and sale of branded and unbranded high quality
doughnut products. "High volume, high quality" has always been the foundation of
our economic strategy. Our business is driven by two complementary business
units: Store Operations, both company and franchise, and Support Operations.
Independently, each is designed to ensure quality and to benefit from economies
of scale. Collectively, both function as an integrated, cost-efficient system.
STORE OPERATIONS. Our principal source of revenue is the sale of doughnuts
produced and distributed by Store Operations. As part of our unique business
model, our stores are both retail outlets and highly automated, high volume
producers of our doughnut products and can sell their products through our
multiple sales channels.
- ON-PREMISES SALES. Each of our stores offers at least 15 of our more
than 20 varieties of doughnuts, including our signature Hot Original
Glazed and nine other prescribed varieties. We also sell our special
blend Krispy Kreme coffee, other beverages, other bakery items and
collectible memorabilia such as tee shirts, sweatshirts and hats.
Fundraising sales, described in "-- Marketing", are another component of
on-premises sales. In order to establish our brand identity with the
total store experience and because of the higher margins associated with
on-premises sales, we plan to focus our initial sales efforts on this
channel.
- OFF-PREMISES SALES. We accomplish off-premises sales through our direct
store delivery system which is designed to:
-- Generate incremental sales
-- Increase market penetration and brand awareness
-- Increase customer convenience
-- Optimize our stores' production capacity
-- Improve a store's return on investment
As of January 30, 2000, approximately 100 of our stores sold to major grocery
store chains, including Kroger (which accounted for 10.2% of our total revenues
in fiscal 2000), Food Lion, Giant Food and Acme Markets, and to local and
national convenience stores, as well as to select co-branding customers.
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SUPPORT OPERATIONS. The mission of our Support Operations is to create
competitive advantages for our stores while operating as a profitable business
enterprise. We have developed important operating competencies and capabilities
which we use to support our stores, including:
- Strong product knowledge and technical skills
- Control of all critical production and distribution processes
- Collective buying power
The basic raw materials used in our products are flour, sugar, shortening and
packaging materials. We obtain most of these materials under long-term purchase
agreements and in the commodity spot markets. Although we own the recipe to our
glaze flavoring -- a key ingredient in many of our doughnuts -- we are currently
dependent on a sole source for our supply. However, we are in the process of
identifying an alternative source.
We implement the mission of Support Operations through three strategic business
units:
- MIX MANUFACTURING. We produce all of our proprietary doughnut mixes at
our manufacturing facility in Winston-Salem, North Carolina. We control
production of this critical input in order to ensure that our products
meet quality expectations and to maximize our profit potential.
Manufacturing and selling our own mixes allows us to capture the profit
that normally would accrue to an outside supplier and is more cost
effective than purchasing from third party vendors. Our mixes are
produced according to our high quality standards which include:
-- Requiring each carefully selected supplier to meet or exceed industry
standards
-- Receiving truckloads of our main ingredients daily
-- Testing each incoming key ingredient
-- Testing each batch of mix
- EQUIPMENT MANUFACTURING. We manufacture proprietary doughnutmaking
equipment which our franchisees are required to purchase. Our carefully
engineered equipment, when combined with our proprietary mixes, produces
doughnuts with uniform consistency and high quality. Manufacturing our
equipment results in several advantages including:
-- Flexibility. We manufacture several models, with varying capacities,
which are capable of producing multiple products and fitting unusual
store configurations.
-- Cost-effectiveness. We believe our costs are lower than if we
purchased our equipment from third parties.
-- Efficiency. We continually refine our equipment design to ensure
maximum automation and thereby reduce in-store labor costs and/or
improve consistency.
- DISTRIBUTION CENTER. Also located at our Winston-Salem complex is our
distribution center, which is capable of supplying our stores with all of
their key supplies including all food ingredients, juices, Krispy Kreme
coffee, signage, display cases, uniforms and other items. Stores must use
our doughnut mixes and special blend coffee exclusively. In addition, all
store operators have agreed contractually through our Supply Chain
Alliance Program to purchase all of their requirements for the critical
areas of their business through 2002. We believe that our ability to
distribute supplies to our operators produces several advantages
including:
-- Economies of scale. We are able to purchase at volume discount prices
which we believe are lower than those that would be available to our
operators individually. In
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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.
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:
- The growth in two-income households and corresponding shift to foods
consumed away from home
- Increased snack food consumption
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- 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. We view our stores as platforms from which we pursue
on-premises as well as off-premises sales opportunities. We have existing
agreements with our franchisees to open approximately 22 new stores in fiscal
2001 and over 100 new stores between fiscal 2002 and fiscal 2005. This
represents 15% store growth in fiscal 2001 and an increase in our store base to
over 260 stores by the end of fiscal 2005. The addition of new stores will be
accomplished primarily through franchising with area developers following a
prescribed development plan for their respective territories. An initial
development plan has been created to optimally penetrate territories with over
100,000 households. The plan assumes stores will be built in high density,
prime-retailing locations in order to maximize customer traffic and on-premises
sales volumes. We believe a territory-based development strategy creates
substantial benefits to both Krispy Kreme and our area developers. These
benefits include:
- Real estate procurement and development
- Scale to cost-justify a strong local support infrastructure
- Brand building and advertising
- Ability to make marketwide commitments to chain store customers
With respect to new store growth, we believe that secondary markets in the
United States with less than 100,000 households also offer additional sales and
profit growth opportunities. Although we operate successfully in some secondary
markets today, we believe that our primary expansion territories are sufficient
to achieve our intermediate growth objectives.
IMPROVE EXISTING STORES' ON-PREMISES SALES. Our area developers have
demonstrated that a store employing our updated design located in a densely
populated area is capable of generating and sustaining high volume on-premises
sales. Many of our stores built prior to 1997 were designed primarily as
wholesale bakeries and their formats and site attributes differ considerably
from newer stores. In order to improve the on-premises sales of some of these
stores, we plan to remodel many of our company-owned stores and, in some limited
instances, close or relocate certain stores to a more dynamic area within their
territories. Finally, we consistently evaluate improvements or additions to our
product line in order to increase same store sales levels and balance
seasonality of sales.
INCREASE OFF-PREMISES SALES. In new markets, we typically focus our initial
efforts on on-premises sales and then use the store platform to capitalize on
off-premises opportunities. We intend to secure additional grocery and
convenience store customers, as well as increase sales to our existing customer
base by offering premium quality products, category management and superior
customer service. In new markets where capacity utilization remains high solely
from servicing on-premises sales, we may develop commissary production
facilities to service off-premises sales. We believe that once high brand
awareness has been established in a market, a commissary has the potential to
improve market penetration and profitability.
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UNIT ECONOMICS
We believe that Krispy Kreme unit economics represent an attractive investment
opportunity for our area developers and as such are a significant factor
contributing to the growth and success of the Krispy Kreme concept.
We estimate that the investment for a new store, excluding land and pre-opening
costs, is $500,000 for a building of approximately 3,600 square feet and
$500,000 for equipment, furniture and fixtures.
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
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
In thousands
Average weekly sales per store:
Company-owned............................................. $ 42 $ 47 $ 54
Franchised................................................ 23 28 38
Company-owned stores' operating cash flow as a percentage of
store revenues............................................ 19.3% 20.3% 23.2%
</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:
- Operating procedures
- Advertising and marketing programs
- Administrative, bookkeeping and accounting procedures
- Public relations
- Generation of sales and operating data
We also provide an opening team which consists of up to nine people, to provide
on-site training and assistance during the first two weeks of operation for each
initial store opened by a new franchisee. The number of opening team members
providing this assistance is reduced with each subsequent store opening.
Our stores which engage in off-premises sales typically operate on a 24-hour
schedule. Other stores generally operate from 5:30 a.m. to 1:00 a.m. seven days
a week, excluding Christmas. Traditionally, our sales have been slower during
the Christmas holiday season and the summer months.
QUALITY STANDARDS AND CUSTOMER SERVICE. We encourage all of our employees to be
courteous, helpful, knowledgeable and attentive. We emphasize the importance of
performance by linking a portion of both a company store manager's and an
assistant store manager's incentive compensation to profitability and customer
service. We also encourage high levels of customer service and the maintenance
of our high quality standards by frequently monitoring our stores through a
variety of methods including periodic quality audits and "mystery shoppers." In
addition, our Customer Experience Department handles customer comments and also
conducts routine satisfaction surveys of our off-premises customers.
MANAGEMENT AND STAFFING. It is important that our corporate staff and store
managers work as a team. Our Senior Vice President, Company Store and Associate
Operations, and Senior Vice President, Area Developer Operations report to our
Chief Operating Officer. Together, they are responsible for corporate
interaction with our store operations division and store management. Through our
divisional directors, each of whom is responsible for a specific geographic
region, we communicate frequently with all store managers and their staffs
using: store audits; weekly communications by telephone or e-mail; and scheduled
and surprise store visits.
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We offer a comprehensive 13-week training program, conducted both at our
headquarters and at designated stores, which provides store managers the
critical skills required to operate a Krispy Kreme store. We plan to add
computer-based training modules that will enhance the program.
Our staffing varies depending on a store's size, volume of business, and number
of sales channels. Stores with sales through all sales channels have
approximately 35 employees handling on-premises sales, processing, production,
bookkeeping and sanitation and between 2-15 delivery personnel. Area developers
frequently hire employees from leasing agencies and employ staff based on store
volume and size. Hourly employees, along with delivery personnel, are trained by
local store management through hands-on experience and training manuals.
We believe that our success is a natural result of the growth and development of
our people. We are developing a career model for both management and non-exempt
employees which will focus on personal development and career growth. The
program will link an individual's economic, career and personal goals with our
corporate and store-level goals.
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 58 stores as of January 30, 2000. Most of
these stores were developed between 1937 and 1996. These stores:
- Were designed as wholesale bakeries
- Generate a majority of their sales volume through off-premises sales
- Are located in the Southeast
- Are larger than new Krispy Kreme stores
ASSOCIATES. We had 25 associates who operated 49 stores as of January 30, 2000.
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.
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As of January 30, 2000, we had 14 area developers operating 37 stores with
contractual commitments to open over 140 stores in their territories during
their initial development schedule. We repurchased the New York City territory
from an area developer on January 31, 2000. We intend to refranchise this
territory to a new area developer, but expect to retain a minority interest. In
addition, we initially anticipate having a majority interest in the Northern
California area developer, which has an initial development schedule to open 24
stores.
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.
Our strategy is to grow primarily through area developers. Our area developer
program includes a royalty and fee structure that is more attractive to Krispy
Kreme than that of our associate program, as well as territory development
requirements.
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
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
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To build our brand and drive our comparable store sales in a manner aligned with
our brand principles, we have focused our marketing activities in the following
areas:
STORE EXPERIENCE. Our stores are where customers first experience a Hot
Original Glazed. Customers know that when our Hot Doughnuts Now sign in the
store window is illuminated, they can see our doughnuts being made and enjoy a
Hot Original Glazed within seconds after it passes through the glaze waterfall.
We believe this begins a lifetime relationship with our customers and forms the
foundation of the Krispy Kreme experience.
RELATIONSHIP MARKETING. Most of our brand-building activities are
grassroots-based and focus on developing relationships with various
constituencies, including consumers, schools, communities and businesses.
Specific initiatives include:
- Product donations to local radio and television stations, schools,
government agencies, and other community organizations
- Good neighbor product deliveries to create trial uses
- Sponsorship of local events and nonprofit organizations
- A "Good Grades Program" which recognizes scholastic achievement with
certificates and free doughnuts
- Our "Krispy Kreme Ambassador Program" which enlists our fans as
ambassadors in new markets to generate awareness and excitement around a
new store opening
FUNDRAISING SALES. Fundraising sales are high volume sales to local charitable
organizations at discounted prices. Charities in turn resell our products at
prices which approximate retail. We believe that providing a fundraising program
to local community organizations and schools helps demonstrate our commitment to
the local community, enhances brand awareness, increases consumer loyalty and
attracts more customers into our stores.
PRODUCT PLACEMENT. Since fiscal 1997, as we began growing nationally, there has
been a significant increase in our product placements and references to our
products on television programs and in selected films, including NBC Today Show,
Rosie O'Donnell, The Tonight Show with Jay Leno, Ally McBeal, NYPD Blue, The
Practice and Primary Colors. We have been mentioned in more than 80 television
shows during 1998 and 1999. We have also been featured or mentioned in over
1,000 print publications in those two years, including The Wall Street Journal,
The New York Times, the Washington Post, the Los Angeles Times, Forbes and Fast
Company. We believe the increasing number of placements and references are a
reflection of the growing interest in our product and brand.
ADVERTISING. Relationship marketing and product placement have been central to
building our brand awareness. Although our marketing strategy has not
historically employed traditional advertising, we intend to develop and test
media advertising in a manner consistent with our brand principles.
STORE LOCATIONS AND OTHER PROPERTIES
STORES. As of January 30, 2000, there were 144 Krispy Kreme stores operating in
27 states, 58 of which were owned by us, 37 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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<PAGE> 45
(MAP AND LIST SHOWING KRISPY KREME STORE LOCATIONS)
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<PAGE> 46
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 58 stores we operated ourselves as of January 30, 2000, we owned the land
and buildings for 32 stores. We leased both the building and the land for 11
stores. We leased only the building for six stores, and we leased only the land
for nine stores.
SATELLITE STORES. Our franchisees operated 15 satellite locations as of January
30, 2000. A satellite location is a retail doughnut store that does not produce
doughnuts on site. Satellite locations are supplied with doughnuts from another
local Krispy Kreme store that has production capability.
SPECIAL PRODUCTION FACILITIES. The manufacturing facility in Charlotte, North
Carolina produces doughnuts and other bakery items, such as honey buns, fruit
pies, dunkin sticks and miniature doughnuts for off-premises sales.
OTHER PROPERTIES. Our corporate headquarters is located in Winston-Salem, North
Carolina. We occupy this facility of approximately 35,000 square feet under a
lease which expires on December 31, 2009, with one five-year renewal option. We
also own a 137,000 square foot manufacturing plant and distribution center in
Winston-Salem.
MANAGEMENT INFORMATION SYSTEMS
Krispy Kreme has a management information system that allows for the rapid
communication of extensive information among our corporate office, support
operations, company stores, associates and area developers. Our franchisees and
other affiliates connect to this system through our Intranet and have access to
e-mail and the ability to provide financial reporting. We have adopted a
balanced scorecard approach for measuring key performance drivers in each of our
business units. Scorecard data are generated internally through our management
information system.
An enterprise resource planning system supports all major financial and
operating functions within the corporation including financial reporting,
inventory control and human resources. A comprehensive data warehouse system
supports the financial and operating needs of our Store Operations and Support
Operations.
All company stores have been retrofitted with a Windows NT-based point of sale,
or POS, system. This POS system provides each store with the ability to more
closely manage on-premises and off-premises sales while providing a kiosk into
our Intranet. We poll the sales information from each store's POS system which
gives us the ability to analyze data regularly. Daily two-way electronic
communication with our stores permits sales transactions to be uploaded and
price changes to be downloaded to in-store POS servers.
Direct store delivery sales operations have access to an internally-developed
route accounting system networked into the corporate Intranet. Information from
these systems is polled weekly and aggregated into the corporate manufacturing
data warehouse.
All information technology hardware, including POS systems, is leased.
COMPETITION
Our competitors include retailers of doughnuts and snacks sold through
supermarkets, convenience stores, restaurants and retail stores. We compete
against Dunkin' Donuts, which has the largest number of outlets in the doughnut
retail industry, as well as against regionally and locally owned doughnut shops.
We compete on elements such as food quality, concept, convenience, location,
customer service and value. Customer service, including frequency of deliveries
and maintenance of fully stocked shelves, is an important factor in successfully
competing for shelf space in grocery stores and convenience stores.
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<PAGE> 47
We believe that our controlled process, which ensures the high volume production
of premium quality doughnuts, makes us strong competitors in both food quality
and value. Through our comprehensive site selection process and uniform store
specifications and designs, we identify premier locations that are highly
visible and increase customer convenience.
We believe that in the in-store bakery market, many operators are looking for
cost-effective alternatives to making doughnuts on-site. With a quality product
and recognized brand name, Krispy Kreme has been able to provide a turnkey
program that is profitable for the grocer. In addition, we also believe that we
compete effectively in convenience stores. There is an industry trend moving
towards expanded fresh product offerings during morning and evening drive times,
and products are either sourced from a central commissary or brought in by local
bakeries. Krispy Kreme provides a fresh daily delivery, merchandised in an
attractive branded display which retailers must use to participate in the
program. Through effective signage and merchandising, operators are able to draw
customers into the store, thus gaining add-on sales. As category management
increases in this segment, growth will come from increased market penetration
and enhanced display opportunities for our products.
In the packaged doughnut market we offer a full product line of doughnuts and
snacks that are sold on a consignment basis and are typically merchandised on a
free-standing branded display. We compete primarily with other well known
producers of baked goods such as Hostess and Dolly Madison and some regional
brands.
TRADEMARKS
Our doughnut shops are operated under the Krispy Kreme name and we use over 40
federally registered trademarks, including "Krispy Kreme" and "Hot Doughnuts
Now" and the logos associated with these marks. We have also registered some of
our trademarks in approximately 20 other countries. We license the use of these
trademarks to our franchisees for the operation of their doughnut shops. We also
license the use of certain trademarks to convenience stores and grocery stores
in connection with the sale of some of our products at those locations.
Although we are not aware of anyone else who is using "Krispy Kreme" or "Hot
Doughnuts Now" as a trademark or service mark, we are aware that some businesses
are using "Krispy" or a phonetic equivalent, such as "Crispie Creme," as part of
a trademark or service mark associated with retail doughnut stores. There may be
similar uses we are unaware of which could arise from prior users. We
aggressively pursue persons who unlawfully and without our consent use our
trademarks.
GOVERNMENT REGULATION
LOCAL REGULATION. Our stores are subject to licensing and regulation by a
number of government authorities, which may include health, sanitation, safety,
fire, building and other agencies in the states or municipalities in which our
doughnut shops are located. Developing new doughnut stores in particular areas
could be delayed by problems in obtaining the required licenses and approvals or
by more stringent requirements of local government bodies with respect to
zoning, land use and environmental factors. Our standard development and
franchise agreements require our area developers and associates to comply with
all applicable federal, state and local laws and regulations, and indemnify us
for costs we may incur attributable to their failure to comply.
FOOD PRODUCT REGULATION. Our doughnut mixes are produced at our manufacturing
facility in Winston-Salem, North Carolina. The North Carolina Department of
Agriculture has regulatory power over food products shipped from this facility,
as well as from Krispy Kreme's commissary in Charlotte, North Carolina. Similar
state regulations may apply to products shipped from our
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doughnut shops to grocery or convenience stores. Many of our grocery and
convenience store customers require us to guarantee our products' compliance
with applicable food regulations.
As is the case for other food producers, numerous other government regulations
apply to our products. For example, the ingredient list, product weight and
other aspects of our product labels are subject to state and federal regulation
for accuracy and content. Most states will periodically check the product for
compliance. The use of various product ingredients and packaging materials is
regulated by the U.S. Department of Agriculture and the Federal Food and Drug
Administration. Conceivably, one or more ingredients in our products could be
banned and substitute ingredients would then need to be found.
FRANCHISE REGULATION. We must comply with regulations adopted by the Federal
Trade Commission, or the FTC, and with several state laws that regulate the
offer and sale of franchises. The FTC's Trade Regulation Rule on Franchising, or
the FTC Rule, and certain state laws require that we furnish prospective
franchisees with a franchise offering circular containing information prescribed
by the FTC Rule and applicable state laws and regulations.
We also must comply with a number of state laws that regulate some substantive
aspects of the franchisor-franchisee relationship. These laws may limit a
franchisor's ability to: terminate or not renew a franchise without good cause;
prohibit interference with the right of free association among franchisees;
disapprove the transfer of a franchise; discriminate among franchisees with
regard to charges, royalties and other fees, and place new stores near existing
franchises. To date, these laws have not precluded us from seeking franchisees
in any given area and have not had a material adverse effect on our operations.
Bills intended to regulate certain aspects of franchise relationships have been
introduced into Congress on several occasions during the last decade, but none
has been enacted.
EMPLOYMENT REGULATIONS. We are subject to state and federal labor laws that
govern our relationship with employees, such as minimum wage requirements,
overtime and working conditions and citizenship requirements. Many of our
on-premises and delivery personnel are paid at rates related to the federal
minimum wage. Accordingly, further increases in the minimum wage could increase
our labor costs. Furthermore, the work conditions at our facilities are
regulated by the Occupational Safety and Health Administration and subject to
periodic inspections.
OTHER REGULATIONS. We have several contracts to serve United States military
bases, which require compliance with certain applicable regulations. The stores
which serve these military bases are subject to health and cleanliness
inspections by military authorities. These accounts are not material to our
overall business. We are also subject to federal and state environmental
regulations, but we currently believe that these will not have a material effect
on our operations.
EMPLOYEES
As of January 30, 2000 we had 3,016 employees. Of these, 190 were employed in
our administrative offices and 122 were employed in our manufacturing and
distribution centers. In our company-owned stores and commissaries, we have
2,704 employees. Of these, 2,466 are full-time, including 204 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.
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LEGAL PROCEEDINGS
On March 9, 2000, we, our Chairman, President and Chief Executive Officer and
other persons were named as defendants in a lawsuit (Kevin L. Boylan and Bruce
Newberg v. Golden Gate Doughnuts, LLC, Krispy Kreme Doughnuts Corporation,
Krispy Kreme Doughnuts, Inc., Scott Livengood, Brad Bruckman, and Does 1 through
20, Superior Court for the County of Los Angeles, California, Case No.
RC226214). The plaintiffs allege that we and other defendants breached an
agreement regarding plaintiffs' participation in a franchise operation in
Northern California. The complaint, which asserts breach of contract, promissory
estoppel, intentional interference with contract and business relations and
breach of fiduciary duty claims, seeks unspecified money damages in an amount to
be proven at trial, but not less than $10 million. The complaint also seeks
punitive damages. Although we had been negotiating with the plaintiffs with
respect to their participation in the Northern California franchise, numerous
material differences regarding the terms and conditions of their participation
were never resolved. As a result, no oral agreement was ever reached and no
written agreement was executed. Because the case has only recently been filed,
it is difficult to predict its outcome. However, based on the information
presently available to us, and our preliminary review of the allegations and
relevant facts, we believe the complaint has no merit and will vigorously defend
the lawsuit.
From time to time, we are subject to other claims and suits arising in the
course of our business, none of which we believe is likely to have a material
effect on our financial condition or results of operations.
OUR PRE-OFFERING REORGANIZATION AND OTHER MATTERS
Currently, all of the stock of Krispy Kreme Doughnuts, Inc. is owned by Krispy
Kreme Doughnut Corporation, which was incorporated in 1982. Krispy Kreme
Doughnuts, Inc., the issuer of the common stock offered by this prospectus, was
incorporated in North Carolina in 1999 to be the holding company for Krispy
Kreme Doughnut Corporation and its other subsidiaries. This will be effected
through a corporate reorganization in the form of a merger in which each
outstanding share of common stock of Krispy Kreme Doughnut Corporation will be
converted into the right to receive 20 shares of common stock of Krispy Kreme
Doughnuts, Inc. and $15.00 in cash. This merger will occur prior to the closing
of this offering.
As a result of the merger, Krispy Kreme Doughnut Corporation will become a
wholly-owned subsidiary of Krispy Kreme Doughnuts, Inc., and all the
shareholders of Krispy Kreme Doughnut Corporation will become shareholders of
Krispy Kreme Doughnuts, Inc. We believe that the holding company structure will
provide greater organizational flexibility and broaden the alternatives
available for future financings. The new holding company structure will create a
framework for future growth, promote new business opportunities and facilitate
the formation of joint ventures or other business combinations with third
parties.
After this offering, we intend to furnish to our shareholders annual reports
containing audited financial statements and quarterly reports containing
unaudited interim financial information for the first three quarters of each
fiscal year.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following contains information concerning our directors and executive
officers as of January 30, 2000, 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.
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J. PAUL BREITBACH has been employed by Krispy Kreme since November 1992 as
Executive Vice President, Finance, Administration and Support Operations. From
1973 to November 1992, Mr. Breitbach was a partner at the accounting firm of
Price Waterhouse, and from 1983 to 1992 was managing partner of that firm's
Winston-Salem, North Carolina office. From 1987 to 1992 he was also group
managing partner for all Price Waterhouse offices in North Carolina and South
Carolina. Mr. Breitbach is a certified public accountant.
MARGARET M. URQUHART has been employed with Krispy Kreme as Executive Vice
President and Chief Operating Officer since December 1999. Prior to joining
Krispy Kreme, Ms. Urquhart was President of Lowes Foods, a supermarket chain,
since November 1995. From July 1993 until November 1995, Ms. Urquhart was
President of Spurwink Consulting Group, a consulting firm advising national
consumer goods manufacturers and retailers. Previously, she was employed for 17
years in various capacities with Hannaford Bros. Co., a supermarket chain,
including as President of its subsidiary, Wellby Super Drug Stores.
RANDY S. CASSTEVENS has been employed by Krispy Kreme since 1993. Mr. Casstevens
has served as Senior Vice President, Finance, since April 1998 and as Secretary
since November 1995. Prior to joining Krispy Kreme, Mr. Casstevens was employed
by Price Waterhouse from 1987 to 1993. Mr. Casstevens is a certified public
accountant.
L. STEPHEN HENDRIX has been employed by Krispy Kreme since January 1978. From
October 1993 to March 1995, Mr. Hendrix served as Senior Vice President,
Development. Mr. Hendrix has served as Senior Vice President, Company Store and
Associate Operations, since March 1995.
MICHELLE P. PARMAN has been employed by Krispy Kreme since 1993. Ms. Parman has
served as Senior Vice President, Corporate Development since April 1998.
Previously, she served as Vice President, Strategic Planning. Before joining
Krispy Kreme, Ms. Parman was employed by Price Waterhouse from 1984 to 1993. Ms.
Parman is a certified public accountant.
ROBERT H. VAUGHN, JR. has been employed by Krispy Kreme since March 1998. Mr.
Vaughn has served as Senior Vice President, Area Developer Operations since
December 1999. Previously, he served as Senior Vice President, Sales and
Marketing. From January 1993 to March 1998, Mr. Vaughn was President of Gullwing
Productions, a licensed apparel company. Mr. Vaughn also served in various
capacities with Hanes Printables, a printed and embroidered sportswear
manufacturer and a division of Sara Lee Knit Products and the Sara Lee
Corporation, from September 1987 until November 1992.
PHILIP R.S. WAUGH, JR. has been employed by Krispy Kreme since May 1993. He has
served as Senior Vice President, Franchise Development since April 1998.
Previously, he served as Vice President, Franchising. From October 1991 until he
joined Krispy Kreme, Mr. Waugh served as Vice President, Corporate Banking with
Southern National Bank of North Carolina. From 1982 until October 1991, he
served in various capacities with Wachovia Bank, N.A. Mr. Waugh is a co-owner of
Midwest Doughnuts, LLC, our Kansas City franchisee.
FRANK E. GUTHRIE has been a director since February 1994. Mr. Guthrie has been
President of Magic City Doughnuts Corp., our Orlando area franchisee, since
1998, and co-owns that company with another one of our directors, Mr. McCoy. He
has also been President and owner of Classic City Doughnuts Corp., our Athens,
Georgia franchisee, since 1992. Additionally, he has been employed by Augusta
Doughnut Company, our Augusta, Georgia franchisee, in various capacities since
1961, and he is currently its President and majority owner.
WILLIAM T. LYNCH, JR. has been a director since November 1998. He has served as
President and Chief Executive Officer of Liam Holdings LLC, a marketing and
capital management firm, since
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April 1997. Mr. Lynch retired as President and Chief Executive Officer of Leo
Burnett Co. in March 1997 after serving with that advertising agency for 31
years.
JOSEPH A. MCALEER, JR. has been a director since May 1988. Mr. McAleer served as
Chairman of the board of directors and Chief Executive Officer from September
1995 until his retirement from Krispy Kreme in January 1998. He also served as
President from May 1988 until August 1992 and as Chief Operating Officer from
May 1988 until August 1992. Mr. McAleer is a co-owner with Mr. Smith, another
one of our directors, of Dallas Doughnuts, our Dallas/Fort Worth franchisee. Mr.
McAleer is also manager and owner of Mackk LLC, our Mobile, Alabama franchisee.
Mr. McAleer is the brother of John N. McAleer, Vice Chairman of our board of
directors.
ROBERT L. MCCOY has been a director since February 1994. Mr. McCoy has been
President and majority owner of Gulf Florida Doughnut Corp., our Tampa, Florida
franchisee, since November 1983, and he is Vice President and co-owner of Magic
City Doughnuts with Mr. Guthrie.
ROBERT J. SIMMONS has been a director since May 1989. Since 1970, he has also
been the President and majority owner of Simac, Inc., our Akron, Ohio
franchisee.
STEVEN D. SMITH has been a director since April 1991. Since April 1997, Mr.
Smith has been President, and a co-owner with Mr. Joseph A. McAleer, Jr., of
Dallas Doughnuts. He has also been President and majority owner of Dales
Doughnut Corp., our Tallahassee and Panama City, Florida franchisee, since 1985
and Dales of Dothan, Inc., our Dothan, Alabama franchisee, since 1991. He has
also been the Chief Executive Officer and owner of Smiths Doughnuts Inc., our
Tuscaloosa, Alabama franchisee, since 1994.
ROBERT L. STRICKLAND has been a director since November 1998. Mr. Strickland
retired as Chairman of the Board of Directors of Lowe's Companies, Inc., a home
improvement retailer, in January 1998, after 41 years of service. He is still a
director of Lowe's. Mr. Strickland is also a director of T. Rowe Price
Associates, an investment management firm, and Hannaford Bros. Co., a
supermarket chain.
BOARD OF DIRECTORS
CLASSIFICATION OF DIRECTORS
The board of directors is divided into three classes under our articles of
incorporation. Class I consists of three directors who will stand for election
at the annual meeting of shareholders to be held in 2000. Class II consists of
three directors who will stand for election at the annual meeting of
shareholders to be held in 2001. Class III consists of three directors who will
stand for election at the annual meeting of shareholders to be held in 2002.
We intend to nominate two additional independent directors for election to the
board shortly after this offering. After their initial term following this
offering, directors in each class will serve for a term of three years. Our
bylaws provide that directors can be removed only with cause by a two-thirds
majority of the shareholders. Officers are chosen by and serve at the discretion
of the board of directors.
BOARD COMMITTEES
The audit committee has the responsibility to review our audited consolidated
financial statements and accounting practices and to consider and recommend the
employment of, and approve the fee arrangements with, independent accountants
for both audit functions and for advisory and other consulting services. Messrs.
William T. Lynch, Jr., Steven D. Smith, Frank E. Guthrie and Robert J. Simmons
comprise the members of the audit committee.
The compensation committee reviews and approves the compensation and benefits
for our executive officers and the employee benefit plans for all other
employees. It makes recommendations to our board of directors regarding these
matters. Messrs. Robert L. Strickland, Robert L. McCoy and Joseph A. McAleer,
Jr. comprise the members of the compensation committee.
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EXECUTIVE COMPENSATION
The table below provides information concerning the total compensation received
for services rendered to Krispy Kreme during its fiscal year ended January 30,
2000 by our chief executive officer and Krispy Kreme's four other highest paid
executive officers, who are referred to as the named officers. "Other annual
compensation" includes perquisites and other personal benefits paid to each of
the named officers, such as automobile allowances, club dues and medical
insurance premiums.
