SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
Commission file number 000-30209
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KRISPY KREME DOUGHNUTS, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1318322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
370 Knollwood Street, Suite 500, Winston-Salem, North Carolina 27103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (336) 725-2981
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at May 22, 2000
-----------------------------
Common Stock at no par value 12,934,957 Shares
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
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Part I. Financial Information ................................................................ 1
Item 1. Consolidated Financial Statements............................................ 1
a) Balance Sheets
As of January 30, 2000 and April 30, 2000 .......................... 1
b) Statements of Operations
For the Three Months Ended May 2, 1999 and April 30, 2000........... 2
c) Statements of Cash Flows
For the Three Months Ended May 2, 1999 and April 30, 2000........... 3
d) Notes to the Consolidated Financial Statements...................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 16
Part II. Other Information..................................................................... 17
Item 1. Legal Proceedings............................................................ 17
Item 2. Changes in Securities and Use of Proceeds.................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................. 17
Signatures............................................................................ 18
Exhibit Index......................................................................... 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Krispy Kreme Doughnuts, Inc.
Consolidated Balance Sheets
(in thousands, except par value amounts)
<TABLE>
<CAPTION>
January 30, April 30,
2000 2000
------------ -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,183 $ 13,119
Short-term investments -- 5,996
Accounts receivable, less allowance for doubtful accounts
of $1,324 (01/30/00) and $1,537 (04/30/00) 17,965 23,199
Accounts receivable, affiliates 1,608 2,234
Other receivables 794 1,599
Inventories 9,979 9,838
Prepaid expenses 3,148 1,077
Income taxes refundable 861 --
Deferred income taxes 3,500 3,832
----------- -------------
Total current assets 41,038 60,894
Property and equipment, net 60,584 64,085
Deferred income taxes 1,398 1,076
Long-term investments -- 17,854
Other assets 1,938 7,126
----------------------------
Total assets $ 104,958 $ 151,035
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 13,106 $ 18,488
Accrued salaries and wages 3,256 1,379
Accrued restructuring expenses 1,115 866
Accrued income taxes -- 791
Accrued expenses 9,709 9,585
Current maturities of long term debt 2,400 --
------------------------------
Total current liabilities 29,586 31,109
Compensation deferred 990 946
Long-term debt 20,502 --
Accrued restructuring expenses 4,259 4,234
Other long-term obligations 1,866 1,724
------------------------------
Total long-term liabilities 27,617 6,904
Minority interest in non-wholly owned subsidiaries -- 564
Shareholders' Equity
Common stock, no par value, 100,000 shares authorized;
issued and outstanding - 0 (01/30/00) and 12,935 (04/30/00) -- 77,199
Common stock, $10 par value, 1,000 shares authorized;
issued and outstanding - 467 (01/30/00) and 0 (04/30/00) 4,670 --
Paid-in capital 10,805 --
Notes receivable, employees (2,547) (2,547)
Nonqualified employee benefit plan asset -- (126)
Nonqualified employee benefit plan liability -- 126
Unrealized holding loss -- (73)
Retained earnings 34,827 37,879
-----------------------------
Total shareholders' equity 47,755 112,458
-----------------------------
Total liabilities and shareholders' equity $ 104,958 $ 151,035
=============================
The accompanying condensed notes are an integral part of these consolidated
financial statements.
</TABLE>
1
<PAGE>
Krispy Kreme Doughnuts, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
May 2, 1999 April 30, 2000
------------------------------
<S> <C> <C>
Total revenues $ 53,328 $ 71,001
Operating expenses 45,724 59,276
General and administrative expenses 3,139 4,435
Depreciation and amortization expenses 1,101 1,595
-------------------------
Income from operations 3,364 5,695
Interest income 26 231
Interest expense (334) (480)
Other expenses -- (380)
Minority interest in consolidated joint ventures -- (113)
-------------------------
Income before income taxes 3,056 4,953
Provision for income taxes 1,163 1,901
-------------------------
Net income $ 1,893 $ 3,052
=========================
Basic earnings per share $ 0.20 $ 0.29
-------------------------
Diluted earnings per share $ 0.20 $ 0.27
-------------------------
The accompanying condensed notes are an integral part of these consolidated
financial statements.
