KRISPY KREME DOUGHNUTS INC, S-1/A, 2000-03-14

KRISPY KREME DOUGHNUTS INC
S-1/A, 2000-03-14
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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 2000

REGISTRATION NO. 333-92909
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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PRE-EFFECTIVE

AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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KRISPY KREME DOUGHNUTS, INC.
(Exact name of registrant as specified in its charter)

<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, including area code, of registrant's number, including area code, of agent for service)
principal 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>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________

If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act of 1933, check the following box. [ ]
---------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON A DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<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 14, 2000

(Krispy Kreme Doughnuts Logo)

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3,000,000 Shares
Common Stock

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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.

- 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.

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<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.

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<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, 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.

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.

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.

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.

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
2.6% 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, with 56 stores in the comparable store base,
increased by 11.1%. The revenue growth was primarily driven by an increase in
the number of off-premises outlets that we serve. Our sales efforts were
particularly directed at convenience stores.

Company Store Operations operating expenses. Company Store Operations operating
expenses increased to $129.3 million in fiscal 1999 from $117.3 million in
fiscal 1998, an increase of 10.3%. Company Store Operations operating expenses
as a percentage of Company Store Operations revenues were 89.1% 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.

29
<PAGE> 33

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, 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.

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, in contrast with our associate program, includes a more attractive
royalty and fee structure, 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.

41
<PAGE> 45

(MAP AND LIST SHOWING KRISPY KREME STORE LOCATIONS)

42
<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

44
<PAGE> 48

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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<PAGE> 49

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

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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<PAGE> 50

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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<PAGE> 51

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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<PAGE> 52

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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<PAGE> 53

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 16,565
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

50
<PAGE> 54

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

51
<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. 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.
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

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<PAGE> 57

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 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-

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<PAGE> 58

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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<PAGE> 61

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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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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<PAGE> 64

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, 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

We intend to implement a shareholder rights plan prior to completing this
offering. To do so, our board of directors has 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, directors and shareholders will agree not to sell any
shares of common stock for 180 days after the date of this prospectus without
the prior written consent of Deutsche Bank Securities Inc., subject to some
exceptions.

Beginning one year after this offering, 9.3 million shares will become eligible
for sale in reliance upon Rule 144 under the Securities Act. It is possible that
these shares may be sold sooner if the sale is registered under the Securities
Act. We may, but are not obligated to, undertake such a registration to permit
our shareholders to sell their shares in the public market or in private
transactions after the expiration of the contractual restrictions described
above.

In general, under Rule 144 as currently in effect, a person who has beneficially
owned shares of our common stock for at least one year is entitled to sell,
within any three-month period, a number of shares that is not more than the
greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately 125,000 shares immediately after this offering, or

- the average weekly trading volume of the common stock during the four
calendar weeks before a notice of the sale is filed.

Sales under Rule 144 must also comply with manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who has not been one of our affiliates at any time
during the 90 days before a sale, and who has beneficially owned the restricted
shares for at least two years, is entitled to sell the shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.

Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon regarding the resale of securities
originally purchased from us by our employees, directors, officers, consultants
or advisors before the date we become subject to the reporting requirements of
the Exchange Act, under written compensatory benefit plans or written contracts
relating to compensation of those persons. In addition, the SEC has indicated
that Rule 701 will apply to the typical stock options granted by an issuer
before it becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, along with the shares acquired upon exercise of these
options, including exercises after the date of this prospectus. Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
180-day contractual

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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 our shareholders has agreed not to offer,
sell, contract to sell or otherwise dispose of, or enter into any transaction
that is designed to, or could be expected to, result in the disposition of any
portion of our common stock held by these persons prior to this offering or
common stock issuable upon exercise of options held by these persons for a
period of 180 days after the effective date of the registration statement of
which this prospectus is a part without the prior written consent of 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 lock-up
agreements with Deutsche Bank Securities, Inc. 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.

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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

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 18,109 18,109
Accounts receivable, affiliates............................ 1,297 1,464 1,464
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.

PRO FORMA (UNAUDITED): On November 10, 1999, shareholders approved a corporate
reorganization to create a holding company (Krispy Kreme Doughnuts, Inc.) to
function as the publicly held parent of Krispy Kreme Doughnut Corporation and
its subsidiaries. Krispy Kreme Doughnut Corporation and the holding company will
enter into a plan of merger, expected to become effective just prior to the
closing of the holding company's public offering of its common stock. As a
result of the merger, the former shareholders of Krispy Kreme Doughnut
Corporation will become shareholders of the holding company, with each of them
receiving a number of holding company shares based on his or her percentage of
ownership of the shares of Krispy Kreme Doughnut Corporation and a cash payment
of $15.00 per share to be paid from the

F-13
<PAGE> 90
KRISPY KREME DOUGHNUT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 to fund the cash payment to shareholders.

The following table sets forth the computation of basic and diluted earnings per
share:

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.

F-14
<PAGE> 91
KRISPY KREME DOUGHNUT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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)
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%
</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>
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 approximately $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 a compensation
expense of approximately $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 $3,208,000 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, 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

F-16
<PAGE> 93
KRISPY KREME DOUGHNUT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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.

F-17
<PAGE> 94
KRISPY KREME DOUGHNUT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

<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....................... 6.66 (7.68) 12.75
Pro forma earnings per share -- Basic...................... 6.66 (7.95) 12.51
Reported earnings per share -- Diluted..................... 6.66 (7.68) 12.11
Pro forma earnings per share -- Diluted.................... 6.66 (7.95) 11.88
</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:
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
$3,787,000, this action reduced fiscal 1999 earnings by $5,680,000 or $12.16 per
share.

15. STORE CLOSINGS AND IMPAIRMENT

<TABLE>
<CAPTION>
--------------------
LEASE LIABILITIES
AND ACCRUED EXPENSES
--------------------
(IN THOUSANDS)
<S> <C>
Balance at January 31, 1999................................. $ 283
Additions................................................... 1,139
Reductions.................................................. (45)
------
Balance at January 30, 2000................................. $1,377
======
</TABLE>

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

F-22
<PAGE> 99
KRISPY KREME DOUGHNUT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 7, 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 7, 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
5.1* -- Opinion of Kilpatrick Stockton, LLP, as to the legality of
the securities being registered
10.1 -- Amended and Restated Loan Agreement, dated December 21,
1998, between Krispy Kreme Doughnut Corporation and the
subsidiaries thereof and Branch Banking and Trust Company
10.2 -- Form of Associates License Agreement
10.3 -- Form of Development Agreement
10.4 -- Form of Franchise Agreement
10.5 -- Letter Agreement, dated April 12, 1994, between Krispy Kreme
Doughnut Corporation and Mr. Scott A. Livengood
10.6 -- Letter Agreement, dated February 15, 1994, between Krispy
Kreme Doughnut Corporation and Mr. Joseph A. McAleer, Jr.
10.7 -- Guaranty of Payment Agreement, dated September 18, 1998, by
Krispy Kreme Doughnut Corporation for the benefit of Beattie
F. Armstrong and Beattie F. Armstrong, Inc.
10.8 -- Collateral Repurchase Agreement, dated March 31, 1998 by and
among Krispy Kreme Doughnut Corporation, the Bank of Blue
Valley and Midwest Doughnuts, LLC
10.9 -- Guaranty by Krispy Kreme Doughnut Corporation, dated
December 31, 1998, in favor of the Bank of Blue Valley with
respect to the obligations of Midwest Doughnuts, LLC
</TABLE>