Amounts under "LTIP Payouts" represent bonuses paid to cover loan repayments due
to Krispy Kreme in connection with the recognition of income upon the conversion
of the Long-Term Incentive Plan, or LTIP, by the named officer. See "-- Other
compensation -- Conversion of the Long-Term Incentive Plan" for more
information. Amounts under "All Other Compensation" represent the dollar value
of bonuses credited to the named officers under our stock bonus plans. See
"-- Other Compensation -- Stock Bonus Plan" and "-- Supplemental Retirement
Plan."
Fiscal 2000 Summary Compensation Table
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -----------------------------
---------------------------------- COMMON SHARES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAMED OFFICER SALARY BONUS COMPENSATION OPTIONS PAYOUTS COMPENSATION
- ------------- -------- -------- ------------ ------------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Scott A. Livengood........ $332,446 $450,339 $66,751 580,000 $151,098 $ 46,331
Chairman of the Board,
President and Chief
Executive Officer
J. Paul Breitbach......... 234,731 298,611 57,547 150,000 162,434 33,169
Executive Vice
President, Finance,
Administration and
Support Operations
John N. McAleer........... 199,845 254,232 52,903 150,000 80,636 28,240
Vice Chairman of the
Board and Executive
Vice President,
Concept Development
L. Stephen Hendrix........ 130,091 125,877 31,824 60,000 35,729 16,534
Senior Vice President,
Company Store and
Associate Operations
Robert H. Vaughn, Jr...... 139,792 133,377 3,372 60,000 -- 16,425
Senior Vice President,
Area Developer
Operations
</TABLE>
STOCK OPTIONS
In fiscal 1999, we established the 1998 Stock Option Plan. Under the terms of
the plan, as amended, 2,153,000 shares of our common stock are reserved for
issuance to employees and directors. Grants may be made to participants in the
form of either incentive stock options or nonqualified stock options. A board
committee is granted discretion to administer the plan. Options granted to
employees under the plan vest ratably over a three-year period commencing with
the second anniversary of the grant date. Options granted to directors under the
plan vest ratably over a three-year period commencing on the grant date of the
options.
In fiscal 1999, 1,558,000 options were granted to all employees as a group, and
273,000 options were granted to non-employee directors. All such grants were
made under our 1998 stock option
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plan, as amended, and are nonqualified stock options. The options are for a term
of ten years. Under the terms of the plan, any forfeitures of options by
participants for any reason will be granted to Mr. Livengood, up to a maximum of
140,000 shares. All shares of our common stock acquired pursuant to the exercise
of stock options are subject to a stock purchase agreement and, at the board
committee's discretion, a separate voting agreement, neither of which will be in
effect following the completion of this offering. No options were granted to the
named officers in fiscal 2000.
The following table shows information concerning stock options held by each of
the named officers at January 30, 2000. None of the named officers held
exercisable options as of that date. The value of unexercised in-the-money
options assumes the fair value at fiscal year end was $19.00 per share, which is
the mid-point of the range shown on the cover page of this prospectus.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
-----------------------------------------------
VALUE OF
UNEXERCISED
COMMON SHARES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS
NAMED OFFICER OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
- ------------- -------------------------- ------------------
<S> <C> <C>
Scott A. Livengood................................... 580,000 $8,015,600
J. Paul Breitbach.................................... 150,000 2,073,000
John N. McAleer...................................... 150,000 2,073,000
L. Stephen Hendrix................................... 60,000 829,200
Robert H. Vaughn, Jr................................. 60,000 829,200
</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>
Except for Mr. Vaughn, each of the named officers has five years of credited
service. Final average compensation is based solely on the officer's salary.
Benefits are computed on a straight-life annuity basis and are not subject to
any deductions.
OTHER COMPENSATION
Conversion of the Long-Term Incentive Plan
The Employees' Long-Term Incentive Plan, or the LTIP, enabled eligible employees
to defer some or all of bonuses earned under our incentive compensation plans.
The deferred amounts were
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<PAGE> 55
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 fiscal 1999, we determined that it was in Krispy Kreme's best interest to
liquidate the LTIP. Accordingly, we undertook a conversion program whereby
phantom stock units under the LTIP were converted into an equivalent number of
actual shares of Krispy Kreme common stock. Participants who elected to
participate in the conversion received a distribution of shares of our common
stock. Non-participants received a cash payout. All shares so distributed are
subject to a stock purchase agreement and a special voting agreement, neither of
which will be in effect upon completion of this offering.
Because the distribution of shares of our common stock pursuant to the
conversion triggered recognition of income for participants, we established a
loan program by which we made 10-year loans with fixed 6% rates of interest
available to senior executive participants in an amount equal to 45% of the
amount of income recognized as a result of the conversion. Pursuant to this
program, we extended loans to the following officers and directors on August 31,
1998:
<TABLE>
<CAPTION>
-----------------------------------------
AMOUNT OUTSTANDING
OFFICER OR DIRECTOR PRINCIPAL AMOUNT AS OF JANUARY 30, 2000
- ------------------- ---------------- ----------------------
<S> <C> <C>
Scott A. Livengood....................................... $449,730 $415,610
J. Paul Breitbach........................................ 532,279 491,897
John N. McAleer.......................................... 261,406 241,574
L. Stephen Hendrix....................................... 124,663 115,205
Joseph A. McAleer, Jr.................................... 504,390 466,123
</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. The amounts shown in the
"Fiscal 2000 Summary Compensation Table" under the "LTIP Payouts" column
reflects the bonuses paid to the named officers in that year.
Stock Bonus Plan
Effective February 1, 1999, we established a stock bonus plan. The stock bonus
plan provides that Krispy Kreme, in its discretion, may make annual
contributions to the plan. Contributions will be made either in the form of
Krispy Kreme stock or, if made in cash, invested primarily in Krispy Kreme
stock. Company contributions are allocated to eligible employees based on a
specific percentage of compensation.
Supplemental Retirement Plan
Effective February 1, 1999, we established a nonqualified supplemental
retirement plan for certain management employees. This plan has two components.
It provides for "make-whole" contributions to certain management employees whose
benefits under the stock bonus plan are limited as a result of legal
restrictions on the amount of compensation that can be taken into account under
the stock bonus plan. Under this component of this plan, we intend to make a
contribution consistent with the contribution made for participants in the stock
bonus plan. Contributions will be made in the form of Krispy Kreme stock, or if
made in cash, invested primarily in Krispy Kreme stock. In the future, we
anticipate that the plan will also provide eligible participants with the
opportunity to defer the same percentage of compensation that nonhighly
compensated employees can defer under our 401(k) plan.
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<PAGE> 56
Subject to tax limits, we intend to fund the stock bonus plan and the stock
bonus component of the supplemental retirement plan for fiscal 2000 by
contributing 144,737 shares of stock contemporaneously with this offering.
Amounts credited to the named officers for stock bonuses in fiscal 2000 are
shown under the "All Other Compensation" column in the "Fiscal 2000 Summary
Compensation Table."
Compensation of directors
We compensate each director who is not an employee with an annual fee of
$18,800. Beginning in our fiscal year ending January 28, 2001, this fee will be
paid quarterly. Non-employee directors also receive additional fees of $300 per
quarter for miscellaneous expenses and approximately $200 monthly for insurance
coverage for themselves and their spouses. In addition to these fees, we
reimburse each director for travel and other related expenses incurred in
attending meetings of the board of directors. In fiscal 1999, we granted each of
our seven non-employee directors nonqualified stock options for 39,000 shares
under the 1998 stock option plan. These options vest ratably over a three-year
period commencing on the grant date and have an exercise price of $5.18 per
share. Options for 91,000 shares are currently exercisable.
Restricted stock plan
In November 1993 and April 1994, the board of directors authorized the issuance
of 252,900 and 50,000 shares of restricted stock, respectively, to some of our
directors and officers. We made loans to each of the participants for the
purchase of these restricted shares. The loans were repaid over a four to six
year period and bore interest at 6% per annum. All of these loans have been
repaid and all restrictions on the purchased shares have lapsed. The following
named officers received loans to purchase restricted stock: Scott A.
Livengood -- $155,311; J. Paul Breitbach -- $116,652; and John N.
McAleer -- $52,844. Some of our other directors also received loans in amounts
not exceeding $60,000. We paid the restricted stock plan participants a bonus
each year equal to the installment due on the loan.
Area developer investment fund
We intend to establish a pooled investment fund, the Krispy Kreme Equity Group,
LLC, which will invest in new area developers. We plan to offer the opportunity
to invest in the fund to certain Krispy Kreme officers and key personnel.
Members of our board of directors who are not Krispy Kreme employees will not be
eligible to invest in the fund. It is anticipated that the fund will invest
exclusively in new area developers and will obtain up to a five percent interest
in them. If any member withdraws, Krispy Kreme has the right of first refusal
with respect to the withdrawing member's interest. The remaining members then
have the right to purchase any interest Krispy Kreme does not purchase. Finally,
Krispy Kreme is obligated to purchase any remaining interest. Members will be
required to withdraw from the fund in the event of their death, termination of
employment with Krispy Kreme or retirement.
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 will receive a salary of $375,000 for fiscal
2001 and is eligible for annual increases and a performance-based bonus.
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<PAGE> 57
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 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 will receive a salary of $214,000 for fiscal
2001 and is eligible for annual increases and 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
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<PAGE> 58
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 will receive a salary of $252,000 for fiscal
2001 and is eligible for annual increases and 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 30, 2000. Mr. McAleer is a former executive officer of Krispy Kreme, and
both Messrs. McAleer and McCoy conduct business with Krispy Kreme through
franchises as described in "Related Party Transactions."
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<PAGE> 59
PRINCIPAL SHAREHOLDERS
The following table presents information regarding the beneficial ownership of
common stock as of January 30, 2000 by: (1) each person who beneficially owns
more than 5% of our common stock; (2) each of our directors and named officers;
and (3) all current executive officers and directors as a group. Beneficial
ownership is determined under the rules of the Securities and Exchange
Commission, or SEC. These rules deem common stock subject to options currently
exercisable, or exercisable within 60 days, to be outstanding for purposes of
computing the percentage ownership of the person holding the options or of a
group of which the person is a member, but they do not deem such stock to be
outstanding for purposes of computing the percentage ownership of any other
person or group. To our knowledge, except under applicable community property
laws or as otherwise indicated, the persons named in the table have sole voting
and sole investment control with regard to all shares beneficially owned. The
applicable percentage ownership for each shareholder before the offering is
based on 9,340,220 shares of common stock outstanding as of January 30, 2000.
The percentages for after the offering give effect to the issuance of 3,000,000
shares in this offering and the contribution of 144,737 shares to our new stock
bonus plan contemporaneously with this offering.
<TABLE>
<CAPTION>
----------------------------------------
PERCENT
BENEFICIALLY
OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
- ---- ------------------ -------- --------
<S> <C> <C> <C>
John N. McAleer (1)................................... 2,680,200 28.7 21.5
Robert L. McCoy (2)(3)(4)............................. 705,380 7.5 5.6
Bonnie Silvey Vandegrift (4)(5)....................... 625,000 6.7 5.0
Carolyn McCoy (4)(6).................................. 550,000 5.9 4.4
Joseph A. McAleer, Jr. (2)............................ 455,720 4.9 3.6
J. Paul Breitbach (7)................................. 324,560 3.5 2.6
Scott A. Livengood.................................... 307,860 3.3 2.5
Steven D. Smith (2)(8)................................ 213,580 2.3 1.7
Frank E. Guthrie (2)(9)............................... 180,380 1.9 1.4
Robert J. Simmons (2)(10)............................. 113,000 1.2 *
L. Stephen Hendrix.................................... 73,460 * *
William T. Lynch (2)(11).............................. 33,000 * *
Robert L. Strickland (2)(12).......................... 33,000 * *
Robert H. Vaughn, Jr.................................. 20,000 * *
All directors and executive officers as a group (16
persons)............................................ 5,239,180 55.6 41.7
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 2,344,060 shares owned by the estate of Joseph A. McAleer, Sr., of
which Mr. John N. McAleer is the executor. Mr. McAleer's address is 370
Knollwood Street, Winston-Salem, North Carolina 27103.
(2) Includes 13,000 shares issuable upon the exercise of currently vested stock
options awarded under our stock option plan.
(3) Includes: (a) 15,000 shares owned beneficially by Patricia B. McCoy, Mr.
McCoy's spouse; (b) 20,000 shares held by the Patricia B. McCoy Revocable Trust,
a trust of which Patricia B.
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<PAGE> 60
McCoy is the sole trustee; (c) 10,000 shares held by the Robert L. McCoy
Revocable Trust, a trust of which Mr. McCoy is the sole trustee; (d) 9,200
shares held by the William Robert McCoy Trust established under the Florida
Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian;
(e) 9,300 shares held by the Julie Ann McCoy Trust established under the Florida
Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole custodian;
(f) 9,000 shares held by the Robert Bailey McCoy Trust established under the
Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is the sole
custodian; (g) 9,000 shares held by the Sarah Elizabeth McCoy Trust established
under the Florida Uniform Trust for Minors Act, a trust of which Mr. McCoy is
the sole custodian; (h) 9,000 shares held by the Lisa Michelle McCoy Trust
established under the Florida Uniform Trust for Minors Act, a trust of which Mr.
McCoy is the sole custodian; and (i) 9,000 shares held by the Michael Phillip
McCoy Trust established under the Florida Uniform Trust for Minors Act, a trust
of which Mr. McCoy is the sole custodian. Mr. McCoy's address is 8425 North
Florida Avenue, Tampa, Florida 33604.
(4) Includes 550,000 shares held by the B.L. McCoy, Jr. Residual Trust, a trust
of which Carolyn McCoy, Robert L. McCoy and Bonnie Silvey Vandegrift are
co-trustees.
(5) Mrs. Vandegrift's address is 5 Robin Circle, Brevard, North Carolina,
28712.
(6) Mrs. McCoy's address is College Walk Apartment 224, Neely Road, Brevard,
North Carolina, 28712.
(7) Includes 67,800 shares held by the Breitbach Children's Trust, a trust of
which Mr. Breitbach is the sole trustee.
(8) Includes 28,320 shares owned beneficially by Connie Sue Smith, Mr. Smith's
spouse.
(9) Includes 132,000 shares owned by Mr. Guthrie indirectly through his
ownership of 60% of the outstanding voting shares of Augusta Doughnut Company.
(10) Includes 80,000 shares owned by Mr. Simmons indirectly through his
ownership of 60% of the outstanding shares of Simac, Inc.
(11) Includes 20,000 shares owned by Mr. Lynch indirectly through his ownership
of 100% of the outstanding shares of Liam Holdings, LLC.
(12) Includes 20,000 shares held by the Robert Louis Strickland Revocable Living
Trust, a trust of which Mr. Strickland is the sole trustee.
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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 1, 1998 JANUARY 31, 1999 JANUARY 30, 2000
- -------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
In thousands
Frank E. Guthrie:
Augusta Doughnut Company..................... $ 639 $ 669 $ 834
Classic City Doughnuts Corp.................. 229 236 291
Frank E. Guthrie and Robert L. McCoy:
Magic City Doughnuts Corporation............. -- 1 1,073
Joseph A. McAleer, Jr.:
Mackk LLC.................................... -- 1,878 2,110
Joseph A. McAleer, Jr. and Steven D. Smith:
Dallas Doughnuts............................. -- -- 1,335
Robert L. McCoy:
Gulf Florida Doughnut Corp................... 1,290 1,868 2,416
Robert J. Simmons:
Simac, Inc................................... 578 576 997
Steven D. Smith:
Dales Doughnut Corp.......................... 646 803 833
Dale's Doughnuts of Dothan, Inc.............. 287 288 315
Smiths Doughnuts, Inc........................ 429 435 456
</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 January
30, 2000. 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 January 30,
2000. 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 $338,000 in fiscal 1998, $361,000 in fiscal 1999 and $446,000 in fiscal
2000. Since September 1998, Pat Silvernail has operated two stores in Macon,
Georgia through S&P of Macon,
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<PAGE> 62
Inc. Total Support Operations sales to and royalties from S&P of Macon were
$285,000 in fiscal 1999 and $1,031,000 in fiscal 2000.
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 qualifications
and to provide financial assistance in the form of collateral repurchase
agreements and company guaranties of bank loans. We established similar
franchise opportunity plans for store managers and associate operators. We
anticipate terminating the plan, except for existing participants with whom we
have entered into or agreed to enter into a franchise agreement. The collateral
repurchase agreements and guaranties we have made pursuant to the Kingsmill Plan
are described below.
DEVELOPMENT RIGHTS OF OFFICERS AND DIRECTORS
We entered into a letter agreement with Mr. Scott A. Livengood, our Chairman,
President and Chief Executive Officer, on April 12, 1994. We granted Mr.
Livengood the option to develop stores in Alamance, Durham and Orange Counties,
North Carolina, and the State of Colorado pursuant to the Kingsmill Plan. Mr.
Livengood subsequently relinquished his development rights to the State of
Colorado and obtained the rights to develop stores in Northern California, also
pursuant to the Kingsmill Plan. Mr. Livengood anticipates releasing these rights
in favor of Krispy Kreme in exchange for the right to purchase a minority
interest (approximately 6.0%) in future joint ventures between Krispy Kreme and
area developers, including the Northern California joint venture. Mr. Livengood
will not be active in the management of the ventures while employed by Krispy
Kreme. Also, he will not receive any financial assistance from us under the
Kingsmill Plan or any other arrangement. Additionally, the terms of the
franchise agreements for these ventures will be consistent with other area
developers.
In August 1999, Mr. John N. McAleer, our Vice Chairman and Executive Vice
President, Concept Development, obtained area development rights for the
metropolitan areas of Portland and Seattle pursuant to the Kingsmill Plan. Mr.
McAleer released these rights in favor of Krispy Kreme. Mr. McAleer has
purchased a minority interest in a limited liability company to which Krispy
Kreme has granted area development rights for the metropolitan areas of
Portland, Seattle, Anchorage, Hawaii and Vancouver. Mr. McAleer will not be
active in the management of the territory while employed by Krispy Kreme. Also,
he will not receive any financial assistance from us under the Kingsmill Plan or
any other arrangement. Additionally, the terms of the franchise agreement for
this territory will be consistent with other area developers.
Pursuant to the Kingsmill Plan, we are a party to an area development agreement
with Midwest Doughnuts, LLC, dated May 29, 1996. Mr. Philip R.S. Waugh, Jr., our
Senior Vice President, Franchise Development, owns 50% of the membership
interests in Midwest Doughnuts. Under the terms of the agreement, the area
developer is required to open a minimum of four stores in the Kansas City
territory, three of which were open as of January 30, 2000. The requirement to
open a fourth store has been suspended. Total Support Operations sales to and
royalties from Midwest Doughnuts were $545,000 in 1998, $1.4 million in fiscal
1999 and $1.5 million in fiscal 2000.
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,
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<PAGE> 63
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 Mr. Guthrie, a trust of which Mr. McCoy
is the sole trustee and Mrs. Patricia B. McCoy, who is Mr. McCoy's spouse. In
the event that the borrower defaults on the loan, we are obligated to repurchase
the equipment at a purchase price equal to the lesser of $302,000 or the unpaid
balance of the loan. We are also obligated to purchase the pledged shares from
the bank at book value.
On September 18, 1998, we entered into a guaranty agreement with Mr. Beattie F.
Armstrong and Beattie F. Armstrong, Inc. for Mr. Pat Silvernail and his wife,
Mrs. Shannon McAleer Silvernail, and S&P of Macon, Inc., our Macon, Georgia
franchisee. Mrs. Silvernail is the sister of, and Mr. Silvernail is consequently
a brother-in-law to, Mr. Joseph A. McAleer, Jr. and Mr. John N. McAleer. Under
the terms of the agreement, we agreed to guarantee two loans in the combined
original principal amount of $1.0 million obtained by the Silvernails and S&P of
Macon to finance the purchase of a Krispy Kreme associates' license agreement
and the two Macon stores.
On March 31, 1998 and December 31, 1998, respectively, we entered into a
collateral repurchase agreement and a guaranty agreement in favor of Bank of
Blue Valley with respect to a loan in the amount of $765,000 incurred by Midwest
Doughnuts under the terms of the Kingsmill Plan. Mr. Philip R.S. Waugh, Jr., who
is our Senior Vice President, Franchise Development, is a 50% owner of Midwest
Doughnuts. The loan is secured by the equipment used in the operation of a
Krispy Kreme store located in Merriam, Kansas. In the event Midwest Doughnuts
defaults on the loan, we are obligated to repurchase the equipment at a purchase
price equal to the lesser of $335,000 or the unpaid portion of the loan used to
fund the purchase of the pledged assets. In addition to our obligation under the
collateral repurchase agreement, we are obligated under the guaranty agreement
to pay the lender up to $205,000 in the event Midwest Doughnuts defaults on the
loan. This loan has been repaid and we have been released from our obligations
under both the collateral repurchase agreement and our guaranty agreement.
On January 30, 1998, we entered into a collateral repurchase agreement in favor
of Branch Banking and Trust Company with respect to loans incurred by Mackk, LLC
in the maximum aggregate principal amount of $1.8 million. Mr. Joseph A.
McAleer, Jr. is the manager and owner of Mackk, LLC. The loans are secured in
part by the equipment and other items of personal property used in the operation
of three Krispy Kreme stores located in Mobile, Alabama. The loans are further
secured by a pledge of shares of Krispy Kreme stock owned by Mr. McAleer. In the
event that Mackk, LLC defaults on the loans, we are obligated to repurchase the
equipment and personal property at a purchase price equal to the lesser of
$325,000 or the unpaid portion of the loans used to fund the purchase of the
pledged assets. We are also required to purchase the pledged shares from the
bank at book value in the event of default. We have been released from our
obligations under this collateral repurchase agreement.
On January 2, 1998, we entered into a collateral repurchase agreement in favor
of Branch Banking and Trust Company with respect to a loan incurred by the
Brevard Tennis and Athletic Club,
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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. This loan has been repaid and we have been
released from our obligations under both the collateral repurchase agreement and
the guaranty agreement.
On December 1, 1997, we entered into a commitment letter among Krispy Kreme,
Branch Banking and Trust Company, Mr. Waugh and the other owners of Midwest
Doughnuts pursuant to the Kingsmill Plan. Under the terms of the commitment
letter, we agreed to guarantee loans obtained by Mr. Waugh and the other members
of Midwest Doughnuts to finance the development of two Krispy Kreme stores in
the Kansas City territory. Our maximum liability under the two guaranties was
limited to $150,000. We have been released from these guarantees.
On October 22, 1996, we entered into a collateral repurchase agreement in favor
of Branch Banking and Trust Company with respect to a loan incurred by Gulf
Florida Doughnut Corp. in the original principal amount of $180,000. Mr. McCoy,
one of our directors, is the President and majority owner of Gulf Florida
Doughnut Corp. The loan is secured by a pledge of Mr. McCoy's Krispy Kreme
shares. In the event that the borrower defaults on the loan, we are obligated to
purchase the pledged shares from the bank at book value.
On May 29, 1996, we entered into a collateral repurchase agreement and a
guaranty agreement in favor of The First National Bank of Olathe with respect to
a loan in the amount of $905,000 incurred by Mr. Waugh and the other members of
Midwest Doughnuts under the terms of the Kingsmill Plan. The loan is secured by
the equipment used in the operation of a Krispy Kreme store located in
Independence, Missouri. In the event Midwest Doughnuts defaults on the loan, we
are obligated to repurchase the equipment at a purchase price equal to the
lesser of $300,000 or the unpaid portion of the loan used to fund the purchase
of the pledged assets. In addition to our obligation under the collateral
repurchase agreement, we are obligated under the guaranty agreement to pay the
lender up to $300,000 in the event Midwest Doughnuts defaults on the loan.
On May 16, 1996, we entered into a guaranty agreement with Branch Banking and
Trust Company for Mr. Waugh and the other members of Midwest Doughnuts pursuant
to the Kingsmill Plan. Under the terms of the agreement, we agreed to guarantee
a loan in the original principal amount of $200,000 obtained by Mr. Waugh and
the other members of Midwest Doughnuts to finance expansion in the Kansas City
market. Our maximum liability under the guaranty was limited to $175,000. We
have been released from the guaranty.
On March 1, 1996, we entered into a collateral repurchase agreement in favor of
Wachovia Bank of North Carolina, N.A. with respect to two separate loans
incurred by Mr. Steven D. Smith, one of our directors, in the original principal
amounts of $310,000 and $900,000. The loans were secured by store equipment and
other personal property and a pledge of Mr. Smith's Krispy Kreme shares.
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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 agreement in favor of Branch Banking and Trust Company with respect
to Krispy Kreme stock pledged by Mrs. Dorgan, who is a sister to Messrs. Joseph
A. McAleer, Jr. and John N. McAleer, as collateral for the loan. Under the terms
of the collateral repurchase agreement, in the event of default on the loan, we
are required to repurchase the pledged common stock at book value and/or the
equipment under the terms of the equipment repurchase agreement.
On February 1, 1993, we entered into an equipment repurchase agreement and
amendment to associate's license agreement with Mr. Smith, one of our directors.
Upon termination of Mr. Smith's associates' license agreement for any reason, we
are obligated to repurchase some equipment used in the operation of the
franchise store in Dothan, Alabama at a purchase price equal to the greater of
its amortized cost or 20% of its original cost of $335,000. Mr. Smith operates
his Dothan franchise through Dale's Doughnuts of Dothan, Inc. We have been
released from our obligations under this repurchase agreement.
On September 22, 1992, we entered into an equipment repurchase and amendment to
associates' license agreement with Mr. Guthrie, one of our directors. Upon the
termination of Mr. Guthrie's associates' license agreement for any reason, we
are obligated to repurchase some equipment used in the operation of the
franchise store in Athens, Georgia at a purchase price equal to the greater of
its amortized cost or 20% of its original cost of $348,000. Mr. Guthrie operates
his Athens franchise through Classic City Doughnuts.
LOAN AGREEMENTS AND OTHER TRANSACTIONS
We have entered into loan agreements with some of our directors and officers as
described below.
On March 13, 1997 and October 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.
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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 20 shares of common
stock in our holding company, plus $15.00 in cash, in exchange for each share of
operating subsidiary common stock they hold.
We have extended loans to some of our officers and directors to cover tax
payments in connection with the conversion of our LTIP and to purchase shares of
restricted stock, as described in "Management -- Executive Compensation -- Other
compensation."
POLICY ON RELATED PARTY TRANSACTIONS
On November 10, 1999, our board of directors adopted a resolution whereby all
future transactions with related parties, including any loans from us to our
officers, directors, principal shareholders or affiliates, must be approved by a
majority of the disinterested members of the board of directors and must be on
terms no less favorable to us than could be obtained from unaffiliated third
parties. The audit committee of the board of directors will be responsible for
reviewing all related party transactions on a continuing basis and potential
conflict of interest situations where appropriate.
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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, 12,484,957 shares of common stock
and no shares of preferred stock will be outstanding. As of January 30, 2000, we
had approximately 146 shareholders.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Thus, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of common stock are entitled to receive ratably any dividends
that may be declared by our board of directors out of funds legally available
for dividends, subject to any preferential dividend rights of outstanding
preferred stock. If we liquidate, dissolve or wind up, the holders of common
stock are entitled to receive ratably all of our assets available after payment
of all debts and other liabilities, subject to the prior rights of any
outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights or any rights to share in any
sinking fund. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future. There has been no established public trading market for our
common stock before this offering.
PREFERRED STOCK
Our articles of incorporation authorize the issuance of up to 10,000,000 shares
of preferred stock from time to time in one or more series and with terms of
each series stated in our board's resolutions providing for the designation and
issue of that series. Our articles also authorize the board of directors to
determine the dividend, voting, conversion, redemption and liquidation
preferences, rights, privileges and limitations pertaining to each series of
preferred stock that we issue. Without seeking any shareholder approval, our
board of directors may issue preferred stock with voting and other rights that
could adversely affect the voting power of the holders of our common stock and
could have the effect of delaying, deferring or preventing a change in control.
Other than the issuance of the series of preferred stock previously authorized
by the board of directors in connection with the shareholder rights plan
described below, we have no present plans to issue any shares of preferred
stock.
ANTI-TAKEOVER PROVISIONS OF KRISPY KREME'S ARTICLES OF INCORPORATION, BYLAWS AND
SHAREHOLDER RIGHTS PLAN
The rights of our shareholders are governed by provisions in our articles of
incorporation, bylaws and shareholder rights plan that are intended to affect
any attempted change in control. Our articles of incorporation opt us out of
some provisions of North Carolina law that would otherwise affect attempted
changes in control of Krispy Kreme.
CLASSIFICATION OF DIRECTORS
Our bylaws provide that our board of directors consists of not more than 15 nor
less than nine members. The board of directors has the power to set the
authorized number of directors by majority vote of the whole board within those
limits. The board currently consists of nine directors, two of whom are employed
by Krispy Kreme and five of whom are Krispy Kreme franchisees. Our bylaws also
divide the board into three classes serving staggered three-year terms. The
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classification of directors could prevent a shareholder, or group of
shareholders, having majority voting power, from obtaining control of our board
until the second annual shareholders' meeting following the date that the
shareholder, or group of shareholders, obtains majority voting power. Thus, this
provision may discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of us.
ADVANCE NOTICE PROVISIONS
Our bylaws provide that shareholders must provide timely notice in writing to
bring business before an annual meeting of shareholders or to nominate
candidates for election as directors at an annual meeting of shareholders.
Notice for an annual meeting is timely if our Secretary receives the written
notice not less than 40 days prior to the scheduled annual meeting. If less than
50 days notice of the meeting is given or made by us to the shareholders, a
shareholder's notice will be timely if received by our Secretary on the tenth
day following the date such notice was given or made.
The bylaws also specify the form and content of a shareholder's notice. These
provisions may prevent shareholders from bringing matters before an annual
meeting of shareholders or from making nominations for directors at an annual
meeting of shareholders.
SHAREHOLDER RIGHTS PLAN
On January 18, 2000, our board of directors declared 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 $96.00 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
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preferred shares will be entitled to a minimum preferential liquidation payment
of $1.00 per share but will be entitled to an aggregate payment of 100 times the
payment made per share of common stock. Each Series A preferred share will have
100 votes, voting together with the shares of common stock. Finally, in the
event of any merger, consolidation or other transaction in which shares of
common stock are exchanged, each Series A preferred share will be entitled to
receive 100 times the amount received per share of common stock. These rights
are protected by customary antidilution provisions.
Before the date the share purchase rights are exercisable, the share purchase
rights may not be detached or transferred separately from the common stock. The
share purchase rights will expire on January 18, 2010, 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 Branch Banking and Trust Company, 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,
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employees, agents and other persons to the fullest extent permitted by North
Carolina law. Our bylaws obligate us, under certain circumstances, to advance
expenses to our directors, officers, employees and agents in defending an
action, suit or proceeding for which indemnification may be sought. We can also
indemnify someone serving at our request as a director, officer, trustee,
partner, employee or agent of one of our subsidiaries or of any other
organization against these liabilities.
Our bylaws also provide that we have the power to purchase and maintain
insurance on behalf of any person who is or was one of our directors, officers,
employees or agents against any liability asserted against that person or
incurred by that person in these capacities, whether or not we would have the
power to indemnify that person against these liabilities under North Carolina
law. We maintain insurance on behalf of all of our directors and executive
officers.
TRANSFER AGENT AND REGISTRAR
Branch Banking and Trust Company will act as the transfer agent and registrar
for our common stock.