</TABLE>
2
<PAGE>
Krispy Kreme Doughnuts, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three months ended
May 2, 1999 April 30, 2000
----------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,893 $ 3,052
Items not requiring (providing) cash:
Depreciation and amortization 1,101 1,595
Change in assets and liabilities:
Receivables (1,266) (6,353)
Inventories 497 141
Prepaid expenses (323) 2,071
Income taxes, net 893 1,642
Accounts payable (847) 5,382
Accrued restructuring expenses (227) (274)
Accrued expenses 1,207 (2,001)
Deferred compensation and other long-term obligations 206 (186)
----------------------------
Net cash provided by operating activities 3,134 5,069
----------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,180) (5,355)
Minority interest in non-wholly owned subs -- 564
Purchase of investments (23,923)
Increase in other assets (1,603) (5,242)
----------------------------
Net cash used for investing activities (4,783) (33,956)
----------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from stock offering, net -- 65,691
Repayment of long-term debt and revolving line of credit, net -- (22,902)
Capital distribution to existing shareholders -- (7,005)
Issuance of stock to Krispy Kreme Profit-Sharing Stock Ownership Plan 3,039
Net borrowings from revolving line of credit 1,483 --
Cash dividends paid (1,547) --
--------------------------
Net cash provided by (used for) financing activities (64) 38,823
--------------------------
Net increase (decrease) in cash and cash equivalents (1,713) 9,936
Cash and cash equivalents at beginning of period 4,313 3,183
--------------------------
Cash and cash equivalents at end of period $ 2,600 $ 13,119
==========================
The accompanying condensed notes are an integral part of these consolidated
financial statements.
</TABLE>
3
<PAGE>
KRISPY KREME DOUGHNUTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND PURPOSE
Krispy Kreme Doughnuts, Inc. (the "Company") was incorporated in North Carolina
on December 2, 1999 as a wholly-owned subsidiary of Krispy Kreme Doughnut
Corporation ("KKDC"). Pursuant to a plan of merger approved by shareholders on
November 10, 1999, the shareholders of KKDC became shareholders of Krispy Kreme
Doughnuts, Inc. on April 4, 2000. Each shareholder received 20 shares of Krispy
Kreme Doughnuts, Inc. common stock and $15 in cash for each share of KKDC common
stock they held. As a result of the merger, KKDC became a wholly-owned
subsidiary of Krispy Kreme Doughnuts, Inc. Krispy Kreme Doughnuts, Inc. closed a
public offering of its common stock on April 10, 2000 by selling 3,450,000
common shares at a price of $21 per share.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying consolidated financial statements are presented in accordance
with the requirements of Article 10 of Regulation S-X and, consequently, do not
include all the disclosures normally required by generally accepted accounting
principles.
The financial information has been prepared in accordance with the Company's
customary accounting practices and has not been audited. In the opinion of
management, the financial information includes all adjustments consisting of
normal recurring adjustments necessary for a fair presentation of interim
results.
Equity Method of Accounting
---------------------------
Investments in 20- to 50- percent owned affiliates are accounted for by the
equity method of accounting, whereby the investment is carried at cost of
acquisition, plus the Company's equity in undistributed earnings or losses since
acquisition.
Marketable Securities
---------------------
Marketable securities consist of money market funds, United States Treasury
notes and mortgage-backed government securities. Marketable securities are
stated at market value as determined by the most recently traded price of each
security at the balance sheet date. All marketable securities are defined as
trading securities or available-for-sale securities under the provisions of
Statement of Financial Accounting Standards No. ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities".
Management determines the appropriate classification of its investments in
marketable securities at the time of the purchase and reevaluates such
determination at each balance sheet date. As of April 30, 2000, all marketable
securities are classified as available-for-sale. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity. The cost of
investments sold is determined on the specific identification or the first-in,
first-out method.
