Krispy Kreme Doughnuts, Inc.

Consolidated Balance Sheets

(in thousands, except par value amounts)

The accompanying condensed notes are an integral part of these consolidated financial statements.

Krispy Kreme Doughnuts, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

The accompanying condensed notes are an integral part of these consolidated financial statements.

Krispy Kreme Doughnuts, Inc.

Consolidated Statements of Cash Flows

(in thousands)

The accompanying condensed notes are an integral part of these consolidated financial statements.

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.

Investments in 20- to 49- 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. Investments in 50 percent owned or greater affiliates are accounted for by the consolidation method of accounting whereby the portion not owned by the Company is shown as a minority interest in consolidated subsidiary companies.

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 July 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.

Inventories are stated at the lower of average cost or market. Inventories consist of the following:

The following table shows the computation of the number of shares outstanding (in thousands):

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:  Legal Contingencies

On March 9, 2000, a lawsuit was filed against the Company, a member of management, 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.

 
Reductions in Lease Liabilities represent ongoing lease payments on remaining lease obligations.

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.

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:

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:

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 July 30, 2000, there were a total of 154 Krispy Kreme stores nationwide consisting of 56 company-owned and 98 franchised stores. Throughout the remainder of fiscal 2001, we anticipate opening approximately 14 additional new stores under existing agreements, most of which are expected to be franchise stores.

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.

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.

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.

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.

Systemwide sales for the quarter increased 39.7% to $107.7 million compared to $77.1 million in the second quarter of the prior year. The increase was driven by an increase of 31.9% in company store sales which increased to $51.5 million and an increase of 47.8% in franchise store sales which increased to $56.2 million. During the quarter, the Company opened 5 franchise stores and one commissary in Nashville, Tennessee. Two company stores and one franchise store were closed, bringing the total number of stores to 154 at the end of the quarter. Of those, 98 are franchise stores and 56 are company owned. We believe increased brand awareness and increased off-premises sales contributed significantly to the 19.4% increase in our systemwide comparable store sales.

Total company revenues increased 36.3% to $70 million in the second quarter of fiscal 2001 compared with $51.4 million in the second quarter of the prior fiscal year. This increase was comprised of Company Store Operations revenue increases of 31.9% to $51.5 million, Franchise Operations revenue increases of 84.3% to $2.3 million and Support Operations revenue increases of 46.4% to $16.2 million. Net income for the quarter was $3.6 million versus $1.0 million a year ago, representing an increase of 265.5%. Diluted earnings per share were $.25, an increase of 150.0% over the second quarter of the prior year.

Company Store Operations Revenues. Company Store Operations revenues increased to $51.5 million in the second quarter of fiscal 2001 from $39.0 million in the second quarter of fiscal 2000, an increase of 31.9%. Comparable store sales increased by 24.4%. 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 $1.7 million and off-premises sales increased approximately $8.5 million. On-premises sales grew principally as a result of more customer visits, an increase in brand awareness and our national store expansion. Additionally, a 6% retail price increase was implemented during the first quarter of fiscal 2001. Our company stores continued to benefit from an increase in the number of outlets 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 $43.6 million in the second quarter of fiscal 2001 from $33.8 million in the same quarter of fiscal 2000, an increase of 28.8%. Company Store Operations operating expenses as a percentage of Company Store Operations revenues were 84.7% in second quarter of fiscal 2001 compared with 86.7% 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. The margin on off-premises sales benefited from the implementation of a new route management system, a computer-assisted ordering system which is designed to optimize the sale of packaged doughnuts in each outlet by minimizing stockouts. These margin improvements were offset by increased fuel costs and increased group and casualty insurance 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 second quarter of fiscal 2001.

Franchise Operations Revenues. Franchise Operations revenues increased to $2.3 million in the second quarter of fiscal 2001 from $1.2 million in the second quarter of the prior year, an increase of 84.3%. The growth in revenue was primarily due to the opening of five franchise stores in the second quarter of fiscal 2001, as well as the opening of eight 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 second quarter of fiscal 2001.

Franchise Operations Operating Expenses. Franchise Operations operating expenses remained unchanged in the second quarter of fiscal 2001 from $0.8 million in the same quarter of the prior year. As a percentage of Franchise Operations revenues, franchise operating expenses were 36.1% in the second quarter of the current year compared with 67.1% in the second quarter of the prior year. The decrease in Franchise Operations operating expenses as a percentage of revenues reflects the continued growth in our franchise system sales with a minimal increase in related operating expenses. In prior years, we hired and trained personnel to oversee the expansion of our franchise concept across the country. In addition to our management training program, they received field training primarily consisting of working with and learning from existing personnel who were qualified to oversee store operations. As these personnel successfully completed their training, we have been able to open additional stores without incurring significant incremental personnel costs.