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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 approximately 12.5 million shares
of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options under the plan. Of
these shares, the 3 million shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933, unless held by affiliates of our company, as that term is defined
in Rule 144 under the Securities Act. For purposes of Rule 144, an affiliate is
a person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, Krispy Kreme. Any
shares held by one of our affiliates will be subject to the resale limitations
of restricted stock as defined in Rule 144 under the Securities Act.
All of our officers and directors, and shareholders owning over 99% of our
outstanding common stock, 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
Deutsche Bank Securities Inc., subject to some exceptions. In addition, certain
purchasers in our directed share program -- under which we have reserved up to
15% of the shares in this offering -- will agree not to sell any shares they
purchase in the program for one year after the date of this prospectus without
our prior written consent, subject to some exceptions.
Beginning one year after this offering, 9.3 million shares will become eligible
for sale in reliance upon Rule 144 under the Securities Act. It is possible that
these shares may be sold sooner if the sale is registered under the Securities
Act. We may, but are not obligated to, undertake such a registration to permit
our shareholders to sell their shares in the public market or in private
transactions after the expiration of the contractual restrictions described
above.
In general, under Rule 144 as currently in effect, a person who has beneficially
owned shares of our common stock for at least one year is entitled to sell,
within any three-month period, a number of shares that is not more than the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 125,000 shares immediately after this offering, or
- the average weekly trading volume of the common stock during the four
calendar weeks before a notice of the sale is filed.
Sales under Rule 144 must also comply with manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who has not been one of our affiliates at any time
during the 90 days before a sale, and who has beneficially owned the restricted
shares for at least two years, is entitled to sell the shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon regarding the resale of securities
originally purchased from us by our employees, directors, officers, consultants
or advisors before the date we become subject to the reporting requirements of
the Exchange Act, under written compensatory benefit plans or written contracts
relating to compensation of those persons. In addition, the SEC has indicated
that
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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. Based on stock
option grants as of the date of this prospectus, options for 182,000 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 Deutsche Bank 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.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., J.P. Morgan Securities Inc., Dain Rauscher Incorporated and BB&T Capital
Markets, a division of Scott & Stringfellow, Inc. have severally agreed to
purchase from Krispy Kreme the following respective number of shares of common
stock at a public offering price less the underwriting discounts and commissions
set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
----------------
NUMBER OF SHARES
UNDERWRITERS ----------------
<S> <C>
Deutsche Bank Securities Inc................................
J.P. Morgan Securities Inc..................................
Dain Rauscher Incorporated..................................
BB&T Capital Markets/Scott & Stringfellow, Inc..............
---------
Total............................................. 3,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public at
the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of
$ per share under the public offering price. The underwriters may
allow, and these dealers may re-allow, a concession of not more than $
per share to other dealers. After the initial public offering, representatives
of the underwriters may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 450,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered hereby. To the extent that
the underwriters exercise this option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the same percentage
of additional shares of common stock as the number of shares of common stock to
be purchased by it in the above table bears to the total number of shares of
common stock offered hereby. We will be obligated, pursuant to the option, to
sell these additional shares of common stock to the underwriters to the extent
the option is exercised. If any additional shares of common stock are purchased,
the underwriters will offer the additional shares on the same terms as those on
which the 3,000,000 shares are being offered.
The underwriting fee is equal to the public offering price per share of common
stock less the amount paid by the underwriters to us per share of common stock.
The underwriting fee is 7.0%
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of the initial public offering price. We have agreed to pay the underwriters the
following fees, assuming either no exercise or full exercise by the underwriters
of the underwriters' over-allotment option:
<TABLE>
<CAPTION>
TOTAL FEES
------------------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE
FEE PER OVER-ALLOTMENT OF OVER-ALLOTMENT
SHARE OPTION OPTION
----------- ------------------- ------------------
<S> <C> <C> <C>
Fees paid by Krispy Kreme..................... $ $ $
</TABLE>
In addition, we estimate that our share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $1.2
million.
We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act of 1933, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.
Each of our officers and directors, and shareholders owning over 99% of our
outstanding common stock, have agreed not to offer, sell, contract to sell or
otherwise dispose of, or enter into any transaction that is designed to, or
could be expected to, result in the disposition of any portion of our common
stock held by these persons prior to this offering or common stock issuable upon
exercise of options held by these persons for a period of 180 days after the
effective date of the registration statement of which this prospectus is a part
without the prior written consent of Deutsche Bank Securities Inc., subject to
limited exceptions. This consent may be given at any time without public notice.
The representatives of the underwriters have advised us that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
In order to facilitate the offering of our common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of our common stock. Specifically, the underwriters may over-allot shares
of our common stock in connection with this offering, thus creating a short
position in our common stock for their own account. A short position results
when an underwriter sells more shares of common stock than that underwriter is
committed to purchase. Additionally, to cover these over-allotments or to
stabilize the market price of our common stock, the underwriters may bid for,
and purchase, shares of our common stock in the open market. Finally, the
representatives, on behalf of the underwriters, may also reclaim selling
concessions allowed to an underwriter or dealer if the underwriting syndicate
repurchases shares distributed by that underwriter or dealer. Any of these
activities may maintain the market price of our common stock at a level above
that which might otherwise prevail in the open market. These transactions may be
effected on the Nasdaq National Market or otherwise. The underwriters are not
required to engage in these activities and, if commenced, may end any of these
activities at any time.
At our request, the underwriters have reserved shares of common stock for sale
to our officers, directors and management, Krispy Kreme franchisees and some of
their management, current shareholders, persons having business relationships
with us and friends who have expressed an interest in participating in this
offering, through a directed share program. We expect these persons to purchase
no more than 15% of the common stock offered in this offering. It is expected
that select participants in the directed share program will enter into one-year
lock-up agreements with Krispy Kreme. 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.
71
<PAGE> 75
As described under "Use of Proceeds" in this prospectus, we intend to use a
portion of the proceeds of this offering to repay borrowings under our existing
loan agreement with our bank, Branch Banking and Trust Company. We estimate that
this repayment will exceed 10% of the net proceeds we receive from this
offering. BB&T Capital Markets, a division of Scott & Stringfellow, Inc., one of
the representatives, is an affiliate of Branch Banking and Trust Company. In
view of this relationship, this offering is being conducted in accordance with
Conduct Rules 2710(c)(8) and 2720(c)(3) of the National Association of
Securities Dealers, Inc., which provide that the offering price to the public
may not be higher than that recommended by a qualified independent underwriter
who has participated in the preparation of the registration statement and
prospectus and has exercised the usual standards of due diligence with respect
thereto. J.P. Morgan Securities Inc. has agreed to serve as the qualified
independent underwriter, and the offering price to the public will not be higher
than the price recommended by J.P. Morgan Securities Inc.
From time to time in the ordinary course of their respective businesses, some of
the underwriters and their affiliates have engaged in and may in the future
engage in commercial banking and/or investment banking transactions with Krispy
Kreme and its affiliates.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock has been
determined by negotiation among us and the representatives of the underwriters.
Among the primary factors considered in determining the public offering price
were:
- Prevailing market conditions
- Our results of operations in recent periods
- The present stage of our development
- The market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business
- Estimates of our business potential
LEGAL MATTERS
Certain legal matters with respect to the validity of common stock offered
hereby are being passed upon for us by Kilpatrick Stockton LLP, Atlanta, Georgia
and Winston-Salem, North Carolina. Cahill Gordon & Reindel, New York, New York,
is acting as counsel to the underwriters in connection with certain legal
matters relating to the common stock offered hereby.
EXPERTS
The financial statements of Krispy Kreme Doughnut Corporation as of January 31,
1999 and January 30, 2000 and for each of the three years in the period ended
January 30, 2000 and the balance sheet of Krispy Kreme Doughnuts, Inc. as of
January 30, 2000 included in this prospectus have been so included in reliance
on the reports of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
72
<PAGE> 76
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.
73
<PAGE> 77
KRISPY KREME DOUGHNUT CORPORATION
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
KRISPY KREME DOUGHNUTS, INC.
INDEX TO THE FINANCIAL STATEMENT
<TABLE>
<CAPTION>
PAGE
AUDITED BALANCE SHEET ----
<S> <C>
Report of Independent Accountants........................... F-24
Balance Sheet............................................... F-25
Notes to Balance Sheet...................................... F-25
</TABLE>
F-1
<PAGE> 78
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 January 31, 1999 and
January 30, 2000, and the results of their operations and their cash flows for
each of the three years in the period ended January 30, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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 6, 2000, except as to Note 18
which is as of March 13, 2000
F-2
<PAGE> 79
KRISPY KREME DOUGHNUT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------------------
PRO FORMA
JANUARY 30,
JANUARY 31, JANUARY 30, 2000
1999 2000 (NOTE 16)
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 4,313 $ 3,183 $ 3,183
Accounts receivable, less allowance for doubtful accounts
of $975 (1999) and $1,324 (2000)......................... 13,775 17,965 17,965
Accounts receivable, affiliates............................ 1,297 1,608 1,608
Other receivables.......................................... 535 794 794
Inventories................................................ 9,886 9,979 9,979
Prepaid expenses........................................... 1,529 3,148 3,148
Income taxes refundable.................................... -- 861 861
Deferred income taxes...................................... 2,120 3,500 3,500
Assets held for sale....................................... 325 -- --
------- -------- --------
Total current assets............................. 33,780 41,038 41,038
Property and equipment, net................................ 53,575 60,584 60,584
Deferred income taxes...................................... 3,036 1,398 1,398
Other assets............................................... 2,921 1,938 1,938
------- -------- --------
Total assets..................................... $93,312 $104,958 $104,958
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... $11,536 $ 13,106 $ 13,106
Dividends payable.......................................... 1,518 -- --
Capital distribution to shareholders payable............... -- -- 7,005
Accrued salaries and wages................................. 2,446 3,256 3,256
Accrued restructuring expenses............................. 1,690 1,115 1,115
Accrued expenses........................................... 4,648 9,709 9,709
Current maturities of long-term debt....................... 2,400 2,400 2,400
Income taxes payable....................................... 1,155 -- --
------- -------- --------
Total current liabilities........................ 25,393 29,586 36,591
------- -------- --------
Compensation deferred (unpaid)............................. 792 990 990
Long-term debt............................................. 18,620 20,502 20,502
Accrued restructuring expenses............................. 4,742 4,259 4,259
Other long-term obligations................................ 1,518 1,866 1,866
------- -------- --------
Total long-term liabilities...................... 25,672 27,617 27,617
SHAREHOLDERS' EQUITY -- SUBJECT TO REDEMPTION:
Common stock, $10 par value, 1,000 shares authorized;
issued and outstanding -- 467 (1999 and 2000)............ 4,670 4,670 4,670
Paid-in capital............................................ 10,805 10,805 10,805
Notes receivable, employees................................ (2,099) (2,547) (2,547)
Retained earnings.......................................... 28,871 34,827 27,822
------- -------- --------
Total shareholders' equity....................... 42,247 47,755 40,750
------- -------- --------
Total liabilities and shareholders' equity....... $93,312 $104,958 $104,958
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 80
KRISPY KREME DOUGHNUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Total revenues............................................. $158,743 $180,880 $220,243
Operating expenses......................................... 140,207 159,941 190,003
General and administrative expenses........................ 9,530 10,897 14,856
Depreciation and amortization expenses..................... 3,586 4,278 4,546
Provision for restructuring................................ -- 9,466 --
-------- -------- --------
Income (loss) from operations.............................. 5,420 (3,702) 10,838
Interest income............................................ 179 181 293
Interest expense........................................... 1,603 1,507 1,525
(Gain) loss on sale of property and equipment.............. (529) 251 --
-------- -------- --------
Income (loss) before income taxes.......................... 4,525 (5,279) 9,606
Provision (benefit) for income taxes....................... 1,811 (2,112) 3,650
-------- -------- --------
Net income (loss).......................................... $ 2,714 $ (3,167) $ 5,956
======== ======== ========
Basic earnings (loss) per share............................ $ 7.45 $ (7.68) $ 12.75
======== ======== ========
Diluted earnings (loss) per share.......................... $ 7.45 $ (7.68) $ 12.13
======== ======== ========
Pro forma (Unaudited -- Note 7):
Basic earnings (loss) per share.......................... $ .37 $ (.38) $ .64
======== ======== ========
Diluted earnings (loss) per share........................ $ .37 $ (.38) $ .61
======== ======== ========
Supplemental (Unaudited -- Note 7):
Basic earnings per share................................. $ .61
========
Diluted earnings per share............................... $ .58
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 81
KRISPY KREME DOUGHNUT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
COMMON COMMON PAID-IN UNEARNED NOTES RETAINED SHAREHOLDERS'
SHARES STOCK CAPITAL COMPENSATION RECEIVABLE EARNINGS EQUITY
------ ------ ------- ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of February 2,
1997...................... 364 $3,642 $ 1,102 $(181) $ (68) $32,022 $36,517
--- ------ ------- ----- ------- ------- -------
Net income for the year
ended February 1, 1998.... -- -- -- -- -- 2,714 2,714
Cash dividends on common
stock ($3.25 per share)... -- -- -- -- -- (1,180) (1,180)
Compensation expense
associated with the
restricted stock plan..... -- -- -- 181 -- -- 181
Collections on notes
receivable................ -- -- -- -- 34 -- 34
--- ------ ------- ----- ------- ------- -------
Balance as of February 1,
1998...................... 364 $3,642 $ 1,102 $ -- $ (34) $33,556 $38,266
--- ------ ------- ----- ------- ------- -------
Net loss for the year ended
January 31, 1999.......... -- -- -- -- -- (3,167) (3,167)
Cash dividends on common
stock ($3.25 per share)... -- -- -- -- -- (1,518) (1,518)
Collections on notes
receivable................ -- -- -- -- 34 -- 34
Conversion of Long-Term
Incentive Plan shares to
common stock.............. 59 590 5,522 -- -- -- 6,112
Sale of common stock........ 44 438 4,181 -- -- -- 4,619
Issuance of notes
receivable................ -- -- -- -- (2,099) -- (2,099)
--- ------ ------- ----- ------- ------- -------
Balance as of January 31,
1999...................... 467 $4,670 $10,805 $ -- $(2,099) $28,871 $42,247
Net income for the year
ended January 30, 2000.... -- -- -- -- -- 5,956 5,956
Collections on notes
receivable................ -- -- -- -- 226 -- 226
Issuance of notes
receivable................ -- -- -- -- (674) -- (674)
--- ------ ------- ----- ------- ------- -------
Balance as of January 30,
2000...................... 467 $4,670 $10,805 $ -- $(2,547) $34,827 $47,755
=== ====== ======= ===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 82
KRISPY KREME DOUGHNUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 2,714 $ (3,167) $ 5,956
Items not requiring (providing) cash:
Depreciation and amortization............................ 3,586 4,278 4,546
Deferred income taxes.................................... 392 (3,658) 258
Loss (gain) on disposal of property and equipment, net... (529) 251 --
Compensation deferred.................................... 661 -- --
Provision for restructuring.............................. -- 9,466 (127)
Provision for store closings and impairment.............. -- 2,336 1,139
Other.................................................... 795 -- --
Change in assets and liabilities:
Receivables.............................................. (675) (3,422) (4,760)
Inventories.............................................. (1,034) (1,881) (93)
Prepaid expenses......................................... 281 (252) (1,619)
Income taxes, net........................................ 697 1,397 (2,016)
Accounts payable......................................... 618 4,584 1,570
Accrued restructuring expenses........................... (11) -- (1,185)
Accrued expenses......................................... (77) 1,008 4,966
Deferred compensation and other long-term obligations.... (291) 742 345
------- -------- --------
Net cash provided by operating activities........ 7,127 11,682 8,980
------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................... (6,707) (12,374) (11,335)
Proceeds from disposal of property and equipment........... 1,740 -- --
Proceeds from disposal of assets held for sale............. 1,293 -- 830
Increase in other assets................................... (2,747) (841) --
Decrease in other assets................................... 525 1,389 479
------- -------- --------
Net cash used for investing activities:.......... (5,896) (11,826) (10,026)
------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of long-term debt................................ (2,400) (2,400) (2,400)
Net borrowings from revolving line of credit............... 3,083 2,550 4,282
Proceeds from stock offering............................... -- 4,619 --
Cash dividends paid........................................ (1,173) (1,180) (1,518)
Issuance of notes receivable............................... -- (2,099) (674)
Collection of notes receivable............................. 34 34 226
------- -------- --------
Net cash provided by (used for) financing
activities:.................................... (456) 1,524 (84)
------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 775 1,380 (1,130)
Cash and cash equivalents at beginning of year............. 2,158 2,933 4,313
------- -------- --------
Cash and cash equivalents at end of year................... $ 2,933 $ 4,313 $ 3,183
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 83
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. Krispy Kreme Doughnut Corporation and its subsidiaries (the
Company) are engaged principally in the sale of doughnuts and related items
through Company-owned stores. The Company also derives revenue from franchise
and development fees and the collection of royalties from franchisees.
Additionally, the Company sells doughnutmaking equipment and mix to
Company-owned and franchised stores.
The significant accounting policies followed by the Company in preparing the
accompanying financial statements are as follows:
BASIS OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its 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
years ended February 1, 1998, January 31, 1999 and January 30, 2000 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure about the fair
F-7
<PAGE> 84
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of certain instruments. Cash, accounts receivable, accounts payable,
accrued liabilities and variable rate debt are reflected in the financial
statements at cost which approximates fair value because of the short-term
maturity of these instruments.
ADVERTISING COSTS. All costs associated with advertising and promoting products
are expensed in the period incurred.
STORE OPENING COSTS. Costs incurred to open either Company or franchise stores
are expensed in the period incurred.
STORE CLOSING COSTS. When a decision is made to close a store, the Company
records a charge to cover the estimated costs of the planned store closing
including (1) the unrecoverable portion of the remaining lease payments on
leased stores, (2) the write-down of store assets to reflect estimated
realizable values (recorded as a reduction of the recorded asset on the
Company's consolidated balance sheet), and (3) other costs associated with the
store closing. Other closing costs and the current portion of lease liabilities
are recorded in Accrued Expenses on the Company's consolidated balance sheet.
The long-term portion of lease liabilities is recorded in Other Long-Term
Obligations.
At the store closing date, the Company discontinues depreciation on all assets
related to closed store properties. Disposition efforts on assets held for sale
begin immediately following the store closing. Reductions in the amount accrued
for store closings represent ongoing lease payments on remaining lease
obligations.
REVENUE RECOGNITION. A summary of the revenue recognition policies for each
segment of the Company (see Note 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.
STOCK-BASED COMPENSATION. The Company accounts for employee stock options in
accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees." Under APB 25, the Company recognizes no
compensation expense related to employee stock options, as no options are
granted below the market price at the grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
recognition of compensation expense based on the fair value of options on the
grant date but allows companies to continue applying APB 25 if certain pro forma
disclosures are made assuming hypothetical fair value method application. For
additional information on the Company's stock options, including pro forma
disclosures required by SFAS 123, refer to Note 10.
F-8
<PAGE> 85
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject
the Company to credit risk consist principally of accounts receivable. Accounts
receivable are primarily from grocery and convenience stores. The Company
performs ongoing credit evaluations of its customers' financial condition. The
Company has one customer that accounted for 10.2% of total revenues for fiscal
2000. The Company's two largest customers accounted for 17.9% of total revenues
for the year. Accounts receivable for these two customers accounted for
approximately 42.5% of net accounts receivable at January 30, 2000.
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 30, 2000, the
Company does not have any items of other comprehensive income to report.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," effective for years beginning after June 15, 2000, the
Company's 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 SFAS 133 is not
expected to have a material impact on the financial statements of the Company.
2. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
DISTRIBUTION EQUIPMENT MIX COMPANY
CENTER DEPARTMENT DEPARTMENT STORES TOTAL
------------ ---------- ---------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
JANUARY 31, 1999
Raw materials............................ $ -- $2,750 $412 $1,247 $4,409
Work in progress......................... -- 46 -- -- 46
Finished goods........................... 724 1,281 22 -- 2,027
Purchased merchandise.................... 2,843 -- -- 540 3,383
Manufacturing supplies................... -- -- 21 -- 21
------ ------ ---- ------ ------
Totals......................... $3,567 $4,077 $455 $1,787 $9,886
====== ====== ==== ====== ======
JANUARY 30, 2000
Raw materials............................ $ -- $2,821 $444 $1,335 $4,600
Work in progress......................... -- 57 -- -- 57
Finished goods........................... 321 1,298 39 -- 1,658
Purchased merchandise.................... 3,129 -- -- 498 3,627
Manufacturing supplies................... -- -- 37 -- 37
------ ------ ---- ------ ------
Totals......................... $3,450 $4,176 $520 $1,833 $9,979
====== ====== ==== ====== ======
</TABLE>
F-9
<PAGE> 86
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
-------------------------
JANUARY 31, JANUARY 30,
1999 2000
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $11,129 $11,144
Buildings................................................... 22,703 24,606
Machinery and equipment..................................... 40,237 47,701
Leasehold improvements...................................... 8,262 9,627
Construction in progress.................................... 22 165
------- -------
82,353 93,243
Less: accumulated depreciation.............................. 28,778 32,659
------- -------
Property and equipment, net....................... $53,575 $60,584
======= =======
</TABLE>
An analysis of the loss (gain) on disposal of property and equipment is as
follows:
<TABLE>
<CAPTION>
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gain on sale of real estate................................ $(567) $ -- $ --
Other, net................................................. 38 251 --
----- ---- ----
$(529) $251 $ --
===== ==== ====
</TABLE>
4. REVOLVING CREDIT AGREEMENT AND LONG-TERM DEBT
On December 29, 1999, the Company amended and restated its Loan Agreement (the
Agreement) with a bank. The new agreement provides a $40 million revolving line
of credit and a $12 million term loan. The Agreement, which is unsecured,
expires on July 10, 2002.
REVOLVING LINE OF CREDIT. Under the terms of the Agreement, interest on the
revolving line of credit is charged, at the Company's option, at either the
lender's prime rate less 110 basis points or at the one-month 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 30, 2000, the amount
outstanding under the revolving line of credit was $19,302,000 and the interest
rate was 6.823%.
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 30, 2000, no amounts from the $40 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 (6.823% at January 30, 2000). 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 January 31, 1999 and
January 30, 2000, the outstanding principal balance of the term loan was
$6,000,000 and $3,600,000, respectively and the interest rate was 6.064% and
6.823%, respectively.
F-10
<PAGE> 87
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At January 30, 2000, the annual maturities of the principal amounts of the term
loan and revolver were:
<TABLE>
<CAPTION>
--------------
FISCAL YEAR ENDING IN AMOUNT
- --------------------- --------------
(IN THOUSANDS)
<S> <C>
2001........................................................ $ 2,400
2002........................................................ 20,502
2003........................................................ --
2004........................................................ --
2005........................................................
-------
$22,902
=======
</TABLE>
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 30, 2000, the Company was in
compliance with each of these covenants.
Interest paid was $1,482,000 in fiscal 1998, $1,404,000 in fiscal 1999 and
$1,421,000 in fiscal 2000.
The amended and restated Agreement which was entered into in December 1999
replaced a Loan Agreement with a bank which was scheduled to expire on July 10,
2002. The previous Loan Agreement was in the form of a $28 million line of
credit facility and had term loan provisions similar to those described above
for the amended and restated Agreement. The interest rate methods under the
former Loan Agreement did not vary from those prescribed in the amended and
restated Agreement.
At January 30, 2000, the Company had an outstanding letter of credit in the
amount of $1,714,000 for insurance liability purposes, which reduces the
Company's available line of credit.
5. LEASE COMMITMENTS
The Company conducts some of its operations from leased facilities and,
additionally, leases certain equipment under operating leases. Generally, these
have initial lease periods of 5 to 18 years and contain provisions for renewal
options of 5 to 10 years.
At January 30, 2000, future minimum annual rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
--------------
FISCAL YEAR ENDING IN AMOUNT
- --------------------- --------------
(IN THOUSANDS)
<S> <C>
2001........................................................ $ 6,934
2002........................................................ 6,529
2003........................................................ 5,323
2004........................................................ 3,321
2005........................................................ 2,428
Thereafter.................................................. 8,987
-------
$33,522
=======
</TABLE>
Rental expense, net of rental income, totaled $4,912,000 in fiscal 1998,
$5,565,000 in fiscal 1999 and $6,220,000 in fiscal 2000.
F-11
<PAGE> 88
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The components of the provision for federal and state income taxes are
summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable.......................................... $1,419 $ 1,546 $3,392
Deferred................................................... 392 (3,658) 258
------ ------- ------
$1,811 $(2,112) $3,650
====== ======= ======
</TABLE>
A reconciliation of the statutory federal income tax rate with the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal taxes at statutory rate............................ $1,539 $(1,795) $3,266
State taxes, net of federal benefit........................ 229 (440) 264
Other...................................................... 43 123 120
------ ------- ------
$1,811 $(2,112) $3,650
====== ======= ======
</TABLE>
Income tax payments, net of refunds, were $670,000 in fiscal 1998, $239,000 in
fiscal 1999 and $5,407,000 in fiscal 2000.
The net current and non-current components of deferred income taxes recognized
in the balance sheet are as follows:
<TABLE>
<CAPTION>
-------------------------
JANUARY 31, JANUARY 30,
1999 2000
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net current assets.......................................... $2,120 $3,500
Net non-current assets...................................... 3,036 1,398
------ ------
$5,156 $4,898
====== ======
</TABLE>
F-12
<PAGE> 89
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO 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>
-------------------------
JANUARY 31, JANUARY 30,
1999 2000
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Compensation deferred (unpaid).............................. $ 471 $ 738
Accrued group insurance..................................... 209 352
Other long-term obligations................................. 418 509
Accrued insurance........................................... 341 1,097
Accrued restructuring expenses.............................. 2,445 2,042
Accrued store closings and impairment expenses.............. -- 452
Unearned revenue............................................ 201 249
Accounts receivable......................................... 371 503
Inventory................................................... 229 236
Charitable contributions carryforward....................... 705 835
State NOL carryforwards..................................... 571 895
Other....................................................... 621 673
------ ------
Gross deferred tax assets......................... 6,582 8,581
------ ------
LIABILITIES
Property and equipment...................................... 1,174 3,343
Prepaid VEBA contribution................................... 133 232
Prepaid expenses............................................ 119 108
------ ------
Gross deferred tax liabilities.................... 1,426 3,683
------ ------
Net asset......................................... $5,156 $4,898
====== ======
</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.
7. EARNINGS PER SHARE
HISTORICAL: Basic earnings per share (EPS) is computed by dividing income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution that could
occur if stock options were exercised. The treasury stock method is used to
calculate dilutive shares, which reduces the gross number of dilutive shares by
the number of shares purchasable from the proceeds of the options assumed to be
exercised.
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
F-13
<PAGE> 90
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will become shareholders of the holding company, with each of them receiving a
number of holding company shares based on his or her percentage of ownership of
the shares of Krispy Kreme Doughnut Corporation and a cash payment of $15.00 per
share to be paid from the proceeds of the offering. This merger will result in
Krispy Kreme Doughnut Corporation becoming a wholly-owned subsidiary of the
holding company. Pro forma basic and diluted earnings per share is calculated in
the same manner as historical earnings per share after giving effect to the
merger exchange ratio of 20-for-1.
SUPPLEMENTAL (UNAUDITED): Supplemental earnings per share adjusts pro forma
earnings per share to reflect the assumed issuance of 405,626 holding company
common shares (based on the expected initial offering price of $19.00 per share)
to fund the $7.0 million cash payment to shareholders.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Net income (loss).......................................... $ 2,714 $ (3,167) $ 5,956
========= ========= ==========
Denominator (Historical):
Denominator for basic earnings per share -- weighted
average shares........................................... 364,221 412,459 467,011
Effect of dilutive securities:
Stock options.............................................. -- -- 23,986
--------- --------- ----------
Denominator for historical diluted earnings per
share -- adjusted weighted average shares................ 364,221 412,459 490,997
========= ========= ==========
Denominator (Pro forma):
Denominator for basic earnings per share -- weighted
average shares........................................... 7,284,420 8,249,180 9,340,220
Effect of dilutive securities:
Stock options.............................................. -- -- 479,720
--------- --------- ----------
Denominator for pro forma diluted earnings per
share -- adjusted weighted average shares................ 7,284,420 8,249,180 9,819,940
========= ========= ==========
Denominator (Supplemental):
Denominator for pro forma basic earnings per
share -- weighted average shares......................... 9,340,220
Effect of issuance of shares to fund cash payment to
shareholders............................................. 405,626
----------
Denominator for basic earnings per share -- weighted
average shares........................................... 9,745,846
Effect of dilutive securities:
Stock options............................................ 479,720
----------
Denominator for supplemental diluted earnings per share --
adjusted weighted average shares......................... 10,225,566
==========
</TABLE>
F-14
<PAGE> 91
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no stock options outstanding in fiscal 1998. Due to the loss in
fiscal 1999, the 91,550 stock options outstanding would have been antidilutive
and were excluded from the calculation of diluted earnings per share.
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
$419,000 in fiscal 1998, $440,000 in fiscal 1999 and $501,000 in fiscal 2000.
Effective May 1, 1994, the Company established the Retirement Income Plan for
Key Employees of Krispy Kreme Doughnut Corporation (the Plan), a nonqualified
noncontributory defined benefit pension plan. The benefits are based on years of
service and average final compensation during the employees' career. The Plan at
all times shall be entirely unfunded as such term is defined for purposes of the
Employee Retirement Income Security Act (ERISA). The actuarial cost method used
in determining the net periodic pension cost is the projected unit credit
method.
The following tables summarize the status of the Plan and the amounts recognized
in the Balance Sheet:
<TABLE>
<CAPTION>
----------------------------
JANUARY 31, JANUARY 30,
1999 2000
----------- -----------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
a. Projected benefit obligation at beginning of year........ $ 669 $ 834
b. Service cost............................................. 152 180
c. Interest cost............................................ 47 56
d. Actuarial (gain) loss.................................... (21) (120)
e. Benefits paid............................................ (13) --
f. Change in plan provisions................................ -- --
----- -------
g. Projected benefit obligation at end of year.............. $ 834 $ 950
===== =======
CHANGE IN PLAN ASSETS
a. Fair value of plan assets at beginning of year........... $ -- $ --
b. Actual return on plan assets............................. -- --
c. Employer contributions................................... 13 --
d. Benefits paid............................................ (13) --
----- -------
e. Fair value of plan assets at end of year................. $ -- $ --
===== =======
NET AMOUNT RECOGNIZED
a. Funded status............................................ $(834) $ (950)
b. Unrecognized transition obligation (asset)............... -- --
c. Unrecognized prior service cost.......................... -- --
d. Unrecognized net loss.................................... 32 (88)
e. Contributions from measurement date to fiscal year end... -- --
f. Net amount recognized.................................... (802) (1,038)
</TABLE>
F-15
<PAGE> 92
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
----------------------------
JANUARY 31, JANUARY 30,
1999 2000
----------- -----------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
a. Weighted average assumed discount rate................... 6.75% 7.50%
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............................................. $ 152 $ 180
b. Interest cost............................................ 47 56
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.................................................... $ 199 $ 236
===== =======
RECONCILIATION OF NET PENSION ASSET (LIABILITY) FOR FISCAL
YEAR
a. Prepaid (accrued) pension cost as of end of prior year... $(616) $ (802)
b. Contributions during the fiscal year..................... 13 --
c. Net periodic pension cost for the fiscal year............ 199 236
----- -------
d. Prepaid (accrued) pension cost as of fiscal year end..... $(802) $(1,038)
===== =======
</TABLE>
Effective February 1, 1999, the Company established the Krispy Kreme
Profit-Sharing Stock Ownership Plan. Under the terms of this qualified plan, the
Company contributes a percentage of each employee's compensation, subject to
Internal Revenue Service limits, to each eligible employee's account under the
plan. The expense associated with this plan in fiscal 2000, based on a
contribution of 7% of eligible compensation, was $2,647,000. Subject to the
completion of an initial public offering (IPO) of the Company's common stock,
the contribution for fiscal 2000 will be in the form of newly issued shares
based on the initial price of the Company's common stock in the IPO. In the
event there is not an IPO, the contribution will be made in cash. Employees
become eligible for participation in the plan upon the completion of one year of
service and vest ratably over five years.
