Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Soliciting Material pursuant to Section 24.14a-11(c) or Section
240.14a-12
KRISPY KREME DOUGHNUTS, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction
applies:
------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------
<PAGE>
[KRISPY KREME LOGO APPEARS HERE]
June 14, 2000
To Our Shareholders:
On behalf of the Board of Directors and management of Krispy Kreme
Doughnuts, Inc., I cordially invite you to the Annual Meeting of Shareholders to
be held on July 11, 2000, at 10:00 AM, Eastern Time, at the Adam's Mark Winston
Plaza Hotel located at 425 North Cherry Street, Winston-Salem, North Carolina
27101.
Our agenda at the Annual Meeting will include the following matters.
Shareholders will be asked to (1) consider and vote upon the election of five
directors, two of whom are currently Krispy Kreme directors; (2) approve the
Company's 2000 Stock Incentive Plan (the "Stock Incentive Plan"); (3) approve
the Company's Senior Executive Incentive Compensation Plan (the "Executive
Incentive Plan"); (4) approve the Company's Employee Stock Purchase Plan (the
"Stock Purchase Plan"); and (5) ratify the Board of Directors' appointment of
Krispy Kreme's independent accountants for our current fiscal year. In addition,
there will be a brief period set aside for questions and answers from attending
shareholders and a short video presentation.
As explained in the Proxy Statement, the Board of Directors believes
that the Stock Incentive Plan, the Executive Incentive Plan, and the Stock
Purchase Plan are essential elements of the Company's comprehensive compensation
program. The Stock Incentive Plan and Stock Purchase Plan play an integral role
in the ability of the Company to attract and retain employees and directors and
further align the interests of these people with the interests of our
shareholders. The Executive Incentive Plan is a restatement of the Company's
annual bonus plan and is designed to reward key management personnel on an
ongoing basis for achieving the Company's operating performance goals.
Shareholder approval of these plans is sought in order to comply with certain
tax law requirements and to enable the Company to take all available deductions
with respect to amounts paid under the plans.
Information about the nominees for directors, the Stock Incentive Plan,
the Executive Incentive Plan, the Stock Purchase Plan and certain other matters
is contained in the accompanying Proxy Statement. A copy of the Company's 2000
Annual Report to Shareholders, which contains financial statements and other
important information about the Company's business, and a separate summary of
the terms of a Shareholder Rights Plan adopted by our Board of Directors are
also enclosed.
You are receiving this Proxy Statement and other enclosed information
as a shareholder of Krispy Kreme, as a Krispy Kreme employee who is
participating in our stock ownership plan, or both. In all cases, it is
important that your shares of stock be represented at the meeting, regardless of
the number of shares you hold. You are encouraged to specify your voting
preferences by marking and dating the enclosed proxy card. However, if you wish
to vote to elect all the nominees for director specified herein, approve the
Stock Incentive Plan, approve the Executive Incentive Plan, approve the Stock
Purchase Plan and ratify the appointment of Krispy Kreme's independent
accountants, all you need to do is sign and date the proxy card.
Please complete and return the proxy card in the enclosed envelope,
whether or not you plan to attend the meeting. If you do attend and wish to vote
in person, you may revoke your proxy at that time.
Sincerely,
Scott A. Livengood
President, Chairman of the Board and
Chief Executive Officer
<PAGE>
KRISPY KREME DOUGHNUTS, INC.
370 Knollwood Street
Winston-salem, North Carolina 27103
----------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 11, 2000
----------
To the Shareholders of
Krispy Kreme Doughnuts, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders of
Krispy Kreme Doughnuts, Inc. will be held at 10:00 AM, Eastern Time, on Tuesday,
July 11, 2000, at the Adam's Mark Winston Plaza Hotel, 425 North Cherry Street,
Winston-Salem, North Carolina 27101, for the following purposes:
1. To elect five directors, four of whose terms will expire in
2003, and one whose term will expire in 2002;
2. To approve the Company's 2000 Stock Incentive Plan;
3. To approve the Company's Senior Executive Incentive
Compensation Plan;
4. To approve the Company's Employee Stock Purchase Plan;
5. To consider and act upon a proposal to ratify the appointment,
by the Board of Directors, of PricewaterhouseCoopers LLP as
the independent accountants of the Company; and
6. To consider such other matters as may properly come before the
meeting and any adjournment or postponement thereof.
Only: (i) shareholders of record; and (ii) Krispy Kreme employees
participating in the Krispy Kreme Profit-Sharing Stock Ownership Plan, each as
of May 22, 2000, are entitled to notice of and to vote at the Annual Meeting and
any adjournment or postponement thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed herewith. Please sign, date and return the proxy promptly in the
enclosed business reply envelope. If you attend the meeting you may, if you
wish, withdraw your proxy and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS,
RANDY S. CASSTEVENS
June 14, 2000 Secretary
Whether or not you expect to be present at the Annual Meeting, please complete,
----------------
date, sign, and promptly return the enclosed proxy card in the enclosed
--------------------------------------------------------------------------------
postage-paid business reply envelope. The proxy may be revoked at any time prior
------------------------------------
to exercise, and if you are present at the Annual Meeting, you may, if you wish,
revoke your proxy at that time and exercise the right to vote your shares
personally.
<PAGE>
[KRISPY KREME LOGO APPEARS HERE]
PROXY STATEMENT
Dated June 14, 2000
for the Annual Meeting of Shareholders
to be Held July 11, 2000
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Krispy Kreme Doughnuts, Inc. ("Krispy
Kreme" or the "Company") for use at Krispy Kreme's 2000 Annual Meeting of
Shareholders ("Annual Meeting") to be held on Tuesday, July 11, 2000, including
any postponement, adjournment or adjournments thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting. Management intends to mail
this Proxy Statement and the accompanying form of proxy to shareholders on or
about June 14, 2000.
Only: (i) shareholders of record at the close of business on May 22,
2000 (the "Record Date"); and (ii) Krispy Kreme employees participating in the
Krispy Kreme Profit-Sharing Stock Ownership Plan at the Record Date, are
entitled to notice of and to vote in person or by proxy at the Annual Meeting.
For convenience, we refer to both shareholders and to plan participants who can
vote their plan shares as "shareholders" in this Proxy Statement. As of the
Record Date, there were 12,934,957 shares of common stock, no par value,
("Common Stock") of Krispy Kreme outstanding and entitled to vote at the Annual
Meeting. The presence of a majority of such shares is required, in person or by
proxy, to constitute a quorum for the conduct of business at the Annual Meeting.
Each share is entitled to one vote on any matter submitted for vote by the
shareholders.
Proxies in the accompanying form, duly executed, and returned to the
management of Krispy Kreme and not revoked, will be voted at the Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the shareholder
at any time prior to the voting of the proxy by delivery of a subsequently dated
proxy, by written notification to the Secretary of Krispy Kreme, or by
personally withdrawing the proxy at the Annual Meeting and voting in person.
Proxies that are executed, but do not contain any specific
instructions, will be voted "FOR" the election of all the nominees for directors
specified herein; "FOR" the approval of the Company's 2000 Stock Incentive Plan
(the "Stock Incentive Plan"); "FOR" the approval of the Company's Senior
Executive Incentive Compensation Plan (the "Executive Incentive Plan"); "FOR"
the approval of the Company's Employee Stock Purchase Plan (the "Stock Purchase
Plan"); and "FOR" the ratification of the appointment of PricewaterhouseCoopers
LLP as Krispy Kreme's independent accountants. Each nominee for director has
indicated that he will serve if elected, but if the situation should arise that
any nominee is no longer able or willing to serve, the proxy may be voted for
the election of such other person as may be designated by the Board of
Directors. The persons appointed as proxies will vote in their discretion on any
other matter that may properly come before the Annual Meeting or any
postponement, adjournment or adjournments thereof, including any vote to
postpone or adjourn the Annual Meeting.