NOTE 3: INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories
consist of the following:
<TABLE>
<CAPTION>
DISTRIBUTION EQUIPMENT MIX COMPANY
(In thousands) CENTER DEPARTMENT DEPARTMENT STORES TOTAL
-------------- ------------ ---------- ---------- ------- -----
JANUARY 30, 2000
Raw materials $ -- $2,821 $ 444 $1,335 $4,600
Work in progress -- 57 -- -- 57
Finished goods 321 1,298 39 -- 1,658
Purchased merchandise 3,129 -- -- 498 3,627
Manufacturing supplies -- -- 37 -- 37
------ ------ ------ ------ ------
Totals $3,450 $4,176 $ 520 $1,833 $9,979
====== ====== ====== ====== ======
APRIL 30, 2000
<S> <C> <C> <C> <C> <C>
Raw materials $ -- $2,579 $ 482 $1,455 $4,516
Work in progress -- 39 -- -- 39
Finished goods 398 790 13 -- 1,201
Purchased merchandise 3,499 -- -- 547 4,046
Manufacturing supplies -- -- 36 -- 36
------ ------ ------ ------ ------
Totals $3,897 $3,408 $ 531 $2,002 $9,838
====== ====== ====== ====== ======
</TABLE>
4
<PAGE>
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(In thousands) JANUARY 30, 2000 APRIL 30, 2000
---------------- --------------
Land $11,144 $11,144
Buildings 24,606 26,131
Machinery and equipment 47,701 50,555
Leasehold improvements 9,627 9,809
Construction in progress 165 667
-------- -------
93,243 98,306
Less: accumulated depreciation 32,659 34,221
-------- -------
Property and equipment, net $60,584 $64,085
======= =======
NOTE 5: EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average number of
common shares outstanding during the period. The computation of diluted earnings
per share reflects the potential dilution that would occur if stock options were
exercised. The treasury stock method is used to calculate dilutive shares, which
reduces the gross number of dilutive shares by the number of shares purchasable
from the proceeds of the options assumed to be exercised.
The following table shows the computation of the number of shares outstanding
(in thousands):
Three Months Ended
--------------------------------
May 2, 1999 April 30, 2000
------------ --------------
Basic shares 9,340 10,362
Effect of dilutive
securities:
Stock options 62 889
----- ------
Diluted shares 9,402 11,251
===== ======
5
<PAGE>
NOTE 6: BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
(In thousands) May 2, 1999 April 30, 2000
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<S> <C> <C>
REVENUES:
Company Store Operations $ 40,577 $ 50,956
Franchise Operations 1,062 2,000
Support Operations 32,683 47,053
Intercompany sales eliminations (20,994) (29,008)
-------- --------
Total revenues $ 53,328 $ 71,001
======== ========
OPERATING INCOME (LOSS):
Company Store Operations $ 5,037 $ 6,660
Franchise Operations 126 1,000
Support Operations 1,628 2,737
Unallocated general and administrative expenses (3,427) (4,702)
-------- --------
Total operating income $ 3,364 $ 5,695
======== ========
DEPRECIATION AND AMORTIZATION EXPENSES:
Company Store Operations $ 744 $ 1,241
Franchise Operations 12 18
Support Operations 56 69
Corporate administration 289 267
-------- --------
Total depreciation and amortization expenses $ 1,101 $ 1,595
======== ========
</TABLE>
NOTE 7: OTHER EVENTS
On January 31, 2000, the Company repurchased the New York City market from an
area developer for approximately $6.9 million. The Company invested an
additional $300,000 in property and equipment. Subsequently, on April 17, 2000,
the Company sold 77.67% of the New York City market for $5.6 million in exchange
for cash and notes receivable. The investment in this joint venture is accounted
for using the equity method and is recorded in other assets on the Consolidated
Balance Sheet.
NOTE 8: JOINT VENTURES
On March 22, 2000, the Company entered into a joint venture to develop the
Northern California market. The Company invested $2,060,000 for a 59% interest.
The financial statements of this joint venture are consolidated in the results
in the Company.
NOTE 9: LEGAL CONTINGENCIES
On March 9, 2000, a lawsuit was filed against the Company, a member of
management and Golden Gate Doughnuts, LLC, a franchisee of the Company, in
Superior Court in the state of California. The Plantiffs 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.