II-2
<PAGE> 106

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.10 -- Collateral Repurchase Agreement, dated January 30, 1998, by
and among Krispy Kreme Doughnut Corporation, Mackk, L.L.C.
and Branch Banking and Trust Company
10.11 -- Collateral Repurchase Agreement, dated January 30, 1998, by
and among Mr. Joseph A. McAleer, Jr., Mackk, L.L.C., Krispy
Kreme Doughnut Corporation and Branch Banking and Trust
Company
10.12 -- Collateral Repurchase Agreement, dated January 2, 1998, by
and among Mrs. Bonnie Silvey Vandegrift, Brevard Tennis and
Athletic Club Incorporated, Krispy Kreme Doughnut
Corporation and Branch Banking and Trust Company
10.13 -- Collateral Repurchase Agreement, dated October 15, 1997, by
and among Krispy Kreme Doughnut Corporation, Midwest
Doughnuts, LLC, and the Bank of Blue Valley
10.14* -- Guaranty by Krispy Kreme Doughnut Corporation, dated October
15, 1997, in favor of the Bank of Blue Valley with respect
to the obligation of Midwest Doughnuts, LLC
10.15 -- Collateral Repurchase Agreement, dated October 22, 1996, by
and among Robert L. McCoy, Gulf Florida Doughnut
Corporation, Krispy Kreme Doughnut Corporation and Branch
Banking and Trust Company
10.16 -- Collateral Repurchase Agreement, dated May 29, 1996, among
Krispy Kreme Doughnut Corporation, Midwest Doughnuts, LLC
and The First National Bank of Olathe
10.17 -- Guaranty by Krispy Kreme Doughnut Corporation, dated May 29,
1996, in favor of the First National Bank of Olathe with
respect to the obligations of Midwest Doughnuts, LLC
10.18 -- Collateral Repurchase Agreement, dated July 7, 1995 by and
among Robert J. Simmons, Simac, Inc., Krispy Kreme Doughnut
Corporation and First National Bank of Ohio
10.19 -- Collateral Repurchase Agreement, dated February 25, 1994, by
and among Mr. William J. Dorgan, Mrs. Patricia M. Dorgan,
Krispy Kreme Doughnut Corporation and Branch Banking and
Trust Company
10.20 -- Promissory Note, dated March 13, 1997, of Midwest Doughnuts,
LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties
payable to the order of Krispy Kreme Doughnut Corporation
10.21* -- Promissory Note, dated March 13, 1997, of Midwest Doughnuts,
LLC, Mr. Philip R.S. Waugh, Jr. and certain other parties
payable to the order of Krispy Kreme Doughnut Corporation
10.22 -- Trademark License Agreement, dated May 27, 1996, between HDN
Development -- Corporation and Krispy Kreme Corporation
10.23 -- Stock Option Plan dated August 6, 1998
10.24 -- Long-Term Incentive Plan dated January 30, 1993
10.25 -- Form of Promissory Note relating to termination of Long-Term
Incentive Plan
10.26 -- Form of Restricted Stock Purchase Agreement
10.27 -- Form of Promissory Note relating to restricted stock
purchases
10.28 -- Employment Agreement dated August 10, 1999 between Krispy
Kreme Doughnut Corporation and John N. McAleer
10.29 -- Employment Agreement dated August 10, 1999 between Krispy
Kreme Doughnut Corporation and Scott A. Livengood
</TABLE>

II-3
<PAGE> 107

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
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>

- ---------------

* To be filed by amendment.

+ 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 second 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 13, 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 second
pre-effective amendment to the registration statement has been signed on March
13, 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

* 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/ RANDY S. CASSTEVENS
- -------------------------------------------
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

EXHIBIT 1.1

KRISPY KREME DOUGHNUTS, INC.

3,000,000 Shares of Common Stock

Underwriting Agreement

, 2000

Deutsche Bank Securities Inc.
J.P. Morgan Securities Inc.
Dain Rauscher Incorporated
BB&T Capital Markets/Scott & Stringfellow, Inc.
As Representatives of the several Underwriters
listed in Schedule I hereto
c/o Deutsche Bank Securities Inc.
One South Street
Baltimore, MD 21202

Ladies and Gentlemen:

Krispy Kreme Doughnuts, Inc., a North Carolina corporation
("Holding"), proposes to issue and sell to the several Underwriters listed in
Schedule I hereto (the "Underwriters"), for whom you are acting as
representatives (the "Representatives"), an aggregate of 3,000,000 shares (the
"Underwritten Shares") of common stock, no par value, of Holding (the "Common
Stock"), and, for the sole purpose of covering over-allotments in connection
with the sale of the Underwritten Shares, up to an additional 450,000 shares
(the "Option Shares") of Common Stock. The Underwritten Shares and the Option
Shares are herein referred to as the "Shares."

Holding currently is a wholly owned subsidiary of Krispy Kreme
Doughnut Corporation, a North Carolina corporation (the "Company"). As soon as
possible following the execution of this Agreement by the parties hereto, (i)
KKDC Reorganization Corporation, a North Carolina corporation and a wholly owned
subsidiary of Holding ("Newco"), will be merged with and into the Company, with
the Company continuing as the surviving corporation (the "Merger") and (ii) each
outstanding share of common stock, par value $10.00 per share, of the Company,
other than shares held by Holding, will be converted into the right to receive
(A) 20.0 shares of Common Stock and (B) a cash payment of $15.00, payable on the
Closing Date (as defined herein) from the proceeds of the offering contemplated
hereby. Following consummation of the Merger, the Company will be a wholly owned
subsidiary of Holding. Holding, the Company and Newco are herein referred to
collectively as the "Krispy Kreme Entities."

The Common Stock, including the Shares, will have attached
thereto rights (the "Rights") to purchase one one-hundredth (1/100) of a share
of Series A Participating Cu-

<PAGE> 2

-2-

mulative Preferred Stock, $1.00 par value per share (the " Series A Preferred
Stock"). The Rights are to be issued pursuant to a Rights Agreement (the "Rights
Agreement") dated as of January 18, 2000 between Holding and Branch Banking and
Trust Company.

As part of the offering contemplated by this Agreement,
Deutsche Bank Alex Brown LLC, an affiliate of Deutsche Bank Securities Inc. (the
"Designated Underwriter"), has agreed to reserve out of the Underwritten Shares
purchased by it under this Agreement, up to 450,000 shares for sale to officers,
directors, and employees of Krispy Kreme Entities and persons having business
relationships with and friends of the Krispy Kreme Entities (collectively, the
"Participants"), as set forth in the Prospectus (as defined herein) under the
heading "Underwriting" (the "Directed Share Program"). The Underwritten Shares
to be sold by the Designated Underwriter pursuant to the Directed Share Program
(the "Directed Shares") will be sold by the Designated Underwriter pursuant to
this Agreement at the public offering price.

Holding has prepared and filed with the Securities and
Exchange Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Securities Act"), a registration
statement, including a prospectus, relating to the Shares and the Rights. The
registration statement as amended at the time when it shall become effective,
including information (if any) deemed to be part of the registration statement
at the time of effectiveness pursuant to Rule 430A under the Securities Act, is
referred to in this Agreement as the "Registration Statement," and the
prospectus in the form first used to confirm sales of Shares is referred to in
this Agreement as the "Prospectus." Each preliminary prospectus contained in the
Registration Statement prior to the time it becomes effective is referred to in
this Agreement as a "Preliminary Prospectus." If Holding has filed an
abbreviated registration statement pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.

1. Holding agrees to sell the Underwritten Shares to the
several Underwriters as hereinafter provided, and each Underwriter, upon the
basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees to purchase, severally and not jointly,
from Holding the respective number of Underwritten Shares set forth opposite
such Underwriter's name on Schedule I hereto at a purchase price per share of
$ (the "Purchase Price"). The public offering price of the Shares is
not in excess of the price recommended by J.P. Morgan Securities Inc., acting as
a "qualified independent underwriter" within the meaning of Rule 2720 of the
Rules of Conduct of the National Association of Securities Dealers, Inc.

In addition, Holding agrees to issue and sell the Option
Shares to the several Underwriters as hereinafter provided, and the
Underwriters, on the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, shall have the
option to purchase, severally and not jointly, from Holding, for the sole
purpose of covering

<PAGE> 3

-3-

over-allotments (if any) in the sale of Underwritten Shares by the several
Underwriters, all or any portion of the Option Shares at the Purchase Price.

If any Option Shares are to be purchased, the number of Option
Shares to be purchased by each Underwriter shall be the number of Option Shares
which bears the same ratio to the aggregate number of Option Shares being
purchased as the number of Underwritten Shares set forth opposite the name of
such Underwriter in Schedule I hereto (or such number increased as set forth in
Section 9 hereof) bears to the aggregate number of Underwritten Shares being
purchased from Holding by the several Underwriters, subject, however, to such
adjustments to eliminate any fractional Shares as the Representatives in their
sole discretion shall make.

The Underwriters may exercise the option to purchase the
Option Shares at any time (but not more than once) on or before the thirtieth
day following the date of this Agreement, by written notice from the
Representatives to Holding. Such notice shall set forth the aggregate number of
Option Shares as to which the option is being exercised and the date and time
when the Option Shares are to be delivered and paid for, which may be the same
date and time as the Closing Date (as hereinafter defined) but shall not be
earlier than the Closing Date or later than the tenth full Business Day (as
hereinafter defined) after the date of such notice (unless such time and date
are postponed in accordance with the provisions of Section 9 hereof). Any such
notice shall be given at least two Business Days prior to the date and time of
delivery specified therein.

2. The Krispy Kreme Entities understand that the Underwriters
intend (i) to make a public offering of the Shares as soon after (A) the
Registration Statement has become effective (if it has not already become
effective) and (B) the parties hereto have executed and delivered this
Agreement, as in the judgment of the Representatives is advisable and (ii)
initially to offer the Shares upon the terms set forth in the Prospectus.