A copy of Krispy Kreme's 2000 Annual Report to Shareholders and a
summary of the terms of the Shareholder Rights Plan adopted by the Company's
Board of Directors are being furnished herewith to each shareholder of record as
of the close of business on the Record Date.
Quorum and Voting Requirements
------------------------------
The holders of a majority of the shares entitled to vote on the Record
Date, represented in person or by proxy, shall constitute a quorum for the
purpose of transacting business at the Annual Meeting. Each outstanding share
shall be entitled to one vote on each matter submitted to a vote at the Annual
Meeting. In the election of directors, those nominees receiving the greatest
number of votes at the Annual Meeting, assuming a quorum is present, shall be
deemed elected, even though such nominees may not receive a majority. For
approval of the Stock Incentive Plan, approval of the Executive Incentive Plan,
1
<PAGE>
approval of the Stock Purchase Plan, ratification of the appointment of Krispy
Kreme's independent accountants and any other business at the Annual Meeting,
the vote of a majority of the shares voted on the matter, assuming a quorum is
present, shall be the act of the shareholders on that matter, unless the vote of
a greater number is required by law. In counting the votes cast, only those cast
"FOR" and "AGAINST" a matter are included, although you cannot vote "against" a
nominee for director. An abstention and a "broker non-vote" are counted only for
purposes of determining the presence of a quorum at the Annual Meeting. "Broker
non-votes" are votes that brokers holding shares of record for their customers
(i.e., in "street name") are not permitted to cast under applicable regulations
because the brokers have not received clear voting instructions from their
customers.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The following table sets forth the information concerning the
beneficial ownership of the Common Stock of Krispy Kreme, which is the Company's
only class of voting stock, on May 22, 2000, by:
o each person known to Krispy Kreme to beneficially own more than 5%
of the Common Stock;
o each director, nominee for director, the Chief Executive Officer and
the four other most highly compensated executive officers; and
o all of Krispy Kreme's directors and executive officers 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 is based on
12,934,957 shares of Common Stock outstanding as of May 22, 2000.
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficial Owner Beneficially Owned Beneficially Owned
---------------- ------------------ ------------------
<S> <C> <C>
John N. McAleer................................................ 2,691,813<F1> 20.8%
Robert L. McCoy................................................ 705,380<F2><F3> 5.4
Joseph A. McAleer, Jr.......................................... 455,720<F2> 3.5
J. Paul Breitbach.............................................. 325,093<F4> 2.5
Scott A. Livengood............................................. 311,043<F5> 2.4
Steven D. Smith................................................ 213,580<F2> <F6> 1.6
Frank E. Guthrie............................................... 189,980<F2> <F7> 1.5
Robert J. Simmons.............................................. 114,500<F2> <F8> *
L. Stephen Hendrix............................................. 73,993<F9> *
William T. Lynch............................................... 38,200<F2> <F10> *
Robert L. Strickland........................................... 33,500<F2> <F11> *
Robert H. Vaughn, Jr........................................... 20,690<F12> *
James H. Morgan................................................ 1,000<F13> *
Mary Davis Holt................................................ -- *
Togo D. West, Jr............................................... -- *
All directors and executive officers as a group
(20 persons).............................................. 5,294,192 40.6
--------------------------
* Less than one percent.
<FN>
<F1> Includes: (a) 2,344,060 shares owned by the estate of Joseph A. McAleer,
Sr., of which Mr. John N. McAleer is the executor; (b) 3,460 shares held by
the John N. McAleer 1999 Trust for the benefit of Jennifer A. McAleer, Mr.
John N. McAleer's daughter, a trust of which Sandra Middlebrooks McAleer,
Mr. John N. McAleer's sister, is the sole trustee; (c) 3,460 shares held by
the John N. McAleer 1999 Trust for the benefit of Lauren E. McAleer, Mr.
John N. McAleer's daughter, a trust of which Sandra Middlebrooks McAleer is
the sole trustee; (d) 3,460 held by the John N. McAleer 1999 Trust for the
benefit of Alexander B. McAleer, Mr. John N. McAleer's son, a trust of
which Sandra Middlebrooks McAleer is the sole trustee; (e) 600 shares owned
by Jamie Dickinson McAleer, Mr. John N. McAleer's spouse; and (f) 533
shares held by a tax-qualified trust pursuant to the Krispy Kreme
Profit-Sharing Stock Ownership Plan. Mr. McAleer's address is 370 Knollwood
Street, Winston-Salem, North Carolina 27103.
2
<PAGE>
<F2> Includes 13,000 shares issuable upon the exercise of currently vested stock
options awarded under our stock option plan.
<F3> Includes: (a) 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; (b) 85,000 shares owned by Mr. McCoy indirectly through
his ownership of 100% of the voting interest of R&P Six Limited
Partnership; (c) 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; (d) 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; (e) 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; (f) 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; (g) 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 (h) 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.
<F4> Includes (a) 67,800 shares held by the Breitbach Children's Trust, a trust
of which Mr. Breitbach is the sole trustee; and (b) 533 shares held by a
tax-qualified trust pursuant to the Krispy Kreme Profit-Sharing Stock
Ownership Plan.
<F5> Includes (a) 533 shares held by a tax-qualified trust pursuant to the
Krispy Kreme Profit-Sharing Stock Ownership Plan; (b) 500 shares held by
the Adrienne A. Livengood Irrevocable Trust for the benefit of Matthew
Scott Livengood, Mr. Livengood's son, a trust of which Adrienne A.
Livengood, Mr. Livengood's spouse, is the sole trustee; (c) 500 shares held
by the Adrienne A. Livengood Irrevocable Trust for the benefit of Gregory
Alan Livengood, Mr. Livengood's son, a trust of which Adrienne A. Livengood
is the sole trustee; (d) 500 shares held by the Adrienne A. Livengood
Irrevocable Trust for the benefit of John Erik Livengood, Mr. Livengood's
son, a trust of which Adrienne A. Livengood is the sole trustee; and (e)
150 shares owned by Matthew Scott Livengood, Mr. Livengood's son.
<F6> Includes 28,320 shares owned beneficially by Connie Sue Smith, Mr. Smith's
spouse.
<F7> Includes 132,000 shares owned by Mr. Guthrie indirectly through his
ownership of 60% of the outstanding voting shares of Augusta Doughnut
Company.
<F8> Includes 80,000 shares owned by Mr. Simmons indirectly through his
ownership of 60% of the outstanding shares of Simac, Inc.
<F9> Includes 533 shares held by a tax-qualified trust pursuant to the Krispy
Kreme Profit-Sharing Stock Ownership Plan.
<F10>Includes (a) 20,000 shares owned by Mr. Lynch indirectly through his
ownership of 100% of the outstanding shares of Liam Holdings, LLC; and (b)
200 shares owned by Molly C. Lynch, Mr. Lynch's daughter, of which Mr.
Lynch disclaims beneficial ownership.
<F11>Includes (a) 20,000 shares held by the Robert Louis Strickland Revocable
Living Trust, a trust of which Mr. Strickland is the sole trustee; and (b)
500 shares held by the Strickland Family Foundation, of which Mr.
Strickland is co-trustee.
3
<PAGE>
<F12>Includes (a) 390 shares held by a tax-qualified trust pursuant to the
Krispy Kreme Profit-Sharing Stock Ownership Plan; (b) 150 shares owned by
Tyler Vaughn, Mr. Vaughn's son; and (c) 150 shares owned by Grace Vaughn,
Mr. Vaughn's daughter.