The Company established a nonqualified "mirror" plan, effective February 1,
1999. Contributions to this nonqualified plan will be made under the same terms
and conditions as the qualified plan, with respect to compensation earned by
participants in excess of the maximum amount of compensation that may be taken
into account under the qualified plan. The Company recorded compensation expense
of $103,000 for amounts credited to certain employees under the nonqualified
plan for fiscal 2000.
9. INCENTIVE COMPENSATION
The Company has an incentive compensation plan for officers, directors and
management level employees. Incentive compensation amounted to $1,652,000 in
fiscal 1998, $2,300,000 in fiscal 1999 and $3,146,000 in fiscal 2000.
In addition, in fiscal 1998, the Company had a Long-Term Incentive Plan (the
Plan). Under the provisions of the Plan, a participant could elect to defer, for
a period of not less than five years,
F-16
<PAGE> 93
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$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 approximately $6,112,000 in common stock issued in connection with the
conversion. Due to the Federal and State income tax consequences of the
conversion incurred by each participant, the Company made a loan to each
participant equal to their tax liability. These loans were executed via a
10-year promissory note (collateralized by the common stock) with a fixed
interest rate of 6%. The amount of such loans outstanding at January 31, 1999
and January 30, 2000, was $2,099,000 and $2,547,000, respectively 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 1998 was approximately $181,000
and for fiscal 1999 and 2000 was $0.
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. During fiscal
F-17
<PAGE> 94
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, an additional 12,000 shares of common stock of the Company were reserved
for issuance under the Plan. Grants may be in the form of either incentive stock
options or nonqualified stock options. During fiscal 1999, 91,550 nonqualified
options with a 10-year life were issued to employees and Directors at an
exercise price of $103.64 per share, the fair market value of the common stock
at the grant date. During fiscal 2000, no additional stock options were issued.
Options granted to employees under the Plan vest ratably over a three-year
period commencing on the second anniversary of the grant date. Options granted
to Directors vest ratably over a three-year period commencing on the grant date.
Below is a summary of the Plan's activity:
<TABLE>
<CAPTION>
-----------------------------------------------------------
WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, February 1, 1998................. -- -- -- --
Granted................................. 91,550 $103.64 4,550 $103.64
Exercised............................... -- -- -- --
Canceled................................ -- -- -- --
------
Balance, January 31, 1999................. 91,550 $103.64 4,550 $103.64
Granted................................. -- -- -- --
Exercised............................... -- -- -- --
Canceled................................ 500 $103.64 -- --
------
Balance, January 30, 2000................. 91,050 $103.64 4,550 $103.64
</TABLE>
The following table summarizes information for options outstanding and
exercisable at January 30, 2000:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------- ------ ------------------- ---------------- ------ -------------------
<S> <C> <C> <C> <C> <C>
$103.64 91,050 10 years $103.64 4,550 $103.64
</TABLE>
Pro Forma Fair Value Disclosures:
Had compensation expense for the Company's stock options been based on the fair
value on the grant date under the methodology prescribed by SFAS 123, the
Company's income from continuing operations and earnings per share for the three
years ending January 30, 2000, would have been impacted as follows. (These
amounts reflect the impact on historical earnings per share and do not reflect
the merger exchange ratio of 20-for-1 or the assumed issuance of 405,626 holding
company common shares as discussed in Note 7.):
<TABLE>
<CAPTION>
----------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C>
Reported net income (loss)................................. $2,714 $(3,167) $5,956
Pro forma net income (loss)................................ 2,714 (3,280) 5,843
Reported earnings per share -- Basic....................... 7.45 (7.68) 12.75
Pro forma earnings per share -- Basic...................... 7.45 (7.95) 12.51
Reported earnings per share -- Diluted..................... 7.45 (7.68) 12.13
Pro forma earnings per share -- Diluted.................... 7.45 (7.95) 11.90
</TABLE>
F-18
<PAGE> 95
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of options granted, which is amortized to expense over the option
vesting period in determining the pro forma impact, is estimated at the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
----------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ------------ -----------
<S> <C> <C> <C>
Expected life of option.................................... -- 7 years 7 years
Risk-free interest rate.................................... -- 4.8% 4.8%
Expected volatility of stock............................... -- -- --
Expected dividend yield.................................... -- 3.1% 3.1%
</TABLE>
The weighted average fair value of options granted during 1998, 1999 and 2000 is
as follows:
<TABLE>
<CAPTION>
----------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ------------ -----------
<S> <C> <C> <C>
Fair value of each option granted.......................... -- $ 9.44 --
Total number of options granted............................ -- 91,550 --
Total fair value of all options granted.................... -- $864,232 --
</TABLE>
11. BUSINESS SEGMENT INFORMATION
The Company has three reportable business segments. The Company Store Operations
segment is comprised of the operating activities of the stores owned by the
Company. 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-19
<PAGE> 96
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment operating income is income before general corporate expenses and income
taxes.
<TABLE>
<CAPTION>
---------------------------------------
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Company Store Operations................................... $132,826 $145,251 $164,230
Franchise Operations....................................... 2,285 3,236 5,529
Support Operations......................................... 90,821 107,431 142,215
Intercompany sales eliminations............................ (67,189) (75,038) (91,731)
-------- -------- --------
Total revenues................................... $158,743 $180,880 $220,243
======== ======== ========
OPERATING INCOME (LOSS):
Company Store Operations................................... $ 13,244 $ 13,029 $ 18,246
Franchise Operations....................................... (183) 448 1,445
Support Operations......................................... 2,835 4,307 7,182
Unallocated general and administrative expenses............ (10,476) (12,020) (16,035)
Provision for restructuring................................ -- (9,466) --
-------- -------- --------
Total operating income........................... $ 5,420 $ (3,702) $ 10,838
======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSES:
Company Store Operations................................... $ 2,339 $ 2,873 $ 3,059
Franchise Operations....................................... 100 57 72
Support Operations......................................... 201 225 236
Corporate administration................................... 946 1,123 1,179
-------- -------- --------
Total depreciation and amortization expenses..... $ 3,586 $ 4,278 $ 4,546
======== ======== ========
</TABLE>
12. RELATED PARTY TRANSACTIONS
Total revenues includes $4,619,000 in fiscal 1998, $8,216,000 in fiscal 1999 and
$12,721,000 in fiscal 2000 of sales to franchise doughnut stores owned by
directors and an employee of the Company. Trade accounts receivable from these
stores totaled $1,326,000 and $1,608,000 at January 31, 1999 and January 30,
2000, respectively. Total revenues also includes royalties from these stores of
$361,000 in fiscal 1998, $569,000 in fiscal 1999 and $904,000 in fiscal 2000.
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.
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. The Kingsmill
Plan was suspended in fiscal 1999. The Company has also entered into collateral
repurchase agreements and loan guarantees with officers and directors outside
the Kingsmill Plan.
F-20
<PAGE> 97
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's contingent liability related to collateral repurchase agreements
for officers and directors is $3,000,000 at January 31, 1999 and $2,456,000 at
January 30, 2000. The Company has guaranteed bank loans of $425,000 and
$2,100,000 at January 31, 1999 and January 30, 2000, respectively.
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
$1,054,000 at January 31, 1999 and $999,000 at January 30, 2000. 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 $1,982,000 at January
31, 1999 and $3,332,000 at January 30, 2000.
The Company is engaged in various legal proceedings incidental to its normal
business activities. In the opinion of management, the outcome of these matters
is not expected to have a material effect on the Company's consolidated
financial statements.
Because the Company enters into long-term contracts with its suppliers, in the
event that any of these relationships terminate unexpectedly, even where it has
multiple suppliers for the same ingredient, the Company's ability to obtain
adequate quantities of the same high quality ingredient at the same competitive
price could be negatively impacted.
14. RESTRUCTURING
<TABLE>
<CAPTION>
--------------------------------
LEASE ACCRUED TOTAL
LIABILITIES EXPENSES ACCRUAL
----------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at February 1, 1998................................. $ 205 $ 100 $ 305
Additions................................................... 5,877 250 6,127
------- ----- -------
Balance at January 31, 1999................................. 6,082 350 6,432
Additions................................................... 723 -- 723
Reductions.................................................. (1,536) (70) (1,606)
Transfers................................................... (487) 487 --
Adjustments................................................. -- (175) (175)
------- ----- -------
Balance at January 30, 2000................................. $ 4,782 $ 592 $ 5,374
======= ===== =======
</TABLE>
Fiscal 2000:
During fiscal 2000, the Company reassessed certain provisions of its
restructuring accrual. The Company determined that it was under-accrued for
losses associated with operating lease
F-21
<PAGE> 98
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitments related to double drive-through buildings by $723,000 and
over-accrued for certain other exit costs by $175,000. In addition, land
included in Assets Held for Sale with a book value of $325,000 was sold for
$830,000 resulting in a credit to restructuring expense. Together, these
adjustments resulted in a net increase in restructuring expense of $43,000 for
the year ended January 30, 2000. This amount has been included in Operating
Expenses of the Company Store Operations segment. Reductions in Lease
Liabilities represent ongoing lease payments on remaining lease obligations.
Reductions in Accrued Expenses represent the cost of moving two double
drive-through buildings. Accrued property taxes of $487,000, originally recorded
as Lease Liabilities, have been transferred to Accrued Expenses. Adjustments to
the accrual represent the reduction of other exit costs.
Fiscal 1999:
On January 13, 1999, the Board of Directors of the Company approved a
restructuring plan for assets and operations included in the Company Store
Operations segment determined either to be inconsistent with the Company's
strategy or whose carrying value may not be fully recoverable. Of the total
restructuring and impairment charge of $9.5 million, $7.8 million related to the
closing of five double drive-through stores and the write-down of five other
inactive double drive-through stores and sites including provisions to
write-down associated land, building and equipment costs to estimated net
realizable value and to cover operating lease commitments associated with these
stores. The Company has no plans to open any new double drive-through stores. An
additional $700,000 relates to future lease payments on double drive-through
buildings subleased to franchisees. Also included in the total charge is a $1.0
million write-down of a facility that produces fried pies and honey buns. These
products are not expected to be a core part of the Company's strategy going
forward. Of the total charge, $5.6 million represents a charge for future cash
outflows for lease payments on land and buildings while $3.6 million represents
the write-down of land and the write-off of buildings and equipment. The
remaining $250,000 represents the accrual of costs to remove double
drive-through buildings from their leased locations. Land held for sale is
carried at the estimated net realizable value determined through review of
current prices for comparable retail locations. After an income tax benefit of
$3,786,000, this action reduced fiscal 1999 earnings by $5,680,000 or $13.77 per
share on a historical basis.
15. STORE CLOSINGS AND IMPAIRMENT
<TABLE>
<CAPTION>
--------------------
LEASE LIABILITIES
AND ACCRUED EXPENSES
--------------------
(IN THOUSANDS)
<S> <C>
Balance at February 1, 1998................................. $ --
Additions................................................... 283
------
Balance at January 31, 1999................................. 283
Additions................................................... 1,139
Reductions.................................................. (45)
------
Balance at January 30, 2000................................. $1,377
======
</TABLE>
F-22
<PAGE> 99
KRISPY KREME DOUGHNUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fiscal 2000:
In the fourth quarter of fiscal 2000, the Company recorded a $1.1 million charge
for the closing of two stores. These stores will be torn down in the second
quarter of fiscal 2001 and new buildings constructed on the same sites. The
accrual consists of the write-off of the net book value of buildings and
leasehold improvements as well as equipment that will be abandoned. This charge
has been recorded in Operating Expenses of the Company Store Operations segment.
Reductions in the accrual consist of ongoing lease payments on remaining lease
obligations.
Fiscal 1999:
The Company recorded a charge of $2.3 million for store closings and impairment
costs in fiscal 1999. The charge consists of $417,000 related to the write-off
of unamortized leasehold improvements for two stores that were closed in the
first quarter of fiscal 2000 and the accrual of $283,000 in remaining lease
costs on a potential store site that will not be used. The remaining $1.6
million relates to the write-down of building and equipment of a facility that
will remain open but whose carrying value was determined not to be fully
recoverable. The fair market value of assets to be held and used was determined
using a formula based on five times after-tax cash flow. This charge has been
recorded in Operating Expenses of the Company Store Operations segment.
16. PRO FORMA BALANCE SHEET (UNAUDITED)
The pro forma balance sheet at January 30, 2000 reflects the accrual of the cash
payment to shareholders to be paid from the proceeds of the offering as
discussed in Note 7, "Pro Forma."
17. SUBSEQUENT EVENT
On January 31, 2000, the Company repurchased the New York City market from an
area developer for approximately $6.9 million.
18. LITIGATION SUBSEQUENT EVENT
On March 9, 2000, a lawsuit was filed against the Company, a member of
management and Golden Gate Doughnuts, LLC, a franchisee of the Company, in
Superior Court in the state of California. The plaintiffs allege, among other
things, breach of contract and seek compensation for injury as well as punitive
damages. The Company believes that the allegations are without merit and that
the outcome of the lawsuit will not have a material adverse effect on its
consolidated financial statements. Accordingly, no accrual for loss (if any) has
been provided in the accompanying consolidated financial statements.
F-23
<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 January 30, 2000, in conformity with accounting principles generally accepted
in the United States. 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 auditing standards generally accepted in the United States,
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
March 6, 2000, except as to Note 3
which is as of March 13, 2000
F-24
<PAGE> 101
KRISPY KREME DOUGHNUTS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
-----------
JANUARY 30,
2000
-----------
<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 $15.00 per share. As a result of this merger, Krispy Kreme
Doughnut Corporation will become a wholly-owned subsidiary of Krispy Kreme
Doughnuts, Inc. This plan of merger is expected to become effective just prior
to the completion of a public offering of the Company's common stock.
2. SHAREHOLDER'S EQUITY
The Company is authorized to issue 10 million shares of no par value preferred
stock and 100 million shares of no par value common stock. Krispy Kreme Doughnut
Corporation has invested $1,000 in exchange for shares of the Company's common
stock.
3. LITIGATION SUBSEQUENT EVENT
On March 9, 2000, a lawsuit was filed against the Company, a member of
management and Golden Gate Doughnuts, LLC, a franchisee of Krispy Kreme Doughnut
Corporation, in Superior Court in the state of California. The plaintiffs
allege, among other things, breach of contract and seek compensation for injury
as well as punitive damages. The Company believes that the allegations are
without merit and that the outcome of the lawsuit will not have a material
adverse effect on its balance sheet or the consolidated financial statements of
Krispy Kreme Doughnut Corporation. Accordingly, no accrual for loss (if any) has
been provided in the consolidated financial statements of Krispy Kreme Doughnut
Corporation.
F-25
<PAGE> 102
BACK COVER
[PICTURE, TEXT, AND LOGO]
[The back cover begins with the sentence, "IS IT ABOUT THE DOUGHNUT OR ABOUT THE
EXPERIENCE?" Underneath the sentence is a picture of a young boy wearing a
Krispy Kreme hat while he watches the doughnutmaking theatre.
Underneath the picture is the Krispy Kreme logo.]
<PAGE> 103
You may rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in the
prospectus. Neither the delivery of this prospectus nor sale of common stock
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or solicitation of an
offer to buy these shares in any circumstances under which the offer or
solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary............... 1
Risk Factors..................... 5
Forward-Looking Statements....... 11
Use of Proceeds.................. 12
Dividend Policy.................. 13
Capitalization................... 14
Dilution......................... 15
Selected Financial Data.......... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 17
Business......................... 31
Management....................... 47
Principal Shareholders........... 56
Related Party Transactions....... 58
Description of Capital Stock..... 64
Shares Eligible for Future
Sale........................... 68
Plan of Distribution............. 70
Legal Matters.................... 72
Experts.......................... 72
Where You Can Find More
Information.................... 73
Index to the Financial
Statements..................... F-1
</TABLE>
Dealer Prospectus Delivery Obligation: Until , 2000 (25
days after the date of this prospectus), all dealers that buy, sell or trade in
these shares of common stock, whether or not participating in this offering, may
be required to deliver a prospectus. Dealers are also obligated to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
(KRISPY KREME LOGO)
3,000,000 Shares
Common Stock
Deutsche Banc Alex. Brown
J.P. Morgan & Co.
Dain Rauscher Wessels
BB&T Capital Markets
Prospectus
, 2000
<PAGE> 104
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......................... 95,000
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Transfer Agent Fees and Expenses............................ *
Miscellaneous............................................... *
----------
Total............................................. $1,200,000+
==========
</TABLE>
- ---------------
* To be filed by amendment
+ Estimate
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Krispy Kreme's Articles of Incorporation and Bylaws provide that our directors
and officers shall not be personally liable to us or our shareholders for
monetary damages for breach of fiduciary duty as a director or officer to the
fullest extent permitted by North Carolina law. Under Section 55-8-51 of the
North Carolina Business Corporation Act, we may indemnify a present or former
director if he conducted himself in good faith and reasonably believed, in the
case of conduct in his official capacity, that his conduct was in Krispy Kreme's
best interests. In all other cases, the director must have believed that his
conduct was at least not opposed to our best interests. In the case of any
criminal proceeding, the director must have had no reasonable cause to believe
his conduct was unlawful. We may not indemnify a director in connection with a
proceeding by or in the right of Krispy Kreme in which the director was adjudged
liable to us or, in connection with any other proceeding, whether or not
involving action in his official capacity, in which he was adjudged liable on
the basis that personal benefit was improperly received by him. Under North
Carolina law, we may indemnify our officers to the same extent as our directors
and to such further extent as is consistent with public policy. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers or persons controlling Krispy Kreme pursuant to
the foregoing provisions, or otherwise, we have been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
Krispy Kreme maintains directors' and officers' liability insurance against any
actual or alleged error, misstatement, misleading statement, act, omission,
neglect or breach of duty by any director or officer, excluding certain matters
including fraudulent, dishonest or criminal acts or self-dealing.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of Krispy Kreme, its directors and executive officers and other
persons for certain liabilities, including liabilities arising under the
Securities Act of 1933.
II-1
<PAGE> 105
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with a corporate reorganization in the form of a merger conducted
in conjunction with this offering, Krispy Kreme Doughnuts, Inc. will issue 20
shares of its common stock, no par value, in exchange for each outstanding share
of the common stock, par value $10.00 per share, of Krispy Kreme Doughnut
Corporation. Krispy Kreme Doughnuts, Inc. expects to issue a total of 9,340,220
shares of its common stock in this exchange. The issuance will be a private
placement exempt from registration under Section 4(2) of the Securities Act.
Pursuant to the reorganization, Krispy Kreme Doughnut Corporation will become a
wholly-owned subsidiary of Krispy Kreme Doughnuts, Inc.
The shareholders of Krispy Kreme Doughnut Corporation approved this transaction
at a special shareholders' meeting on November 10, 1999. It is anticipated that
the reorganization will be effective concurrently with the effectiveness of this
registration statement. The Agreement and Plan of Merger by and between Krispy
Kreme Doughnut Corporation, Krispy Kreme Doughnuts, Inc. and KKDC Reorganization
Corporation dated December 2, 1999 is filed with this registration statement as
Exhibit 2.1.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
<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
4.2+ -- Rights Agreement between the Company and Branch Banking and
Trust Company, as Rights Agent, dated as of January 18, 2000
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
</TABLE>
II-2
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.9 -- Guaranty by Krispy Kreme Doughnut Corporation, dated
December 31, 1998, in favor of the Bank of Blue Valley with
respect to the obligations of Midwest Doughnuts, LLC
10.10 -- Collateral Repurchase Agreement, dated January 30, 1998, by
and among Krispy Kreme Doughnut Corporation, Mackk, L.L.C.
and Branch Banking and Trust Company
10.11 -- Collateral Repurchase Agreement, dated January 30, 1998, by
and among Mr. Joseph A. McAleer, Jr., Mackk, L.L.C., Krispy
Kreme Doughnut Corporation and Branch Banking and Trust
Company
10.12 -- Collateral Repurchase Agreement, dated January 2, 1998, by
and among Mrs. Bonnie Silvey Vandegrift, Brevard Tennis and
Athletic Club Incorporated, Krispy Kreme Doughnut
Corporation and Branch Banking and Trust Company
10.13 -- Collateral Repurchase Agreement, dated October 15, 1997, by
and among Krispy Kreme Doughnut Corporation, Midwest
Doughnuts, LLC, and the Bank of Blue Valley
10.14+ -- Guaranty by Krispy Kreme Doughnut Corporation, dated October
15, 1997, in favor of the Bank of Blue Valley with respect
to the obligation of Midwest Doughnuts, LLC
10.15 -- Collateral Repurchase Agreement, dated October 22, 1996, by
and among Robert L. McCoy, Gulf Florida Doughnut
Corporation, Krispy Kreme Doughnut Corporation and Branch
Banking and Trust Company
10.16 -- Collateral Repurchase Agreement, dated May 29, 1996, among
Krispy Kreme Doughnut Corporation, Midwest Doughnuts, LLC
and The First National Bank of Olathe
10.17 -- Guaranty by Krispy Kreme Doughnut Corporation, dated May 29,
1996, in favor of the First National Bank of Olathe with
respect to the obligations of Midwest Doughnuts, LLC
10.18 -- Collateral Repurchase Agreement, dated July 7, 1995 by and
among Robert J. Simmons, Simac, Inc., Krispy Kreme Doughnut
Corporation and First National Bank of Ohio
10.19 -- Collateral Repurchase Agreement, dated February 25, 1994, by
and among Mr. William J. Dorgan, Mrs. Patricia M. Dorgan,
Krispy Kreme Doughnut Corporation and Branch Banking and
Trust Company
10.20 -- Promissory Note, dated March 13, 1997, of Midwest Doughnuts,
LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties
payable to the order of Krispy Kreme Doughnut Corporation
10.21+ -- Promissory Note, dated October 13, 1997, of Midwest
Doughnuts, LLC, Mr. Philip R.S. Waugh, Jr. and certain other
parties payable to the order of Krispy Kreme Doughnut
Corporation
10.22 -- Trademark License Agreement, dated May 27, 1996, between HDN
Development -- Corporation and Krispy Kreme Corporation
10.23 -- Stock Option Plan dated August 6, 1998
10.24 -- Long-Term Incentive Plan dated January 30, 1993
10.25 -- Form of Promissory Note relating to termination of Long-Term
Incentive Plan
10.26 -- Form of Restricted Stock Purchase Agreement
10.27 -- Form of Promissory Note relating to restricted stock
purchases
10.28 -- Employment Agreement dated August 10, 1999 between Krispy
Kreme Doughnut Corporation and John N. McAleer
</TABLE>
II-3
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.29 -- Employment Agreement dated August 10, 1999 between Krispy
Kreme Doughnut Corporation and Scott A. Livengood
10.30 -- Employment Agreement dated August 10, 1999 between Krispy
Kreme Doughnut Corporation and J. Paul Breitbach
10.31 -- Kingsmill Plan
21.1+ -- List of subsidiaries
23.1+ -- Consent of Kilpatrick Stockton LLP (will be included in the
opinion filed as Exhibit No. 5 to this Registration
Statement)
23.2+ -- Consent of PricewaterhouseCoopers LLP
24.1 -- Powers of Attorney of certain officers and directors of the
Company (included on the signature pages of this
Registration Statement)
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
+ Filed herewith.
b. Financial Statement Schedules
Schedule II -- Consolidated Valuation and Qualifying Accounts and Reserves of
Krispy Kreme Doughnut Corporation
ITEM 17. UNDERTAKINGS.
Krispy Kreme hereby undertakes to provide to the Underwriters at the closing
specified in the underwriting agreements certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Krispy Kreme
pursuant to the provisions of our Articles of Incorporation and Bylaws or
otherwise, Krispy Kreme has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person of Krispy Kreme in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Krispy Kreme will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned undertakes that:
1. For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Krispy Kreme pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE> 108
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Krispy Kreme has
duly caused this third pre-effective amendment to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Winston-Salem, North Carolina, on March 30, 2000.
KRISPY KREME DOUGHNUTS, INC.
By: /s/ SCOTT A. LIVENGOOD
------------------------------------
Scott A. Livengood
Chairman of the Board of
Directors,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this third
pre-effective amendment to the registration statement has been signed on March
30, 2000, 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)
* Vice Chairman of the Board of Directors and
- ------------------------------------------- Executive Vice President, Concept
John N. McAleer Development
/s/ J. PAUL BREITBACH Executive Vice President, Finance,
- ------------------------------------------- Administration and Support Operations
J. Paul Breitbach (Principal Financial and Accounting
Officer)
* Director
- -------------------------------------------
Frank E. Guthrie
* Director
- -------------------------------------------
William T. Lynch
* Director
- -------------------------------------------
Joseph A. McAleer, Jr.
* Director
- -------------------------------------------
Robert L. McCoy
* Director
- -------------------------------------------
Robert J. Simmons
* Director
- -------------------------------------------
Steven D. Smith
* Director
- -------------------------------------------
Robert L. Strickland
*By: /s/ J. PAUL BREITBACH
- -------------------------------------------
as attorney-in-fact
</TABLE>
II-5
<PAGE> 109
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Krispy Kreme Doughnut Corporation:
Our report on the consolidated financial statements of Krispy Kreme Doughnut
Corporation and its subsidiaries is included herein. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule of Krispy Kreme Doughnut Corporation and subsidiaries.
In our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PRICEWATERHOUSECOOPERS LLP
Greensboro, North Carolina
March 6, 2000
II-6
<PAGE> 110
KRISPY KREME DOUGHNUT CORPORATION
SCHEDULE II -- CONSOLIDATED
VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
-----------------------------------------------------------------
ADDITIONS
ADDITIONS CHARGED
BALANCE AT CHARGED TO BALANCE AT
BEGINNING TO OTHER END
RESERVE FOR DOUBTFUL ACCOUNTS OF PERIOD OPERATIONS ACCOUNTS DEDUCTIONS(1) OF PERIOD
- ----------------------------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended February 1, 1998......... $292,919 $ 180,573 $ -- $ 100,104 $ 373,388
======== ========== ========== ========== ==========
For the year ended January 31, 1999......... $373,388 $2,101,099 $ -- $1,499,487 $ 975,000
======== ========== ========== ========== ==========
For the year ended January 30, 2000......... $975,000 $ 832,506 $ -- $ 483,644 $1,323,862
======== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Amounts represent write-off of uncollectible receivable balances.
II-7
<PAGE> 1
COMMON STOCK KRISPY KREME COMMON STOCK
Certificate Number DOUGHNUTS Shares
AMERICA'S FAVORITE DOUGHNUT
SINCE 1937
NO PAR VALUE CUSIP 501014 10 4
PER SHARE SEE REVERSE FOR CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF NORTH CAROLINA
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE
PER SHARE, OF KRISPY KREME DOUGHNUTS, INC. Transferable on the books of
the Corporation in person or by duly authorized Attorney, upon
surrender of this Certificate, properly endorsed. This Certificate is
not valid until countersigned and registered by the Transfer Agent and
Registrar. WITNESS the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
Dated:
/s/ Randy S. Casstevens /s/ Scott A. Livingood
Secretary President
Countersigned and Registered:
BRANCH BANKING AND TRUST COMPANY
(WILSON, NC)
By Transfer Agent
and Registrar
Authorized Signature.
<PAGE> 2
KRISPY KREME DOUGHNUTS, INC.
Krispy Kreme Doughnuts, Inc. ("Krispy Kreme") is authorized to issue
Preferred stock in one or more series which, when issued may have certain
preferences or special rights in the payment of dividends, in voting, upon
liquidation, or otherwise. Krispy Kreme will upon request furnish any
shareholder, without charge, information as to the number of such shares
authorized and outstanding and a copy of the portions of the charter or
resolutions containing the designations, preferences, limitations and relative
rights of all shares and any series thereof. Any such request is to be
addressed to the Transfer Agent named on the face of this certificate.
This certificate also evidences certain Rights as set forth in a Rights
Agreement between Krispy Kreme and Branch Banking and Trust Company, dated as
of January 18, 2000 (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal office of Krispy Kreme. Krispy Kreme will mail to the holder of this
certificate a copy of the Rights Agreement without charge promptly after
receipt of a written request therefor. Under certain circumstances, as set
forth in the Rights Agreement, such Rights may be evidenced by separate
certificates and no longer be evidenced by this certificate, may be redeemed or
exchanged or may expire. As set forth in the Rights Agreement, Rights issued
to, or held by, any Person who is, was or becomes an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement), whether currently held by or on behalf of such Person or by any
subsequent holder, may be null and void.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UGMA/UTMA - __________ as Custodian for _______________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under the ________________ Uniform Gifts/Transfers
JT TEN - as joint tenants with right to Minors Act
of survivorship and not as
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received ___________________, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ----------------------------------------_______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ____________________________________________
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated:
---------------------------------------
---------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE
WHATEVER.
SIGNATURE GUARANTEE:
<PAGE> 1
EXHIBIT 4.2
RIGHTS AGREEMENT
DATED AS OF
JANUARY 18, 2000
BETWEEN
KRISPY KREME DOUGHNUTS, INC.
AND
BRANCH BANKING AND TRUST COMPANY
AS RIGHTS AGENT
<PAGE> 2
TABLE OF CONTENTS(1)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Definitions........................................................................1
Section 2. Appointment of Rights Agent........................................................5
Section 3. Issue of Rights Certificates.......................................................5
Section 4. Form of Rights Certificate.........................................................7
Section 5. Countersignature and Registration..................................................7
Section 6. Transfer and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or
Stolen Rights Certificates......................................................8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights......................8
Section 8. Cancellation and Destruction of Right Certificates................................10
Section 9. Reservation and Availability of Capital Stock.....................................10
Section 10. Preferred Stock Record Date......................................................12
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights.........................................................................12
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.......................21
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.............21
Section 14. Fractional Rights and Fractional Shares..........................................24
Section 15. Rights of Action.................................................................25
Section 16. Agreement of Right Holders.......................................................26
Section 17. Right Certificate Holder Not Deemed a Shareholder................................26
Section 18. Concerning the Rights Agent......................................................27
</TABLE>
- -------------------------
(1) The Table of Contents is not a part of this Agreement.