3. Payment for the Shares shall be made by wire transfer in
immediately available funds (X) to the account specified to the Representatives
by Holding in the case of the Underwritten Shares on , 2000, or at
such other time on the same or such other date, not later than the fifth
Business Day thereafter, as the Representatives and Holding may agree upon in
writing or (Y) to the account specified to the Representatives by Holding with
regard to payment to Holding with regard to the Option Shares on the date and
time specified by the Representatives in the written notice of the Underwriters'
election to purchase such Option Shares. The time and date of such payment for
the Underwritten Shares is referred to herein as the "Closing Date" and the time
and date for such payment for the Option Shares, if other than the Closing Date,
are herein referred to as the "Additional Closing Date." As used herein, the
term "Business Day" means any day other than a day on which banks are permitted
or required to be closed in New York City.

Payment for the Shares to be purchased on the Closing Date or
the Additional Closing Date, as the case may be, shall be made against delivery
to the Representatives for the

<PAGE> 4

-4-

respective accounts of the several Underwriters of the Shares to be purchased on
such date registered in such names and in such denominations as the
Representatives shall request in writing not later than two full Business Days
prior to the Closing Date or the Additional Closing Date, as the case may be,
with any transfer taxes payable in connection with the transfer to the
Underwriters of the Shares duly paid by Holding. The certificates for the Shares
will be made available for inspection and packaging by the Representatives at
the office of Deutsche Bank Securities Inc. set forth above not later than 1:00
P.M., New York City time, on the Business Day prior to the Closing Date or the
Additional Closing Date, as the case may be.

4. The Krispy Kreme Entities, jointly and severally, represent
and warrant to each Underwriter that:

(a) no order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus filed as part of the Registration Statement as
originally filed or as part of any amendment thereto, or filed pursuant
to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act, and did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information relating to any Underwriter furnished to
the Krispy Kreme Entities in writing by such Underwriter through the
Representatives expressly for use therein;

(b) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that
purpose has been instituted or, to the best knowledge of any Krispy
Kreme Entity, threatened by the Commission; and the Registration
Statement and Prospectus (as amended or supplemented if Holding shall
have furnished any amendments or supplements thereto) comply, or will
comply, as the case may be, in all material respects with the
Securities Act and do not and will not, as of the applicable effective
date as to the Registration Statement and any amendment thereto and as
of the date of the Prospectus and any amendment or supplement thereto,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented, if applicable, at the Closing Date or Additional Closing
Date, as the case may be, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; except that the foregoing representations and
warranties shall not apply to statements or omissions in the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to

<PAGE> 5

-5-

the Krispy Kreme Entities in writing by such Underwriter through the
Representatives expressly for use therein;

(c) the financial statements, and the related notes thereto,
included in the Registration Statement and the Prospectus present
fairly, in the case of Holding, the financial position of Holding as of
the date indicated and, in the case of the Company and its consolidated
subsidiaries, the consolidated financial position of the Company and
its consolidated subsidiaries and, as of the dates indicated and the
results of their operations and changes in their consolidated cash
flows for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis; and the supporting schedules included in
the Registration Statement present fairly the information required to
be stated therein;

(d) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any change in the capital stock or long-term debt of any of the
Krispy Kreme Entities or any of their subsidiaries (other than changes
in capital stock contemplated in the Prospectus as a result of the
Merger), or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general
affairs, business, prospects, management, financial position,
shareholders' equity or results of operations of the Krispy Kreme
Entities and their subsidiaries, taken as a whole (a "Material Adverse
Change"), otherwise than as set forth or contemplated in the
Prospectus; and except as set forth or contemplated in the Prospectus,
none of the Krispy Kreme Entities nor any of their subsidiaries has
entered into any transaction or agreement (whether or not in the
ordinary course of business) material to the Krispy Kreme Entities and
their subsidiaries, taken as a whole;

(e) each of the Krispy Kreme Entities has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with power and
authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as
a foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties, or conducts any business, so as to require such
qualification, other than where the failure to be so qualified or in
good standing would not have a material adverse effect on the general
affairs, business, prospects, management, financial position,
shareholders' equity or results of operations of the Krispy Kreme
Entities and their subsidiaries, taken as a whole (a "Material Adverse
Effect");

(f) each of the Company's subsidiaries which is not a Krispy
Kreme Entity has been duly incorporated or organized and is validly
existing as a corporation under the laws of its jurisdiction of
incorporation or organization, with power and authority (corporate and
other) to own its properties and conduct its business as described in
the

<PAGE> 6

-6-

Prospectus, and has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of
each jurisdiction in which it owns or leases properties, or conducts
any business, so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have a
Material Adverse Effect; and all the outstanding shares of capital
stock of each subsidiary of the Company (other than Holding) have been
duly authorized and validly issued, are fully-paid and non-assessable,
and (except, in the case of foreign subsidiaries, for directors'
qualifying shares and except as set forth in the Prospectus) are owned
by the Company, directly or indirectly, free and clear of all liens,
encumbrances, security interests and claims;

(g) this Agreement has been duly authorized, executed and
delivered by each of the Krispy Kreme Entities;

(h) the Company has an authorized capitalization as set forth
in the Prospectus, and all of the outstanding shares of capital stock
of the Company have been duly authorized and validly issued, are
fully-paid and non-assessable and are not subject to any pre-emptive or
similar rights; and, except as set forth in or contemplated by the
Prospectus, there are no outstanding rights (including, without
limitation, pre-emptive rights), warrants or options to acquire, or
instruments convertible into or exchangeable for, any shares of capital
stock or other equity interest in the Company or any of its
subsidiaries, or any contract, commitment, agreement, understanding or
arrangement of any kind relating to the issuance of any capital stock
of the Company or any such subsidiary, any such convertible or
exchangeable securities or any such rights, warrants or options;

(i) Holding has an authorized capitalization as set forth in
the Prospectus and such authorized capital stock conforms as to legal
matters to the description thereof in the Prospectus, and, upon
consummation of the Merger, all of the outstanding shares of capital
stock of Holding shall have been duly authorized and validly issued,
will be fully-paid and non-assessable and will not be subject to any
pre-emptive or similar rights; and, except as set forth in or expressly
contemplated by the Prospectus, there will be no outstanding rights
(including, without limitation, pre-emptive rights), warrants or
options to acquire, or instruments convertible into or exchangeable
for, any shares of capital stock or other equity interest in Holding or
any of its subsidiaries, or any contract, commitment, agreement,
understanding or arrangement of any kind relating to the issuance of
any capital stock of Holding or any such subsidiary, any such
convertible or exchangeable securities or any such rights, warrants or
options; and, upon consummation of the Merger, all the outstanding
shares of capital stock of the Company will be directly owned by
Holding, free and clear of all liens, encumbrances, security interests
and claims;

(j) the Shares have been duly authorized, and, when issued and
delivered to and paid for by the Underwriters in accordance with the
terms of this Agreement,

<PAGE> 7

-7-

will be duly issued and will be fully paid and non-assessable and will
conform to the description thereof in the Prospectus; and the issuance
of such Shares is not subject to any preemptive or similar rights;

(k) the Rights Agreement has been duly authorized, executed
and delivered by Holding; the Rights have been duly authorized by
Holding and, when issued upon issuance of the Shares, will be validly
issued, and Series A Preferred Stock has been duly authorized by
Holding and validly reserved for issuance upon the exercise of the
Rights and, when issued upon exercise in accordance with the terms of
the Rights Agreement, will be validly issued, fully paid and
non-assessable;

(l) none of the Krispy Kreme Entities nor any of their
subsidiaries is, or with the giving of notice or lapse of time or both
would be, in violation of or in default under its certificate or
articles of incorporation or by-laws or any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which any
of the Krispy Kreme Entities or any of their subsidiaries is a party or
by which it or any of them or any of their respective properties is or
will be bound, except for violations and defaults which individually
and in the aggregate are not material to the Krispy Kreme Entities and
their subsidiaries, taken as a whole; the issue and sale of the Shares
to be sold by Holding hereunder and the performance by the Krispy Kreme
Entities of their obligations under this Agreement and the consummation
of the transactions contemplated herein will not conflict with or
result in a breach of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which any of the Krispy Kreme
Entities or any of their subsidiaries is a party or by which any of the
Krispy Kreme Entities or any of their subsidiaries is bound or to which
any of the property or assets of any of the Krispy Kreme Entities or
any of their subsidiaries is subject, nor will any such action result
in any violation of the provisions of the certificate or articles of
incorporation or the by-laws of any of the Krispy Kreme Entities or any
applicable law or statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over any of the
Krispy Kreme Entities, their subsidiaries or any of their respective
properties; and no consent, approval, authorization, order, license,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares to be
sold by Holding hereunder or the consummation by the Krispy Kreme
Entities of the transactions contemplated by this Agreement, except
such consents, approvals, authorizations, orders, licenses,
registrations or qualifications as have been obtained under the
Securities Act and as may be required under state securities or Blue
Sky Laws in connection with the purchase and distribution of the Shares
by the Underwriters;