<F13>Includes 1,000 shares owned beneficially by Margaret O. Morgan, Mr.
Morgan's spouse.
</FN>
</TABLE>
ELECTION OF DIRECTORS
(Item Number 1 On the Proxy Card)
Composition and Recommendation of the Board
-------------------------------------------
Krispy Kreme's Bylaws provide that the Board of Directors shall consist
of not less than nine nor more than fifteen directors, with the exact number
being set from time to time by the Board of Directors. The Board presently
consists of nine directors, two of whom are independent directors. The Board of
Directors is divided into three classes of directors. The term of each director
in Class I expires this year, the term of each director in Class II expires in
2001 and the term of each director in Class III expires in 2002. Upon the
expiration of the terms for each class of directors, the directors of such
class, if reelected, will serve for a term of three years. On May 22, 2000, the
Board of Directors voted to increase the number of directors from nine to
twelve.
The Board of Directors recommends a vote "FOR" the nominees for
director listed below for election to the Board of Directors.
Nomination of Class I Directors
-------------------------------
Two of the five nominees for director are current Class I directors who
are being nominated for reelection. If reelected, their terms will expire in
2003. The nominees for reelection as Class I directors are Frank E. Guthrie and
Robert L. McCoy. Robert J. Simmons, one of the Class I directors whose term
expires this year, has decided to retire as a director of the Company.
Nomination of Three New Directors
---------------------------------
One of the five nominees for director is being nominated to fill a
vacancy in Class I and two are being nominated to fill new directorships in
Class I and Class III. If all three are elected, two will serve as Class I
directors and one will serve as a Class III director. The Board has nominated:
Mary Davis Holt and Togo D. West, Jr. as Class I directors, whose terms
will expire in 2003; and
James H. Morgan as a Class III director, whose term will expire in
2002.
About the Nominees
------------------
The following information as of May 22, 2000 has been furnished by the
nominees for director. Except as otherwise indicated, the nominees have been or
were engaged in their present or last principal employment, in the same or a
similar position, for more than five years.
4
<PAGE>
Name (Age) Information About the Nominees
---------- ------------------------------
Nominee for New Class Iii Director Whose Term Will Expire in 2002
-----------------------------------------------------------------
James H. Morgan (52) JAMES H. MORGAN has been a consultant for
Wachovia Securities, Inc., a securities and
investment banking firm, since January 2000.
From April 1999 through December 1999, Mr.
Morgan was employed as Chairman and Chief
Executive Officer of Wachovia Securities,
Inc. Mr. Morgan was employed as Chairman and
Chief Executive Officer of
Interstate/Johnson Lane, Wachovia
Securities' predecessor, from 1990 to 1999
and led the transition during the merger of
Interstate/Johnson Lane and Wachovia
Securities in 1999.
Nominees for Two New and Two Current Class I Directors Whose Terms Will Expire
------------------------------------------------------------------------------
in 2003
-------
Mary Davis Holt (49) MARY DAVIS HOLT has been with Time Inc. for
28 years where she has held the positions of
Chief Operations Officer of Time Life Inc.,
a direct-marketing media company, since 1992
and Senior Executive Vice President of Time
Life since 1999. Ms. Holt was employed by
Time Life as Chief Operating Officer and
Executive Vice President of Time-Life Kids
and Time-Life Education from 1996 to 1999,
and as President of Time Life Books from
1991 to 1992.
Togo D. West, Jr. (57) TOGO WEST has served as Secretary of
Veterans Affairs and a member of the
President's Cabinet since 1998. He served as
Secretary of the Army from 1993 to 1998. Mr.
West is an attorney who has practiced with
the law firm of Covington and Burling in
Washington, D.C. and has been a partner of
Patterson, Belknap, Webb & Tyler. He has
been General Counsel of the Department of
Defense, General Counsel of the Department
of the Navy and has served with the U.S.
Department of Justice. Prior to his most
recent government service, Mr. West was
Senior Vice President for Government Affairs
for the Northrop Corporation, an aerospace
and defense systems company.
Frank E. Guthrie (61) FRANK E. GUTHRIE has been a Krispy Kreme
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.
Robert L. Mccoy (50) ROBERT L. MCCOY has been a Krispy Kreme
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.
5
<PAGE>
About the Continuing Directors
------------------------------
The following information as of May 22, 2000 has been furnished by the
continuing directors who are not up for election at this Annual Meeting. Except
as otherwise indicated, the continuing directors have been or were engaged in
their present or last principal employment, in the same or a similar position,
for more than five years.
Name (Age) Information About the Continuing Directors
---------- ------------------------------------------
Class II Directors Whose Terms Expire in 2001
---------------------------------------------
Scott A. Livengood (47) 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.
Joseph A. McAleer, Jr. (50) 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.
Steven D. Smith (47) 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.
Class III Directors Whose Terms Expire in 2002
----------------------------------------------
John N. McAleer (41) 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.
Robert L. Strickland (69) 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.
6
<PAGE>
Name (Age) Information About the Nominees
---------- ------------------------------
William T. Lynch (57) 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 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.
Meetings and Committees of the Board
------------------------------------
The Board of Directors meets on a regular basis to supervise, review,
and direct Krispy Kreme's business and affairs. During our fiscal year ended
January 30, 2000, the Board held ten meetings. The Board of Directors has
established an Audit Committee and a Compensation Committee to which it has
assigned certain responsibilities in connection with the governance and
management of Krispy Kreme's affairs. Each of the directors attended at least
75% of the Board meetings during fiscal 2000.
AUDIT COMMITTEE. The Audit Committee reviews our audited consolidated
financial statements and accounting practices and considers and recommends the
employment of, and approves 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 Audit Committee held 2 meetings
during fiscal 2000. Mr. Robert J. Simmons attended one of the meetings of the
Audit Committee during fiscal 2000. The remaining members of the Audit Committee
attended both meetings of the Audit Committee during fiscal 2000.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for
the review and approval of compensation of Krispy Kreme's executive officers and
the employee benefit plans for all employees. Messrs. Robert L. Strickland,
Robert L. McCoy, and Joseph A. McAleer, Jr. comprise the members of the
Compensation Committee. The Compensation Committee held four meetings during
fiscal 2000. Each of the members of the Compensation Committee attended at least
75% of the meetings of the Compensation Committee during fiscal 2000.
Directors' Compensation
-----------------------
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 nonqualified stock options for 39,000 shares
to each of Messrs. Frank E. Guthrie, William T. Lynch, Jr., Joseph A. McAleer,
Jr., Robert L. McCoy, Robert J. Simmons, Steven D. Smith and Robert L.
Strickland under Krispy Kreme's 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.
APPROVAL OF 2000 STOCK INCENTIVE PLAN
(Item Number 2 On the Proxy Card)
Introduction to and Purpose of the 2000 Stock Incentive Plan
------------------------------------------------------------
The Board of Directors recommends that shareholders approve the Krispy
Kreme Doughnuts, Inc. 2000 Stock Incentive Plan (the "Stock Incentive Plan"),
adopted by the Board on June 6, 2000, subject to approval by the Company's
shareholders. The Board of Directors is proposing that the Company's
shareholders approve the Stock Incentive Plan for a number of reasons, including
compliance with Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). See "Compliance with Section 162(m) of the Internal Revenue Code"
7
<PAGE>
below. The Stock Incentive Plan, if approved by shareholders, will be effective
July 1, 2000 and will remain in effect until June 30, 2010, unless it is
terminated by the Board at an earlier date.