6
<PAGE>
NOTE 10: COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Krispy Kreme Krispy Kreme
Doughnut Corporation Doughnuts, Inc.
--------------------- ---------------
Current Additional Notes
Comprehensive Common Paid-In Common Receivable
Income Stock Capital Stock Employees
-------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 30, 2000 $ -- $ 4,670 $ 10,805 $ -- $ (2,547)
Proceeds from public offering $ 65,690
Conversion of Krispy Kreme
Doughnut Corporation shares
to Krispy Kreme
Doughnuts, Inc. shares (4,670) (10,805) 15,475
Cash distribution to shareholders (7,005)
Issuance of shares to employee
stock ownership plan 3,039
Net income for the three
months ended April 30, 2000 $ 3,052
Contribution to the nonqualified
employee benefit plan
Liability under the nonqualified
employee benefit plan
Unrealized holding loss (73)
--------- ---------- --------- -------- ---------
Balance at April 30, 2000 $ 2,979 $ -- $ -- $ 77,199 $ (2,547)
======== ========== ========= ======== =========
<CAPTION>
Nonqualified Nonqualified Accumulated
Employee Employee Other
Benefit Benefit Retained Comprehensive
Plan Assets Plan Liability Earnings Income Total
----------- -------------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance at January 30, 2000 $ -- $ -- $ 34,827 $ -- $ 47,755
Proceeds from public offering 65,690
Conversion of Krispy Kreme
Doughnut Corporation shares
to Krispy Kreme
Doughnuts, Inc. shares --
Cash distribution to shareholders (7,005)
Issuance of shares to employee
stock ownership plan 3,039
Net income for the three
months ended April 30, 2000 3,052 3,052
Contribution to the nonqualified
employee benefit plan (126) 126
Liability under the nonqualified
employee benefit plan 126 126
Unrealized holding loss (73) (73)
------- ------- -------- ------- --------
Balance at April 30, 2000 $ (126) $ 126 $ 37,879 $ (73) $112,458
======= ======== ======== ======= =======
</TABLE>
7
<PAGE>
NOTE 11: RESTRUCTURING
Lease Accrued Total
Liabilities Expenses Accrual
-------------- ----------- -----------
Balance at January 30, 2000 $ 4,782 $ 592 $ 5,374
Reductions (274) - (274)
-------------- ----------- -----------
Balance at April 30, 2000 $ 4,508 $ 592 $ 5,100
-------------- ----------- -----------
Reductions in Lease Liabilities represent ongoing lease payments on remaining
lease obligations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion may contain certain forward-looking statements that are
beyond the control of the Company. Actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ include, but are not limited to: the
Company's ability to continue and manage growth; delays in store openings;
quality of franchise store operations; price and availability of raw materials
needed to produce doughnut mixes and other ingredients; changes in customer
preferences and perceptions; risks associated with competition; risks associated
with fluctuations in operating and quarterly results; compliance with government
regulations; and other factors discussed in more detail under "Risk Factors" in
the Company's Prospectus dated April 4, 2000 and filed with the Securities and
Exchange Commission.
COMPANY OVERVIEW AND INDUSTRY OUTLOOK
Our principal business, which began in 1937, is owning and franchising Krispy
Kreme doughnut stores where we make and sell over 20 varieties of premium
quality doughnuts, including our Hot Original Glazed. Each of our stores is a
doughnut factory with the capacity to produce from 2,400 dozen to over 6,000
dozen doughnuts daily. Consequently, each store has significant fixed or
semi-fixed costs, and margins and profitability are significantly impacted by
doughnut production volume and sales. Our doughnut stores are versatile in that
most can support multiple sales channels to more fully utilize production
capacity. These sales channels are comprised of:
o 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.
o 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:
o Maintain the consistency and quality of our products
throughout our system
o Utilize volume buying power which helps lower the cost of
supplies to each of our stores
o 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 April 30, 2000, there
were a total of 151 Krispy Kreme stores nationwide consisting of 57
company-owned and 94 franchised stores. Throughout the remainder of fiscal 2001,
we anticipate opening approximately 13 additional new stores under existing
agreements, all of which are expected to be franchise stores. In the first
quarter, we announced agreements with five new area developers who will open
stores in 13 new markets.