(m) other than as set forth or contemplated in the Prospectus,
there are no legal or governmental investigations, actions, suits or
proceedings pending or, to the knowledge of the Krispy Kreme Entities,
threatened against or affecting any Krispy

<PAGE> 8

-8-

Kreme Entity, any of their subsidiaries or any of their respective
properties or to which any of the Krispy Kreme Entities or any of their
subsidiaries is a party or to which any property of any of the Krispy
Kreme Entities or any of their subsidiaries is, or may be the subject
which, if determined adversely to any of the Krispy Kreme Entities or
any of their subsidiaries, could individually or in the aggregate have,
or reasonably be expected to have, a Material Adverse Effect, and, to
the best knowledge of the Krispy Kreme Entities, no such proceedings
are threatened or contemplated by governmental authorities or
threatened by others; to the knowledge of the Krispy Kreme Entities,
there are no legal or governmental investigations, actions, suits or
proceedings pending against or affecting any Krispy Kreme franchisee
which, if determined adversely, could individually or in the aggregate
have, or reasonably be expected to have, a Material Adverse Effect; and
there are no statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;

(n) the Krispy Kreme Entities and their subsidiaries have good
and marketable title in fee simple to all items of real property and
good and marketable title to all personal property owned by them, in
each case free and clear of all liens, encumbrances and defects except
such as are set forth or referred to in the Prospectus or such as do
not materially affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the Krispy
Kreme Entities and their subsidiaries; and any real property and
buildings held under lease by the Krispy Kreme Entities and their
subsidiaries are held by them under valid, existing and enforceable
leases with such exceptions as are not material and do not interfere
with the use made or proposed to be made of such property and buildings
by the lessee;

(o) no relationship, direct or indirect, exists between or
among any of the Krispy Kreme Entities or any of their subsidiaries, on
the one hand, and their directors, officers, shareholders, customers or
suppliers, on the other hand, which is required to be described in the
Registration Statement or the Prospectus which is not described as
required;

(p) no person has the right to require any Krispy Kreme Entity
to register any securities for offering and sale under the Securities
Act by reason of the filing of the Registration Statement with the
Commission or the issue and sale of the Shares to be sold by Holding
hereunder;

(q) neither Holding nor the Company is and, after giving
effect to the offering and sale of the Shares, neither will be an
"investment company" or an entity "controlled" by an "investment
company", as such terms are defined in the Investment Company Act of
1940, as amended (the "Investment Company Act");

<PAGE> 9

-9-

(r) to the knowledge of the Krispy Kreme Entities,
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") who have
certified certain financial statements included in the Registration
Statement and the Prospectus are independent public accountants as
required by the Securities Act;

(s) the Krispy Kreme Entities and their subsidiaries have
filed all federal, state, local, foreign and franchise tax returns
which have been required to be filed and have paid all taxes shown
thereon and all assessments received by them or any of them to the
extent that such taxes have become due and are not being contested in
good faith which would have or could reasonably be expected to have a
Material Adverse Effect; and, except as disclosed in the Registration
Statement and the Prospectus, there is no tax deficiency which has been
or might reasonably be expected to be asserted or threatened against
any of the Krispy Kreme Entities or any of their subsidiaries which
would have or could reasonably be expected to have a Material Adverse
Effect;

(t) none of the Krispy Kreme Entities and no subsidiary
thereof has taken nor will it take, directly or indirectly, any action
designed to, or that might be reasonably expected to, cause or result
in stabilization or manipulation of the price of the Common Stock;

(u) each of the Krispy Kreme Entities and their subsidiaries
owns, possesses or has obtained all material licenses, permits,
certificates, consents, orders, approvals, franchises and other
authorizations from, and has made all declarations and filings with,
all federal, state, local and other governmental authorities (including
foreign regulatory agencies), all self-regulatory organizations and all
courts and other tribunals, domestic or foreign, necessary to own or
lease, as the case may be, and to operate its properties and to carry
on its business as conducted as of the date hereof, and none of the
Krispy Kreme Entities or any of their subsidiaries has, and, received
any actual notice of any proceeding relating to revocation or
modification of any such license, permit, certificate, consent, order,
approval, franchise or other authorization, except as set forth in the
Registration Statement and the Prospectus; and each Krispy Kreme Entity
and each of their subsidiaries is in compliance with all material laws
and regulations relating to the conduct of its business as conducted as
of the date hereof;

(v) the Krispy Kreme Entities and their subsidiaries are in
compliance in all material respects with the applicable requirements of
the Federal Trade Commission (the "FTC") rules governing franchising
and all applicable provisions of federal, state, local and other laws
or regulations governing the business of a franchisor;

(w) there are no existing or, to the best knowledge of the
Krispy Kreme Entities, threatened labor disputes with any employees of
any of the Krispy Kreme Entities or any of their subsidiaries which are
likely to have a Material Adverse Effect;

<PAGE> 10

-10-

(x) the Krispy Kreme Entities and their subsidiaries are (i)
in compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) in receipt of
all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses
and (iii) in compliance with the terms and conditions of any such
permit, license or other approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or other approvals would not, singly or in the
aggregate, have a Material Adverse Effect;

(y) in the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the
business, operations and properties of the Company and its
subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license
or other approval, any related constraints on operating activities and
any potential liabilities to third parties). On the basis of such
review, the Company has reasonably concluded that such associated costs
and liabilities would not, singly or in the aggregate, have a Material
Adverse Effect;

(z) each employee benefit plan, within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), that is maintained, administered or contributed to by the
Company or any of its affiliates for employees or former employees of
the Company and its affiliates has been maintained in compliance with
its terms and the requirements of any applicable statutes, orders,
rules and regulations, including but not limited to ERISA and the
Internal Revenue Code of 1986, as amended ("Code"). No prohibited
transaction, within the meaning of Section 406 of ERISA or Section 4975
of the Code, has occurred with respect to any such plan excluding
transactions effected pursuant to a statutory or administrative
exemption. For each such plan which is subject to the funding rules of
Section 412 of the Code or Section 302 of ERISA, no "accumulated
funding deficiency" as defined in Section 412 of the Code has been
incurred, whether or not waived, and the fair market value of the
assets of each such plan (excluding for these purposes accrued but
unpaid contributions) exceeds the present value of all benefits accrued
under such plan determined using reasonable actuarial assumptions;

(aa) except as set forth in the Prospectus, each Krispy Kreme
Entity and each of their subsidiaries owns, is licensed to use or
otherwise possesses adequate rights to use the patents, patent rights,
licenses, inventions, trademarks, service marks, trade names,
copyrights and know-how, including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures

<PAGE> 11

-11-

(collectively, the "Intellectual Property"), necessary to carry on the
business conducted by it, except to the extent that the failure to own,
be licensed to use or otherwise possess adequate rights to use such
Intellectual Property would not have a Material Adverse Effect; except
as set forth in the Prospectus, no Krispy Kreme Entity nor any of its
subsidiaries has received any notice of infringement of or conflict
with (and no Krispy Kreme Entity has knowledge of any infringement of
or conflict with) asserted rights of others with respect to
Intellectual Property of the Krispy Kreme Entities and their
subsidiaries which could have a Material Adverse Effect; the
discoveries, inventions, products or processes of the Krispy Kreme
Entities and their subsidiaries referred to in the Registration
Statement and the Prospectus do not, to the best knowledge of the
Krispy Kreme Entities, infringe or conflict with any right or patent of
any third party, or any discovery, patent product or process which is
the subject of a patent application filed by any third party, known to
the Krispy Kreme Entities which could have a Material Adverse Effect;

(bb) the statistical and market-related data included in the
Registration Statement and the Prospectus are based on or derived from
sources which are believed by the Krispy Kreme Entities to be reliable;

(cc) the Krispy Kreme Entities and their subsidiaries carry,
or are covered by, insurance in such amounts and covering such risks as
is adequate for the conduct of their business and the value of their
properties and as is customary for companies engaged in similar
businesses in similar industries;

(dd) except for compensation to be received by the
Underwriters under this Agreement, none of the Krispy Kreme Entities
know of any outstanding claims for services, either in the nature of a
finder's fee or origination fee, with respect to any of the
transactions contemplated hereby;

(ee) as of the date of this Agreement, the Krispy Kreme
Entities have satisfied all conditions precedent to the Merger except
for the execution and delivery of this Agreement and, if it has not
already occurred, the effectiveness of the Registration Statement; and

(ff) (i) the Registration Statement, the Prospectus and any
Preliminary Prospectus comply, and any further amendments or
supplements thereto will comply, in all material respects, with any
applicable laws or regulations of foreign jurisdictions in which the
Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share
Program, and (ii) no authorization, approval, consent, license, order,
registration or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is
necessary under the securities law and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the
United States.