Support Operations Revenues. Support Operations sales to franchise stores increased to $16.2 million in the second quarter of fiscal 2001 from $11.1 million in the same quarter of fiscal 2000, an increase of 46.4%. The primary reason for the increase in revenues was the opening of five new franchise stores and one new company-owned commissary in the second quarter of fiscal 2001; 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 $13.8 million in second quarter of fiscal 2001 from $9.7 million in second quarter of fiscal 2000, an increase of 42.6%. Support Operations operating expenses as a percentage of Support Operations revenues were 85.2% in second quarter of the current year compared with 87.5% in second 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. Continued stability in our key ingredient costs also contributed. Higher transportation costs due primarily to fuel cost increases offset the decrease in operating expenses as a percentage of revenue.

General And Administrative Expenses. General and administrative expenses increased to $4.6 million in the second quarter of fiscal 2001 from $3.9 million in the second quarter of fiscal 2000, an increase of 16.1%. General and administrative expenses as a percentage of total revenues for the second quarter were 6.5% in fiscal 2001 compared with 7.7% in fiscal 2000. The strong sales growth in the quarter reduced these expenses as a percentage of revenues. The dollar growth in general and administrative expenses is due to increased personnel costs needed to support our national expansion.

Depreciation And Amortization Expenses. Depreciation and amortization expenses increased to $1.6 million in the second quarter of fiscal 2001 from $1.2 million in the second quarter of the prior year, an increase of 36.4%. Depreciation and amortization expenses as a percentage of total revenues for the second quarter were 2.3% in fiscal 2001 compared with 2.2% in fiscal 2000. Depreciation and amortization expenses increased due to capital asset additions.

Interest Income. Interest income increased in the second 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, $27 million was invested in various government securities, short-term commercial paper instruments, and corporate bonds at the end of the second quarter resulting in interest income of $547,000 for the quarter. There were no investments of this nature during the second quarter of fiscal 2000.

Interest Expense. Interest expense decreased significantly in second quarter of fiscal 2001 over the same quarter of the prior year. This decrease is a direct result of paying off substantially all our debt in mid-April after the completion of our intial public offering.

Equity in joint ventures and minority interest in consolidated joint ventures. These expenses consist of the Company's share of operating results associated with the Company's investments in joint ventures, as well as the elimination of a minority interest in a consolidated joint venture.

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 $2.2 million in the second quarter of fiscal 2001 representing a 38.0% effective rate compared to $599,000, or 38.0%, in the second 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.

Systemwide sales for the six months increased 40.5% to $211.1 million compared to $150.2 million in the same period of the prior year. The increase was driven by an increase of 28.7% in company store sales which increased to $102.4 million and an increase of 53.8% in franchise store sales which increased to $108.6 million. During the first six months, the Company opened 13 franchise stores, one store in Northern California, and one commissary in Nashville, Tennessee. Three company stores and two franchise store were closed, bringing the total number of stores to 154 at the end of the six months. We believe increased brand awareness and increased off-premises sales contributed significantly to the 19.2% increase in our systemwide comparable store sales.

Total company revenues increased 34.7% to $141.0 million in the first six months of fiscal 2001 compared with $104.7 million in the first six months of the prior fiscal year. This increase was comprised of Company Store Operations revenue increases of 28.7% to $102.4 million, Franchise Operations revenue increases of 86.1% to $4.3 million and Support Operations revenue increases of 50.5% to $34.3 million. Net income for the first six months was $6.6 million versus $2.9 million a year ago, representing an increase of 130.8%. Diluted earnings per share were $.52, an increase of 73.3% over the same period of the prior year.

Company Store Operations Revenues. Company Store Operations revenues increased to $102.4 million in the first six months of fiscal 2001 from $79.6 million in the first six months of fiscal 2000, an increase of 28.7%. Comparable store sales increased by 23.8%. 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 $3.5 million and off-premises sales increased approximately $15.6 million. On-premises sales grew principally as a result of more customer visits, an increase in brand awareness and our national store expansion. Additionally, a 6% retail price increase was implemented during the first quarter of fiscal 2001. Our company stores continued to benefit from an increase in the number of outlets 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 $86.6 million in the first six months of fiscal 2001 from $68.6 million in the same period of fiscal 2000, an increase of 26.2%. Company Store Operations operating expenses as a percentage of Company Store Operations revenues were 84.6% in first six months of fiscal 2001 compared with 86.2% in the same period 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. The margin on off-premises sales benefited from the implementation of a new route management system during the second quarter of fiscal 2001. This system is a computer-assisted ordering system designed to optimize the sale of packaged doughnuts in each outlet by minimizing stockouts. These margin improvements were offset by increased fuel costs and increased group and casualty insurance 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 six months of fiscal 2001.