9
<PAGE>
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.
O 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 filing 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.
O 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.
O 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.
O FRANCHISE OPERATIONS. Represents the results of our franchise
program. We have two franchise programs: (1) the associate
program, which is our original franchising program developed
in the 1940s, and (2) the area developer program, which was
developed in the mid-1990s. Associates pay royalties of 3.0%
of on-premises sales and 1.0% of all other sales, with the
exception of private label sales, for which they pay no
royalties. Area developers pay royalties of 4.5% of all sales,
contribute 1.0% of all sales to our national advertising fund
and pay franchise fees ranging from $20,000 to $40,000 per
store. Expenses for this business segment include costs
incurred to recruit new franchisees and to monitor and aid in
the performance of these stores and direct general and
administrative expenses.
O SUPPORT OPERATIONS. Represents the results of our Support
Operations business unit, located in Winston-Salem, North
Carolina. This business unit buys ingredients used to produce
doughnut mixes and manufactures doughnutmaking equipment which
all of our stores are required to purchase. Additionally, this
business unit purchases and sells essentially all supplies
necessary to operate a Krispy Kreme store, including all food
ingredients, juices, Krispy Kreme coffee, signage, display
cases, uniforms and other items. Generally, shipments are made
to each of our stores on a weekly basis by common carrier. All
intercompany transactions between Support Operations and
Company Store Operations have been eliminated in
consolidation. Expenses for this business unit include all
expenses incurred at the manufacturing and distribution level
along with direct general and administrative expenses.
10
<PAGE>
OTHER. Includes a discussion of significant line items not discussed in the
overview or segment discussions, including general and administrative expenses,
depreciation and amortization expenses, interest income, interest expense, net,
other expenses and the provision for income taxes.
The table below shows our operating results expressed as a percentage of total
revenues. Certain operating data are also shown for the same periods.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
May 2, April 30,
1999 2000
------ ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................................... 100.0% 100.0%
Operating expenses....................................... 85.7 83.5
General and administrative expenses...................... 5.9 6.2
Depreciation and amortization expenses................... 2.1 2.2
-------- --------
Income from operations................................... 6.3 8.1
Interest income.......................................... -- 0.3
Interest expense......................................... (0.6) (0.7)
Other expenses........................................... -- (0.5)
Minority interest in consolidated joint ventures......... -- (0.2)
-------- --------
Income before income taxes............................... 5.7 7.0
Provision for income taxes............................... 2.2 2.7
-------- --------
Net income............................................ 3.5% 4.3%
======== ========
DOLLARS IN THOUSANDS
--------------------
OPERATING DATA:
Systemwide sales......................................... $ 73,137 $ 103,347
Increase in comparable store sales:
Company-owned......................................... 23.3%
Systemwide............................................ 19.1%
</TABLE>
The following table shows business segment revenues expressed as a percentage of
total revenues and business segment operating expenses expressed as a percentage
of applicable business segment revenues. Operating expenses exclude depreciation
and amortization expenses.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
May 2, April 30,
1999 2000
------ ---------
<S> <C> <C>
REVENUES BY BUSINESS SEGMENT:
Company Store Operations..................................... 76.1% 71.8%
Franchise Operations......................................... 2.0 2.8
Support Operations........................................... 21.9 25.4
----- -----
Total revenues............................................ 100.0% 100.0%
===== =====
OPERATING EXPENSES BY BUSINESS SEGMENT:
Company Store Operations..................................... 85.8% 84.5%
Franchise Operations......................................... 87.0% 49.1%
Support Operations........................................... 85.6% 84.4%
Total operating expenses..................................... 91.6% 89.7%
</TABLE>
11
<PAGE>
THREE MONTHS ENDED APRIL 30, 2000 COMPARED WITH THREE MONTHS ENDED MAY 2, 1999
OVERVIEW
Systemwide sales for the quarter increased 41.3% to $103.3 million compared to
$73.1 million in the first quarter of the prior year. The increase was driven by
an increase of 25.6% in company store sales which increased to $51 million and
an increase of 60.9% in franchise store sales which increased to $52.3 million.