<PAGE> 12

-12-

5. Each of the Krispy Kreme Entities, jointly and severally,
covenants and agrees with each of the several Underwriters as follows:

(a) if the Registration Statement has not already become
effective, to use its best efforts to cause the Registration Statement
to become effective at the earliest possible time and, if required, to
file the final Prospectus with the Commission within the time periods
specified by Rule 424(b) and Rule 430A under the Securities Act and to
file promptly all reports and any definitive proxy or information
statements required to be filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Exchange Act") subsequent to
the date of the Prospectus and for so long as the delivery of a
prospectus is required in connection with the offering or sale of the
Shares; and to furnish copies of the Prospectus to the Underwriters in
New York City prior to 10:00 a.m., New York City time, on the Business
Day next succeeding the date of this Agreement in such quantities as
the Representatives may reasonably request;

(b) to deliver, at the expense of the Krispy Kreme Entities,
to the Representatives six signed copies of the Registration Statement
(as originally filed) and each amendment thereto, in each case
including exhibits, and to each other Underwriter a conformed copy of
the Registration Statement (as originally filed) and each amendment
thereto, in each case without exhibits and, during the period mentioned
in paragraph (e) below, to each of the Underwriters as many copies of
the Prospectus (including all amendments and supplements thereto) as
the Representatives may reasonably request;

(c) before filing any amendment or supplement to the
Registration Statement or the Prospectus, whether before or after the
time the Registration Statement becomes effective, to furnish to the
Representatives a copy of the proposed amendment or supplement for
review and not to file any such proposed amendment or supplement to
which the Representatives reasonably object;

(d) to advise the Representatives promptly, and to confirm
such advice in writing (i) when the Registration Statement has become
effective, (ii) when any amendment to the Registration Statement has
been filed or becomes effective, (iii) when any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof, (iv) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for any additional
information, (v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any
order preventing or suspending the use of any preliminary prospectus or
the Prospectus or the initiation or threatening of any proceeding for
that purpose, (vi) of the occurrence of any event, within the period
referenced in paragraph (e) below, as a result of which the Prospectus
as then amended or supplemented would in-

<PAGE> 13

-13-

clude an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, and (vii) of the receipt by any Krispy Kreme
Entity of any notification with respect to any suspension of the
qualification of the Shares for offer and sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose; and
to use its best efforts to prevent the issuance of any such stop order,
or of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of any order suspending any such
qualification of the Shares, or notification of any such order thereof
and, if issued, to obtain as soon as possible the withdrawal thereof;

(e) if, during such period of time after the first date of the
public offering of the Shares as in the opinion of counsel for the
Underwriters a prospectus relating to the Shares is required by law to
be delivered in connection with sales by the Underwriters or any
dealer, any event shall occur as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements
therein, in light of the circumstances when the Prospectus is delivered
to a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with law, forthwith to prepare and
furnish, at the expense of the Krispy Kreme Entities, to the
Underwriters and to the dealers (whose names and addresses the
Representatives will furnish to the Krispy Kreme Entities) to which
Shares may have been sold by the Representatives on behalf of the
Underwriters and to any other dealers upon request, such amendments or
supplements to the Prospectus as may be necessary so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus will comply with
law;

(f) to endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the
Representatives shall reasonably request and to continue such
qualification in effect so long as reasonably required for distribution
of the Shares; provided that no Krispy Kreme Entity shall be required
to file a general consent to service of process in any jurisdiction;

(g) to make generally available to its security holders and to
the Representatives as soon as practicable a consolidated earnings
statement covering a period of at least twelve months beginning with
the first fiscal quarter of Holding occurring after the effective date
of the Registration Statement, which shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 of the Commission
promulgated thereunder;

(h) for a period of three years from the Closing Date, to
furnish to the Representatives copies of all reports or other
communications (financial or other) furnished to holders of the Shares,
and copies of any reports and financial statements furnished to or
filed with the Commission or any national securities exchange;

<PAGE> 14

-14-

(i) for a period of 180 days after the date of the initial
public offering of the Shares not to (i) offer, pledge, announce the
intention to sell, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise without the prior written consent of
Deutsche Bank Securities Inc., other than the Shares to be sold by
Holding hereunder, shares issued in connection with the Merger and any
options granted or shares of Common Stock issued upon the exercise of
options granted under any stock option plan existing as of the date of
this Agreement;

(j) to use the net proceeds received by Holding from the sale
of the Shares by Holding pursuant to this Agreement in the manner
specified in the Prospectus under caption "Use of Proceeds";

(k) to file with the Commission such reports as may be
required by Rule 463 under the Securities Act;

(l) to use its best efforts to list for quotation the Shares
on the National Market System of The Nasdaq Stock Market, Inc. (the
"NNM"); and

(m) whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all costs and expenses incident to the performance of
its obligations hereunder, including without limiting the generality of
the foregoing, all costs and expenses (i) incident to the preparation,
reregistration, transfer, execution and delivery of the Shares, (ii)
incident to the preparation, printing and filing under the Securities
Act of the Registration Statement, the Prospectus and any preliminary
prospectus (including in each case all exhibits, amendments and
supplements thereto), (iii) incurred in connection with the
registration or qualification of the Shares under the laws of such
jurisdictions as the Representatives may designate (including
reasonable fees of counsel for the Underwriters and its disbursements),
(iv) in connection with the listing of the Shares on the NNM, (v)
related to the filing with, and clearance of the offering by, the
National Association of Securities Dealers, Inc. (including the fees
and expenses of J.P. Morgan Securities Inc. acting as "qualified
independent underwriter" within the meaning of the aforementioned Rule
2720 of the Conduct Rules), (vi) in connection with the printing
(including word processing and duplication costs) and delivery of this
Agreement, the Preliminary and Supplemental Blue Sky Memoranda and the
furnishing to the Underwriters and dealers of copies of the
Registration Statement and the Prospectus, including mailing and
shipping, as herein provided, (vii) any expenses incurred by the

<PAGE> 15

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Krispy Kreme Entities in connection with a "road show" presentation to
potential investors, (viii) the cost of preparing stock certificates
and (ix) the cost and charges of any transfer agent and any registrar;

(n) in connection with the Directed Share Program, the Krispy
Kreme Entities will ensure that the Directed Shares will be restricted
to the extent required by the National Association of Securities
Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer,
assignment, pledge or hypothecation for a period of three months
following the date of the effectiveness of the Registration Statement.
The Designated Underwriter will notify Holding as to which Participants
will need to be so restricted. Holding will direct the transfer agent
to place stop transfer restrictions upon such securities for such
period of time; and

(o) the Krispy Kreme Entities will pay all fees and
disbursements of counsel incurred by the Underwriters in connection
with the Directed Shares Program and stamp duties, similar taxes or
duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program.

Furthermore, the Krispy Kreme Entities covenant with the
Underwriters that they will comply with all applicable securities and other
applicable laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share Program.

6. The several obligations of the Underwriters hereunder to
purchase the Shares on the Closing Date or the Additional Closing Date, as the
case may be, are subject to the performance by the Krispy Kreme Entities of
their obligations hereunder and to the following additional conditions:

(a) the Registration Statement shall have become effective (or
if a post-effective amendment is required to be filed under the
Securities Act, such post-effective amendment shall have become
effective) not later than 5:00 P.M., New York City time, on the date
hereof; and no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment shall be in
effect, and no proceedings for such purpose shall be pending before or
threatened by the Commission; the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) within the applicable time
period prescribed for such filing by the rules and regulations under
the Securities Act and in accordance with Section 5(a) hereof; and all
requests for additional information shall have been complied with to
the satisfaction of the Representatives;

(b) the respective representations and warranties of the
Krispy Kreme Entities contained herein are true and correct on and as
of the Closing Date or the Additional Closing Date, as the case may be,
as if made on and as of the Closing Date or the Additional Closing
Date, as the case may be, and each of the Krispy Kreme Enti-

<PAGE> 16

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ties shall have complied with all agreements and all conditions on its
part to be performed or satisfied hereunder at or prior to the Closing
Date or the Additional Closing Date, as the case may be;

(c) since the respective dates as of which information is
given in the Prospectus there shall not have been any change in the
capital stock or long-term debt of any of the Krispy Kreme Entities or
any of their subsidiaries (other than changes in capital stock
contemplated in the Prospectus as a result of the Merger), or any
Material Adverse Change, or any development involving a prospective
Material Adverse Change, otherwise than as set forth or contemplated in
the Prospectus, the effect of which in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares on the Closing Date
or the Additional Closing Date, as the case may be, on the terms and in
the manner contemplated in the Prospectus; and none of the Krispy Kreme
Entities nor any of their subsidiaries shall have sustained since the
date of the latest audited financial statements of the Company and its
consolidated subsidiaries included in the Prospectus any material loss
or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus;