The Board of Directors of Krispy Kreme Doughnut Corporation previously
adopted the Krispy Kreme Doughnut Corporation 1998 Stock Option Plan on August
5, 1998 (the "1998 Option Plan"), and the amendments to the 1998 Option Plan,
effective March 1, 2000, and March 10, 2000, respectively. As of June 7, 2000,
options for 2,085,000 shares of Common Stock had been granted under the 1998
Option Plan. A total of 1,913,000 shares were reserved originally for issuance
under the 1998 Option Plan. By amendments effective March 1, 2000, and March 10,
2000, the Board of Directors increased the number of shares reserved to
2,225,000. Upon the approval of the Stock Incentive Plan, no additional options
or other awards will be granted under the 1998 Option Plan.
The Board of Directors believes that the Stock Incentive Plan will play
an integral role in the ability of the Company to attract and retain employees
and directors and to further align the interests of these people with the
interests of our shareholders. Moreover, the Stock Incentive Plan should benefit
the Company by closely aligning the interests of employees with the interests of
the Company's shareholders.
The following description of the material features of the Stock
Incentive Plan is a summary and is qualified in its entirety by reference to the
Stock Incentive Plan. The Company will provide promptly, upon request and
without charge, a copy of the full text of the Stock Incentive Plan to each
person to whom this proxy statement is delivered. The Stock Incentive Plan is
not subject to the provisions of the Employee Retirement Income Security Act of
1974.
Eligibility
-----------
Employees, non-employee directors and independent consultants and
advisors of the Company and its subsidiaries may be granted awards under the
Stock Incentive Plan. Awards are generally made at the discretion of the
Compensation Committee of the Board of Directors. As of June 1, 2000, the
Company estimates that approximately 125 employees of the Company and its
subsidiaries will participate in the Stock Incentive Plan.
Description of Awards
---------------------
GENERAL. Awards granted under the Stock Incentive Plan may be
"incentive stock options" ("ISOs"), as defined in Section 422 of the Code,
"nonqualified stock options" ("NQSOs"), stock appreciation rights ("SARs"),
performance units, restricted stock (or units) and share awards.
The Compensation Committee of the Board of Directors (or a subcommittee
thereof) (the "Committee"), generally has discretion to set the terms and
conditions of grants and awards, including the term, exercise price, and vesting
conditions (including vesting based on the Company's performance); to select the
persons who receive such grants and awards; and to interpret and administer the
Stock Incentive Plan. The maximum number of shares of Common Stock with respect
to which awards may be granted under the Stock Incentive Plan is 1,000,000
shares, plus 140,000 shares that remain available for grant under the 1998
Option Plan. The Stock Incentive Plan provides aggregate limits on grants of the
various types of awards in the amount of 750,000 shares for ISOs and 300,000
shares, in the aggregate, for SARs, performance units, restricted stock and
stock awards. The maximum number of shares for which options (ISOs and NQSOs) or
SARs may be granted to any individual during any calendar year is 250,000
shares, subject to anti-dilution and similar provisions; provided, however, that
to the extent the maximum permissible award is not made in a year, such amount
may be carried over to subsequent years. The maximum number of shares for which
restricted stock grants intended to be subject to Section 162(m) or performance
units may be granted to any individual during any calendar year is 75,000
shares. The Board of Directors may at any time amend or terminate the Stock
Incentive Plan, subject to applicable laws. The Company will pay the
administrative costs of the Plan.
OPTIONS. The Committee may grant ISOs only to employees of the Company,
including officers. NQSOs may be granted to any person employed by or performing
services for the Company, including non-employee directors. The option price for
each option may be not less than 100% of the fair market value of the Common
Stock subject to the option. ISOs are also subject to certain limitations
prescribed by the Code, including the requirement that such options may not be
8
<PAGE>
granted to employees who own more than 10% of the combined voting power of all
classes of voting stock (a "principal shareholder") of the Company, unless the
option price is at least 110% of the fair market value of the Common Stock
subject to the option. In addition, an ISO granted to a principal shareholder
may not be exercisable more than five years from its date of grant.
Full payment of the option price must be made when an option is
exercised. The purchase price may be paid in cash or in such other form of
consideration as the Committee may approve, which may include shares of Common
Stock valued at their fair market value on the date of exercise,
Company-provided loans, or by any other means which the Committee determines to
be consistent with the Plan's purpose and applicable law. A Participant will
have no rights as a shareholder with respect to the shares subject to his Option
until the Option is exercised.
STOCK APPRECIATION RIGHTS. The Committee may grant an SAR in connection
with all or any portion of a previously or contemporaneously granted option or
independent of any option grant. An SAR entitles the participant to receive the
amount by which the fair market value of a specified number of shares on the
exercise date exceeds an exercise price established by the Committee, which
shall not be less than 100% of the fair market value of the Common Stock at the
time the SAR is granted or the option exercise price of the related option. Such
excess amount shall be payable in Common Stock, in cash, or in a combination
thereof, as determined by the Committee.
PERFORMANCE UNITS. The Committee may grant performance units (a right
to receive a designated dollar amount of Common Stock or cash contingent on
achievement of performance or other objectives). The full and/or partial payment
of performance unit awards granted will be made only upon certification by the
Committee of the attainment by the Company, over a performance period
established by the Committee, of any one or more performance targets, which have
been established by the Committee and which are based on objective criteria. No
payment will be made if the targets are not met.
RESTRICTED AND OTHER STOCK AWARDS. The Committee may grant restricted
stock awards (a grant of Common Stock or the right to receive Common Stock, with
such awards subject to a risk of forfeiture or other restrictions that lapse
upon the achievement of one or more performance or other objectives, as
determined by the Committee ) or share awards (a grant of Common Stock). Any
such awards shall be subject to such conditions, restrictions and contingencies
as the Committee determines. These conditions may include, for example, a
requirement that the Participant continue employment with the Company for a
specified period or that the Company or the Participant achieve certain stated
objectives.
Termination of Awards.
----------------------
The terms of an award may provide that it will terminate, among other
reasons, upon the holder's termination of employment or other status with the
Company or its subsidiaries, upon a specified date, upon the holder's death or
disability, or upon the occurrence of a change in control. Also, the Committee
may, within the terms of the Stock Incentive Plan, provide in the Award
Agreement for the acceleration of vesting for any of the above reasons.
Compliance With Section 162(M) of the Internal Revenue Code
-----------------------------------------------------------
A federal income tax deduction will generally be unavailable to the
Company for annual compensation in excess of one million dollars paid to the
chief executive officer and the four other most highly compensated officers of a
public corporation. However, amounts that constitute "performance-based"
compensation are not counted toward the one million dollar limit. The Committee
may generally designate any award described above as intended to be
"performance-based" compensation. Any awards so designated shall be conditioned
on the achievement of one or more performance goals, as required by Section
162(m). The performance goals that may be used by the Committee for such awards
shall be based on any one or more of the following performance measures, as
selected by the Committee: earnings, earnings per share, earnings before
interest, taxes and depreciation and amortization, growth in earnings per share,
achievement of annual operating profit plans, operating profit margin, return on
equity performance, total shareholder return, stock price, system-wide sales,
customer satisfaction, store income as a percentage of sales, comparable store
sales growth, number of new store operating weeks, achievement of new store
sales standards, EBITDA, return on assets, general administrative expenses as a
9
<PAGE>
percentage of revenue, or aging of accounts receivable. Each goal may be based
on or otherwise employ comparisons relating to capital, shareholders' equity
and/or shares outstanding, investments or to assets or net assets. To satisfy
the requirements that apply to "performance-based" compensation, these goals
must be approved by the Company's shareholders, and approval of the Plan will
also constitute approval of the foregoing goals.