During the quarter, the Company opened 8 franchise stores and one store in
Northern California. One company store and one franchise store were closed,
bringing the total number of stores to 151 at the end of the quarter. Of those,
94 are franchise stores and 57 are company owned. We believe increased brand
awareness contributed significantly to the 19% increase in our systemwide
comparable store sales.
Total company revenues increased 33.1% to $71 million in the first quarter of
fiscal 2001 compared with $53.3 million in the first quarter of the prior fiscal
year. This increase was comprised of Company Store Operations revenue increases
of 25.6% to $51.0 million, Franchise Operations revenue increases of 88.3% to
$2.0 million and Support Operations revenue increases of 54.4% to $18.0 million.
Net income for the quarter was $3.1 million versus $1.9 million a year ago,
representing an increase of 61.2%. Diluted earnings per share were $.27, an
increase of 35% over the first quarter of the prior year.
COMPANY STORE OPERATIONS
COMPANY STORE OPERATIONS REVENUES. Company Store Operations revenues increased
to $51.0 million in the first quarter of fiscal 2001 from $40.6 million in the
first quarter of fiscal 2000, an increase of 25.6%. Comparable store sales
increased by 23.3%. 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 $3.3 million and off-premises sales increased
approximately $7.1 million. On-premises sales grew principally as a result of
more customer visits, an increase in brand awareness and our national store
expansion. Additionally, there was a 6% retail price increase implemented during
the quarter. 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 to the addition of both convenience store
and grocery store outlets.
COMPANY STORE OPERATIONS OPERATING EXPENSES. Company Store Operations operating
expenses increased to $43.1 million in the first quarter of fiscal 2001 from
$34.8 million in the same quarter of fiscal 2000, an increase of 23.7%. Company
Store Operations operating expenses as a percentage of Company Store Operations
revenues were 84.5% in first quarter of fiscal 2001 compared with 85.8% in the
same quarter of the prior year. The decrease in Company Store Operations
operating expenses as a percentage of revenues was due to increased operating
efficiencies resulting from increased sales levels at our stores. These
additional sales have utilized excess production capacity thereby enhancing the
stores' profitability. These margin improvements were offset by increased fuel
costs.
We constantly evaluate our store base, not only with respect to our stores'
financial and operational performance, but also with respect to alignment with
our brand image and how well each store meets our customers' needs. As a result
of this review, we make provisions to cover closing or impairment costs for
stores that perform poorly, and for older stores that need to be closed and
relocated. No provisions were made during the first quarter of fiscal 2001.
FRANCHISE OPERATIONS
FRANCHISE OPERATIONS REVENUES. Franchise Operations revenues increased to $2.0
million in the first quarter of fiscal 2001 from $1.1 million in the first
quarter of the prior year, an increase of 88.3%. The growth in revenue was
primarily due to the opening of 8 franchise stores in the first quarter of
fiscal 2001 and the impact of 19 franchise stores opened in fiscal 2000 being
open for the full first quarter of fiscal 2001.
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FRANCHISE OPERATIONS OPERATING EXPENSES. Franchise Operations operating expenses
increased to $1.0 million in the first quarter of fiscal 2001 from $0.9 million
in the same quarter of the prior year, an increase of 6.3%. Franchise Operations
operating expenses as a percentage of Franchise Operations revenues were 49.1%
in first quarter of the current year compared with 87.0% in first quarter of the
prior year. 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 $18.0 million in the first quarter of fiscal 2001 from $11.7
million in the same quarter of fiscal 2000, an increase of 54.4%. The primary
reason for the increase in revenues was the opening of eight new franchise
stores in the first quarter of fiscal 2001, the full-quarter impact of stores
opened in fiscal 2000 and comparable store sales increases. Increased doughnut
sales through both the on-premises and off-premises sales channels by franchise
stores translated into increased revenues for Support Operations from sales of
mixes, sugar, shortening and other supplies. Also, each of these new stores is
required to purchase doughnutmaking equipment and other peripheral equipment
from Support Operations, thereby enhancing Support Operations sales.