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 19. Merger or Consolidation or Change of Name of Rights Agent........................27
Section 20. Duties of Rights Agent...........................................................28
Section 21. Change of Rights Agent...........................................................30
Section 22. Issuance of New Right Certificates...............................................31
Section 23. Redemption.......................................................................30
Section 24. Exchange.........................................................................31
Section 25. Notice of Proposed Actions.......................................................32
Section 26. Notices..........................................................................34
Section 27. Supplements and Amendments.......................................................34
Section 28. Successors.......................................................................35
Section 29. Determinations and Actions by the Board of Directors, etc........................34
Section 30. Benefits of this Agreement.......................................................35
Section 31. Severability.....................................................................36
Section 32. Governing Law....................................................................35
Section 33. Counterparts.....................................................................36
Section 34. Descriptive Headings.............................................................36
</TABLE>
Exhibit A - Form of Board Resolution Establishing and Designating
Preferred Stock
Exhibit B - Form of Rights Certificate
Exhibit C - Summary of Terms
ii
<PAGE> 4
RIGHTS AGREEMENT
THIS AGREEMENT is made and entered into as of January 18, 2000 (the
"EFFECTIVE DATE"), by and between KRISPY KREME DOUGHNUTS, INC.,, a North
Carolina corporation (the "COMPANY"), and BRANCH BANKING AND TRUST COMPANY, a
North Carolina corporation, as Rights Agent (the "RIGHTS AGENT").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company has approved the
execution of this Agreement and has authorized and declared a dividend
distribution of one Right (as defined below) for each outstanding share of
Common Stock, par value $10.00 per share, of the Company (the "COMMON STOCK") at
the close of business on the Effective Date and has authorized the issuance of
one Right for each share of Common Stock, each Right representing the right to
purchase, one one-hundredth of a share of Series A Participating Cumulative
Preferred Stock of the Company having the rights, powers and preferences set
forth in the Board Resolution Establishing and Designating Series A Preferred
Stock attached hereto as EXHIBIT A, upon the terms and subject to the conditions
contained herein (individually, a "RIGHT," and collectively, the "RIGHTS");
NOW, THEREFORE, for and in consideration of the premises and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. The following terms, as used herein, have the
following meanings:
(a) "ACQUIRING PERSON" means any Person who or which, together with all
Affiliates and Associates of such Person, shall be the Beneficial Owner of 15%
or more of the shares of Common Stock then outstanding; provided, however, that,
an "ACQUIRING PERSON" shall not include the following Persons: (i) any Excluded
Person, (ii) any Person who is the Beneficial Owner of 15% or more of the shares
of Common Stock outstanding as of the Effective Date, or (iii) any Person, who
alone or together with its Affiliates or Associates becomes the Beneficial Owner
of 15% or more of the shares of Common Stock then outstanding as a result of an
Approved Acquisition; provided, further, that in the event that a Person does
not become an Acquiring Person by reason of clause (iii) above, such Person
nonetheless shall become an Acquiring Person if such Person thereafter becomes
the Beneficial Owner of an additional 2% or more of the Common Stock then
outstanding, unless the acquisition of such Common Stock is an Approved
Acquisition. Notwithstanding the foregoing, if the Board of Directors of the
Company determines in good faith that a Person has acquired 15% or more of the
shares of Common Stock then outstanding without the purpose or effect of
changing or influencing control of the Company or in connection with or as a
participant in any transaction having that purpose or effect, and such Person
agrees with the Company not to acquire any additional shares of its Common Stock
and undertakes to divest itself as promptly as practicable of a sufficient
number of shares of Common Stock so that such Person would no longer own 15% or
more of such
<PAGE> 5
Common Stock, then such Person shall not be deemed to be an Acquiring Person
for any purposes of this Agreement. In determining what is "as promptly as
practicable" the Board may take into account such factors as the impact of the
divestment on the market price of the Company's Common Stock, the average volume
of trading in its shares, and other factors that may affect its shareholders or
the price of its Common Stock.
(b) "AFFILIATE" and "ASSOCIATE" have the respective meanings ascribed
to such terms in Rule 12b-2 under the Exchange Act as in effect on the date
hereof.
(c) "APPROVED ACQUISITION" means any acquisition of Common Stock that
(i) causes a Person to become the Beneficial Owner of (A) 15% or more of the
shares of Common Stock then outstanding, or (B) if already a Beneficial Owner of
15% or more of the shares of Common Stock then outstanding, an additional 2% or
more of the shares of Common Stock then outstanding, and (ii) is approved in
advance by a majority of the Directors.
(d) A Person shall be deemed the "BENEFICIAL OWNER" of, and shall be
deemed to "BENEFICIALLY OWN," any securities:
(i) which such Person or any of its Affiliates or Associates
beneficially owns (as determined pursuant to Rule 13d-3 under the
Exchange Act as in effect on the date hereof), directly or indirectly;
(ii) which such Person or any of its Affiliates or Associates,
directly or indirectly, has
(A) the right to acquire (whether such right is
exercisable immediately or only upon the occurrence of certain
events or the passage of time or both) pursuant to any
agreement, arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange
rights, rights (other than pursuant to the Rights), warrants,
options or otherwise; provided, however, that a Person shall
not be deemed the "BENEFICIAL OWNER" of, or to "BENEFICIALLY
OWN," any securities tendered pursuant to a tender or exchange
offer made by or on behalf of such Person or any of its
Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or
(B) the right to vote or dispose of (whether such
right is exercisable immediately or only upon the occurrence
of certain events or the passage of time or both) pursuant to
any agreement, arrangement or understanding (whether or not in
writing) or otherwise; provided, however, that a Person shall
not be deemed the "BENEFICIAL OWNER" of, or to "BENEFICIALLY
OWN," any security under this clause (B) as a result of an
agreement, arrangement or understanding to vote such security
if such agreement, arrangement or understanding (1) arises
solely from a revocable proxy or consent given to such Person
in response to a public proxy or
2
<PAGE> 6
consent solicitation made pursuant to, and in accordance with,
the applicable rules and regulations promulgated under the
Exchange Act, and (2) is not also then reportable by such
Person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which
such Person (or any of its Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing) for the
purpose of acquiring, holding, voting (except pursuant to a revocable
proxy as described in SUBSECTION (II)(B) above) or disposing of any
such securities; provided, however, that nothing in this SECTION 1(E)
shall cause any Person engaged in business as an underwriter of
securities who acquires any securities of the Company through such
Person's participation in good faith in a firm commitment underwriting
to be deemed the "BENEFICIAL OWNER" of, or to "BENEFICIALLY OWN," such
securities until the expiration of 40 days after the date of such
acquisition.
(e) "BUSINESS DAY" means any day other than a Saturday, Sunday or a day
on which banking institutions in the State of North Carolina are authorized or
obligated by law or executive order to close.
(f) "CLOSE OF BUSINESS" on any given date means 5:00 P.M.,
Winston-Salem, North Carolina time, on such date; provided, however, that if
such date is not a Business Day, then it shall mean 5:00 P.M., Winston-Salem,
North Carolina time, on the next succeeding Business Day.
(g) "COMMON STOCK" means the Common Stock, par value $10.00 per share,
of the Company, except that, when used with respect to any Person other than the
Company, "COMMON STOCK" means the capital stock (or other equity interests) of
such Person with the greatest voting power, or the equity securities or other
equity interests having the power to control or direct the management of such
Person.
(h) "DIRECTOR" means any member of the Board of Directors of the
Company, while such Person is a member of the Board.
(i) "DISTRIBUTION DATE" means the earlier of (i) the Close of Business
on the tenth day (or such later day as may be designated by action of a majority
of the Directors) after the Share Acquisition Date, and (ii) the Close of
Business on the tenth Business Day (or such later day as may be designated by
action of a majority of the Directors) after the date of the commencement by any
Person (other than an Excluded Person) of, or of the first public announcement
of the intention by any Person (other than an Excluded Person) to commence, a
tender or exchange offer if, upon consummation thereof, such Person, together
with all Affiliates and Associates of such Person, would be the Beneficial Owner
of 15% or more of the shares of Common Stock then outstanding.
3
<PAGE> 7
(j) "EMPLOYEE BENEFIT PLAN" means any employee benefit plan of the
Company or any of its Subsidiaries or any Person organized, appointed or
established by the Company or any of its Subsidiaries for or pursuant to the
terms of any such plan.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "EXCLUDED PERSON" means the Company, any of its Subsidiaries or any
Employee Benefit Plan.
(m) "EXPIRATION DATE" means the earlier of (i) the Final Expiration
Date, and (ii) the time at which all Rights are redeemed as provided in SECTION
23 or exchanged as provided in SECTION 24.
(n) "FINAL EXPIRATION DATE" means the Close of Business on the date
that is the tenth anniversary of the Effective Date.
(o) "FLIP-IN EVENT" means any event described in SECTION 11(A)(II)(A),
(B) OR (C), but excluding any event described in SECTION 11(A)(II)(D).
(p) "FLIP-OVER EVENT" means any event described in SECTION 13(A)(X),
(Y), OR (Z).
(q) "PERSON" means an individual, corporation, partnership, limited
liability company, association, trust or any other entity or organization.
(r) "PREFERRED STOCK" means the Series A Participating Cumulative
Preferred Stock, par value $1.00 per share, of the Company having the terms set
forth in the form of certificate of designation attached hereto as EXHIBIT A.
(s) "PURCHASE PRICE" means the price (subject to adjustment as provided
herein) at which a holder of a Right may purchase one one-hundredth of a share
of Preferred Stock (subject to adjustment as provided herein) upon exercise of a
Right, which price shall initially be $96.00.
(t) "QUALIFYING TENDER OFFER" means a tender or exchange offer for all
outstanding shares of Common Stock of the Company approved by a majority of
Directors then in office, after taking into account the potential long-term
value of the Company and all other factors that they consider relevant.
(u) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(v) "SHARE ACQUISITION DATE" means the date of the first public
announcement (including the filing of a report on Schedule 13D under the
Exchange Act (or any comparable or successor report)) by the Company or an
Acquiring Person
4
<PAGE> 8
indicating that an Acquiring Person has become such, which announcement makes
express reference to such status as an Acquiring Person pursuant to this
Agreement.
(w) "SUBSIDIARY" means, with respect to any Person, any other Person of
which securities or other ownership interests having ordinary voting power, in
the absence of contingencies, to elect a majority of the board of directors or
other Persons performing similar functions are at the time directly or
indirectly owned or controlled by such first Person.
(x) "TRADING DAY" means a day on which the principal national
securities exchange or inter-dealer quotation system on which the shares of
Common Stock are listed, admitted to trading or quoted is open for the
transaction of business or, if the shares of Common Stock are not listed,
admitted to trading or quoted on any national securities exchange or
inter-dealer quotation system, then a Business Day.
(y) "TRIGGERING EVENT" means any Flip-in Event or any Flip-over Event.
SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with SECTION 3, shall prior to the Distribution Date also be the
holders of the Common Stock) in accordance with the terms and conditions hereof,
and the Rights Agent hereby accepts such appointment. The Company may from time
to time appoint such co-Rights Agents as it may deem necessary or desirable. If
the Company appoints one or more co-Rights Agents, then the respective duties of
the Rights Agent and any co-Rights Agents shall be as the Company shall
determine.
SECTION 3. ISSUE OF RIGHTS CERTIFICATES. (a) Prior to the Distribution
Date, (i) the Rights will be evidenced (subject to SECTION 3(B)) by the
certificates for the Common Stock and not by separate Rights Certificates (as
defined below), and the registered holders of the Common Stock shall be deemed
to be the registered holders of the associated Rights, and (ii) the Rights will
be transferable only in connection with the transfer of the underlying shares of
Common Stock (including a transfer to the Company). As soon as practicable after
the Company has notified the Rights Agent of the occurrence of a Distribution
Date, the Rights Agent will, subject to SECTION 7(D), send, by first-class,
insured, postage prepaid mail, to each record holder of the Common Stock as of
the Close of Business on the Distribution Date, at the address of such holder
shown on the records of the Company, one or more Rights Certificates, in
substantially the form of EXHIBIT B attached hereto (the "RIGHTS CERTIFICATES"),
evidencing one Right (subject to adjustment as provided herein) for each share
of Common Stock so held. If an adjustment in the number of Rights per share of
Common Stock has been made pursuant to SECTION 11(p), then the Company shall, at
the time of distribution of the Rights Certificates to record holders of Common
Stock as of the Close of Business on the Distribution Date, make the necessary
and appropriate rounding adjustments (in accordance with SECTION 14(A)) so that
Rights Certificates representing only whole numbers of Rights are distributed to
such holders and cash is paid to
5
<PAGE> 9
such holders in lieu of any fractional Rights. From and after the Distribution
Date, the Rights will be evidenced solely by such Right Certificates.
(b) As soon as practicable after the Effective Date, the Company will
send a summary of the Rights substantially in the form of EXHIBIT C attached
hereto, by first-class, postage prepaid mail, to each record holder of the
Common Stock as of the Close of Business on the Effective Date at the address of
such holder shown on the records of the Company. Until the Distribution Date,
the Rights shall be evidenced by such certificates evidencing the Common Stock,
and the registered holders of such Common Stock shall also be the registered
holders of the associated Rights.
(c) Rights shall be issued in respect of all shares of Common Stock
that become outstanding (on original issuance or out of treasury) after the
Effective Date but prior to the earlier of the Distribution Date or the
Expiration Date. Certificates for the Common Stock that become outstanding or
shall be transferred or exchanged after the Effective Date but prior to the
earlier of the Distribution Date or the Expiration Date shall also be deemed to
be certificates for Rights and shall have impressed on, printed on, written on
or otherwise affixed to them the following legend:
This certificate also evidences certain Rights as set
forth in a Rights Agreement between Krispy Kreme Doughnuts,
Inc. and Branch Banking and Trust Company, dated as of January
18, 2000 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is
on file at the principal office of the Company. The Company
will mail to the holder of this certificate a copy of the
Rights Agreement without charge promptly after receipt of a
written request therefor. Under certain circumstances, as set
forth in the Rights Agreement, such Rights may be evidenced by
separate certificates and no longer be evidenced by this
certificate, may be redeemed or exchanged or may expire. As
set forth in the Rights Agreement, Rights issued to, or held
by, any Person who is, was or becomes an Acquiring Person or
an Affiliate or Associate thereof (as such terms are defined
in the Rights Agreement), whether currently held by or on
behalf of such Person or by any subsequent holder, may be null
and void.
(d) With respect to the certificates containing the foregoing legend,
until the earlier of the Distribution Date or the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any of such certificates shall also constitute the transfer of the Rights
associated with the Common Stock represented thereby. If the Company purchases
or acquires any shares of
6
<PAGE> 10
Common Stock after the Effective Date but prior to the Distribution Date, any
Rights associated with such Common Stock shall be deemed canceled and retired so
that the Company shall not be entitled to exercise any Rights associated with
the Common Stock that are no longer outstanding.
SECTION 4. FORM OF RIGHTS CERTIFICATE. (a) The Rights Certificates (and
the forms of assignment, election to purchase and certificates to be printed on
the reverse thereof) shall be substantially in the form of EXHIBIT B attached
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law, rule or regulation or
with any rule or regulation of any stock exchange or inter-dealer quotation
system of a registered national securities association on which the Rights may
from time to time be listed, traded or quoted or to conform to usage. Subject to
SECTIONS 11 AND 22, the Rights Certificates, whenever distributed, shall be
dated as of the Distribution Date, shall entitle the holders thereof to purchase
such number of one one-hundredths of a share of Preferred Stock as shall be set
forth therein at the price set forth therein, but the number of such one
one-hundredths and the Purchase Price thereof shall be subject to adjustment as
provided herein.
(b) Any Rights Certificate representing Rights beneficially owned by
any Person referred to in SECTION 7(D)(I), (II) OR (III) shall (to the extent
feasible) contain the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement). This Rights
Certificate and the Rights represented hereby may be or may
become null and void in the circumstances specified in Section
7(d) of the Rights Agreement.
SECTION 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President or any Vice President, either manually or by facsimile
signature, and shall have affixed thereto the Company's seal or a facsimile
thereof which shall be attested by the Secretary or an Assistant Secretary of
the Company, either manually or by facsimile signature. The Rights Certificates
shall be manually countersigned by the Rights Agent and shall not be valid for
any purpose unless so countersigned. In case any officer of the Company whose
manual or facsimile signature is affixed to the Rights Certificates shall cease
to be such officer of the Company before countersignature by the Rights Agent
and issuance and delivery by the Company, such Rights Certificates may,
nevertheless, be countersigned by the Rights Agent and issued and delivered with
the same force and effect as though the individual who signed such Rights
Certificates had not ceased to be such officer of the Company. Any Rights
Certificate may be signed on behalf of the Company by any Person who, at the
actual date of the execution of such
7
<PAGE> 11
Rights Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Agreement any such
Person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise, transfer
or exchange, books for registration and transfer of the Rights Certificates.
Such books shall show with respect to each Rights Certificate the name and
address of the registered holder thereof, the number of Rights indicated on the
certificate, and the certificate number.
SECTION 6. TRANSFER AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED,
DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. (a) Subject to SECTION 4(B),
7(D), AND 14, at any time after the Close of Business on the Distribution Date
and prior to the Close of Business on the Expiration Date, any Rights
Certificate(s) may, upon the terms and subject to the conditions set forth in
this SECTION 6(A), be transferred or exchanged for another Rights Certificate(s)
evidencing a like number of Rights as the Rights Certificate(s) surrendered. Any
registered holder desiring to transfer or exchange any Rights Certificate(s)
shall make such request in writing delivered to the Rights Agent, and shall
surrender such Rights Certificate(s) (with, in the case of a transfer, the form
of assignment and certificate on the reverse side thereof duly executed) to the
Rights Agent at the principal office or offices of the Rights Agent designated
for such purpose. Neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate(s) until the registered holder of the Rights has complied
with the requirements of SECTION 7(e). Upon satisfaction of the foregoing
requirements, the Rights Agent shall, subject to SECTIONS 4(B), 7(D), 14 AND 24,
countersign and deliver to the Person entitled thereto a Rights Certificate(s)
as so requested. The Company may require payment of a sum sufficient to cover
any transfer tax or other governmental charge that may be imposed in connection
with any transfer or exchange of any Rights Certificate(s).
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will issue and deliver a new
Rights Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered holder in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
SECTION 7. EXERCISE OF RIGHTS; EXPIRATION DATE OF RIGHTS; RESTRICTIONS
ON TRANSFER. (a) Subject to SECTION 7(D), the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein, including, without limitation, SECTIONS 7(E), 9(C), 11(A), 13,
23, AND 24), in whole or in part, at any time after the Distribution Date and
prior to the Expiration Date upon surrender of the Rights Certificate, with
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the form of election to purchase and the certificate on the reverse side thereof
duly executed (with signatures guaranteed), to the Rights Agent at the principal
office or offices of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price (in lawful money of the United States of
America by certified check or bank draft payable to the order of the Company)
with respect to the Rights then to be exercised and an amount equal to any
applicable transfer tax or other governmental charge.
(b) Upon satisfaction of the requirements of SECTION 7(A) and subject
to SECTION 20(K), the Rights Agent shall thereupon promptly (i)(A) requisition
from any transfer agent of the Preferred Stock (or make available, if the Rights
Agent is the transfer agent therefor) certificates for the total number of one
one-hundredths of a share of Preferred Stock to be purchased (and the Company
hereby irrevocably authorizes its transfer agent to comply with all such
requests), or (B) if the Company shall have elected to deposit the shares of
Preferred Stock issuable upon exercise of the Rights with a depository agent,
requisition from the depository agent depository receipts representing such
number of one one-hundredths of a share of Preferred Stock as are to be
purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the
depository agent), and the Company will direct the depository agent to comply
with such request, (ii) requisition from the Company the amount of cash, if any,
to be paid in lieu of issuance of fractional shares in accordance with SECTION
14, and (iii) after receipt of such certificates or depository receipts and
cash, if any, cause the same to be delivered to or upon the order of the
registered holder of such Rights Certificate (with such certificates or receipts
registered in such name or names as may be designated by such holder). If the
Company is obligated to deliver Common Stock, other securities or assets
pursuant to this Agreement, the Company will make all arrangements necessary so
that such other securities and assets are available for distribution by the
Rights Agent, if and when appropriate.
(c) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing the number of Rights remaining unexercised shall be issued by the
Rights Agent and delivered to, or upon the order of, the registered holder of
such Rights Certificate, registered in such name or names as may be designated
by such holder, subject to the provisions of SECTION 14.
(d) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Flip-in Event, any Rights beneficially owned
by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person,
(ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate)
who becomes a transferee after the Acquiring Person (or of any such Associate or
Affiliate) becomes such, or (iii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring Person (or of any such Associate or Affiliate) becoming such
and receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person (or any such Associate or Affiliate) to
holders of equity interests in such Acquiring Person (or in any such Associate
or Affiliate) or to any Person with whom the Acquiring Person (or any such
Associate
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<PAGE> 13
or Affiliate) has any continuing agreement, arrangement or understanding
regarding the transferred Rights, or (B) a transfer which the Board of Directors
have determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this SECTION 7(D) shall become null
and void without any further action, and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise; provided, however, that the foregoing provisions of
this SECTION 7(D) shall not apply to Rights beneficially owned by an Acquiring
Person (or an Associate or Affiliate) of such Acquiring Person or a transferee
thereof if such Person became an Acquiring Person pursuant to a Qualifying
Tender Offer. The Company shall use all reasonable efforts to insure that the
provisions of SECTION 4(B) AND THIS SECTION 7(D) and are complied with, but
shall have no liability to any holder of Rights Certificates or other Person as
a result of its failure to make any determinations with respect to an Acquiring
Person or its Affiliates and Associates or any transferee of any of them
hereunder.
(e) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder of Rights upon the occurrence of any purported
transfer pursuant to SECTION 6 or exercise pursuant to this SECTION 7 unless
such registered holder (i) shall have completed and signed the certificate
contained in the form of assignment or election to purchase, as the case may be,
set forth on the reverse side of the Rights Certificate surrendered for such
transfer or exercise, as the case may be, (ii) shall not have indicated an
affirmative response to clause 1 or 2 thereof, and (iii) shall have provided
such additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All
Rights Certificates surrendered for exercise, transfer or exchange shall, if
surrendered to the Company or to any of its agents, be delivered to the Rights
Agent for cancellation or in canceled form, or, if surrendered to the Rights
Agent, shall be canceled by it, and no Rights Certificates shall be issued in
lieu thereof except as expressly permitted by this Agreement. The Company shall
deliver to the Rights Agent for cancellation and retirement, and the Rights
Agent shall cancel and retire, any other Rights Certificate purchased or
acquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all canceled Rights Certificates to the Company, or shall,
at the written request of the Company, destroy such canceled Rights
Certificates, and in either such case shall deliver a certificate of
cancellation or destruction thereof, as appropriate, to the Company.
SECTION 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK. (a) The
Company covenants and agrees that it will use reasonable efforts to cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of Triggering Event, out of its
authorized and unissued shares of Common Stock) a number of shares of Preferred
Stock (and, following the occurrence of a Triggering Event, out of its
authorized but unissued shares of Common Stock) that will be, except as provided
in SECTION
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<PAGE> 14
11(A)(III), sufficient to permit the exercise in full of all outstanding Rights
as provided in this Agreement.
(b) So long as the Preferred Stock (and, following the occurrence of
Triggering Event, Common Stock and other securities) issuable and deliverable
upon the exercise of the Rights may be listed on any national securities
exchange or inter-dealer quotation system of a registered national securities
association, the Company shall use its best efforts to cause, from and after
such time as the Rights become exercisable, all securities reserved for such
issuance to be listed on any such exchange or quotation system upon official
notice of issuance upon such exercise.
(c) The Company shall use its best efforts (i) to file, as soon as
practicable following the earliest date after the occurrence of a Flip-in Event,
or as soon as is required by law following the Distribution Date, as the case
may be, a registration statement under the Securities Act with respect to the
securities issuable upon exercise of the Rights, (ii) to cause such registration
statement to become effective as soon as practicable after such filing, and
(iii) to cause such registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Securities Act) until
the earlier of (A) the date as of which the Rights are no longer exercisable for
such securities, and (B) the Expiration Date. The Company will also take such
action as may be appropriate under, or to ensure compliance with, the securities
or blue sky laws of the various states in connection with the exercisability of
the Rights. The Company may temporarily suspend, for a period of time not to
exceed 90 days after the date set forth in this SECTION 9(C)(I), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall notify the Rights Agent and issue a public announcement stating
that the exercisability of the Rights has been temporarily suspended, as well as
a public announcement at such time as the suspension is no longer in effect that
the rights are currently exercisable. Notwithstanding any such provision of this
Agreement to the contrary, the Rights shall not be exercisable for securities in
any jurisdiction if the requisite qualification in such jurisdiction shall not
have been obtained, such exercise therefor shall not be permitted under
applicable law or a registration statement in respect of such securities shall
not have been declared effective.
(d) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all one one-hundredths of a share of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock or other securities) issuable upon exercise of the Rights shall, at the
time of delivery of the certificates for such securities (subject to payment of
the Purchase Price), be duly authorized, validly issued, fully paid, and
nonassessable.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and other governmental
charges which may be payable in respect of the issuance or delivery of the
Rights Certificates and of any certificates for Preferred Stock (or Common Stock
or other securities, as the case may be) upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax or other
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<PAGE> 15
governmental charge which may be payable in respect of any transfer involved in
the issuance or delivery of any Rights Certificates or of any certificates for
Preferred Stock (or Common Stock or other securities, as the case may be) to a
Person other than the registered holder of the applicable Rights Certificate,
and prior to any such transfer, issuance or delivery any such tax or other
governmental charge shall have been paid by the holder of such Rights
Certificate or it shall have been established to the Company's satisfaction that
no such tax or other governmental charge is due.
SECTION 10. PREFERRED STOCK RECORD DATE. Each Person (other than the
Company) in whose name any certificate for Preferred Stock (or Common Stock or
other securities, as the case may be) is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of such
Preferred Stock (or Common Stock or other securities, as the case may be)
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly surrendered and payment
of the Purchase Price (and any applicable transfer taxes or other governmental
charges) was made; provided, however, that if the date of such surrender and
payment is a date upon which the transfer books of the Company relating to the
Preferred Stock (or Common Stock or other securities, as the case may be) are
closed, such Person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the applicable transfer books of the Company are open.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR
NUMBER OF RIGHTS. The Purchase Price, the number and kind of shares covered by
each Right, and the number of Rights outstanding are subject to adjustment from
time to time, as provided in this SECTION 11.
(a)(i) If the Company shall at any time after the date of this
Agreement (A) declare or pay a dividend on the Preferred Stock payable in shares
of Preferred Stock (or other capital stock), (B) subdivide the outstanding
Preferred Stock into a greater number of shares, (C) combine the outstanding
Preferred Stock into a smaller number of shares, or (D) issue any shares of its
capital stock in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger involving the
Company in which the Company is the surviving or continuing corporation), except
as otherwise provided in SECTION 7(D) and this SECTION 11(A), then the Purchase
Price in effect immediately prior to the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, and the
number and kind of shares of Preferred Stock or other capital stock issuable on
such date shall be proportionately adjusted so that each holder of a Right shall
thereafter be entitled to receive, upon exercise thereof at the Purchase Price
in effect immediately prior to such date, the aggregate number and kind of
shares of Preferred Stock or other capital stock, as the case may be, which, if
such Right had been exercised immediately prior to such date and at a time when
the applicable transfer books of the Company were open, such holder would have
been entitled to receive upon such exercise and by virtue of such dividend,
subdivision, combination or reclassification. If an event occurs which requires
an adjustment under both this SECTION 11(A)(I)
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and SECTION 11(A)(II), the adjustment provided for in this SECTION 11(A)(I)
shall be in addition to, and shall be made prior to, any adjustment required
pursuant to SECTION 11(A)(II).
(ii) Subject to SECTIONS 23 AND 24, if:
(A) any Person, alone or together with its Affiliates
and Associates, shall, at any time after the date of this
Agreement become an Acquiring Person (other than pursuant to a
Qualifying Tender Offer), or
(B) during such time as there is an Acquiring Person,
there shall be a reclassification of securities (including any
reverse stock split), recapitalization of the Company, or any
merger or consolidation of the Company with any of its
Subsidiaries or any other transaction or series of
transactions involving the Company or any of its Subsidiaries
(whether or not with or into or otherwise involving an
Acquired Person), other than a Flip-over Event(s), which has
the effect, directly or indirectly, of increasing by more than
2% the proportionate share of the outstanding shares of any
class of equity or convertible securities of the Company or
any of its Subsidiaries which is directly or indirectly
beneficially owned by any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, or
(C) any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, at any time after the date
of this Agreement, directly or indirectly, (1) shall merge
into the Company or otherwise combine or consolidate with the
Company and the Company shall be the continuing or surviving
corporation of such merger, combination or consolidation and,
in connection with such merger, combination or consolidation,
none of the outstanding shares of the Common Stock of the
Company shall be changed into or exchanged for stock or other
securities of the Company or of any other Person or cash or
any other property, (2) shall, in one transaction or a series
of transactions, other than in connection with the exercise of
a Right or Rights and other than in connection with the
exercise or conversion of securities exercisable for or
convertible into securities of the Company which securities
were outstanding prior to the time such Acquiring Person
became such, transfer any assets to the Company or to any of
its Subsidiaries in exchange (in whole or in part) for shares
of Common Stock, for other equity securities of the Company,
or for securities exercisable for or convertible into shares
of equity securities of the Company (Common Stock or
otherwise) or otherwise obtain from the Company, with or
without consideration, any additional shares of such equity
securities or securities exercisable for or convertible into
shares of such equity securities (other than pursuant to a pro
rata offer or distribution to all holders of Common Stock),
(3) shall sell, purchase, lease, exchange, mortgage, pledge,
transfer or otherwise dispose of assets (in one or more
transactions), to, from, with or of, as the case may be, the
Company or
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<PAGE> 17
any of its Subsidiaries (including, in the case of
Subsidiaries, by way of a merger, combination or consolidation
of any Subsidiary), on terms and conditions less favorable to
the Company than the Company would be able to obtain in
arm's-length negotiations with an unaffiliated third party,
other than pursuant to a Flip-over Event, (4) shall sell,
purchase, lease, exchange, mortgage, pledge, transfer or
otherwise acquire or dispose of in one transaction or a series
of transactions, to, from or with (as the case may be) the
Company or any of its Subsidiaries (other than incidental to
the lines of business, if any, engaged in as of such date
between the Company and such Acquiring Person or Associates or
Affiliate) assets having an aggregate fair market value of
more than $4,000,000, other than pursuant to a transaction set
forth in SECTION 13(A), (5) shall receive any compensation
from the Company or any of its Subsidiaries other than
compensation for full-time employment as a regular employee,
or fees for serving as a director, at rates in accordance with
the Company's (or its Subsidiaries') past practices, or (6)
shall receive the benefit, directly or indirectly (except
proportionately as a shareholder and except if resulting from
a requirement of law or governmental regulation), of any
loans, assumptions of loans, advances, guarantees, pledges or
other financial assistance, or any tax credits or other tax
advantage, provided by the Company or any of its Subsidiaries,
(D) provided that the events described in SECTIONS
11(A)(II)(A), (B) AND (C) shall not include a repurchase by
the Company of Common Stock that is approved by a majority of
Directors, promptly following five days after the date of the
occurrence of the event described in SECTION 11(A)(II)(A)
hereof and promptly following the occurrence of any event
described in SECTION 11(A)(B) or (C) hereof,
then proper provision shall promptly be made so that each holder of a
Right shall (except as otherwise provided herein, including, without
limitation, SECTION 7(D)) thereafter be entitled to receive, upon
exercise of the Right, without payment of the Purchase Price and in
lieu of Preferred Stock, such number of duly authorized, validly
issued, fully paid and nonassessable shares of Common Stock of the
Company (such shares being referred to herein as the "ADJUSTMENT
SHARES") as shall be equal to the result obtained by (x) multiplying
the then current Purchase Price by the number of one one-hundredths of
a share of Preferred Stock for which a Right is then exercisable (such
product being thereafter referred to as the "PURCHASE PRICE" for each
Right and for all purposes of this Agreement), and dividing that
product by (y) the current market price (determined pursuant to SECTION
11(D)(I)) per share of Common Stock on the date of such first
occurrence; provided, however, that if the transaction that would
otherwise give rise to the foregoing adjustment is also subject to the
provisions of SECTION 13, then only the provisions of SECTION 13 shall
apply and no adjustment shall be made pursuant to this SECTION
11(A)(II).