Certain Federal Income Tax Consequences
---------------------------------------
OPTIONS. Under current tax law, a holder of an ISO under the Stock
Incentive Plan does not realize taxable income upon the grant or exercise of the
ISO. (Depending upon the holder's income tax situation, however, the exercise of
the ISO may have alternative minimum tax implications.) In general, a holder of
an ISO will only recognize income at the time that Common Stock acquired through
exercise of the ISO is sold or otherwise disposed of. In that situation, the
amount of income that the optionee must recognize is equal to the amount by
which the value of the Common Stock on the date of the sale or other disposition
exceeds the option exercise price. If the optionee disposes of the stock after
the required holding period -- that is, no earlier than a date that is two years
after the date of grant of the option and one year after the date of exercise --
the income is taxed as capital gains. If disposition occurs prior to expiration
of the holding period, the optionee will recognize ordinary income equal to the
difference between the fair market value of the shares at the exercise date and
the option exercise price; any additional increase in the value of option shares
after the exercise date will be taxed as capital gain. The Company is generally
entitled to a tax deduction equal to the amount of ordinary income recognized by
the optionee.
An optionee will not realize income when an NQSO option is granted to
him or her. Upon exercise of such option, however, the optionee must recognize
ordinary income to the extent that the fair market value of the Common Stock on
the date the option is exercised exceeds the option exercise price. Any such
gain is taxed in the same manner as ordinary income in the year the option is
exercised. Thereafter, any additional gain recognized upon the disposition of
the shares of stock obtained by the exercise of an NQSO will be taxed as short
or long-term capital gain or loss, depending on the optionee's holding period.
The Company will not experience any tax consequences upon the grant of an NQSO,
but will be entitled to take an income tax deduction equal to the amount that
the option holder includes in income when the NQSO is exercised.
STOCK APPRECIATION RIGHTS. The grant of an SAR will not result in
taxable income to the participant. Generally, upon exercise of an SAR, the
amount of cash or the fair market value of Common Stock received will be taxable
to the participant as ordinary income and the Company will be entitled to a
corresponding deduction. If the SAR is settled in Common Stock, gains and losses
realized by the participant upon the disposition of any such shares will be
treated as capital gains and losses, with the basis in such shares equal to the
fair market value of the shares at the time of exercise.
PERFORMANCE UNITS. A participant who has been granted a performance
unit award will not realize taxable income at the time of grant and the Company
will not be entitled to a corresponding deduction. Generally, the participant
will have compensation income at the time of distribution equal to the amount of
cash received and the then fair market value of the distributed shares and the
Company will be entitled to a corresponding deduction.
RESTRICTED AND OTHER STOCK. A participant who has been granted a
restricted stock award will not realize taxable income at the time of grant and
the Company will not be entitled to a corresponding deduction, assuming that the
restrictions constitute a "substantial risk of forfeiture" for federal income
tax purposes. Upon the vesting of stock subject to an award, or upon the
issuance of shares in the case of a restricted stock award made in the form of
units, the holder will realize ordinary income in an amount equal to the then
fair market value of those shares, and the Company will be entitled to a
corresponding deduction. Gains or losses realized by the participant upon
disposition of such shares will be treated as capital gains and losses, with the
basis in such shares equal to the fair market value of the shares at the time of
vesting. Dividends paid to the holder during the restriction period, if so
provided, will also be compensation income to the participant and the Company
will be entitled to a corresponding deduction. Under certain circumstances, a
participant may elect pursuant to Section 83(b) of the Code to have income
recognized at the date of grant of a restricted stock award and to have the
applicable capital gain holding period commence as of that date and the Company
will be entitled to a corresponding deduction. The fair market value of
unrestricted stock is taxable as compensation to the participant (and deductible
by the Company) at the time the stock is transferred.
10
<PAGE>
WITHHOLDING OF TAXES. The Company may withhold amounts from
participants to satisfy withholding tax requirements. Subject to guidelines
established by the Committees, participants may have Common Stock withheld from
awards or may tender Common Stock to the Company to satisfy tax withholding
requirements.
TAX ADVICE. The preceding discussion is based on federal tax laws and
regulations presently in effect, which are subject to change, and the discussion
does not purport to be a complete description of the federal income tax aspects
of the Stock Incentive Plan. A participant may also be subject to state and
local taxes in connection with the grant of awards under the Stock Incentive
Plan. The Company suggests that participants consult with their individual tax
advisors to determine the applicability of the tax rules to the awards granted
to them in their personal circumstances.
NEW STOCK INCENTIVE PLAN BENEFITS
As of June 6, 2000, no options or other awards have been granted under
the Stock Incentive Plan. Future awards will be made at the discretion of the
Committee. The number of options and awards that may be granted in the future to
eligible participants is not currently determinable.
RECOMMENDATION OF THE BOARD
The Board of Directors, which unanimously approved the Stock Incentive
Plan, recommends a vote "FOR" approval of the Stock Incentive Plan.
APPROVAL OF THE SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
(Item Number 3 On the Proxy Card)
The Board of Directors recommends that shareholders approve the Krispy
Kreme Doughnuts, Inc. Senior Executive Incentive Compensation Plan (the
"Executive Incentive Plan"), adopted by the Board on June 6, 2000, subject to
approval by the Company's shareholders. The Executive Incentive Plan is a
restatement of the Company's existing incentive bonus plan. Stockholder approval
of the Executive Incentive Plan is sought in order to qualify the Executive
Incentive Plan under Section 162(m) of the Internal Revenue Code, thereby
allowing the Company to deduct for federal income tax purposes all compensation
paid under the Executive Incentive Plan to the named executive officers. The
Executive Incentive Plan ties the incentive compensation payable to the chief
executive officer and other executive officers directly to the attainment of
specific, objective performance targets, thereby aligning the interests of
management with the interests of the Company's shareholders. The provisions of
the Executive Incentive Plan are set forth below.
Eligibility
-----------
Executive officers of Krispy Kreme at the level of senior
vice-president and above shall be eligible to receive awards under the Executive
Incentive Plan. Such executive officers include the Chief Executive Officer and
the named officers. The eligible group is approximately eleven to fifteen
persons. The Committee shall designate the executive officers who will
participate in the Executive Incentive Plan each year.
Administration of the Executive Incentive Plan
----------------------------------------------
The Executive Incentive Plan shall be administered by the Compensation
Committee (or a subcommittee thereof) of the Board of Directors, consisting of
two or more outside directors (the "Committee"). The Committee shall have the
sole discretion to interpret the Executive Incentive Plan; approve a
pre-established objective performance measurement or measures annually; certify
the level to which each performance measure was attained prior to any payment
under the Executive Incentive Plan; approve the amount of awards made under the
Executive Incentive Plan; determine who shall receive any payment under the
Executive Incentive Plan; and determine when, and in what form, such payments
shall be made.
11
<PAGE>
The Committee shall have full power and authority to administer and
interpret the Executive Incentive Plan and to adopt such rules, regulations and
guidelines for the administration of the Executive Incentive Plan and for the
conduct of its business as the Committee deems necessary or advisable. The
Committee's interpretations of the Executive Incentive Plan and all actions
taken and determinations made by the Committee shall be conclusive and binding
on all parties concerned, including Krispy Kreme, its stockholders and any
person receiving an award under the Executive Incentive Plan.