SUPPORT OPERATIONS OPERATING EXPENSES. Support Operations operating expenses
increased to $15.2 million in first quarter of fiscal 2001 from $10.0 million in
first quarter of fiscal 2000, an increase of 52.3%. Support Operations operating
expenses as a percentage of Support Operations revenues were 84.4% in first
quarter of the current year compared with 85.6% in first quarter of the prior
year. 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. Increased fuel costs, as well as startup costs associated with the
California distribution center, offset the decrease in operating expenses as a
percentage of revenue.
OTHER
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $4.4 million in the first quarter of fiscal 2001 from $3.1 million
in the first quarter of fiscal 2000, an increase of 41.3%. General and
administrative expenses as a percentage of total revenues for the first quarter
were 6.2% in fiscal 2001 compared with 5.9% in fiscal 2000. 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, as well as increased professional services and costs associated
with being a public company.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
increased to $1.6 million in the first quarter of fiscal 2001 from $1.1 million
in the first quarter of the prior year, an increase of 44.9%. Depreciation and
amortization expenses as a percentage of total revenues for the first quarter
were 2.2% in fiscal 2001 compared with 2.1% in fiscal 2000. Depreciation and
amortization expenses increased due to capital asset additions.
INTEREST INCOME. Interest income increased in the first quarter of fiscal 2001
as a result of the investment of proceeds from our initial public offering.
Proceeds from the public offering were received in mid-April. Approximately, $28
million was invested in various government securities and short-term commercial
paper instruments at the end of the first quarter resulting in interest income
of $231,000 for the quarter. There were no investments of this nature during the
first quarter of fiscal 2000.
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INTEREST EXPENSE. Interest expense increased slightly in first quarter of fiscal
2001 over the same quarter of the prior year. Borrowing amounts were higher in
the first quarter of fiscal 2001 compared to the same period in the prior year
due to increased working capital requirements, as well as investments in joint
ventures. Additionally, interest rates were higher in the first quarter of
fiscal 2001 compared to the first quarter of fiscal 2000. We paid off
substantially all of our debt in mid-April after the completion of our initial
public offering.
OTHER. Other expenses consist of operating results incurred in conjunction with
refranchising the New York market, including the operating results of that
market for approximately 11 weeks of the quarter until the market was sold to
the new area developer on April 17, 2000. During this period, four of the stores
were closed for remodeling for approximately 15 weeks.
PROVISION FOR INCOME TAXES. The provision for income taxes is based on the
effective tax rate applied to the respective period's pre-tax income. The
provision for income taxes was $1.9 million in the first quarter of fiscal 2001
representing a 38.4% effective rate compared to $1.2 million, or 38.1%, in the
first quarter of the prior year.
Historically, we have experienced seasonal variability in our quarterly
operating results, with higher profits per store in the first and third quarters
than in the second and fourth quarters. The seasonal nature of our operating
results is expected to continue.
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 first quarter of fiscal 2001 primarily
through cash flow generated from operations, but also through borrowings under
our line of credit and term loan facility and proceeds from the stock offering.
Net cash flow from operations was $5.1 million in first quarter of fiscal 2001
and $3.1 million in first quarter of fiscal 2000. Operating cash flow has
benefited from an improvement in our net income. Operating cash flow has been
negatively impacted by additional investments in working capital, primarily
accounts receivable, 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 $33.9 million in first quarter of
fiscal 2001 and $4.8 million in first quarter of the prior year. Investing
activities primarily consist of investment of approximately $28 million of the
proceeds from the initial public offering, as well as 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 and development of new stores.
Net cash for investing activities was also used for investments in joint
ventures.
Net cash provided by (used for) financing activities was $38.8 million in the
first quarter of fiscal 2001 and ($64,000) in first quarter of fiscal 2000.
Financing activities in the first quarter of fiscal 2001 consisted of the
completion of our initial public stock offering; repayment of borrowings;
capital distribution to our existing shareholders; and issuance of stock to the
company's stock ownership plan. Our financing activities in first quarter of
fiscal 2000 consisted primarily of borrowings under our line of credit and
payment of cash dividends declared in fiscal 1999.