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(iii) If the number of shares of Common Stock which are
authorized by the Company's articles of incorporation but not
outstanding or reserved for issuance other than upon exercise of the
Rights is insufficient to permit the exercise in full of the Rights in
accordance with SECTION 11(A)(II), the Company shall (A) determine the
excess of (1) the value of the Adjustment Shares issuable upon the
exercise of a Right (computed using the "CURRENT MARKET PRICE" used to
determine the number of Adjustment Shares), over (2) the Purchase Price
(such excess being referred to herein as the "SPREAD"), and (B) with
respect to each Right, make adequate provision to substitute for the
Adjustment Shares, (1) (to the extent available) Common Stock and then,
(2) (to the extent available) other equity securities of the Company
which a majority of the Directors has determined to be essentially
equivalent to shares of Common Stock in respect to dividend,
liquidation and voting rights (such securities being referred to herein
as "COMMON STOCK EQUIVALENTS"), and then, if necessary, (3) other
equity or debt securities of the Company, cash or other assets, a
reduction in the Purchase Price or any combination of the foregoing,
having an aggregate value (as determined by the Board of Directors
based upon the advice of a nationally recognized investment banking
firm selected by the Board of Directors) equal to the value of the
Adjustment Shares; provided, however, if the Company shall not have
made adequate provision to deliver value pursuant to clause (B) above
within thirty (30) days following the latter of (x) the first
occurrence of a Flip-in Event and (y) the date on which the Company's
right of redemption pursuant to SECTION 23 expires, then the Company
shall be obligated to deliver, upon the surrender for exercise of a
Right and without requiring payment of the Purchase Price, shares of
Common Stock (to the extent available), shares of Preferred Stock of
the Company, and then, if necessary, cash, which shares and cash have
an aggregate value equal to the Spread. If the Board of Directors of
the Company shall determine in good faith that it is likely that
sufficient additional shares of Common Stock could be authorized for
issuance upon exercise in full of the Rights, the 30 day period set
forth above (such period, as it may be extended, being referred to
herein as the "SUBSTITUTION PERIOD") may be extended to the extent
necessary, but not more than 90 days following the first occurrence of
a Flip-In Event, in order that the Company may seek shareholder
approval for the authorization of such additional shares. If the
Company determines that some action is to be taken pursuant to the
first or second sentence of this SECTION 11(A)(III), then the Company
(x) shall provide, subject to SECTION 7(D), that such action shall
apply uniformly to all outstanding Rights, and (y) may suspend the
exercisability of the Rights until the expiration of the Substitution
Period in order to seek any authorization of additional shares or to
decide the appropriate form and value of any consideration to be
delivered as referred to in such first or second sentence. If any such
suspension occurs, the Company shall issue a public announcement
stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this SECTION
11(A)(III), the value of the Common Stock shall be the current market
price per share of Common Stock (as determined pursuant to SECTION
11(D)) on the later of the date of the first occurrence of a Flip-in
Event and the first date that the right to redeem the Rights pursuant
to SECTION 23
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shall expire; any common stock equivalent shall be deemed to have the
same value as the Common Stock on such date; and the value of other
securities or assets shall be determined pursuant to SECTION
11(D)(III).
(b) If the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within 45 calendar days after
such record date) Preferred Stock (or securities having the same rights,
privileges and preferences as the shares of Preferred Stock ("EQUIVALENT
PREFERRED STOCK")) or securities convertible into or exercisable for Preferred
Stock (or equivalent preferred stock) at a price per share of Preferred Stock
(or equivalent preferred stock) (in each case, taking account of any conversion
or exercise price) less than the current market price (as determined pursuant to
SECTION 11(D)) per share of Preferred Stock on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock which the
aggregate price (taking account of any conversion or exercise price) of the
total number of shares of Preferred Stock (and/or equivalent preferred stock) so
to be offered would purchase at such current market price, and the denominator
of which shall be the number of shares of Preferred Stock outstanding on such
record date, plus the number of additional shares of Preferred Stock (and/or
equivalent preferred stock) so to be offered. In case such subscription price
may be paid by delivery of consideration part or all of which shall be in a form
other than cash, the value of such consideration shall be as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be conclusive for
all purposes. Shares of Preferred Stock owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed,
and if such rights, options or warrants are not so issued, the Purchase Price
shall be adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger involving the Company in which
the Company is the surviving entity) of evidences of indebtedness, equity
securities other than Preferred Stock, cash or assets (other than a regular
periodic cash dividend out of the earnings or retained earnings of the Company)
or rights, options or warrants (excluding those referred to in SECTION 11(B)),
the Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the current market price (as
determined pursuant to SECTION 11(D)) per share of Preferred Stock on such
record date, less the value (as determined pursuant to SECTION 11(D)(III)) of
such evidences of indebtedness, equity securities, assets, rights, options or
warrants so to be distributed with respect to one share of Preferred Stock, and
the denominator of which shall be such current market price per share of
Preferred Stock (as determined by SECTION 11(D)). Such adjustment shall be made
successively whenever such a record date is fixed, and if such distribution is
not so made, the
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Purchase Price shall be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder other than
computations made pursuant to SECTION 11(A)(III) OR 14, the "CURRENT MARKET
PRICE" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such Common Stock for the 30
consecutive Trading Days immediately prior to such date; for purposes of
computations made pursuant to SECTION 11(A)(III), the "CURRENT MARKET PRICE" per
share of Common Stock on any date shall be deemed to be the average of the daily
closing prices per share of such Common Stock for the 10 consecutive Trading
Days immediately following such date; and for purposes of computations made
pursuant to SECTION 14, the "CURRENT MARKET PRICE" per share of Common Stock for
any Trading Day shall be deemed to be the closing price per share of Common
Stock for such Trading Day; provided, however, that if the current market price
per share of the Common Stock is determined during a period following the
announcement by the issuer of such Common Stock of (A) a dividend or
distribution on such Common Stock payable in shares of such Common Stock or
securities exercisable for or convertible into shares of such Common Stock
(other than the Rights), or (B) any subdivision, combination or reclassification
of such Common Stock, and prior to the expiration of the requisite 30 Trading
Day or 10 Trading Day period after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the "CURRENT MARKET PRICE" shall
be properly adjusted to take into account ex-dividend trading. The closing price
for each day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Common Stock are not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which the shares of Common Stock are listed or
admitted to trading or, if the shares of Common Stock are not listed or admitted
to trading on any national securities exchange, the last quoted price or, if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by The Nasdaq Stock Market or such other
system then in use or, if on any such date the shares of Common Stock are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Common Stock
selected by the Board of Directors of the Company. If on any such date no market
maker is making a market in the Common Stock, then the fair value of such shares
on such date as determined in good faith by the Board of Directors of the
Company shall be used. If the Common Stock is not publicly held or not so listed
or traded, the "CURRENT MARKET PRICE" per share means the fair value per share
as determined in good faith by the Board of Directors of the Company, which
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
"CURRENT MARKET PRICE" per share of Preferred Stock shall be determined
in the same manner set forth above for the Common Stock in SECTION
11(D)(I) (other than the last sentence thereof). If
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<PAGE> 21
the current market price per share of Preferred Stock cannot be
determined in such manner, or if the Preferred Stock is not publicly
held or listed or traded in a manner described in SECTION 11(D)(I),
then the "CURRENT MARKET PRICE" per share of Preferred Stock shall be
conclusively deemed to be an amount equal to 100 (as such number may be
appropriately adjusted for such events as stock splits, stock dividends
and recapitalizations with respect to the Common Stock occurring after
the date of this Agreement) multiplied by the current market price per
share of Common Stock (as determined pursuant to SECTION 11(D)(I)
(other than the last sentence thereof)). If neither the Common Stock
nor the Preferred Stock is publicly held or so listed or traded, the
"CURRENT MARKET PRICE" per share of the Preferred Stock shall be
determined in the same manner as set forth in the last sentence of
SECTION 11(D)(I). For all purposes of this Agreement, the "CURRENT
MARKET PRICE" of one one-hundredth of a share of Preferred Stock shall
be equal to the "CURRENT MARKET PRICE" of one share of Preferred Stock
divided by 100.
(iii) For the purpose of any computation hereunder, the value
of any securities or assets other than Common Stock or Preferred Stock
shall be the fair value as determined in good faith by the Board of
Directors of the Company, which determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all
purposes.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 2% in the Purchase Price; provided, however,
that any adjustments which by reason of this SECTION 11(E) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this SECTION 11 shall be made to the nearest
cent or to the nearest ten-thousandth of a share of Common Stock or other share
or one-millionth of a share of Preferred Stock, as the case may be.
(f) If at any time, as a result of an adjustment made pursuant to
SECTION 11(A)(II) or SECTION 13(a), the holder of any Right shall be entitled to
receive upon exercise of such Right any shares of capital stock other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
SECTIONS 11(A), (B), (C), (E), (G), (H), (I), (J), (K) AND (M), and the
provisions of SECTIONS 7, 9, 10, 13 AND 14 with respect to the Preferred Stock
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made hereunder shall evidence the right to purchase, at the Purchase
Price then in effect, the then applicable number of one one-hundredths of a
share of Preferred Stock and other capital stock of the Company issuable from
time to time hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
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(h) Unless the Company shall have exercised its election as provided in
SECTION 11(I), upon each adjustment of the Purchase Price as a result of the
calculations made in SECTIONS 11(B) AND (C), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
share of Preferred Stock (calculated to the nearest one-millionth) obtained by
(i) multiplying (x) the number of one one-hundredths of a share for which a
Right was exercisable immediately prior to this adjustment by (y) the Purchase
Price in effect immediately prior to such adjustment of the Purchase Price, and
(ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of one one-hundredths of a share of Preferred Stock issuable upon the
exercise of a Right. Each of the Rights outstanding after such adjustment of the
number of Rights shall be exercisable for the number of one one-hundredths of a
share of Preferred Stock for which such Right was exercisable immediately prior
to such adjustment. Each Right held of record prior to such adjustment of the
number of Rights shall become that number of Rights (calculated to the nearest
ten-thousandth) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall make a
public announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least 10 days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this SECTION 11(I), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Right Certificates evidencing, subject to
SECTION 14, the additional Rights to which such holders shall be entitled as a
result of such adjustment, or, at the option of the Company, shall cause to be
distributed to such holders of record in substitution and replacement for the
Rights Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a share of Preferred Stock issuable upon the
exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one one-hundredth of a
share and the number of shares which were expressed in the initial Rights
Certificates issued hereunder.
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(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the par value, if any, of the number of one
one-hundredths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable such number of one one-hundredths of a share
of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this SECTION 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-hundredths of a share of Preferred Stock or other capital
stock of the Company, if any, issuable upon such exercise over and above the
number of one one-hundredths of a share of Preferred Stock or other capital
stock of the Company, if any, issuable upon such exercise on the basis of the
Purchase Price in effect prior to such adjustment; provided, however, that the
Company shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(m) Anything in this SECTION 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this SECTION 11, as and to
the extent that it, in its sole discretion, shall determine to be advisable in
order that any (i) consolidation or subdivision of the Preferred Stock, (ii)
issuance wholly for cash of any Preferred Stock at less than the current market
price, (iii) issuance wholly for cash of Preferred Stock or securities which by
their terms are convertible into or exercisable for Preferred Stock, (iv) stock
dividends, or (v) issuance of rights, options or warrants referred to in this
SECTION 11, hereafter made by the Company to the holders of its Preferred Stock,
shall not be taxable to such shareholders.
(n) The Company covenants and agrees that it will not at any time after
the Distribution Date, (i) consolidate with any other Person, (ii) merge with or
into any other Person, (iii) effect a statutory share exchange with any Person,
or (iv) sell, lease or otherwise transfer (and/or permit any of its Subsidiaries
to sell, lease or otherwise transfer), in one transaction or a series of related
transactions, assets aggregating more than 50% of the assets (measured by either
book value or fair market value) or generating more than 50% of operating income
or cash flow of the Company and its Subsidiaries, taken as a whole, to any other
Person or Persons if (x) at the time of or immediately after such consolidation,
merger, statutory share exchange, sale, lease or transfer there are any rights,
warrants or other instruments or securities outstanding or any agreements or
arrangements in effect which would substantially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights, or (y) prior to,
simultaneously with or immediately after such consolidation, merger, statutory
share exchange, sale, lease or transfer, the shareholders of a Person who
constitutes, or would constitute, the "PRINCIPAL PARTY" for the
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<PAGE> 24
purposes of SECTION 13 shall have received a distribution of Rights previously
owned by such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that after the Distribution Date,
it will not, except as permitted by SECTIONS 23, 24 OR 27, take (or permit any
Subsidiary to take) any action if at the time such action is taken it is
reasonably foreseeable that such action will substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights, unless such action
is approved by a majority of the Directors.
(p) Notwithstanding anything in this Agreement to the contrary, if at
any time after the Effective Date and prior to the Distribution Date the Company
shall (i) pay a dividend on the outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock into a
larger number of shares, or (iii) combine the outstanding Common Stock into a
smaller number of shares, the number of Rights associated with each share of
Common Stock then outstanding, or issued or delivered thereafter shall be
proportionately adjusted so that the number of Rights thereafter associated with
each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event.
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in SECTIONS 11 AND 13, the Company
shall (a) promptly prepare a certificate setting forth such adjustment and a
brief statement of the facts accounting for such adjustment, (b) promptly file
with the Rights Agent and with each transfer agent for the Preferred Stock and
the Common Stock a copy of such certificate, and (c) mail a brief summary
thereof to each holder of a Rights Certificate (or, if prior to the Distribution
Date, to each holder of a certificate representing shares of Common Stock) in
the manner set forth in SECTION 26. The Rights Agent shall be fully protected in
relying on any such certificate and on any adjustment contained therein and
shall not be obligated or responsible for calculating any adjustment nor shall
it be deemed to have knowledge or any such adjustment unless and until it shall
have received such a certificate.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER. (a) Except for any transaction with a Person who has consummated
a Qualifying Tender Offer which transaction is approved by a majority of the
Directors, if following the Share Acquisition Date, directly or indirectly,
(w) the Company shall consolidate with, merge with or
into, or otherwise combine with, any other Person, and the
Company shall not be the
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continuing or surviving corporation of such consolidation,
merger or combination, or
(x) any Person shall consolidate with, merge with or
into, or otherwise combine with, the Company, and the Company
shall be the continuing or surviving corporation of such
consolidation, merger or combination and, in connection with
such consolidation, merger or combination, all or part of the
outstanding shares of Common Stock shall be changed into or
exchanged for other stock or securities of the Company or any
other Person or cash or any other property, or
(y) the Company shall be a party to any statutory
share exchange with any other Person after which the Company
is a subsidiary of any other Person, or
(z) the Company and/or one or more of its
Subsidiaries shall sell, lease or otherwise transfer, in one
transaction or a series of related transactions, assets
aggregating more than 50% of the assets (measured by either
book value or fair market value) or generating more than 50%
of the operating income or cash flow of the Company and its
Subsidiaries, taken as a whole, to any other Person or
Persons,
then, and in each such case, proper provision shall promptly be made so that (i)
each holder of a Right, except as provided in SECTION 7(D), shall thereafter be
entitled to receive, upon exercise thereof at the then current Purchase Price,
such number of duly authorized, validly issued, fully paid and nonassessable
shares of freely tradable Common Stock of the Principal Party (as defined
below), not subject to any rights of call or first refusal, liens, encumbrances
or other claims, as shall be equal to the result obtained by (A) multiplying the
then current Purchase Price by the number of one one-hundredths of a share of
Preferred Stock for which a Right was exercisable immediately prior to the first
occurrence of a Flip-over Event (or, if a Flip-in Event has previously occurred,
multiplying the number of such one one-hundredths of a share of Preferred Stock
for which a Right was exercisable immediately prior to the first occurrence of a
Flip-in Event by the Purchase Price in effect immediately prior to such first
occurrence) (such product being thereafter referred to as the "PURCHASE PRICE"
for each Right and for all purposes of this Agreement), and dividing that
product by (B) 50% of the current market price (determined pursuant to SECTION
11(D)(I)) per share of the Common Stock or other securities of such Principal
Party) on the date of consummation of such consolidation, merger, combination,
statutory share exchange, sale, lease or transfer;
(ii) the Principal Party shall thereafter be liable for, and
shall assume, by virtue of such consolidation, merger, combination,
statutory share exchange, sale, lease or transfer, all the obligations
and duties of the Company pursuant to this Agreement;
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<PAGE> 26
(iii) the term "COMPANY" shall thereafter be deemed to refer
to such Principal Party, it being specifically intended that the
provisions of SECTION 11 shall apply only to such Principal Party
following the first occurrence of a Flip-over Event;
(iv) such Principal Party shall take such steps (including,
without limitation, the authorization and reservation of a sufficient
number of shares of its Common Stock to permit exercise of all
outstanding Rights in accordance with this SECTION 13(A)) in connection
with the consummation of any such transaction as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as
nearly as reasonably may be, in relation to the shares of its Common
Stock thereafter deliverable upon the exercise of the Rights; and
(v) the provisions of SECTION 11(A)(II) shall be of no effect
following the first occurrence of a Flip-over Event.
(b) "PRINCIPAL PARTY" means:
(i) in the case of any transaction described in SECTIONS 13(A)
(W), (X) OR (Y), (A) the Person that is the issuer of any securities
into which shares of Common Stock of the Company are converted in such
merger, consolidation, or combination or for which shares of Common
Stock of the Company are exchanged in such statutory share exchange,
or, if there is more than one such issuer, the issuer of the Common
Stock of which has the greatest aggregate market value, or (B) if no
securities are issued, (x) the person that survives such consolidation
or is the other party to the merger, combination or statutory share
exchange, or, if there is more than one such Person, the Person the
Common Stock of which has the greatest aggregate market value, or (y)
if the Person that is the other party to the merger does not survive
the merger, the Person that does survive the merger (including the
Company if it survives); and
(ii) in the case of any transactions described in SECTIONS
13(A)(Z), the Person that is the party receiving the greatest portion
of the assets, operating income or cash flow transferred pursuant to
such transaction or transactions, or, if each person that is a party to
such transaction or transactions receives the same portion of the
assets, operating income or cash flow so transferred, or, if the Person
receiving the greatest portion of the assets, operating income or cash
flow cannot be determined, the person the Common Stock of which has the
greatest aggregate market value;
provided, however, that in any such case, (A) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary of another Person the Common Stock of which is and
has been so registered, "PRINCIPAL PARTY" shall refer to such other Person; and
(B) in case such Person is a Subsidiary, directly or indirectly, of more than
one Person, the Common Stock of two or more of which are and have been so
registered, "PRINCIPAL
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<PAGE> 27
PARTY" shall refer to whichever of such Persons is the issuer of the Common
Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
combination, statutory share exchange, sale, lease or transfer unless the
Principal Party shall have a sufficient number of authorized shares of its
Common Stock which are not outstanding or otherwise reserved for issuance to
permit the exercise in full of the Rights in accordance with this SECTION 13 and
unless prior thereto the Company and such Principal Party shall have executed
and delivered to the Rights Agent a supplemental agreement providing for the
terms set forth in SECTIONS 13(A) AND (B) and further providing that, as soon as
practicable after the date of any consolidation, merger, combination, statutory
share exchange, sale, lease or transfer mentioned in SECTION 13(A), the
Principal Party will (i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities issuable upon
exercise of the Rights on an appropriate form, and will use its best efforts to
cause such registration statement (A) to become effective as soon as practicable
after such filing, and (B) to remain effective (with a prospectus at all times
meeting the requirements of the Securities Act) until the Expiration Date; and
(ii) deliver to holders of the Rights historical financial statements for the
Principal Party and each of its Affiliates which comply in all respects with the
requirements for registration on Form 10 under the Exchange Act.
(d) The provisions of this SECTION 13 shall similarly apply to
successive mergers, consolidations, combinations, statutory share exchanges,
sales, leases or other transfers. If any Flip-over Event shall occur at any time
after the occurrence of a Flip-in Event, the Rights which have not theretofore
been exercised shall thereafter become exercisable in the manner described in
SECTION 13(A).
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company
shall not be required to issue fractions of Rights, except prior to the
Distribution Date as provided in SECTION 11(P), or to distribute Rights
Certificates which evidence fractional Rights. In lieu of any such fractional
Rights, the Company shall pay to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable an amount in cash equal to the same fraction of the current market
price of a whole Right. For purposes of this SECTION 14(A), the current market
price of a whole Right shall be the closing price of a Right for the Trading Day
immediately prior to the date on which such fractional Rights would otherwise
have been issuable. The closing price of a Right for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported on the principal national securities exchange on which the Rights are
listed or admitted to trading or, if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price, or, if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by The Nasdaq Stock Market or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company.
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<PAGE> 28
If on any such date no such market maker is making a market in the Rights, the
current market price of the Rights on such date shall be as determined in good
faith by the Board of Directors of the Company.
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions which are multiples of one one-hundredth
of a share of Preferred Stock) upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Preferred Stock (other than
fractions which are multiples of one one-hundredth of a share of Preferred
Stock). In lieu of any such fractional shares of Preferred Stock, the Company
shall pay to the registered holders of Rights Certificates at the time such
Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market price of one one-hundredth of a share of
Preferred Stock. For purposes this SECTION 14(B), the current market price of
one one-hundredth of a share of Preferred Stock shall be one one-hundredth of
the closing price of a share of Preferred Stock (as determined pursuant to
SECTION 11(D)) for the Trading Day immediately prior to the date of such
exercise.
(c) Following the occurrence of any Triggering Event or upon any
exchange pursuant to SECTION 24, the Company shall not be required to issue
fractions of shares of Common Stock upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Common Stock. In lieu of
fractional shares of Common Stock, the Company shall pay to the registered
holders of Rights Certificates at the time such Rights are exercised or
exchanged as provided herein an amount in cash equal to the same fraction of the
current market price of a share of Common Stock. For purposes of this SECTION
14(C), the current market price of a share of Common Stock shall be the closing
price of a share of Common Stock (as determined pursuant to SECTION 11(D)(I))
for the Trading Day immediately prior to the date of such exercise or exchange.
(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right except as permitted by this SECTION 14.
SECTION 15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of
Common Stock), and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of any Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of any Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive
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<PAGE> 29
relief against actual or threatened violations of the obligations of, any Person
subject to this Agreement.
SECTION 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to SECTIONS 6(A) AND 7(E), the Company and the Rights Agent
may deem and treat the Person in whose name a Rights Certificate (or, prior to
the Distribution Date, a certificate representing Common Stock) is registered as
the absolute owner thereof and of the Rights evidenced thereby (notwithstanding
any notations of ownership or writing on the Rights Certificate or the
certificate representing shares of Common Stock made by anyone other than the
Company or the Rights Agent) for all purposes whatsoever, and neither the
Company nor the Rights Agent, subject to the last sentence of SECTION 7(D),
shall be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority prohibiting or otherwise restraining
performance of such obligation; provided, however, that the Company must use its
best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
SECTION 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the shares of capital stock
which may at any time be issuable on the exercise of the Rights represented
thereby, nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to give or withhold consent to any corporate action, or to receive
notice of meetings or other actions affecting shareholders (except as provided
in SECTION 25), or to receive dividends or subscription rights, or otherwise,
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until the Right or Rights evidenced by such Rights Certificate shall have been
exercised in accordance with the provisions hereof.
SECTION 18. CONCERNING THE RIGHTS AGENT. (a) The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the execution or
administration of this Agreement or the exercise or performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent , its
directors, officers, employees and agents for, and to hold each of them harmless
against, any loss, liability, or expense, incurred without gross negligence, bad
faith or willful misconduct on the part of the Rights Agent, for anything done
or omitted by any of them in connection with the acceptance and administration
of this Agreement or the exercise or performance of the Rights Agent's duties
hereunder, including the costs and expenses of defending against any claim of
liability.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with the administration of this Agreement or the exercise or performance of its
duties hereunder in reliance upon any Rights Certificate or certificate for
Common Stock or for other securities of the Company, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice,
instruction, direction, consent, certificate, statement, or other paper or
document believed by it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper Person or Persons.
(c) The indemnity provided in this Section 18 shall survive the
expiration of the Rights, the resignation or removal of the Rights Agent and the
termination if this Agreement.
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any corporation resulting
from any merger or consolidation to which the Rights Agent or any successor
Rights Agent shall be a party, or any corporation succeeding to the corporate
trust or stock transfer business of the Rights Agent or any successor Rights
Agent, shall be the successor to the Rights Agent under this Agreement without
the execution or filing of any paper or any further act on the part of any of
the parties hereto; provided, however, that such corporation would be eligible
for appointment as a successor Rights Agent under the provisions of SECTION 21.
In case at the time such successor Rights Agent shall succeed to the agency
created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all
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<PAGE> 31
such cases such Rights Certificates shall have the full force provided in the
Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases, such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the advice or opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such advice
or opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any "ACQUIRING PERSON" and the
determination of "CURRENT MARKET PRICE") be proved or established by the Company
prior to taking, suffering or omitting to take any action hereunder, such fact
or matter (unless other evidence in respect thereof is specifically prescribed
herein) may be deemed to be conclusively proved and established by a certificate
signed by the Chairman of the Board, the President, any Vice President, the
Secretary or any Assistant Secretary of the Company and delivered to the Rights
Agent. Any such certificate shall be full authorization to the Rights Agent for
any action taken, suffered or omitted in good faith by it under the provisions
of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any
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<PAGE> 32
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to SECTION 7(D)) or any adjustment
in the terms of the Rights (including the manner, method or amount thereof)
provided for in SECTIONS 3, 11, 13, 23 OR 24, or the ascertaining of the
existence of facts that would require any such adjustment (except with respect
to the exercise of Rights evidenced by Rights Certificates after actual notice
of any such adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
of Common Stock or Preferred Stock to be issued pursuant to this Agreement or
any Rights Certificate or as to whether any shares of Common Stock or Preferred
Stock will, when issued, be duly authorized, validly issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President any Vice President, the Secretary or any
Assistant Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken, suffered or omitted to be taken by it in good faith in accordance
with instructions of any such officer or for any delay in acting while awaiting
instructions. Any application by the Rights Agent for written instructions from
the Company may, at the option of the Rights Agent, set forth in writing any
action proposed to be taken or omitted by the Rights Agent under this Agreement
and the date on or after which such action shall be taken or such omission shall
be effective. The Rights Agent shall not be liable for any action taken by, or
omission of, the Rights Agent in accordance with a proposal included in any such
application on or after the date specified in such application (which date shall
not be less than five (5) Business Days after the date any officer of the
Company actually receives such application, unless any such officer shall have
consented in writing to an earlier date) unless, prior to taking any such action
(or the effective date in the case of an omission), the Rights Agent shall have
received written instructions in response to such application specifying the
action to be taken or omitted.
(h) The Rights Agent and any shareholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not the Rights
Agent under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents,
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and the Rights Agent shall not be answerable or accountable for any act,
default, neglect or misconduct of any such attorneys or agents or for any loss
to the Company or to any holders of Rights resulting from any such act, default,
neglect or misconduct; provided, however, that the Rights Agent was not grossly
negligent in the selection thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 or 2 thereof,
the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
(l) The Rights Agent undertakes only the express duties and obligations
imposed on it by this Agreement and no implied duties or obligations shall be
read into this Agreement against the Rights Agent.
(m) Anything in this Agreement to the contrary notwithstanding, in no
event shall the Rights Agent be liable for special, indirect or consequential
loss or damage of any kind whatsoever (including but not limited to lost
profits).
SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' written notice mailed to the Company and to each transfer agent of
the Common Stock and Preferred Stock by registered or certified mail, and,
subsequent to the Distribution Date, to the holders of the Rights Certificates
by first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' written notice, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Stock and Preferred Stock by registered or certified mail, and subsequent
to the Distribution Date, to the holders of the Rights Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days of giving notice of such removal or after it has been notified
in writing of such resignation or incapacity by the resigning or incapacitated
Rights Agent or by the holder of a Rights Certificate (who shall, with such
notice, submit his Rights Certificate for inspection by the Company), then the
registered holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be (a) a
corporation organized and doing business under the laws of the United States or
of the State of North Carolina (or any other state of the United States
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<PAGE> 34
so long as such corporation is authorized to do business as a banking
institution in the State of North Carolina), in good standing, having a
principal office in the State of North Carolina, which is authorized under such
laws to exercise stock transfer or corporate trust powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $50,000,000 or (b) an Affiliate of a corporation described in SECTION
21(A). After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock
and the Preferred Stock, and, subsequent to the Distribution Date, mail a notice
thereof in writing to the registered holders of the Rights Certificates. Failure
to give any notice provided for in this SECTION 21, or any defect therein, shall
not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities issuable or property purchasable upon exercise of the Rights made in
accordance with the provisions of this Agreement.
SECTION 23. REDEMPTION AND TERMINATION. (a) The Company may, at its
option, but only upon the vote of a majority of the Board of Directors then in
office, at any time prior to the earlier of (i) the Close of Business on the
Share Acquisition Date, or (ii) the Final Expiration Date, redeem all but not
less than all of the then outstanding Rights at a redemption price of $0.001 per
Right, as such amount may be appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
redemption price being referred to herein as the "REDEMPTION PRICE"), and the
Company may, at its option, pay the Redemption Price in shares of Common Stock
(based on the "CURRENT MARKET VALUE," as defined in SECTION 11(D), of the shares
of Common Stock at the time of redemption), cash or any other form of
consideration deemed appropriate by the Board of Directors; provided, however,
that any redemption of Rights shall also be subject to any additional approval
procedures required by the articles of incorporation or bylaws of the Company.
Notwithstanding anything in this Agreement to the contrary, the Rights shall not
be exercisable after the first occurrence of a Flip-in Event until such time as
the Company's right of redemption hereunder has expired.
(b) If, following the occurrence of a Share Acquisition Date (i) a
Person who is an Acquiring Person shall have transferred or otherwise disposed
of a number of shares of Common Stock in one transaction or series of
transactions, not directly or indirectly involving the
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<PAGE> 35
Company or any of its Subsidiaries, which did not result in the occurrence of a
Triggering Event such that such Person is thereafter the Beneficial Owner of 10%
or less of the outstanding Common Stock, and (ii) there are no other Persons
immediately following the occurrence of the event described in clause (i) who
are Acquiring Persons, then the right of redemption shall be reinstated and
thereafter be subject to the provisions of this SECTION 23.
(c) Immediately upon the action of the Board of Directors of the
Company electing to redeem the Rights and without any further action and without
any notice, the right to exercise the Rights will terminate and thereafter the
only right of the holders of Rights shall be to receive the Redemption Price for
each Right so held. The Company shall promptly thereafter give notice of such
redemption to the Rights Agent and the holders of the Rights in the manner set
forth in SECTION 26; provided, however, that the failure to give, or any defect
in, such notice shall not affect the validity of such redemption. Any notice
which is mailed in the manner provided herein shall be deemed given, whether or
not the holder receives the notice. Each such notice of redemption will state
the method by which the payment of the Redemption Price will be made.
SECTION 24. EXCHANGE. (a) At any time after any Person becomes an
Acquiring Person, a majority of the Directors may, at their option, exchange all
or part of the then outstanding and exercisable Rights (which shall not include
Rights that have become void pursuant to SECTION 7(D)) for shares of Common
Stock at an exchange ratio of one share of Common Stock per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "EXCHANGE RATIO").