Awards
------
The Committee shall establish annual incentive award targets for
Executive Incentive Plan participants. The Committee shall also establish
quantifiable annual performance targets which must be achieved in order for an
award to be earned under the Executive Incentive Plan. Such targets may be
either absolute or relative and shall be based on earnings, earnings per share,
earnings before interest, taxes and depreciation and amortization, growth in
earnings per share, achievement of annual operating profit plans, operating
profit margin, return on equity performance, total shareholder return, stock
price, system-wide sales, customer satisfaction, store income as a percentage of
sales, comparable store sales growth, number of new store operating weeks,
achievement of new store sales standards, EBITDA, return on assets, general
administrative expenses as a percentage of revenue, or aging of accounts
receivable. The specific performance targets for each participating executive
officer shall be established in writing by the Committee within 90 days after
the commencement of the fiscal year (or within such other time period as may be
required by ss. 162(m) of the Internal Revenue Code) to which the performance
target relates. The performance target shall be established in such a manner
that a third party having knowledge of the relevant facts could determine
whether the performance goal has been met. The Committee is not precluded from
paying annual bonuses outside of the Executive Incentive Plan.
Awards shall be payable following the completion of each fiscal year
upon written certification by the Committee that Krispy Kreme achieved the
specified performance targets established for the participating executive
officer. The maximum award which may be paid to any participant in the Executive
Incentive Plan for a plan year is $900,000.
Effective Date, Amendments and Termination
------------------------------------------
The Executive Incentive Plan became effective on January 31, 2000,
subject to approval by the stockholders of Krispy Kreme at the 2000 Annual
Meeting of Stockholders. The Committee may at any time terminate or from time to
time amend the Executive Incentive Plan in whole or in part, but no such action
shall adversely affect any rights or obligations with respect to any awards
previously made under the Executive Incentive Plan. However, unless the
stockholders of Krispy Kreme shall have first approved thereof, no amendment of
the Executive Incentive Plan shall be effective which would increase the maximum
amount which can be paid to any one executive officer under the Executive
Incentive Plan in any fiscal year, which would change the specified performance
goals for payment of awards, or which would modify the requirement as to
eligibility for participation in the Executive Incentive Plan.
Recommendation of the Board
---------------------------
The Board of Directors, which unanimously approved the Executive
Incentive Plan, recommends a vote "FOR" approval of the Executive Incentive
Plan.
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN
(Item Number 4 On the Proxy Card)
Purpose of the Employee Stock Purchase Plan
-------------------------------------------
The Board of Directors recommends that shareholders approve the Krispy
Kreme Doughnuts, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"),
adopted by the Board on June 6, 2000, subject to the approval of the Company's
shareholders. While all employees are eligible, the Stock Purchase Plan is
targeted to the Company's non-executive employees. Effective August 1, 2000, it
12
<PAGE>
allows eligible employees to purchase stock in accordance with Section 423 of
the Internal Revenue Code of 1986, as amended.
The Board believes that by enabling employees to purchase Company stock
conveniently and efficiently, the Stock Purchase Plan will benefit the Company
by (i) assisting it in recruiting and retaining the services of qualified
employees with capability and initiative, (ii) providing greater incentive for
employees and (iii) aligning the interests of employees with those of the
Company and its shareholders through opportunities for increased stock
ownership.
The more significant features of the Stock Purchase Plan are described
below; however, the following description of the Stock Purchase Plan is not
intended to be complete and is qualified in its entirety by the complete text of
the Stock Purchase Plan. The Company will provide promptly, upon request and
without charge, a copy of the full text of the Stock Purchase Plan to each
person to whom a copy of this proxy statement is delivered.
The Stock Purchase Plan must be approved by the holders of a majority
of the shares of Common Stock represented at the Annual Meeting.
Administration
--------------
The Compensation Committee of the Board of Directors or its designee
will administer the Stock Purchase Plan. The Compensation Committee will have
complete authority to interpret the provisions of the Stock Purchase Plan, to
prescribe the forms that are used under the Stock Purchase Plan, to adopt, amend
and rescind rules and regulations pertaining to the administration of the Stock
Purchase Plan and to make all other determinations necessary or advisable for
the administration of the Stock Purchase Plan.
Eligibility
-----------
Each employee of the Company or any subsidiary who works at least 20
hours per week is eligible to participate in the Stock Purchase Plan as of the
first January 1, April 1, July 1, or October 1 after he completes 12 months of
employment. Directors who are employees of the Company or any subsidiary are
eligible to participate in the Stock Purchase Plan.
Enrollment
----------
Each eligible employee may elect to participate in the Stock Purchase
Plan during the applicable enrollment period. The enrollment period is the month
preceding each quarterly Date of Grant. An eligible employee who elects to
participate in the Stock Purchase Plan is referred to as a "Participant."
Terms and Conditions of Stock Purchases
---------------------------------------
PURCHASE RIGHTS. Each individual who is a Participant on a Date of
Grant will be granted an option to purchase shares (a "Purchase Right") as of
that Date of Grant. As noted above, the term "Date of Grant" means the first day
of each calendar quarter during the term of the Stock Purchase Plan. The number
of shares of Common Stock subject to such Purchase Right will be determined by
dividing the purchase price (as described below) into the balance credited to
each Participant's account from payroll deductions as of the Date of Exercise
next following the Date of Grant. The "Date of Exercise" means the last day of
each quarter.
PURCHASE PRICE. The purchase price per share for Common Stock purchased
on the exercise of a Purchase Right shall be the lesser of (i) the fair market
value of the Common Stock on the applicable Date of Grant and (ii) the fair
market value of the Common Stock on the applicable Date of Exercise.
EXERCISE. Unless a Participant withdraws from the Stock Purchase Plan,
each Purchase Right will be exercised automatically on each Date of Exercise for
the number of whole shares of Common Stock that may be purchased at the purchase
price for that Purchase Right. The balance of any accumulated payroll deductions
credited to the Participant's account will be held for the following purchase
13
<PAGE>
period unless the Participant withdraws from the Stock Purchase Plan. Fractional
shares will not be issued under the Stock Purchase Plan.
PAYMENT. The purchase price for shares of Common Stock is accumulated
by payroll deductions from the Participant's base compensation each payroll
period and credited to the Participant's account under the Stock Purchase Plan.
The amount of the deduction is equal to a whole percentage of the Participant's
base compensation which is at least one percent (1%), but not greater than
twenty percent (20%), as specified by the Participant on an election form. A
Participant may not alter the amount of payroll deduction on or after the
applicable Date of Grant except in the case of a termination of employment.
WITHDRAWAL. A Participant may discontinue his or her participation in
the Stock Purchase Plan at any time by giving written notice to that effect in
accordance with reasonable administrative rules established by the Company.
TRANSFERABILITY. Purchase Rights granted under the Stock Purchase Plan
are nontransferable except by will or the laws of descent and distribution. No
right or interest of a Participant in any Purchase Right may be liable for, or
subject to, any lien, obligation or liability of the Participant.
SHAREHOLDER RIGHTS. No Participant will, as a result of the grant of a
Purchase Right, have any rights as a shareholder until the applicable Date of
Exercise.
Shares Subject to Plan
----------------------
Upon the exercise of a Purchase Right, the Company may issue shares
from its authorized but unissued Common Stock or may purchase shares on the open
market. The maximum aggregate number of shares of Common Stock that may be
issued under the Stock Purchase Plan is 500,000 shares. If a Purchase Right is
terminated for any reason other than its exercise, the number of shares of
Common Stock allocated to the Purchase Right may be reallocated to other
Purchase Rights to be granted under the Stock Purchase Plan. In the event that
(a) the Company (i) effects one or more stock dividends, stock split-ups,
subdivisions or consolidations or (ii) engages in a transaction to which Section
424 of the Internal Revenue Code applies or (b) there occurs any other event
which, in the judgment of the Committee necessitates such action, then the
maximum number of shares as to which Purchase Rights may be granted under the
Stock Purchase Plan will be adjusted, and the terms of outstanding Purchase
Rights will be adjusted, as the Committee determines to be equitably required.