In the next five years, we will use cash primarily for the following activities:
o Remodeling and relocation of selected older company-owned
stores
o Additional mix production capacity to support expansion
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o Joint venture investments in area developer stores
o 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 the initial public 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. 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:
o Slowing our plans to remodel and relocate older company-owned
stores
o Reducing the number and amount of joint venture investments in
area developer stores
o 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.
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. 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.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company maintains investment portfolio holdings of various issuers, types
and maturities. These securities are classified as available-for-sale and are
recorded on the balance sheet at fair value, with unrealized gains or losses
reported as a separate component in the Shareholders' Equity section of the
balance sheet. The Company does not hedge its interest rate exposure.
We have no derivative financial interests or derivative commodity instruments in
our cash or cash equivalents.
We purchase certain commodities such as flour, sugar and soybean oil. These
commodities are usually purchased under long-term purchase agreements, generally
one to three years, at a fixed price. We are subject to market risk in that the
current market price of any commodity item may be below our contractual price.
We do not use financial instruments to hedge commodity prices.
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Part II. Other Information
Item 1. Legal Proceedings
------------------
On March 9, 2000, a lawsuit was filed against the Company, a member of
management, a franchisee of the Company and other persons in Superior
Court in the state of California. (Kevin L. Boylan and Bruce Newberg v.
Golden Gate Doughnuts, LLC, Krispy Kreme 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 the Company and other
defendants breached an agreement regarding plaintiffs' participation in
a franchise operation in Northern California. The complaint, which
asserts breach of contract, promissory estoppel, intentional
interference with contract and business relations and breach of
fiduciary duty claims, seeks unspecified money damages in an amount to
be proven at trial, but not less than $10 million. The complaint also
seeks punitive damages. Although the Company had been negotiating with
the plaintiffs with respect to their participation in the Northern
California franchise, numerous material differences regarding the terms
and conditions of their participation were never resolved. As a result,
no oral agreement was ever reached and no written agreement was
executed. Because the case has only recently been filed, it is
difficult to predict its outcome. However, based on the information
presently available to the Company, and preliminary review of the
allegations and relevant facts, the Company believes the complaint has
no merit, will not have a material adverse effect on its consolidated
financial statements and the Company will consequently vigorously
defend the lawsuit. No accrual for loss (if any) has been provided in
the accompanying financial statements.
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.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
On April 10, 2000, the Company closed its initial public offering by
selling 3,450,000 shares of its common stock, no par value, at a price
of $21 per share, raising $65.7 million after expenses. See the
Company's Registration Statement on Form S-1 (SEC File No. 333-92909),
declared effective on April 3, 2000. The offering commenced on April 4,
2000 and all securities offered have been sold. The Company registered
a proposed maximum aggregate offering price of $74.75 million and the
actual aggregate offering price sold was $72.45 million. Offering
expenses and underwriting discounts amounted to approximately $6.75
million. The offering was managed by Deutsche Banc Alex. Brown, J.P.
Morgan & Co., Dain Rausher Wessels and BB&T Capital Markets. Proceeds
from the offering were used for repayment of debt ($30.7 million) and
capital distribution to existing shareholders as part of a pre-offering
corporate reorganization ($7.0 million). The remainder of the proceeds
will be used for remodeling and relocation of selected older
company-owned stores, as well as general corporate purposes, including
working capital needs. Currently, these funds are invested in various
government securities and short-term commercial paper instruments.
Item 6. Exhibits and Reports On Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description
------- -----------
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - There were no Form 8-K filings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KRISPY KREME DOUGHNUTS, INC.
(Registrant)
By: /s/ Scott A. Livengood
---------------------------
Scott A. Livengood
Chairman of the Board, President,
and Chief Executive Officer
(principal executive officer)
By: /s/ J. Paul Breitbach
---------------------------
J. Paul Breitbach
Executive Vice President, Finance,
Administration and Support
Operations (principal financial and
accounting officer)
June 9, 2000
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EXHIBIT INDEX
Exhibit No. Description
---------- -----------
27.1 Financial Data Schedule