(b) Immediately upon the action of the Board of Directors electing to
exchange any Rights pursuant to SECTION 24(A) and without any further action and
without any notice, the right to exercise such Rights will terminate and
thereafter the only right of a holder of such Rights shall be to receive that
number of shares of Common Stock equal to the number of such Rights held by such
holder multiplied by the Exchange Ratio. The Company shall promptly thereafter
give notice of such exchange to the Rights Agent and the holders of the Rights
to be exchanged in the manner set forth in SECTION 26; provided, however, that
the failure to give, or any defect in, such notice shall not affect the validity
of such exchange. Any notice which is mailed in the manner provided herein shall
be deemed given, whether or not the holder receives the notice. Each such notice
of exchange will state the method by which the exchange of the shares of Common
Stock for Rights will be effected and, in the event of any partial exchange, the
number of Rights which will be exchanged. Any partial exchange shall be effected
pro rata based on the number of Rights (other than Rights which have become void
pursuant to SECTION 7(D)) held by each holder of Rights.
(c) If there shall not be sufficient Common Stock issued but not
outstanding or authorized but unissued to permit any exchange of Rights as
contemplated by this SECTION 24, the Company shall take all such action as may
be necessary to authorize additional Common Stock for issuance upon exchange of
the Rights. In the event the Company shall, after a good
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faith effort, be unable to take all such action as may be necessary to authorize
such additional Common Stock, the Company may substitute common stock
equivalents (as defined in SECTION 11(A)(III)) for shares of Common Stock
exchangeable for Rights, at the initial rate of one common stock equivalent for
each share of Common Stock, as appropriately adjusted to reflect adjustments in
dividend, liquidation and voting rights of common stock equivalents pursuant to
the terms thereof, so that each common stock equivalent delivered in lieu of
each share of Common Stock shall have essentially the same dividend, liquidation
and voting rights as one share of Common Stock.
(d) The Company shall not be required to issue fractional shares of
Common Stock or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of such fractional shares of Common Stock, the Company
shall pay to the registered holders of Rights Certificates with regard to which
such fractional shares of Common Stock would otherwise be issuable, an amount in
cash equal to the same fraction of the current market value of a whole share of
Common Stock. For purposes of this SECTION 24(D), the current market value of a
whole share of Common Stock shall be the closing price of a share of Common
Stock (as determined pursuant to SECTION 11(D)) for the Trading Day immediately
prior to the date of the exchange.
SECTION 25. NOTICE OF PROPOSED ACTIONS. (a) If the Company shall
propose, at any time after the Distribution Date, (i) to pay any dividend
payable in stock of any class to the holders of Preferred Stock or to make any
other distribution to the holders of Preferred Stock (other than a regular
quarterly cash dividend out of earnings or retained earnings of the Company),
(ii) to offer to the holders of its Preferred Stock rights or warrants to
subscribe for or to purchase any additional shares of Preferred Stock or shares
of stock of any class or any other securities, rights or options, (iii) to
effect any reclassification of its Preferred Stock (other than a
reclassification involving only the subdivision or combination of outstanding
shares of Preferred Stock), (iv) to effect any consolidation or merger with or
into any other Person, or to effect a statutory share exchange with any Person,
or to effect and/or to permit one or more of its Subsidiaries to effect any
sale, lease or other transfer, in one transaction or a series of related
transactions, of assets aggregating more than 50% of the assets (measured by
either book value or fair market value) or generating more than 50% of the
operating income or cash flow of the Company and its Subsidiaries, taken as a
whole, to any other Person or Persons, or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Right, to the extent feasible and in accordance
with SECTION 26, a notice of such proposed action, which shall specify the
record date for the purposes of any such dividend, distribution or offering of
rights or warrants, or the date on which any such reclassification,
consolidation, merger, statutory share exchange, sale, lease, transfer,
liquidation, dissolution or winding up is to take place and the date of
participation therein by the holders of Preferred Stock, if any such date is to
be fixed, and such notice shall be so given in the case of any action covered by
clause (i) or (ii) above at least 20 days prior to the record date for
determining holders of the Preferred Stock entitled to participate in such
dividend, distribution or offering, and in the case of any such other action, at
least 20 days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of Preferred Stock,
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<PAGE> 37
whichever shall be the earlier. The failure to give notice required by this
Section or any defect therein shall not affect the legality or validity of the
action taken by the Company or the vote upon any such action.
(b) Notwithstanding anything in this Agreement to the contrary, prior
to the Distribution Date a public filing by the Company with the Securities and
Exchange Commission shall constitute sufficient notice to the holders of
securities of the Company, including the Rights, for purposes of this Agreement
and no other notice need be given to such holders.
(c) If a Triggering Event shall occur, then, in any such case, (i) the
Company shall as soon as practicable thereafter give to each holder of a Right,
in accordance with SECTION 26, a notice of the occurrence of such event, which
shall specify the event and the consequences of the event to holders of Rights
under SECTION 11(A)(II) OR 13, as the case may be, and (ii) all references in
SECTION 25(A) to Preferred Stock shall be deemed thereafter to refer to Common
Stock or other capital stock, as the case may be.
SECTION 26. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right to or on the
Company shall be sufficiently given or made if sent by first-class, postage
prepaid mail to the address of the Company indicated on the signature page
hereof or such other address as the Company shall specify in writing to the
Rights Agent. Subject to the provisions of SECTION 21, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Right to or on the Rights Agent shall be sufficiently given or made if
sent by first-class, postage prepaid mail to the address of the Rights Agent
indicated on the signature page hereof or such other address as the Rights Agent
shall specify in writing to the Company. Notices or demands authorized by this
Agreement to be given or made by the Company or the Rights Agent to the holder
of any Rights Certificate (or, prior to the Distribution Date, to the holder of
any certificate representing shares of Common Stock) shall be sufficiently given
or made if sent by first-class, postage prepaid mail to the address of such
holder shown on the registry books of the Company.
SECTION 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date
and subject to the penultimate sentence of this SECTION 27, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date, and
subject to the penultimate sentence of this SECTION 27, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Right Certificates in order (a)
to cure any ambiguity, (b) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(c) to shorten or lengthen any time period hereunder, or (d) to change or
supplement the provisions hereof in any manner which the Company may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of Rights (other than an Acquiring Person or an Affiliate or Associate
of an Acquiring Person); provided, however, that
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this Agreement may not be supplemented or amended pursuant to SECTION 27(C) to
lengthen (i) a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable, or (ii) any other time period,
unless lengthening such other time period is for the purpose of protecting,
enhancing, or clarifying the rights of, or benefits to the holders of, the
Rights. Upon the delivery of a certificate from an appropriate officer of the
Company which states that the proposed supplement or amendment is in compliance
with the terms of this Section, the Rights Agent shall execute such supplement
or amendment. Notwithstanding anything contained in this Agreement to the
contrary, no supplement or amendment shall be made which changes the Redemption
Price, the Final Expiration Date, the Purchase Price or the number of one
one-hundredths of a share of Preferred Stock for which a Right is exercisable,
and no supplement or amendment that changes the rights or duties of the Rights
Agent under this Agreement shall be effective without the consent of the Rights
Agent. Prior to the Distribution Date, the interests of the holders of Rights
shall be deemed coincident with the interests of the holders of Common Stock.
SECTION 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS. For
all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) under the Exchange Act as in effect on
the date of this Agreement. The Board of Directors of the Company shall have the
exclusive power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board or to the Company, or as may
be necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (a) interpret the provisions of this
Agreement, and (b) make all determinations deemed necessary or advisable for the
administration of this Agreement (including a determination to redeem or
exchange or not to redeem or exchange the Rights or to amend this Agreement);
provided, however, that any redemption of Rights shall also be subject to any
additional approval procedures required by the articles of incorporation or
bylaws of the Company. All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, all omissions with
respect to the foregoing) which are done or made by the Board in good faith,
shall (x) be final, conclusive and binding on the Company (subject to any
additional redemption approval procedures referred to in the proviso to the
immediately preceding sentence), the Rights Agent, the holders of the Rights and
all other parties, and (y) not subject the Board of Directors of the Company to
any liability to the holders of the Rights.
SECTION 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any Person other than the Company and, the Rights Agent,
and the
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successors and assigns of each, if any, and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, the certificates representing
the shares of Common Stock) any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive benefit
of the Company, the Rights Agent and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, the certificates representing
the shares of Common Stock).
SECTION 31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that, notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in SECTION 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth day following the date of such determination by the Board of Directors.
SECTION 32. GOVERNING LAW. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of North Carolina and for all purposes shall be governed by
and construed in accordance with the laws of such State (other than its
conflicts of laws rules) applicable to contracts to be made and performed
entirely within such State.
SECTION 33. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute one and
the same instrument.
SECTION 34. DESCRIPTIVE HEADINGS. The captions herein are included for
convenience of reference only, do not constitute a part of this Agreement and
shall be ignored in the construction and interpretation hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
COMPANY
KRISPY KREME DOUGHNUTS, INC.
By: /s/ J. Paul Breitbach
------------------------------------------
Name: J. Paul Breitbach
Title: Executive Vice President, Finance,
Administration and Support Operations
370 Knollwood Street
Winston-Salem, North Carolina 27103
Tel: (336) 725-2981
Fax: (336) 733-3794
RIGHTS AGENT
BRANCH BANKING AND TRUST COMPANY
By: /s/ Margaret H. Smith
------------------------------------------
Name: Margaret H. Smith
Title: Vice President
Branch Banking and Trust Company
223 West Nash Street
Post Office Box 2887
Wilson, North Carolina 27893
Tel: (252) 246-4303
Fax: (919) 213-4303
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EXHIBIT A
FORM OF
BOARD RESOLUTION ESTABLISHING AND DESIGNATING
SERIES A PARTICIPATING CUMULATIVE
PREFERRED STOCK
OF
KRISPY KREME DOUGHNUTS, INC.
JANUARY 18, 2000
The undersigned, being all of the directors of Krispy Kreme
Doughnuts, Inc., a North Carolina corporation (the "Corporation"), do hereby
adopt the following resolutions:
1. APPROVE RIGHTS AGREEMENT.
WHEREAS, the Board of Directors has discussed with its
financial advisors and counsel the possibility of an unsolicited offer for the
Corporation's assets or its outstanding shares; and
WHEREAS, the Board of Directors believes that the adoption of
a shareholder rights plan would enhance its flexibility in responding to any
unsolicited offer, could increase the amount to be received by its shareholders
in any such offer, and would allow the Corporation to protect its shareholders
from coercive offers or offers that the Board of Directors deems, for various
reasons, not to be in the best interests of the Corporation and its
shareholders; and
WHEREAS, the Board of Directors, together with its counsel,
have reviewed the terms of various shareholder rights plans recently adopted by
other companies, and after such review, believes that the adoption of the Rights
Agreement in substantially the form attached hereto as EXHIBIT A (the "Rights
Agreement") is in the best interests of the Corporation and its shareholders;
and
WHEREAS, in connection with the adoption of the Rights
Agreement the Corporation must declare and pay a dividend of one Right (as
hereinafter defined) for each outstanding share of Common Stock of the
Corporation, with each Right representing the right to purchase one
one-hundredth of a share of a new class of Preferred Stock having the rights,
powers and preferences set forth in part 2 of these Resolutions, and upon the
terms and conditions set forth in the Rights Agreement (individually, a "Right,"
and collectively, the "Rights");
A-1
<PAGE> 42
NOW, THEREFORE, BE IT HEREBY RESOLVED, that the proper
officers of the Corporation be, and each of them hereby is, authorized and
directed to execute and deliver, in the name and on behalf of the Corporation,
the Rights Agreement in substantially the form previously furnished to the Board
and to select a rights agent to serve thereunder, with such changes therein or
additions thereto as such officer shall approve, with the advice of the
Corporation's counsel, said approval to be conclusively evidenced by the
execution and delivery of the same, such Rights Agreement to be effective
automatically upon its execution (the "Effective Date"); and
FURTHER RESOLVED, that the Board of Directors hereby declares
a dividend of one Right per each outstanding share of Common Stock outstanding
as of the Effective Date; and
FURTHER RESOLVED, that the proper officers of the Corporation
be, and each of them hereby is, authorized, empowered and directed to take any
and all such actions and to execute and deliver and to file and record, as the
case may be, any and all such documents, agreements, instruments, certificates
or instructions (however characterized or described) as they or any of them may,
with the advice of counsel, deem necessary or advisable in order to carry into
effect the issuance of the Rights and the terms of the Rights Agreement or the
transactions contemplated therein or thereby, as shall be evidenced conclusively
by the taking of such actions or the execution and delivery and the filing and
recording, as the case may be, of such documents, agreements, instruments,
certificates or instructions.
2. DESIGNATION OF SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK
WHEREAS, the number of shares of capital stock which the
Corporation has authority to issue is 100,000,000 shares of common stock, par
value $10.00 per share (the "Common Stock"), and 10,000,000 shares of preferred
stock, par value $1.00 per share (the "Preferred Stock"); and
WHEREAS, in connection with adoption of the Rights Agreement,
the Corporation must designate a series of Preferred Stock;
NOW THEREFORE, BE IT HEREBY RESOLVED, that pursuant to the
authority expressly granted to and vested in the Board of Directors of the
Corporation by Article IV of the Amended and Restated Articles of Incorporation
of the Corporation, the Board of Directors hereby creates, establishes and
authorizes the issuance of, out of the 10,000,000 shares of authorized and
unissued Preferred Stock of the Corporation, a series of Preferred Stock, par
value $1.00 per share, of the Corporation which shall be designated and known as
the "Series A Participating Cumulative Preferred Stock" of the Corporation and
hereby states that the designation, number of shares, preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends and
qualifications, of such series are as follows:
A-2
<PAGE> 43
"SECTION 1. DESIGNATION AND NUMBER OF SHARES. The shares of
such series shall be designated as "Series A Participating Cumulative Preferred
Stock" (the "SERIES A PREFERRED STOCK"), and the number of shares constituting
such series shall be 1,000,000. Such number of shares of the Series A Preferred
Stock may be increased or decreased by resolution of the Board of Directors;
provided, however, that no decrease shall reduce the number of shares of Series
A Preferred Stock to a number less than the number of shares then outstanding
plus the number of shares issuable upon exercise or conversion of outstanding
rights, options or other securities issued by the Corporation.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of
any shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Preferred Stock with respect to dividends, if any, the
holders of shares of Series A Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable on the last day of March,
June, September and December of each year (each such date being referred to
herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of any share or
fraction of a share of Series A Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $1.00 and (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate per
share amount (payable in kind) of all cash dividends or other distributions and
100 times the aggregate per share amount of all non-cash dividends or other
distributions (other than (i) a dividend payable in shares of Common Stock, par
value $.01 per share, of the Corporation (the "COMMON STOCK") or (ii) a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise)), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series A Preferred Stock. If the Corporation shall at any time after
JANUARY 18, 2000 (the "RIGHTS DECLARATION DATE") declare or pay any dividend on
Common Stock payable in shares of Common Stock or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise) into a greater or lesser number of shares of
Common Stock, then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under
clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in SECTION 2(A) immediately after it
declares a dividend or distribution on the Common Stock (other than as described
in clauses (i) and (ii) of the first sentence of SECTION 2(A)); provided,
however, that if no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Dividend Payment Date
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<PAGE> 44
and the next subsequent Quarterly Dividend Payment Date (or, with respect to the
first Quarterly Dividend Payment Date, the period between the first issuance of
any share or fraction of a share of Series A Preferred Stock and such first
Quarterly Dividend Payment Date), a dividend of $1.00 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Preferred Stock, unless the date of issue of such shares is on or before the
record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue and be cumulative from the date
of issue of such shares, or unless the date of issue is a date after the record
date for the determination of holders of shares of Series A Preferred Stock
entitled to receive a quarterly dividend and on or before such Quarterly
Dividend Payment Date, in which case dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall not be more than 60 days
prior to the date fixed for the payment thereof.
SECTION 3. VOTING RIGHTS. In addition to any other voting
rights required by law, the holders of shares of Series A Preferred Stock shall
have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of shareholders of the
Corporation. If the Corporation shall at any time after the Rights Declaration
Date declare or pay any dividend on Common Stock payable in shares of Common
Stock or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise) into a greater or
lesser number of shares of Common Stock, then in each such case the number of
votes per share to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) Except as otherwise provided herein or by law, the holders
of shares of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as a single class on all matters submitted to a vote of
shareholders of the Corporation.
(C) (i) If at any time dividends on any Series A Preferred
Stock shall be in arrears in an amount equal to six quarterly dividends thereon
(whether or not consecutive), the
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<PAGE> 45
occurrence of such contingency shall mark the beginning of a period (herein
called a "DEFAULT PERIOD") which shall extend until such time when all accrued
and unpaid dividends for all previous quarterly dividend periods and for the
current quarterly dividend period on all shares of Series A Preferred Stock then
outstanding shall have been declared and paid or set apart for payment. During
each default period, all holders of Series A Preferred Stock and any other
series of Preferred Stock then entitled as a class to elect directors, voting
together as a single class, irrespective of series, shall have the right to
elect one Director.
(ii) During any default period, such voting right of the
holders of Series A Preferred Stock may be exercised initially at a special
meeting called pursuant to SECTION 3(C)(III) or at any annual meeting of
shareholders, and thereafter at annual meetings of shareholders; provided,
however, that neither such voting right nor the right of the holders of any
other series of Preferred Stock, if any, to increase, in certain cases, the
authorized number of Directors shall be exercised unless the holders of 10% in
number of shares of Preferred Stock outstanding shall be present in person or by
proxy. The absence of a quorum of holders of Common Stock shall not affect the
exercise by holders of Preferred Stock of such voting right. At any meeting at
which holders of Preferred Stock shall exercise such voting right initially
during an existing default period, they shall have the right, voting as a class,
to elect Directors to fill such vacancy, if any, in the Board of Directors as
may then exist up to one Director or, if such right is exercised at an annual
meeting, to elect one Director. If the number which may be so elected at any
special meeting does not amount to the required number, the holders of the
Preferred Stock shall have the right to make such increase in the number of
Directors as shall be necessary to permit the election by them of the required
number. After the holders of the Preferred Stock shall have exercised their
right to elect Directors in any default period and during the continuance of
such period, the number of Directors shall not be increased or decreased except
by vote of the holders of Preferred Stock as herein provided or pursuant to the
rights of any equity securities ranking senior to or pari passu with the Series
A Preferred Stock.
(iii) Notwithstanding anything to the contrary contained in
the Corporation's Articles of Incorporation or Bylaws, unless the holders of
Preferred Stock shall, during an existing default period, have previously
exercised their right to elect Directors, the Board of Directors may order, or
any shareholder(s) owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding, irrespective of
series, may request, the calling of a special meeting of holders of Preferred
Stock, which meeting shall thereupon be called by the President, a Vice
President or the Secretary of the Corporation. Notice of such meeting and of any
annual meeting at which holders of Preferred Stock are entitled to vote pursuant
to this SECTION 3(C)(III) shall be given to each holder of record of Preferred
Stock by mailing a copy of such notice to him at his last address as the same
appears on the books of the Corporation. Such meeting shall be called for a time
not earlier than 20 days and not later than 60 days after such order or request
or in default of the calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any shareholder(s)
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series. Notwithstanding
the provisions of
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<PAGE> 46
this SECTION 3(C)(III), no such special meeting shall be called during the
period within 60 days immediately preceding the date fixed for the next annual
meeting of shareholders.
(iv) In any default period, the holders of Common Stock, and
other classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of Preferred
Stock shall have exercised their right to elect one Director voting as a class,
after the exercise of which right (x) the Directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in SECTION
3(C)(II) be filled by vote of a majority of the remaining Directors theretofore
elected by the holders of the class of stock which elected the Director whose
office shall have become vacant. References in this SECTION 3(C) to Directors
elected by the holders of a particular class of stock shall include Directors
elected by such Directors to fill vacancies as provided in clause (y) of the
foregoing sentence.
(v) Immediately upon the expiration of a default period, (x)
the right of the holders of Preferred Stock as a class to elect Directors shall
cease, (y) the term of any Directors elected by the holders of Preferred Stock
as a class shall terminate, and (z) the number of Directors shall be such number
as may be provided for in the Articles of Incorporation or Bylaws irrespective
of any increase made pursuant to the provisions of SECTION 3(C)(II) (such number
being subject, however, to change thereafter in any manner provided by law or in
the Articles of Incorporation or Bylaws). Any vacancies in the Board of
Directors effected by the provisions of clauses (y) and (z) in the preceding
sentence may be filled by a majority of the remaining Directors.
(D) Except as otherwise provided herein, holders of Series A
Preferred Stock shall have no special voting rights, and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in SECTION 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on outstanding shares of Series A
Preferred Stock shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, or make any other
distributions on, any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock;
(ii) declare or pay dividends on, or make any other
distributions on, any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except dividends paid ratably on the
A-6
<PAGE> 47
Series A Preferred Stock and all such other parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem, purchase or otherwise acquire for value any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock; provided, however, that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of stock of the Corporation ranking junior (as to
dividends and upon dissolution, liquidation or winding up) to the
Series A Preferred Stock; or
(iv) redeem, purchase or otherwise acquire for value any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of Series A Preferred Stock
and all such other parity stock upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates
and other relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for value any shares of stock of
the Corporation unless the Corporation could, under SECTION 4(A), purchase or
otherwise acquire such shares at such time and in such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred
Stock redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock without designation as to series and may be reissued
as part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors as permitted by the Articles of
Incorporation or as otherwise permitted under North Carolina law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $1.00 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment; provided, however, that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to holders of Common
A-7
<PAGE> 48
Stock, or (2) to the holders of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such other parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. If the Corporation shall at any time after the Rights
Declaration Date pay any dividend on Common Stock payable in shares of Common
Stock or effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise) into a greater or
lesser number of shares of Common Stock, then in each such case the aggregate
amount to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under the proviso in clause (1) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION OR MERGER. If the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged for or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash or any other property, as the case may be, into which or for
which each share of Common Stock is exchanged or changed. If the Corporation
shall at any time after the Rights Declaration Date pay any dividend on Common
Stock payable in shares of Common Stock or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
SECTION 8. NO REDEMPTION. The Series A Preferred Stock shall
not be redeemable.
SECTION 9. RANK. The Series A Preferred Stock shall rank
junior (as to dividends and upon liquidation, dissolution and winding up) to all
other series of the Corporation's preferred stock, except any series that
specifically provides that such series shall rank junior to the Series A
Preferred Stock.
SECTION 10. FRACTIONAL SHARES. Series A Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares,
A-8
<PAGE> 49
to exercise voting rights, receive dividends, participate in distributions and
to have the benefit of all other rights of holders of Series A Preferred Stock.
SECTION 11. AMENDMENT. The Articles of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of Series A
Preferred Stock, voting separately as a class."
FURTHER RESOLVED, that the officers of the Corporation shall
be and each of them hereby is authorized to execute the Articles of Amendment in
substantially the form as those attached hereto as Exhibit B and incorporated
herein (the "Articles of Amendment"), with such changes as they shall determine
to be necessary, appropriate or advisable, and to take all actions necessary to
cause the Articles of Amendment to be acknowledged, filed, recorded and become
effective in accordance with the applicable provisions of the Act with the
execution and filing of such Articles of Amendment and any other documents
relating to the Series A Preferred Stock being conclusive evidence of authority
from the Corporation and the approval of, and ratification by, the Corporation
of the Series A Preferred Stock, the Articles of Amendment and any related
documents so executed and filed; and
FURTHER RESOLVED, that, in order to be properly issued,
certificates for the Series A Preferred Stock shall be executed on behalf of the
Corporation by the President or any Vice President, under its corporate seal
reproduced thereon, and attested by the Secretary or any Assistant Secretary;
that the signature of each of such officers on the certificates for the Series A
Preferred Stock may be manual or facsimile; that the certificates for the Series
A Preferred Stock bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Corporation shall bind the
Corporation notwithstanding that such individuals or any of them cease to hold
such offices prior to the authentication of such certificates or the delivery of
such certificates; and that such certificates shall be in a form as deemed
appropriate by the officers of the Corporation; and
FURTHER RESOLVED, that the President and any Vice President
shall be and each of them hereby is authorized, in the name of and on behalf of
the Corporation, to prepare execute and deliver stock certificates representing
the Series A Preferred Stock; and
FURTHER RESOLVED, that any and all actions heretofore taken
and any and all documents, agreements, instruments, certificates or instructions
(however characterized or described) heretofore executed and delivered or filed
and recorded, as the case may be, on behalf of the Corporation by the officers
of the Corporation so empowered to do such things in order to carry into effect
the purposes and intent of the foregoing resolutions or the transactions
contemplated therein or thereby, be and the same hereby are, in all respects
ratified and approved; and
A-9
<PAGE> 50
FURTHER RESOLVED, that all of the shares of Series A Preferred
Stock are hereby reserved and set aside for issuance pursuant to the Rights in
accordance with the Rights Agreement and these resolutions, and the proper
officers of the Corporation are hereby authorized to issue said shares pursuant
to the Rights Agreement; and
FURTHER RESOLVED, that the proper officers of this Corporation
be, and each of them hereby is authorized, empowered and directed to take any
and all such actions and to execute and deliver and to file and record, as the
case may be, any and all such documents, agreements, instruments, certificates,
or instructions (however characterized or described) as they or any of them may
deem necessary or advisable in order to carry into effect the purposes and
intent of the foregoing resolutions or the transactions contemplated therein or
thereby, as shall be evidenced conclusively by the taking of such actions or the
execution and delivery and the filing and recording, as the case may be, of such
documents, agreements, instruments, certificates or instructions.
A-10
<PAGE> 51
EXHIBIT B
Form of Rights Certificate
Certificate No. R- _________________Rights
NOT EXERCISABLE AFTER THE EARLIER OF JANUARY __, 2000, AND THE DATE ON WHICH THE
RIGHTS EVIDENCED HEREBY ARE REDEEMED OR EXCHANGED BY THE COMPANY AS SET FORTH IN
THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.001 PER RIGHT
AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. AS SET FORTH IN
THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR
BECOMES AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS
ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON BEHALF OF
SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BE NULL AND VOID. [THE RIGHTS
REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR AN ASSOCIATE OF
AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). THIS
RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BE OR MAY BECOME NULL
AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(d) OF THE RIGHTS
AGREEMENT.)](1)
RIGHTS CERTIFICATE
KRISPY KREME DOUGHNUTS, INC.
This Rights Certificate certifies that __________________, or
registered assigns, is the registered holder of the number of Rights set forth
above, each of which entitles the holder (upon the terms and subject to the
conditions set forth in that certain Rights Agreement, dated as of January 18,
2000 (the "Rights Agreement"), between Krispy Kreme Doughnuts, Inc., a North
Carolina corporation (the "Company"), and Branch Banking and Trust Company (the
"Rights Agent")), to purchase from the Company, at any time after the
Distribution Date (as such term is defined in the Rights Agreement) and prior to
the Expiration Date (as such term is defined in the Rights Agreement), one
one-hundredth{s} of a fully paid, non-assessable share of Series A Participating
Cumulative Preferred Stock (the "Preferred Stock") of the Company, at a purchase
price of $96.00 per one one-hundredth of a share (the "Purchase Price"), payable
in lawful money of the United States of America, upon surrender of this Rights
Certificate, with the form
- ---------------------
(1) If applicable, insert this portion of the legend and delete the preceding
sentence.
B-1
<PAGE> 52
of election to purchase and related certificate duly executed, and payment of
the Purchase Price at an office of the Rights Agent designated for such purpose.
Terms used herein and not otherwise defined herein have the
meanings assigned to them in the Rights Agreement.
The number of Rights evidenced by this Rights Certificate (and
the number and kind of shares issuable upon exercise of each Right) and the
Purchase Price set forth above are as of January 18, 2000, and may have been or
in the future may be adjusted as a result of the occurrence of certain events,
as more fully provided in the Rights Agreement.
Upon the occurrence of a Flip-in Event, if the Rights
evidenced by this Rights Certificate are beneficially owned by (a) an Acquiring
Person or an Associate or Affiliate of an Acquiring Person, (b) a transferee of
an Acquiring Person (or any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person (or any such Associate or Affiliate)
becomes such, or (c) under certain circumstances specified in the Rights
Agreement, a transferee of an Acquiring Person (or any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person (or any such Associate or Affiliate) becoming such, such Rights shall
become null and void, and no holder hereof shall have any right with respect to
such Rights from and after the occurrence of such Flip-in Event.
This Right Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Rights Certificates,
which limitations of rights include the temporary suspension of the
exercisability of such Rights under the specific circumstances set forth in the
Rights Agreement. Copies of the Rights Agreement are on file at the office of
the Company and are also available upon written request to the Company.
Upon surrender at the principal office or offices of the
Rights Agent designated for such purpose and subject to the terms and conditions
set forth in the Rights Agreement, any Rights Certificate(s) may be transferred
or exchanged for another Rights Certificate(s) evidencing a like number of
Rights as the Rights Certificate(s) surrendered. If this Rights Certificate
shall be exercised in part, the holder shall be entitled to receive upon
surrender hereof another Rights Certificate(s) for the number of whole Rights
not exercised.
Subject to the provisions of the Rights Agreement, the Board
of Directors of the Company may, at its option,
(a) at any time prior to the earlier of (i) the Close
of Business on the Share Acquisition Date and (ii) the Final
Expiration Date, redeem all but not less than all the then
outstanding Rights at a redemption price of $0.001 per Right;
or
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<PAGE> 53
(b) at any time after any Person becomes an Acquiring
Person, exchange all or part of the then outstanding Rights
(other than Rights held by the Acquiring Person and certain
related Persons) for shares of Common Stock at an exchange
ratio of one share of Common Stock per Right. If the Rights
shall be exchanged in part, the holder of this Rights
Certificate shall be entitled to receive upon surrender hereof
another Rights Certificate(s) for the number of whole Rights
not exchanged.
After the expiration of the redemption period, the Company's
right of redemption may be reinstated if an Acquiring Person reduces his
beneficial ownership to ten percent (10%) or less of the outstanding shares of
Common Stock in a transaction or series of transactions not involving the
Company and there is no other Acquiring Person.
No fractional shares of Preferred Stock are required to be
issued upon the exercise of any Right(s) evidenced hereby (other than fractions
which are multiples of one one-hundredth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depository receipts), but
in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
No holder of this Rights Certificate shall be entitled to
vote, receive dividends or be deemed for any purpose the holder of the shares of
capital stock which may at any time be issuable on the exercise hereof, nor
shall anything contained in the Rights Agreement or herein be construed to
confer upon the holder hereof, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting shareholders (except as provided in the Rights Agreement), or
to receive dividends or subscription rights, or otherwise, until the Right(s)
evidenced by this Rights Certificate shall have been exercised as provided in
the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
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<PAGE> 54
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed under its corporate seal by its authorized officers.
Dated as of ________________________, ____
KRISPY KREME DOUGHNUTS, INC.
By:______________________________
Name:____________________________
Title:___________________________
(SEAL)
Attest:
___________________________
Secretary
Countersigned:
_________________________________,
as Rights Agent
By:______________________________
Authorized Signature
B-4
<PAGE> 55
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed if the registered
holder desires to transfer the
Rights Certificate.)
FOR VALUE RECEIVED______________________________________________________________
hereby sells, assigns and transfers unto________________________________________
________________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________________
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney, to
transfer the within Rights Certificate on the books of the within-named Company,
with full power of substitution.
Dated:______________________________ ___________________________________
Signature
Signature Guaranteed:
B-5
<PAGE> 56
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) the Rights evidenced by this Rights Certificate ___ are
___ are not being assigned by or on behalf of a Person who is or was an
Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as
such terms are defined in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it ___ did ___ did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring person.
Dated:______________________________ ___________________________________
Signature
NOTICE
The signatures to the foregoing Assignment and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change whatsoever.