Amendment and Termination
-------------------------
No Purchase Rights may be granted under the Stock Purchase Plan after
July 31, 2010. The Board may, without further action by shareholders, terminate
or suspend the Stock Purchase Plan prior to that date. The Board also may amend
the Stock Purchase Plan except that no amendment that increases the number of
shares of Common Stock that may be issued under the Stock Purchase Plan (except
as described above in the event of a recapitalization, etc.) or changes the
class of individuals who may participate in the Stock Purchase Plan will become
effective until it is approved by shareholders.
Federal Income Tax Consequences
-------------------------------
The Company has been advised by counsel regarding the federal income
tax consequences of the Stock Purchase Plan. No income will be recognized by a
Participant upon the grant or the exercise of a Purchase Right. A Participant
will recognize income if and when he disposes of the shares acquired under the
Purchase Right. If the disposition does not occur within two years after the
grant of the Purchase Right or within one year after the exercise of the
Purchase Right (the "Purchase Right holding period"), the Participant will
recognize ordinary income measured as the lesser of (i) the excess of the fair
market value of the shares at the time of the sale or disposition over the
purchase price or (ii) an amount equal to fifteen percent of the fair market
value of the shares as of the applicable Date of Grant. Any additional gain will
be treated as capital gain.
14
<PAGE>
If Common Stock acquired under a Purchase Right is disposed of prior to
the end of the Purchase Right holding period, the Participant will recognize, as
ordinary income, the difference between the fair market value of the Common
Stock on the applicable Date of Exercise and the purchase price. Any gain in
excess of that amount will be characterized as capital gain.
The Company will not be entitled to a federal income tax deduction with
respect to the grant or exercise of a Purchase Right unless the Participant
disposes of the Common Stock acquired thereunder prior to the expiration of the
Purchase Right holding period. In that event, the employer corporation (the
Company or a subsidiary), generally will be entitled to a federal income tax
deduction equal to the amount of ordinary income recognized by the Participant.
Recommendation of the Board
---------------------------
The Board of Directors, which unanimously approved the Stock Purchase
Plan, recommends a vote "FOR" approval of the Stock Purchase Plan.
RATIFICATION OF APPOINTMENT OF ACCOUNTANTS
(Item Number 5 On the Proxy Card)
Upon recommendation of the Audit Committee, the Board of Directors has
appointed PricewaterhouseCoopers LLP, independent public accountants, to audit
Krispy Kreme's accounts for its fiscal year ending January 28, 2001.
PricewaterhouseCoopers LLP audited the accounts of the Company for fiscal 2000
and has served as independent public accountants to Krispy Kreme since 1992.
While ratification by the shareholders of this appointment is not required by
law or by Krispy Kreme's Articles of Incorporation or Bylaws, Krispy Kreme's
management believes that such ratification is desirable. A representative of
PricewaterhouseCoopers LLP is expected to be present at the Annual Meeting, will
have an opportunity to make a statement if he or she so desires, and is expected
to be available to respond to appropriate questions.
The Board of Directors recommends a vote "FOR" ratification of
PricewaterhouseCoopers LLP as independent public accountants to the Company.
EXECUTIVE OFFICERS
The following information as of May 22, 2000 has been furnished by the
executive officers who are not serving as directors. Except as otherwise
indicated, the officers have been or were engaged in their present or last
principal employment, in the same or a similar position, for more than five
years.
Name (Age) Information About the Executive Officer
---------- ---------------------------------------
J. Paul Breitbach (62) 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.
15
<PAGE>
Name (Age) Information About the Executive Officer
---------- ---------------------------------------
Margaret M. Urquhart (50) MARGARET M. URQUHART has been employed by
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 (34) 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 (50) 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 (38) 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. (43) 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. (39) 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.
16
<PAGE>
Name (Age) Information About the Executive Officer
---------- ---------------------------------------
Stan L. Parker (40) STAN L. PARKER has been employed by Krispy
Kreme since August 1998. Mr. Parker has
served as Senior Vice President, Marketing
since March 2000. Previously, he served as
Vice President, Marketing. From June 1988 to
August 1998, Mr. Parker served in a variety
of marketing and strategic planning
positions with Sara Lee Corporation working
on the Hanes, Hanes Her Way, and Champion
brands. His last position at Sara Lee was
Vice President of Hanes Kidswear.
Darryl T. Williams (38) DARRYL T. WILLIAMS has been employed by
Krispy Kreme as Senior Vice President, Sales
since March 2000. Mr. Williams served as
Vice President, Sales of Sara Lee Branded
Apparel, a division of Sara Lee Corporation,
from January 1993 to March 2000.
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.
"All Other Compensation" represent the dollar value of bonuses credited to the
named officers under the Company's stock bonus plans.
Fiscal 2000 Summary Compensation Table
--------------------------------------
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
----------------------------------- ------------
Other Annual All Other
Named Officer Salary Bonus Compensation Ltip Payouts Compensation
------------- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Scott A. Livengood.............. $332,446 $450,339 $66,751 $151,098 $46,331
Chairman of the Board,
President and Chief Executive
Officer
J. Paul Breitbach............... 234,731 298,611 57,547 162,434 33,169
Executive Vice President,
Finance, Administration and
Support Operations
John N. McAleer................. 199,845 254,232 52,903 80,636 28,240
Vice Chairman of the Board and
Executive Vice President,
Concept Development
L. Stephen Hendrix.............. 130,091 125,877 31,824 35,729 16,534
Senior Vice President,
Company Store and Associate
Operations
Robert H. Vaughn, Jr............ 139,792 133,377 3,372 -- 16,425
Senior Vice President, Area
Developer Operations
</TABLE>
17
<PAGE>
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 plan, as amended, and are
nonqualified stock options. The options are for a term of ten years. Because the
Board of Directors reduced the number of shares for which an option was granted
to Mr. Livengood in order to make grants to other employees, the Board
determined that any forfeitures of options by participants for any reason will
be granted to Mr. Livengood, up to a maximum of 140,000 shares. 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 our initial public
offering price on April 4, 2000 of $21.00 per share.
Fiscal Year End Option Values
-----------------------------
<TABLE>
<CAPTION>
Common Shares Value of
Underlying Unexercised Unexercised In-money Options
Named Officer Options At Fiscal Year End At Fiscal Year End
------------- -------------------------- ------------------
<S> <C> <C>
Scott A. Livengood.................................. 580,000 $9,175,600
J. Paul Breitbach................................... 150,000 2,373,000
John N. McAleer..................................... 150,000 2,373,000
L. Stephen Hendrix.................................. 60,000 949,200
Robert H. Vaughn, Jr................................ 60,000 949,200
</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.
18
<PAGE>
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 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.
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.
19
<PAGE>
We funded 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 our initial public offering on April 4, 2000.
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."
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 EQUITY FUND
In March 2000, we established a pooled investment fund, the Krispy
Kreme Equity Group, LLC, which invests in new area developers in certain
markets. Krispy Kreme officers are eligible to invest in the fund. Members of
our Board of Directors who are not Krispy Kreme officers are not eligible to
invest in the fund. Krispy Kreme does not provide any funds to its officers to
invest in the fund or provide guarantees for the investment. The fund invests
exclusively in new area developers, obtaining up to a five percent interest in
them. If any member of the fund withdraws, the fund has a right of first refusal
with respect to the withdrawing member's interest. The remaining members then
have the right to purchase any interest the fund does not purchase. Finally,
Krispy Kreme is obligated to purchase any remaining interest. Members are
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 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:
o An amount equal to his current annual base salary and non-incentive
compensation through the expiration date of the agreement
o 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
20
<PAGE>
o 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-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.