(d) the Representatives shall have received on and as of the
Closing Date or the Additional Closing Date, as the case may be, a
certificate of an executive officer of Holding and the Company, with
specific knowledge about the Krispy Kreme Entities' financial matters,
satisfactory to the Representatives to the effect set forth in
subsections (a) through (c) (with respect to the respective
representations, warranties, agreements and conditions of the Krispy
Kreme Entities) of this Section and to the further effect that there
has not occurred any Material Adverse Change, or any development
involving a prospective Material Adverse Change;

(e) Kilpatrick Stockton LLP, counsel for the Company, shall
have furnished to the Representatives their written opinion, dated the
Closing Date or the Additional Closing Date, as the case may be, in
form and substance reasonably satisfactory to the Representatives, to
the effect that:

(i) Holding has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, with power and authority
(corporate and other) to own its properties and conduct its
business as described in the Prospectus;

(ii) Holding has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties, or conducts any business, so as

<PAGE> 17

-17-

to require such qualification, other than where the failure to
be so qualified or in good standing would not have a Material
Adverse Effect;

(iii) each of Holding's subsidiaries has been duly
incorporated or organized and is validly existing as a
corporation under the laws of its jurisdiction of
incorporation or organization with power and authority
(corporate and other) to own its properties and conduct its
business as described in the Prospectus and has been duly
qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or
conducts any business, so as to require such qualification,
other than where the failure to be so qualified and in good
standing would not have a Material Adverse Effect; and all of
the outstanding shares of capital stock of each subsidiary
have been duly and validly authorized and issued, are fully
paid and non-assessable, and (except, in the case of foreign
subsidiaries, for directors' qualifying shares and except as
otherwise set forth in the Prospectus) are owned directly or
indirectly by Holding, free and clear of all liens,
encumbrances, equities or claims;

(iv) other than as set forth or contemplated in the
Prospectus, there are no legal or governmental investigations,
actions, suits or proceedings pending or, to the best of such
counsel's knowledge, threatened against or affecting Holding
or any of its subsidiaries or any of their respective
properties or to which Holding or any of its subsidiaries is
or may be a party or to which any property of Holding or its
subsidiaries is or may be the subject which, if determined
adversely to Holding or any of its subsidiaries, would
individually or in the aggregate have, or reasonably be
expected to have, a Material Adverse Effect; to the best of
such counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by
others; and such counsel does not know of any statutes,
regulations, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that
are not described or filed as required;

(v) this Agreement has been duly authorized, executed
and delivered by each of the Krispy Kreme Entities;

(vi) the authorized capital stock of Holding conforms
as to legal matters to the description thereof contained in
the Prospectus;

(vii) the shares of capital stock of Holding
outstanding prior to the issuance of the Shares to be sold by
Holding hereunder have been duly authorized and are validly
issued, fully paid and non-assessable;

<PAGE> 18

-18-

(viii) the Shares to be issued and sold by Holding
hereunder have been duly authorized, and when delivered to and
paid for by the Underwriters in accordance with the terms of
this Agreement, will be validly issued, fully paid and
non-assessable and the issuance of such Shares is not subject
to any preemptive or similar rights;

(ix) the statements in the Prospectus under "Shares
Eligible For Future Sale" and "Description of Capital Stock",
and in the Registration Statement in Items 14 and 15, insofar
as such statements constitute a summary of the terms of the
Common Stock, legal matters, documents or proceedings referred
to therein, fairly present in all material respects the
information called for with respect to such terms, legal
matters, documents or proceedings;

(x) such counsel is of the opinion that the
Registration Statement and the Prospectus and any amendments
and supplements thereto (other than the financial statements
and related schedules therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the requirements of the Securities Act and believes that
(other than the financial statements and related schedules
therein and the statistical or other industry data therein, as
to which such counsel need express no belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective did not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, and that the
Prospectus, as amended or supplemented, if applicable, does
not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading;

(xi) the Registration Statement has been declared
effective under the Securities Act and, to such counsel's
knowledge, no stop order proceedings with respect thereto are
pending before or threatened by the Commission under the
Securities Act;

(xii) all holders of securities of Holding or, prior
to consummation of the Merger, the Company having rights to
the registration of shares of Common Stock, or other
securities, because of the filing of the Registration
Statement have waived such rights or such rights have expired
by reason of lapse of time following notification of the
intent to file the Registration Statement;

(xiii) neither Holding nor any of its subsidiaries
is, or with the giving of notice or lapse of time or both
would be, in violation of or in default under its certificate
or articles of incorporation or by-laws or any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to

<PAGE> 19

-19-

such counsel to which Holding or any of its subsidiaries is a
party or by which it or any of them or any of their respective
properties is bound, except for violations and defaults which
would not, individually and in the aggregate, have a Material
Adverse Effect; the issue and sale of the Shares being
delivered on the Closing Date or the Additional Closing Date,
as the case may be, to be sold by Holding hereunder and the
performance by Holding of its obligations under this Agreement
and the consummation of the transactions contemplated herein
will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which Holding
or any of its subsidiaries is a party or by which Holding or
any of its subsidiaries is bound or to which any of the
property or assets of Holding or any of its subsidiaries is
subject, nor will any such action result in any violation of
the provisions of the articles of incorporation or the by-laws
of Holding or any applicable law or statute or any order, rule
or regulation of any court or governmental agency or body
having jurisdiction over Holding, its subsidiaries or any of
their respective properties;

(xiv) no consent, approval, authorization, order,
license, registration or qualification of or with any court or
governmental agency or body is required for the issuance by
Holding of the Shares to be sold by it hereunder or the
consummation by the Krispy Kreme Entities of the other
transactions contemplated by this Agreement, except such
consents, approvals, authorizations, orders, licenses,
registrations or qualifications as have been obtained under
the Securities Act and as may be required under state
securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;

(xv) Holding is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment
company" or entity "controlled" by an "investment company", as
such terms are defined in the Investment Company Act;

(xvi) the Rights Agreement has been duly authorized,
executed and delivered by Holding; the Rights have been duly
authorized by Holding and, when issued upon issuance of the
Shares, will be validly issued, and the Series A Preferred
Stock has been duly authorized by Holding and validly reserved
for issuance upon the exercise of the Rights and, when issued
upon such exercise in accordance with the terms of the Rights
Agreement, will be validly issued, fully paid and
non-assessable; and

(xvii) the Merger has become effective under North
Carolina law in accordance with the Agreement and Plan of
Merger dated December 2, 1999 by and between the Company,
Holding and Newco; the Company is the sur-

<PAGE> 20

-20-

viving corporation of the Merger and has the status, rights
and liabilities of a surviving corporation set forth in North
Carolina law; the Merger was duly authorized by all necessary
corporate and shareholder action on the part of each
constituent corporation and complies with all applicable
provisions of North Carolina law; in the Merger, the Company
became a wholly owned subsidiary of Holding.

In rendering such opinions, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the
United States and the States of New York and North Carolina, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to Underwriters' counsel) of other counsel
reasonably acceptable to Underwriters' counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent such counsel
deems proper, on certificates of responsible officers of Holding and
the Company and certificates or other written statements of officials
of jurisdictions having custody of documents respecting the corporate
existence or good standing of Holding, the Company and their
subsidiaries. The opinion of such counsel for the Krispy Kreme Entities
shall state that the opinion of any such other counsel upon which they
relied is in form satisfactory to such counsel and, in such counsel's
opinion, the Underwriters and they are justified in relying thereon.
With respect to the matters to be covered in subparagraph (x) above
counsel may state their opinion and belief is based upon their
participation in the preparation of the Registration Statement and the
Prospectus and any amendment or supplement thereto and review and
discussion of the contents thereof but is without independent check or
verification except as specified.

The opinion of Kilpatrick Stockton LLP described above shall
be rendered to the Underwriters at the request of Krispy Kreme Entities
and shall so state therein;

(f) Kilpatrick Stockton LLP, counsel for the Company, shall
have furnished to the Representatives their additional written opinion,
dated the Closing Date, in form and substance reasonably satisfactory
to the Representatives, relating to the exemption from registration
under the Securities Act of the issuance of the shares of Common Stock
pursuant to the Merger;

(g) Stephen Johnson, Senior Counsel to the Company, shall have
furnished to the representatives his written opinion, dated the Closing
Date or the Additional Closing Date, as the case may be, in form and
substance reasonably satisfactory to the representatives, to the effect
that:

(i) such counsel is of the opinion that the
Registration Statement and the Prospectus and any amendments
and supplements thereto (other than the financial statements
and related schedules therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the

<PAGE> 21

-21-

requirements of the Securities Act and believes that (other
than the financial statements and related schedules therein
and the statistical or other industry data therein, as to
which such counsel need express no belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective did not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, and that the
Prospectus, as amended or supplemented, if applicable, does
not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading;