Franchise Operations Revenues. Franchise Operations revenues increased to $4.3 million in the first six months of fiscal 2001 from $2.3 million in the first six months of the prior year, an increase of 86.1%. The growth in revenue was primarily due to the opening of 13 franchise stores in the first six months of fiscal 2001 and the impact of 19 franchise stores opened in fiscal 2000 being open for the entire first six months of fiscal 2001.

Franchise Operations Operating Expenses. Franchise Operations operating expenses remained unchanged in the first six months of fiscal 2001 from $1.8 million in the same period of the prior year. As a percentage of Franchise Operations revenues, franchise operating expenses were 42.1% in the first six months of the current year compared with 76.3% in the second period of the prior year. The decrease in Franchise Operations operating expenses as a percentage of revenues reflects the continued growth in our franchise system sales with a minimal increase in related operating expenses. In prior years, we hired and trained personnel to oversee the expansion of our franchise concept across the country. In addition to our management training program, they received field training primarily consisting of working with and learning from existing personnel who were qualified to oversee store operations. As our personnel successfully completed their training, we have been able to open additional stores without incurring significant incremental personnel costs.

Support Operations Revenues. Support Operations sales to franchise stores increased to $34.3 million in the first six months of fiscal 2001 from $22.8 million in the same period of fiscal 2000, an increase of 50.5%. The primary reason for the increase in revenues was the opening of 13 new franchise stores, one store in Northern California, one new company-owned commissary in the first six months of fiscal 2001, the full-period 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 $29.1 million in the first six months of fiscal 2001 from $19.7 million in same period of fiscal 2000, an increase of 47.5%. Support Operations operating expenses as a percentage of Support Operations revenues were 84.8% in the first six months of the current year compared with 86.5% in the first six months 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. Continued stability in our key ingredient costs also contributed. Higher transportation costs due primarily to fuel cost increases offset the decrease in operating expenses as a percentage of revenue.

General And Administrative Expenses. General and administrative expenses increased to $9.0 million in the first six months of fiscal 2001 from $7.1 million in the first six months of fiscal 2000, an increase of 27.3%. General and administrative expenses as a percentage of total revenues for the second quarter were 6.4% in fiscal 2001 compared with 6.8% in fiscal 2000. The decrease was primarily due to the revenue growth during the period. The dollar growth in general and administrative expense is due to increased personnel costs needed to support our national expansion.

Depreciation And Amortization Expenses. Depreciation and amortization expenses increased to $3.2 million in the first six months of fiscal 2001 from $2.3 million in the same period of the prior year, an increase of 40.5%. Depreciation and amortization expenses as a percentage of total revenues for the first six months were 2.3% in fiscal 2001 compared with 2.2% in fiscal 2000. Depreciation and amortization expenses increased due to capital asset additions.

Interest Income. Interest income increased in the first six months 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, $27 million was invested in various government securities, short-term commercial paper instruments, and corporate bonds at the end of the period resulting in interest income of $778,000 for the first six months. There were no investments of this nature during the same period of fiscal 2000.

Interest Expense. Interest expense of $520,000 in the first six months of fiscal 2001 decreased 25.7% from $700,000 in the same period of fiscal 2000. This decrease is a direct result of paying off substantially all of our debt in mid-April after the completion of our initial public offering.

Equity in joint ventures and minority interest in consolidated joint ventures. These expenses consist of the Company's share of operating results associated with the Company's investments in joint ventures, as well as the elimination of a minority interest in a consolidated joint venture.

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 $4.1 million in the first six months of fiscal 2001 representing a 38.2% effective rate compared to $1.8 million, or 38.0%, in the same period of the prior year.

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 the first six months of fiscal 2001 primarily through cash flow generated from operations, as well as proceeds from the stock offering.

Net cash flow from operations was $11.4 million in the first six months of fiscal 2001 and $3.0 million in first six months 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 $41.2 million in first six months of fiscal 2001 and $6.7 million in first six months of the prior year. Investing activities primarily consist of investment of approximately $27 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, 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 financing activities was $38.8 million in the first six months of fiscal 2001 and $1.4 million in first six months of fiscal 2000. Financing activities in the first six months 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 six months 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:

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:

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.

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.

In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities," effective for all fiscal quarters of all fiscal 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.

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.