B-6
<PAGE> 57
-------------------
FORM OF ELECTION TO PURCHASE
(To be executed if the registered holder desires to exercise Rights represented
by the Rights Certificate.)
To: Krispy Kreme Doughnuts, Inc.
The undersigned hereby irrevocably elects to exercise
______________ Rights represented by this Rights Certificate to purchase shares
of Preferred Stock issuable upon the exercise of the Rights (or such other
securities of the Company or of any other Person which may be issuable upon the
exercise of the Rights) and requests that certificates for such securities be
issued in the name of and delivered to:
Please insert social security
or other identifying number
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced
by this Rights Certificate, a new Rights Certificate for the balance of such
Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- ---------------------------------------------
(Please print name and address)
- ---------------------------------------------
Dated: ____________________, _______
------------------------------
Signature
B-7
<PAGE> 58
Signature Guaranteed:
B-8
<PAGE> 59
EXHIBIT C
------------
KRISPY KREME DOUGHNUTS, INC.
SHAREHOLDER RIGHTS PLAN
Summary of Terms
Form of Security: The Board of Directors has declared a dividend of one
preferred stock purchase right for each outstanding
share of the Company's Common Stock, payable to
holders of record as of the close of business on
January 18, 2000 (the "Effective Date") (each a
"Right," and collectively, the "Rights").
Distribution Date: The earlier of:
(1) the 10th day after public announcement
that (a) any person or group has become the
beneficial owner of 15% or more of the
Company's Common Stock, or (b) if any such
person or group has acquired such an
interest, the acquisition of an additional
2% or more of the Common Stock then
outstanding (other than pursuant to an
Approved Acquisition (as defined below));
and
(2) the 10th business day after the date of
the commencement of a tender or exchange
offer by any person which would, if
consummated, result in such person becoming
the beneficial owner of 15% or more of the
Company's Common Stock, in each case,
subject to extension by a majority of the
Board of Directors.
Approved Acquisition: An acquisition of 15% or more of the Common Stock
then outstanding by any person, or, if any person has
acquired such an interest, the acquisition of an
additional 2% or more of the Common Stock then
outstanding, in either event if such acquisition is
approved in advance by a majority of the Board of
Directors.
C-1
<PAGE> 60
Qualifying Tender Offer: A tender or exchange offer for all the Common Stock
which is approved by a majority of the Directors.
Transfer: Prior to the Distribution Date, the Rights will be
evidenced by the certificates for and will be
transferred with the Common Stock, and the registered
holders of the Common Stock will be deemed to be the
registered holders of the Rights.
After the Distribution Date, the Rights Agent will
mail separate certificates evidencing the Rights to
each record holder of the Common Stock as of the
close of business of the Distribution Date, and
thereafter the Rights will be transferable separately
from the Common Stock.
Exercise: Prior to the Distribution Date, the Rights will not
be exercisable.
After the Distribution Date, each Right will be
exercisable to purchase, for $96.00 (the "Purchase
Price"), one one-hundredth of a share of Series A
Participating Cumulative Preferred Stock, par value
$1.00 per share, of the Company; provided, however,
that following the occurrence of a Flip-in Event (as
described below), the Rights are not exercisable
until the Company's redemption rights have expired.
Flip-In: If (1) any person or group (an "Acquiring Person")
becomes the beneficial owner of 15% or more of the
Company's Common Stock (other than pursuant to a
Qualifying Tender Offer), (2) during such time as
there is an Acquiring Person, an event occurs which
results in such Acquiring Person's ownership interest
in the Company being increased by more than 2%, (3)
the Company is the surviving corporation in a merger
with an Acquiring Person and its Common Stock is not
changed or exchanged, or (4) an Acquiring Person
engages in one or more "self-dealing" transactions as
set forth in the Rights Agreement, then each Right
(other than Rights beneficially owned by the
Acquiring Person and certain affiliated persons) will
entitle the holder to elect to receive a number of
shares of the Company's Common Stock (or in certain
circumstances, cash, property or other securities of
the Company) having a market value equal to the
Purchase Price. Notwithstanding the foregoing, in
most instances following the occurrence of the events
set forth in this paragraph, all
C-2
<PAGE> 61
Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially
owned by any Acquiring Person will be null and void.
However, Rights are not exercisable following the
occurrence of the events set forth above until such
time as the Rights are no longer redeemable by the
Company as set forth below.
Flip-Over: If, after any person has become an Acquiring Person
(other than pursuant to a Qualifying Tender Offer),
(1) the Company is involved in a merger or other
business combination in which the Company is not the
surviving corporation or its Common Stock is
exchanged for other securities or assets, or (2) the
Company and/or one or more of its subsidiaries sell
or otherwise transfer assets aggregating more than
50% of the assets or generating more than 50% of the
operating income or cash flow of the Company and its
subsidiaries, taken as a whole, with such Acquiring
Person, then each Right will entitle the holder to
purchase, for the Purchase Price, a number of shares
of common stock of the other party to such business
combination or sale (or in certain circumstances, an
affiliate) having a market value of twice the
Purchase Price.
Exchange: At any time after any person has become an Acquiring
Person, a majority of the Board of Directors may
exchange all or part of the Rights (other than the
Rights beneficially owned by the Acquiring Person and
certain affiliated persons) for shares of Common
Stock at an exchange ratio of one share of Common
Stock per Right.
Redemption: Subject to the applicable provisions in the Company's
articles of incorporation and bylaws, the Board of
Directors may redeem all of the Rights at a price of
$0.001 per Right at any time prior to the close of
business on the date of the public announcement that
any person has become an Acquiring Person. After any
person has become an Acquiring Person, the Rights may
not be redeemed. The Company's right of redemption
may be reinstated if an Acquiring Person reduces his
beneficial ownership to 10% or less of the
outstanding shares of Common Stock in a transaction
or series of transactions not involving the Company.
Immediately upon the action of the Board of Directors
ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of the
Rights will be to receive the redemption price
thereof.
C-3
<PAGE> 62
Expiration: The Rights will expire on the tenth (10th)
anniversary of the Effective Date, unless earlier
exchanged or redeemed.
Amendments: Prior to the Distribution Date, the Rights Agreement
may be amended in any respect, other than to change
the Redemption Price, the Expiration Date, the
Purchase Price or the number of shares of Preferred
Stock for which a Right is exercisable.
After the Distribution Date, the Rights Agreement may
be amended in any respect that does not adversely
affect the Rights holders (other than any Acquiring
Person and certain affiliated persons).
After any person has become an Acquiring Person, the
Rights Agreement may be amended only with the
approval of a majority of the Board of Directors.
Voting Rights: Rights holders have no rights as a shareholder of the
Company, including the right to vote and to receive
dividends.
Antidilution Provisions: The Purchase Price payable, and the number of shares
of Preferred Stock or other securities or property
issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (1)
in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the
Preferred Stock, (2) upon the grant to holders of the
Preferred Stock of certain rights or warrants to
subscribe for or purchase Preferred Stock at a price,
or securities convertible into Preferred Stock with a
conversion price, less than the then-current market
price of the Preferred Stock, or (3) upon the
distribution to holders of the Preferred Stock of
evidences of indebtedness or assets (excluding
regular periodic cash dividends paid out of earnings
or retained earnings) or of subscription rights or
warrants.
The number of outstanding Rights and the number of
1/100ths of a share of Preferred Stock issuable upon
exercise of each Right are also subject to adjustment
in the event of a stock split of the Common Stock or
a stock dividend on the Common Stock payable in
Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring prior to
the Distribution Date.
C-4
<PAGE> 63
With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative
adjustments amount to at least 2% of the Purchase
Price. No fractional shares of Preferred Stock will
be issued (other than fractions which are integral
multiples of 1/100th of a share of a Preferred
Stock), and in lieu thereof, an adjustment in cash
will be made based on the market price of the
Preferred Stock on the last trading date prior to the
date of exercise.
Preferred Stock: The dividend and liquidation rights of the Preferred
Stock are designed so that the value of one
one-hundredth of a share of Preferred Stock issuable
upon exercise of each Right will approximate the same
economic value of one share of Common Stock,
including voting rights. Shares of Preferred Stock
issuable upon exercise of the Rights will not be
redeemable. Each share of Preferred Stock will
entitle the holder to a minimum preferential dividend
of $1.00 per share, but will entitle the holder to an
aggregate dividend payment of 100 times the dividend
declared on each share of Common Stock. In the event
of liquidation, each share of Preferred Stock will be
entitled to a minimum preferential liquidation
payment of $1.00, plus accrued and unpaid dividends
and distributions thereon, but will be entitled to an
aggregate payment of 100 times the payment made per
share of Common Stock. In the event of any merger,
consolidation or other transaction in which Common
Stock is exchanged for or changed into other stock or
securities, cash or other property, each share of
Preferred Stock will be entitled to receive 100 times
the amount received per share of Common Stock.
Each share of Preferred Stock will be entitled to 100
votes on all matters submitted to a vote of the
shareholders of the Company, and shares of Preferred
Stock will generally vote together as one class with
the Common Stock and any other voting capital stock
of the Company on all matters submitted to a vote of
the Company's shareholders. Further, whenever
dividends on the Preferred Stock are in arrears in an
amount equal to six quarterly payments, the Preferred
Stock, together with any other shares of preferred
stock then entitled to elect directors, shall have
the right, as a single class, to elect one director
until the default has been cured.
While the dividend of the Rights will not be taxable
to shareholders or to the Company, shareholders or
the
C-5
<PAGE> 64
Company may, depending upon the circumstances,
recognize taxable income in the event that the Rights
Taxes: become exercisable as set forth above.
C-6
<PAGE> 1
EXHIBIT 5.1
ATTORNEYS AT LAW
1001 West Fourth Street
Winston-Salem, North Carolina 27101-2400
KILPATRICK STOCKTON LLP Telephone: 336.607.7300
Facsimile: 336.607.7505
Web site: www.kilstock.com
FRANK MURPHY
March 30, 2000 E-MAIL: [email protected]
DIRECT DIAL: 336.607.7474
Krispy Kreme Doughnuts, Inc.
370 Knollwood Street
Winston-Salem, NC 27103
RE: KRISPY KREME DOUGHNUTS, INC.
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-92909)
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
File No. 333-92909, as amended (the "Registration Statement") filed by Krispy
Kreme Doughnuts, Inc. (the "Company"), a North Carolina corporation, with the
Securities and Exchange Commission with respect to the registration under the
Securities Act of 1933, as amended, of 3,000,000 shares of Common Stock, no par
value per share, of the Company (the "Common Stock"), to be sold by the Company
to the underwriters named in the Registration Statement (the "Underwriters")
for resale by them to the public, together with an additional 450,000 shares of
Common Stock subject to an over-allotment option granted to the Underwriters by
the Company.
As your counsel, and in connection with the preparation of the
Registration Statement, we have examined the originals or copies of such
documents, corporate records, certificates of public officials and officers of
the Company, and other instruments related to the authorization and issuance of
the Common Stock as we deemed relevant or necessary for the opinion expressed
herein. Based upon the foregoing, it is our opinion that the shares of Common
Stock to be issued and sold by the Company to the Underwriters will be, upon
issuance, sale, and delivery in the manner and under the terms and conditions
described in the Registration Statement, validly issued, fully paid, and
nonassessable.
ATLANTA - AUGUSTA - BRUSSELS - CHARLOTTE - LONDON - MIAMI - RALEIGH - STOCKHOLM
- - WASHINGTON - WINSTON-SALEM
<PAGE> 2
KILPATRICK STOCKTON LLP
KRISPY KREME DOUGHNUTS, INC.
March 30, 2000
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name in the "Legal
Matters" section of the Registration Statement, including the Prospectus
constituting a part thereof, and any amendments thereto.
Yours truly,
KILPATRICK STOCKTON LLP
By: /s/ R. Frank Murphy, II
----------------------------
\ R. Frank Murphy, II
Partner
<PAGE> 1
Exhibit 10.14
Store #901
GUARANTY BY CORPORATION
,
------------------------- -----------------
(City) (State)
October 15, 1997
--------------------------------------------
For good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, and to induce Bank of Blue Valley (herein, with
its participants, successors and assigns, called "Lender"), at its option, at
any time or from time to time to make the loan evidenced by the Note comprising
the Indebtedness to Midwest Doughnuts, L.L.C. (herein called "Borrower") or to
engage in any other transactions with Borrower, the Undersigned hereby
absolutely and unconditionally guarantees to the Lender the full and prompt
payment when due, whether at maturity or earlier by reason of acceleration or
otherwise, of the debts, liabilities and obligations described as follows:
A. If this [X] is checked, the Undersigned guarantees to Lender
the payment and performance of the debt, liability or
obligation of Borrower to Lender evidenced by or arising out
of the following: note # 9206809 dated October 15, 1997 in the
amount of $765,000 and any extensions, renewals or
replacements thereof (hereinafter referred to as the
"Indebtedness").
B. If this [ ] is checked, the Undersigned guarantees to Lender
the payment and performance of each and every debt, liability
and obligation of every type and description which Borrower
may now or at any time hereafter owe to Lender (whether such
debt, liability or obligation now exists or is hereafter
created or incurred, and whether it is or may be direct or
indirect, due or to become due, absolute or contingent,
primary or secondary, liquidated or unliquidated, or joint,
several, or joint and several; all such debts, liabilities and
obligations being hereinafter collectively referred to as the
"Indebtedness"). Without limitation, this guaranty includes
the following described debt(s):
The term, "Indebtedness" as used in this guaranty shall not include any
obligations entered into between Borrower and Lender after the date hereof
(including any extensions, renewals, or replacements of such obligations).
The Undersigned further acknowledges and agrees with Lender that:
1. No act or thing need occur to establish the liability of the
Undersigned hereunder, and no act or thing, except full payment and discharge of
all Indebtedness, shall in any way exonerate the Undersigned or modify, reduce,
limit or release the liability of the Undersigned hereunder.
2. This is an absolute, unconditional and continuing guaranty of
payment of the Indebtedness and shall continue to be in force and be binding
upon the Undersigned, whether or not all Indebtedness is paid in full, until
this guaranty is revoked by written notice actually received by the Lender, and
such revocation shall not be effective as to Indebtedness existing or committed
for at the time of actual receipt of such notice by the Lender, or as to any
renewals, extensions and refinancings thereof.
The Undersigned represents and warrants to the Lender that the
Undersigned has a direct and substantial economic interest in Borrower and
expects to derive substantial benefits therefrom and from any loans and
financial accommodations resulting in the creation of Indebtedness guaranteed
hereby, and that this guaranty is given for a corporate purpose. The Undersigned
agrees to rely exclusively on the right to revoke this guaranty prospectively as
to future transactions, by written notice actually received by Lender if at any
time, in the opinion of the directors or officers of the Undersigned, the
corporate benefits then being received by the Undersigned in connection with
this guaranty are not sufficient to warrant the continuance of this guaranty as
to future Indebtedness. Accordingly, so long as this guaranty is not revoked
prospectively in accordance with this guaranty, the Lender may rely conclusively
on a continuing warranty, hereby made, that the Undersigned continues to be
benefited by this guaranty and the Lender shall have no duty to inquire into or
confirm the receipt of any such benefits, and this guaranty shall be effective
and enforceable by the Lender without regard to the receipt, nature or value of
any such benefits.
3. If the Undersigned shall be dissolved or shall be or become
insolvent (however defined) or revoke this guaranty, then the Lender shall have
the right to declare immediately due and payable, and the Undersigned will
forthwith pay to the Lender, the full amount of all Indebtedness, whether due
and payable or unmatured. If the Undersigned voluntarily commences or there is
commenced involuntarily against the Undersigned a case under the United States
Bankruptcy Code, the full amount of all Indebtedness, whether due and payable or
unmatured, shall be immediately due and payable without demand or notice
thereof.
4. The liability of the Undersigned hereunder shall be limited to a
principal amount of $300,000.00 of the Indebtedness (inclusive of attorney's
fees, collection of costs and enforcement expenses) (if unlimited or if no
amount is stated, the Undersigned shall be liable for all Indebtedness, without
any limitation as to amount), plus accrued interest thereon. Indebtedness may be
created and continued in any amount, whether or not in excess of such principal
amount, without affecting or impairing the liability of the Undersigned
hereunder. The Lender may apply any sums received by or available to the Lender
on account of the Indebtedness from Borrower or any other person (except the
Undersigned), from their properties, out of any collateral security or from any
other source to payment of the excess. Such application of receipts shall not
reduce, affect or impair the liability of the Undersigned hereunder. If the
liability of the Undersigned is limited to a stated amount pursuant to this
paragraph 4, any payment made by the Undersigned under this guaranty shall be
effective to reduce or discharge such liability only if accompanied by a written
transmittal document, received by the Lender, advising the Lender that such
payment is made under this guaranty for such purpose.
5. The Undersigned will pay or reimburse the Lender for all costs and
expenses (including reasonable attorneys' fees and legal expenses) incurred by
the Lender in connection with the protection, defense or enforcement of this
guaranty in any litigation or bankruptcy or insolvency proceedings.
THIS GUARANTY INCLUDES THE ADDITIONAL PROVISIONS ON PAGE 2 HEREOF, ALL OF WHICH
ARE MADE A PART HEREOF.
This guaranty is [X] unsecured; [ ] secured by a mortgage or security
agreement dated _________________; [ ] secured by ____________________________.
IN WITNESS WHEREOF, this guaranty has been duly executed by the Undersigned the
day and year first above written. By acceptance of this guaranty, and
notwithstanding anything contained herein to the contrary, Lender agrees that it
shall not amend, extend, renew, or replace the Indebtedness in any manner which
extends the final payment date thereof, increases the interest rate thereunder
or increases the amount of the regularly scheduled payments thereunder, or
permits the delay of any regularly scheduled payment due thereunder for more
than sixty (60) days, without the prior written consent of the Undersigned. Any
such amendment, extension, renewal or replacement made without the prior written
consent of the Undersigned shall not be binding on the Undersigned. The
Undersigned agrees that variations in the interest rate in accordance with the
variable rate features of the above referenced Note shall not he in violation of
the foregoing.
KRISPY KREME DOUGHNUT CORPORATION
By: (Title)
-----------------------------------------
By: /s/ Scott A. Livengood President
-----------------------------------------
"Undersigned" shall refer to all entities
who sign this guaranty, individually and
jointly.
<PAGE> 2
ADDITIONAL PROVISIONS
6. Whether or not any existing relationship between the Undersigned and
Borrower has been changed or ended and whether or not this guaranty has been
revoked, the Lender may, but shall not be obligated to, enter Into transactions
resulting in the creation or continuance of Indebtedness, without any consent or
approval by the Undersigned and without any notice to the Undersigned. The
liability of the Undersigned shall not be affected or impaired by any of the
following acts or things (which the Lender is expressly authorized to do, omit
or suffer from time to time, both before and after revocation of this guaranty,
without notice to or approval by the Undersigned): (i) any acceptance of
collateral security, guarantors, accommodation parties or sureties for any or
all Indebtedness; (ii) any one or more extensions or renewals of Indebtedness
(whether or not for longer than the original period) or any modification of the
interest rates, maturities or other contractual terms applicable to any Indebted
ness; (iii) any waiver adjustment, forbearance, compromise or indulgence granted
to Borrower, any delay or lack of diligence in the enforcement of Indebtedness,
or any failure to institute proceedings, file a claim, give any required notices
or otherwise protect any Indebtedness; (iv) any full or partial release of,
settlement with, or agreement not to sue, Borrower or any other guarantor or
other person liable in respect of any Indebtedness; (v) any discharge of any
evidence of Indebtedness or the acceptance of any instrument in renewal thereof
or substitution therefor; (vi) any failure to obtain collateral security
(including rights of setoff) for Indebtedness, or to see to the proper or
sufficient creation and perfection thereof, or to establish the priority
thereof, or to protect, insure, or enforce any collateral security; or any
release, modification, substitution, discharge, impairment, deterioration,
waste, or loss of any collateral security; (vii) any foreclosure or enforcement
of any collateral security; (viii) any transfer of any Indebtedness or any
evidence thereof; (ix) any order of application of any payments or credits upon
Indebtedness; (x) any election by the Lender under Section 1111(b)(2) of the
United States Bankruptcy Code.
7. The Undersigned waives any and all defenses, claims and discharges
of Borrower or any other obligor, pertaining to Indebtedness, except the defense
of discharge by payment in full. Without limiting the generality of the
foregoing, the Undersigned will not assert, plead or enforce against the Lender
any defense of waiver, release, estoppel, statute of limitations, res judicata,
statute of frauds, fraud, forgery, incapacity, minority, usury, illegality or
unenforceability which may be available to Borrower or any other person liable
in respect of any Indebtedness, or any setoff available against the Lender to
Borrower or any such other person, whether or not on account of a related
transaction. The Undersigned expressly agrees that the Undersigned shall be and
remain liable, to the fullest extent permitted by applicable law, for any
deficiency remaining after foreclosure of any mortgage or security interest
securing Indebtedness, whether or not the liability of Borrower or any other
obligor for such deficiency is discharged pursuant to statute or judicial
decision. The undersigned shall remain obligated, to the fullest extent
permitted by law, to pay such amounts as though Borrower's obligations had not
been discharged.
8. The Undersigned further agree(s) that the Undersigned shall be and
remain obligated to pay Indebtedness even though any other person obligated to
pay Indebtedness, including Borrower, has such obligation discharged in
bankruptcy or otherwise discharged by law. 'Indebtedness' shall include
post-bankruptcy petition interest and attorneys' fees and any other amounts
which Borrower is discharged from paying or which do not accrue to Indebtedness
due to Borrower's discharge, and Undersigned shall remain obligated to pay such
amounts as fully as if Borrower's obligations had not been discharged.
9. If any payment applied by the Lender to Indebtedness is thereafter
set aside, recovered, rescinded or required to be returned for any reason
(including, without limitation, the bankruptcy, insolvency or reorganization of
Borrower or any other obligor), the Indebtedness to which such payment was
applied shall for the purposes of this guaranty be deemed to have continued in
existence, notwithstanding such application, and this guaranty shall be
enforceable as to such Indebtedness as fully as if such application had never
been made.
10. Until payment of the above-referenced Note is made in full, the
Undersigned will subordinate to any claim of Lender against Borrower any claim,
remedy or other right which the Undersigned may now have or hereafter acquire
against Borrower or any other person obligated to pay Indebtedness arising out
of the creation or performance of the Undersigned's obligation under this
guaranty, including, without limitation, any right of subrogation, contribution,
reimbursement, indemnification, exoneration or any right to participate in any
claim or remedy the Undersigned may have against the Borrower, collateral, or
other party obligated for Borrower's debt, whether or not such claim, remedy, or
right arises In equity, or under contract, statute or common law.
11. The Undersigned waives presentment, demand for payment, notice of
dishonor or nonpayment, and protest of any instrument evidencing Indebtedness.
The Lender shall not be required first to resort for payment of the indebtedness
to Borrower or other persons or their properties, or first to enforce, realize
upon or exhaust any collateral security for Indebtedness, before enforcing this
guaranty.
12. The liability of the Undersigned under this guaranty is in addition
to and shall be cumulative with all other liabilities of the Undersigned to the
Lender as guarantor or otherwise, without any limitation as to amount, unless
the instrument or agreement evidencing or creating such other liability
specifically provides to the contrary.
13. The Undersigned represents and warrants to the Lender that (i) the
Undersigned is a corporation duly organized and existing in good standing and
has full power and authority to make and deliver this guaranty; (ii) the
execution, delivery and performance of this guaranty by the Undersigned have
been duly authorized by all necessary action of its directors and shareholders
and do not and will not violate the provisions of, or constitute a default
under, any presently applicable law or its articles of incorporation or by-laws
or any agreement presently binding on it; (iii) this guaranty has been duly
executed and delivered by the authorized officers of the Undersigned and
constitutes its lawful, binding and legally enforceable obligation (subject to
the United States Bankruptcy Code and other similar laws generally affecting the
enforcement of creditors' rights); and (iv) the authorization, execution,
delivery and performance of this guaranty do not require notification to,
registration with, or consent or approval by, any federal, state or local
regulatory body or administrative agency.
14. This guaranty shall be effective upon delivery to the Lender,
without further act, condition or acceptance by the Lender, shall be binding
upon the Undersigned and the successors and assigns of the Undersigned and shall
inure to the benefit of the Lender and its participants, successors and assigns.
Any invalidity or unenforceability of any provision or application of this
guaranty shall not affect other lawful provisions and application hereof, and to
this end the provisions of this guaranty are declared to be severable. Except as
allowed by the terms herein, this guaranty may not be waived, modified, amended,
terminated, released or otherwise changed except by a writing signed by the
Undersigned and the Lender. This guaranty shall be governed by the laws of the
State in which it is executed. The Undersigned waives notice of the Lender's
acceptance hereof.
<PAGE> 1
EXHIBIT 10.21
SATISFACTION: The debt evidenced by
this Note has been satisfied in full this
_____ day of ______________, 19__
Signed: _____________________________
PROMISSORY NOTE
Winston-Salem, NC
$33,620.14 10-13-97
FOR VALUE RECEIVED the undersigned, jointly and severally, promise to pay to
KRISPY KREME DOUGHNUT CORPORATION or order, the principal sum of THIRTY THREE
THOUSAND, SIX HUNDRED TWENTY AND 14/100 DOLLARS with interest from OCTOBER 13,
1997, at a rate per annum equal to the prime rate of Branch Banking & Trust as
it may fluctuate from time to time plus one percent (1%) (to change on a daily
basis but adjusted as set forth below) on the unpaid balance until paid or until
default, both principal and interest payable in lawful money of the United
States of America, at the office of KRISPY KREME DOUGHNUTS COMPANY, P O BOX 83,
WINSTON-SALEM, NORTH CAROLINA 27102-0083 (ATTENTION: RANDY S. CASSTEVENS) or at
such place as the legal holder hereof may designate in writing and, at Payee's
election, via electronic funds transfer pursuant to the Authorization Agreement
to initiate Debits / Credits of even date herewith. It is understood and agreed
that additional amounts may be advanced by the holder hereof as provided in the
instruments, if any, securing this Note and such advances will be added to the
principal of this Note and will accrue interest at the above specified rate of
interest from the date of advance until paid. The principal and interest shall
be due and payable in ELEVEN equal consecutive monthly payments of principal and
interest in the amount of $2,947.93 each to be paid on the 13TH day of each
month during the term hereof, the first such payment being due and payable on
OCTOBER 13, 1997 with a final payment of all unpaid principal and all accrued
and unpaid interest herein due on SEPTEMBER 13, 1996. On each anniversary date
of this Note, the payee shall adjust and change the monthly payment due for the
next twelve months for any change in interest rate due to a change in said prime
rate from either the date of this Note or the date of the more recent adjustment
and change of monthly payment. In addition, there shall be an addition to or
subtraction from the unpaid principal balance (and corresponding adjustment in
the monthly payment) for any additional interest that would have been paid had
the interest rate and monthly payment been adjusted on the actual date(s) of
such change in the prime rate or for any overpayment of interest that has been
made (but would not have been made) had the interest rate and monthly payment
been changed on the actual date(s) of such change in prime rate. Such
adjustments may be made more frequently than annually in the Payee's discretion.
If not sooner paid, the entire remaining indebtedness (including, but not
limited to, all unpaid principal and all accrued and unpaid interest and all
other sums due hereunder) shall be due and payable on SEPTEMBER 13, 1996.
If payable in installments, each such installment shall, unless otherwise
provided, be applied first to payment of interest then accrued and due on the
unpaid principal balance, with the remainder applied to the unpaid principal.
Unless otherwise provided, this Note may be prepaid in full or in part at any
time without penalty or premium. Partial prepayments shall be applied to
installments due in reverse order of their maturity.
In the event of (a) default in payment of any installment of principal or
interest hereof or under any other note from Maker to Payee as the same becomes
due and such default is not cured within ten (10) days from the due date, or (b)
default under the terms of any instrument securing this Note, and such default
is not cured within fifteen (15) days after written notice to maker, then in
either such event the holder may without further notice, declare the remainder
of the principal sum, together with all interest accrued thereon and the
prepayment premium, if any, at once due and payable. Failure to exercise this
option shall not constitute a waiver of the right to exercise the same at any
other time. The unpaid principal of this Note and any part thereof, accrued
interest and all other sums due under this Note and the Deed of Trust, if any,
shall bear interest at the rate provided for above after default until paid.
All parties to this Note, including maker and any sureties, endorsers, or
guarantors hereby waive protest, presentment, notice of dishonor, and notice of
acceleration of maturity and agreed to continue to remain bound for the payment
of principal, interest and all other sums due under this Note and the Deed of
Trust notwithstanding any change or changes by way of release, surrender,
exchange, modification or substitution of any security for this Note or by way
of any extension or extensions of time for the payment of principal and
interest; and all such parties waive all and every kind of notice of such change
or changes and agree that the same may be made without notice or consent of any
of them.
Upon default the holder of this Note may employ an attorney to enforce the
holder's rights and remedies and the maker, principal, surety, guarantor and
endorsers of this Note hereby agree to pay to the holder reasonable attorneys
fees not exceeding a sum equal to fifteen percent (15%) of the outstanding
balance owing on said Note, plus all other reasonable expenses incurred by the
holder in exercising any of the holder's rights and remedies upon default. The
rights and remedies of the holder as provided in this Note and any instrument
securing this Note shall be cumulative and may be pursued singly, successively,
or together against the property described in any Deed of Trust or any other
instrument securing this Note or any other funds, property or security held by
the holder for payment or security, in the sole discretion of the holder. The
failure to exercise any such rights or remedy shall not be a waiver or release
or such rights or remedies or the right to exercise any of them at another time.
This Note is to be governed and construed in accordance with the laws of the
State of North Carolina.
This Note is given for money owed. To further secure this Note, Maker(s)
grants Payee a first priority security interest under the UCC in all machinery,
equipment, furniture and fixtures owned by Maker(s) and/or in which Maker(s) has
any interest now or hereafter located at 4242 SOUTH NOLAND ROAD, INDEPENDENCE,
MO 64055 and agrees to execute such further instruments, security agreements and
financing statements as Payee may from time to time request to evidence and/or
perfect such security interest. In the event such security interest ever
constitutes a lower than first priority security interest, Payee may declare
this Note in default and no cure period for such default shall exist.
Any default hereunder shall constitute a default under that certain
Associates License Agreement dated 5-29-96 by and between Midwest Doughnuts,
L.L.C. and Krispy Kreme Doughnut Corporation (the "Franchise Agreement") and any
default under the Franchise Agreement shall constitute a default under this
Note.
MIDWEST DOUGHNUTS, L.L.C.
- -------------------------
BY: /s/ Philip R. S. Waugh, Jr.
- ---------------------------------
MEMBER
(Corporate Seal)
<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
- --------------------------------------------------------------------------------
Thorton's Flav-O-Rich Bakery, North Carolina Thorton's Flav-O-Rich Bakery,
Incorporated Incorporated
- --------------------------------------------------------------------------------
HD Capital Corporation Delaware HD Capital Corporation
- --------------------------------------------------------------------------------
HDN Development Corporation Kentucky HDN Development Corporation
- --------------------------------------------------------------------------------
Krispy Kreme Distributing North Carolina Krispy Kreme Distributing
Company, Incorporated Company, Incorporated
- --------------------------------------------------------------------------------
- --------
(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
reports dated March 6, 2000, except as to Note 18 which is as of March 13, 2000,
relating to the financial statements and financial statement schedule of Krispy
Kreme Doughnut Corporation and our report dated March 6, 2000, except as to Note
3 which is as of March 13, 2000, 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
March 30, 2000