(ii) each of Holding and its subsidiaries owns,
possesses or has obtained all licenses, permits, certificates,
consents, orders, approvals and other authorizations from, and
has made all declarations and filings with, all federal,
state, local and other governmental authorities (including
foreign regulatory agencies), all self-regulatory
organizations and all courts and other tribunals, domestic or
foreign, necessary to own or lease, as the case may be, and to
operate its properties and to carry on its business as
conducted as of the date hereof, and, to such counsel's
knowledge, neither Holding nor any such subsidiary has
received any actual notice of any proceeding relating to
revocation or modification of any such license, permit,
certificate, consent, order, approval or other authorization,
except as described in the Registration Statement and the
Prospectus; and each of Holding and its subsidiaries is in
compliance with all laws and regulations relating to the
conduct of its business as conducted as of the date of the
Prospectus, except where any such failure to comply would not,
individually or in the aggregate, have a Material Adverse
Effect;

(iii) Holding and its subsidiaries have good and
marketable title in fee simple to all real property and good
and marketable title to all personal property owned by them,
in each case free and clear of all liens, encumbrances and
defects except such as are set forth or referred to in the
Prospectus or such as do not materially affect the value of
such property and do not interfere with the use made and
proposed to be made of such property by Holding and its
subsidiaries; and any real property and buildings held under
lease by Holding and its subsidiaries are held by them under
valid, existing and enforceable leases with such exceptions as
are not material and do not interfere with the use made or
proposed to be made of such property and buildings by Holding
or its subsidiaries;

(iv) to the knowledge of such counsel, each of
Holding and its subsidiaries is in compliance with all
Environmental Laws, except, in each case, where noncompliance,
individually or in the aggregate, would not have a Mate-

<PAGE> 22

-22-

rial Adverse Effect; there are no legal or governmental
proceedings pending or, threatened against or affecting
Holding or any of its subsidiaries under any Environmental Law
which, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect; and

(v) except as set forth in the Prospectus, Holding
and each of its subsidiaries owns, is licensed to use or
otherwise possesses adequate rights to use the Intellectual
Property reasonably necessary to carry on the business
conducted by it, except to the extent that the failure to own,
be licensed to use or otherwise possess adequate rights to use
such Intellectual Property would not have a Material Adverse
Effect; except as set forth in the Prospectus, none of Holding
or any subsidiary has received any notice of infringement of
or conflict with, and to the best of the such counsel's
knowledge, there is no infringement of or conflict with,
asserted rights of others with respect to the Intellectual
Property, the discoveries, inventions, products or processes
of Holding and its subsidiaries referred to in the
Registration Statement and the Prospectus do not, to the best
of such counsel's knowledge, infringe or conflict with any
right or patent of any third party, or any discovery, patent
product or process which is the subject of a patent
application filed by any third party.

In rendering such opinions, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the
United States and the States of New York and North Carolina, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to Underwriters' counsel) of other counsel
reasonably acceptable to Underwriters' counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent such counsel
deems proper, on certificates of responsible officers of Holding and
the Company and certificates or other written statements of officials
of jurisdictions having custody of documents respecting the corporate
existence or good standing of Holding, the Company and their
subsidiaries. The opinion of such counsel for the Krispy Kreme Entities
shall state that the opinion of any such other counsel upon which they
relied is in form satisfactory to such counsel and, in such counsel's
opinion, the Underwriters and they are justified in relying thereon.
With respect to the matters to be covered in subparagraph (i) above
counsel may state their opinion and belief is based upon their
participation in the preparation of the Registration Statement and the
Prospectus and any amendment or supplement thereto and review and
discussion of the contents thereof but is without independent check or
verification except as specified.

The opinion of Stephen Johnson described above shall be
rendered to the Underwriters at the request of Krispy Kreme Entities
and shall so state therein;

(h) Piper Marbury Rudnick & Wolfe, special franchise counsel
for the Krispy Kreme Entities, shall have furnished to the
Representatives their written opinion, dated the Closing

<PAGE> 23

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Date or the Additional Closing Date, as the case may be, in form and
substance satisfactory to the Representatives, to the effect that:

(i) Each of the franchise agreements entered into by
Holding or its subsidiaries relating to its conveyance of
franchise rights have been duly authorized, executed and
delivered by Holding and its subsidiaries;

(ii) the Company's uniform franchise offering
circulars, dated , , inclusive of attached
exhibits ("UFOCS"), contained information in compliance, as of
the effective date of the respective UFOCS, with the
disclosure provisions of the FTC franchise and business
opportunity laws and regulations ("FTC Rules") and the
franchise disclosure laws of those states with which the
Company has filed such UFOCS and complied as to form with the
FTC Rules and such state franchise disclosure laws;

(iii) Holding and its subsidiaries hold, and are
operating in compliance in all material respects with, all
franchises, licenses, permits, certificates, consents, orders,
approvals and other authorizations from, and has made all
declarations and filings with, all franchise, federal, state,
local and other governmental authorities and all
self-regulatory organizations required for the conduct of its
business and all such franchises, licenses, permits,
certificates, consents, orders, approvals and other
authorizations are valid and in full force and effect;

(iv) the descriptions of federal and state franchise
regulations set forth in the Prospectus under the captions
"Risk Factors - We need to successfully maintain our status as
a franchisor and may be harmed by actions taken by our
franchisees that are outside of our control" and "Business
Government regulations" fairly and accurately describe the
status of the material governmental franchise regulations
pertaining to franchising activities of Holding and its
subsidiaries;

(v) the description of the franchising agreements of
Holding and its subsidiaries set forth in the Prospectus under
the caption "Business - Store ownership" fairly and accurately
describes the material terms of such franchise agreements; and

(vi) no Krispy Kreme Entity has received any notice
of violation of any FTC Rule or any state franchise
registration or franchise disclosure law.

The opinion of Piper Marbury Rudnick & Wolfe described above
shall be rendered to the Underwriters at the request of the Krispy
Kreme Entities and shall so state therein;

<PAGE> 24

-24-

(i) on the effective date of the Registration Statement and
the effective date of the most recently filed post-effective amendment
to the Registration Statement and also on the Closing Date or
Additional Closing Date, as the case may be, PricewaterhouseCoopers
shall have furnished to you letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, containing
statements and information of the type customarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus;

(j) the Representatives shall have received on and as of the
Closing Date or Additional Closing Date, as the case may be, an opinion
of Cahill Gordon & Reindel, counsel to the Underwriters, with respect
to the due authorization and valid issuance of the Shares, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters;

(k) the Shares to be delivered on the Closing Date or
Additional Closing Date, as the case may be, shall have been approved
for listing on the NNM, subject to official notice of issuance;

(l) the Merger has become effective under North Carolina law
in accordance with the Agreement and Plan of Merger dated December 2,
1999 by and between the Company, Holding and Newco; the Company is the
surviving corporation of the merger of Newco with and into the Company
and has the status, rights and liabilities of the surviving corporation
as set forth in the applicable provisions of North Carolina law; the
Merger was duly authorized by all necessary corporate and shareholder
action on the part of each constituent corporation and complies with
all applicable provisions of North Carolina law;

(m) on or prior to the Closing Date or Additional Closing
Date, as the case may be, the Krispy Kreme Entities shall have
furnished to the Representatives such further certificates and
documents as the Representatives shall reasonably request; and

(n) the lock-up agreements of Holding's officers, directors
and shareholders, in the form delivered to the Company, shall be in
full force and effect on the Closing Date or Additional Closing Date,
as the case may be.

7. (a) Holding agrees:

(1) to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the
Securities Act, against any losses, claims, damages or liabilities to
which such Underwriter or any such controlling person may become
subject under the Securities Act or otherwise, insofar as

<PAGE> 25

-25-

such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or (iii)
any alleged act or failure to act by any Underwriter in connection
with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based
upon matters covered by clause (i) or (ii) above (provided that Holding
shall not be liable under this clause (iii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction
that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its gross negligence or willful
misconduct); provided, however, that Holding will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with
written information furnished to Holding by or through the
Representatives specifically for use in the preparation thereof.
Holding also agrees to indemnify and hold harmless J.P. Morgan
Securities Inc. ("J.P. Morgan") and each person, if any, who controls
J.P. Morgan within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages and liabilities incurred as a result of J.P.
Morgan's participation as a "qualified independent underwriter" within
the meaning of the Conduct Rules of the NASD in connection with the
offering of the Shares.

(2) to reimburse each Underwriter and each such controlling
person upon demand for any legal or other out-of-pocket expenses
reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending any such loss, claim, damage
or liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or
not such Underwriter or controlling person is a party to any action or
proceeding. In the event that it is finally judicially determined that
the Underwriters were not entitled to receive payments for legal and
other expenses pursuant to this subparagraph, the Underwriters will
promptly return all sums that had been advanced pursuant hereto.

(b) Each Underwriter severally and not jointly will indemnify
and hold harmless Holding, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls Holding
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities to which Holding or any such director, officer or controlling person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof)

<PAGE> 26

-26-

arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse upon demand any legal or other expenses reasonably incurred by
Holding or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to Holding by or through the Representatives specifically
for use in the preparation thereof. This indemnity agreement will be in addition
to any liability which such Underwriter may otherwise have.

(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 7(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 7(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 7(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be

<PAGE> 27

-27-

designated in writing by you in the case of parties indemnified pursuant to
Section 7(a) and by Holding in the case of parties indemnified pursuant to
Section 7(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding. Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 7(a) hereof in respect of such
action or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local counsel)
for J.P. Morgan in its capacity as a "qualified independent underwriter" and all
persons, if any, who control J.P. Morgan within the meaning of either Section 15
of the Act or Section 20 of the Exchange Act.

(d) Holding and each subsidiary of Holding, whether direct or
indirect, jointly and severally, agree to indemnify and hold harmless the
Designated Underwriter and its affiliates and each person, if any, who controls
the Designated Underwriter or its affiliates within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (i) caused by any untrue
statement or alleged untrue statement of a material fact contained in any
material prepared by or with the consent of Holding for distribution to
Participants in connection with the Directed Share Program, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; (ii)
caused by the failure of any Participant to pay for and accept delivery of
Directed Shares that the Participant has agreed to purchase; or (iii) related
to, arising out of, or in connection with the Directed Share Program other than
losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of the Designated Underwriter.

(e) To the extent the indemnification provided for in this
Section 7 is unavailable to or insufficient to hold harmless an indemnified
party under Section 7(a) or (b) above in respect of any losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by Holding on the one
hand and the Underwriters on the

<PAGE> 28

-28-

other from the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of Holding on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by Holding on the one hand and
the Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
Holding bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by Holding on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.

Holding and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 7(e) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7(e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 7(e) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 7(e)
to contribute are several in proportion to their respective underwriting
obligations and not joint.

(f) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this Section 7
hereby consents to the jurisdiction of any court having jurisdiction over any
other contributing party, agrees that process issuing from such court may be
served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.

<PAGE> 29

-29-

(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 7 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of Holding set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, Holding, its directors or officers or any persons controlling
the Company, (ii) acceptance of any Shares and payment therefor hereunder, and
(iii) any termination of this Agreement. A successor to any Underwriter, or to
Holding, its directors or officers, or any person controlling Holding, shall be
entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 7.

8. Notwithstanding anything herein contained, this Agreement
(or the obligations of the several Underwriters with respect to the Option
Shares) may be terminated in the absolute discretion of the Representatives, by
notice given to Holding, if after the execution and delivery of this Agreement
and prior to the Closing Date (or, in the case of the Option Shares, prior to
the Additional Closing Date) (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange or the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of or
guaranteed by Holding shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities, or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in the judgment of the Representatives, is material and adverse and which,
in the judgment of the Representatives, makes it impracticable to market the
Shares being delivered at the Closing Date or the Additional Closing Date, as
the case may be, on the terms and in the manner contemplated in the Prospectus.

9. This Agreement shall become effective upon the later of (x)
execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Registration Statement (or, if
applicable, any post-effective amendment) by the Commission.

If on the Closing Date or the Additional Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Underwritten

<PAGE> 30

-30-

Shares set forth opposite the names of all such non-defaulting Underwriters, or
in such other proportions as the Representatives may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to Section 1 be
increased pursuant to this Section 9 by an amount in excess of one-ninth of such
number of Shares without the written consent of such Underwriter. If on the
Closing Date or the Additional Closing Date, as the case may be, any Underwriter
or Underwriters shall fail or refuse to purchase Shares which it or they have
agreed to purchase hereunder on such date, and the aggregate number of Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares to be purchased on such date, and arrangements
satisfactory to the Representatives and Holding for the purchase of such Shares
are not made within 36 hours after such default, this Agreement (or the
obligations of the several Underwriters to purchase the Option Shares, as the
case may be) shall terminate without liability on the part of any non-defaulting
Underwriter or Holding. In any such case either you or Holding shall have the
right to postpone the Closing Date (or, in the case of the Option Shares, the
Additional Closing Date), but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.

10. If this Agreement shall be terminated by the Underwriters,
or any of them, because of any failure or refusal on the part of the Krispy
Kreme Entities to comply with the terms or to fulfill any of the conditions of
this Agreement, or if for any reason Holding shall be unable to perform its
obligations under this Agreement or any condition of the Underwriters'
obligations cannot be fulfilled, Holding agrees to reimburse the Underwriters or
such Underwriters as have so terminated this Agreement with respect to
themselves, severally, for all out-of-pocket expenses (including the reasonable
fees and expenses of their counsel) reasonably incurred by the Underwriters in
connection with this Agreement or the offering contemplated hereunder.

11. This Agreement shall inure to the benefit of and be
binding upon the Krispy Kreme Entities and the Underwriters, including the
Designated Underwriter and the "qualified independent underwriter", each
affiliate of any Underwriter which assists such Underwriter in the distribution
of the Shares, any controlling persons referred to herein and their respective
successors and assigns. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person, firm or corporation any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. No purchaser of Shares from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.

12. Any action by the Underwriters hereunder may be taken by
the Representatives jointly or by Deutsche Bank Securities Inc. alone on behalf
of the Underwriters,

<PAGE> 31

-31-

and any such action taken by the Representatives jointly or by Deutsche Bank
Securities Inc. alone shall be binding upon the Underwriters. All notices and
other communications hereunder shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be given to the
Representatives, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New
York 10260 (telefax: (212) 648-5705); Attention: Syndicate Department. Notices
to any Krispy Kreme Entity shall be given to it at 370 Knollwood Street,
Winston-Salem, NC 27103 (telefax: (336) 733-3790); Attention: President - Krispy
Kreme Doughnuts, Inc.

13. This Agreement may be signed in counterparts, each of
which shall be an original and all of which together shall constitute one and
the same instrument.

14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAWS PROVISIONS THEREOF.

<PAGE> 32

-32-

If the foregoing is in accordance with your understanding,
please sign and return four counterparts hereof.

Very truly yours,

KRISPY KREME DOUGHNUTS, INC.

By:
------------------------------------
Name:
Title:

KRISPY KREME DOUGHNUT CORPORATION

By:
------------------------------------
Name:
Title:

KKDC REORGANIZATION CORPORATION

By:
------------------------------------
Name:
Title:

<PAGE> 33

-33-

Accepted the date first written above:

DEUTSCHE BANK SECURITIES INC.
J.P. MORGAN SECURITIES INC.
DAIN RAUSCHER INCORPORATED
BB&T CAPITAL MARKETS/SCOTT & STRINGFELLOW, INC.
Acting severally on behalf of
themselves and the several
Underwriters listed in
Schedule I hereto.

By: DEUTSCHE BANK SECURITIES INC.

By:
------------------------------------
Name:
Title:

<PAGE> 34

SCHEDULE I

Number of
Underwritten Shares
Underwriter To Be Purchased
- ----------- -------------------

Deutsche Bank Securities Inc...............................
J.P. Morgan Securities Inc.................................
Dain Rauscher Incorporated.................................
BB&T Capital Markets/Scott & Stringfellow, Inc.............
---------
Total 3,000,000
=========

<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 13, 2000

<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-30-2000 JAN-31-1999
<PERIOD-START> FEB-01-1999 FEB-02-1998
<PERIOD-END> JAN-30-2000 JAN-31-1999
<CASH> 3,183,000 4,313,000
<SECURITIES> 0 0
<RECEIVABLES> 21,691,000 16,582,000
<ALLOWANCES> 1,324,000 975,000
<INVENTORY> 9,979,000 9,886,000
<CURRENT-ASSETS> 41,038,000 33,780,000
<PP&E> 93,243,000 82,354,000
<DEPRECIATION> 32,659,000 28,778,000
<TOTAL-ASSETS> 104,958,000 93,312,000
<CURRENT-LIABILITIES> 25,986,000 25,393,000
<BONDS> 22,902,000 21,020,000
0 0
0 0
<COMMON> 4,670,000 4,670,000
<OTHER-SE> (2,547,000) (2,099,000)
<TOTAL-LIABILITY-AND-EQUITY> 104,958,000 93,312,000
<SALES> 220,243,000 180,880,000
<TOTAL-REVENUES> 220,243,000 180,880,000
<CGS> 190,003,000 159,941,000
<TOTAL-COSTS> 209,405,000 184,583,000
<OTHER-EXPENSES> 0 251,000
<LOSS-PROVISION> 0 9,466,000
<INTEREST-EXPENSE> 1,525,000 1,507,000
<INCOME-PRETAX> 9,606,000 (5,279,000)
<INCOME-TAX> 3,650,000 (2,112,000)
<INCOME-CONTINUING> 5,956,000 (3,167,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,956,000 (3,167,000)
<EPS-BASIC> 12.75 (7.68)
<EPS-DILUTED> 12.13 (7.68)

</TABLE>