21
<PAGE>
RELATED PARTY TRANSACTIONS
Associates' License Agreements With Related Parties
---------------------------------------------------
We are parties to franchise agreements, referred to as 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.
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 sales to and royalties from our directors' affiliated
franchise companies during the past fiscal year.
Year Ended
Director and Franchise Companies January 30, 2000
-------------------------------- ----------------
in Thousands
Frank E. Guthrie:
Augusta Doughnut Company.......................... $834
Classic City Doughnuts Corp....................... 291
Frank E. Guthrie and Robert L. McCoy:
Magic City Doughnuts Corporation.................. 1,073
Joseph A. McAleer, Jr.:
Mackk LLC......................................... 2,110
Joseph A. McAleer, Jr. and Steven D. Smith:
Dallas Doughnuts.................................. 1,335
Robert L. McCoy:
Gulf Florida Doughnut Corp........................ 2,416
Robert J. Simmons:
Simac, Inc........................................ 997
Steven D. Smith:
Dales Doughnut Corp............................... 833
Dale's Doughnuts of Dothan, Inc................... 315
Smiths Doughnuts, Inc............................. 456
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 sales to and royalties from Dorgan's Doughnuts were
$446,000 in fiscal 2000. Since September 1998, Pat Silvernail has operated two
stores in Macon, Georgia through S&P of Macon, Inc. Total sales to and royalties
from S&P of Macon were $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
22
<PAGE>
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 have terminated 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 has released
these rights in favor of Krispy Kreme in exchange for the right to purchase a
proportionate 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 in any form from the Company 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 owns 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 in any form from the Company 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 sales to and royalties from
Midwest Doughnuts were $1.5 million in fiscal 2000.
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.
23
<PAGE>
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, 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
24
<PAGE>
of the pledged assets. In addition to our obligation under the collateral
repurchase agreement, we are obligated under the guaranty agreement to pay the
lender up to $300,000 in the event Midwest Doughnuts defaults on the loan.
On May 16, 1996, we entered into a guaranty agreement with Branch
Banking and Trust Company for Mr. Waugh and the other members of Midwest
Doughnuts pursuant to the Kingsmill Plan. Under the terms of the agreement, we
agreed to guarantee a loan in the original principal amount of $200,000 obtained
by Mr. Waugh and the other members of Midwest Doughnuts to finance expansion in
the Kansas City market. Our maximum liability under the guaranty was limited to
$175,000. We have been released from the guaranty.
On March 1, 1996, we entered into a collateral repurchase agreement in
favor of Wachovia Bank of North Carolina, N.A. with respect to two separate
loans incurred by Mr. Steven D. Smith, one of our directors, in the original
principal amounts of $310,000 and $900,000. The loans were secured by store
equipment and other personal property and a pledge of Mr. Smith's Krispy Kreme
shares. In the event of default, we were obligated to purchase the pledged
shares from the bank at book value and to repurchase the equipment at a purchase
price equal to the greater of its amortized cost or 20% of its original cost.
Those loans have been fully repaid.
On July 7, 1995, we entered into a collateral repurchase agreement in
favor of First National Bank of Ohio with respect to a loan incurred by Simac,
Inc. in the original principal amount of $340,000. Mr. Robert J. Simmons, a
Krispy Kreme director, is the President and majority owner of Simac, Inc., our
Akron, Ohio franchisee. The loan is secured by the equipment and personal
property assets used in the operation of a Krispy Kreme store located in
Middleburg Heights, Ohio. In the event that Simac, Inc. defaults on the loan, we
are obligated to repurchase the bank's collateral at a purchase price equal to
the lesser of the unpaid balance of the loan or the amortized cost of the
pledged assets. On September 29, 1996, we leased the Middleburg Heights, Ohio
store for a term of five years from Mr. Simmons and certain related parties.
Under the terms of the lease we are required to pay annual rent in the amount of
$72,000 and have the option to purchase the store for a total purchase price
equal to $1.0 million.
On February 25, 1994, we entered into an equipment repurchase and
amendment to associates' license agreement with Mr. William J. Dorgan, a
brother-in-law to Messrs. Joseph A. McAleer, Jr. and John N. McAleer. This
agreement was in connection with financing in the aggregate amount of $1.2
million obtained by Mr. Dorgan and his wife, Mrs. Patricia M. Dorgan, from
Branch Banking and Trust Company, relating to Mr. Dorgan's Biloxi and Gulfport,
Mississippi franchises. Upon termination of Mr. Dorgan's associates' license
agreement for any reason, we are obligated to repurchase some equipment used in
the operation of Mr. Dorgan's stores at a purchase price of $350,000. We also
executed a collateral repurchase 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.
25
<PAGE>
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 a loan to Midwest Doughnuts, LLC in the
principal amount of $66,000, bearing interest at 9.25%. Mr. Waugh, our Senior
Vice President, Franchise Development, is a 50% owner of Midwest Doughnuts. The
loan, which has been fully repaid, were secured by the equipment and property
used in connection with a Krispy Kreme store located in Independence, Missouri.
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 fiscal
year did not exceed $60,000.
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 "Executive Compensation--Other
Compensation."
Policy On Related Party Transactions
------------------------------------
Our Board of Directors has adopted a resolution whereby all
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 will be responsible for reviewing all related party transactions
on a continuing basis and potential conflict of interest situations where
appropriate.
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."
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report sets forth the duties of the Compensation Committee and the
current strategy and components of Krispy Kreme's compensation programs for its
executive officers, which for fiscal 2000 included Mr. Livengood (the Chief
Executive Officer) and officers at the Executive Vice President level and above.
This report also describes the basis on which compensation determinations were
made with respect to these executive officers for the 2000 fiscal year.
The Compensation Committee
--------------------------
The Compensation Committee of the Board of Directors was formed in
fiscal 1999 and comprises three directors. The Compensation Committee is
responsible for the review and approval of the compensation of Krispy Kreme's
Chief Executive Officer and other executive officers and of employee benefit
plans. Among other responsibilities, the Committee specifically:
o Develops, in consultation with management, executive compensation
policies and philosophies;
o Evaluates the performance of the Chief Executive Officer;
o Reviews and recommends to the Board of Directors salary and
incentive compensation, including annual and long-term incentives,
for the Chief Executive Officer;
26
<PAGE>
o Reviews and approves the salaries and incentive compensation for
other executive officers; and
o Reviews and approves the short-term and long-term incentive
compensation programs, including the performance goals, for the
Company's executive officers.
The Committee has retained national executive compensation consulting
firms to advise the Committee and the Company on executive compensation issues.
EXECUTIVE COMPENSATION POLICIES
The Company's executive compensation strategy is designed to establish
a strong connection between the creation of shareholder value and the
compensation earned by its executives--primarily by tying base compensation
increases and incentive compensation to the attainment of Company performance
goals and increases in the Company's stock price. The current general strategy
was formulated in fiscal 1999 with the assistance of PricewaterhouseCoopers LLP.
Krispy Kreme's fundamental executive compensation objectives are to:
o Link executive compensation to the Company's economic performance;
o Promote the achievement of economic goals and focus executive
officers on the creation of shareholder value;
o Maximize Krispy Kreme's growth opportunities and emphasize variable
executive compensation over fixed compensation; and
o Attract and retain executive officers and further align the
interests of these key employees with the interests of Krispy
Kreme's shareholders.
To determine the market for executive compensation in its industry, the
Company studies the compensation paid by a group of its peers to their executive
officers. Krispy Kreme's strategy is to provide compensation which, when
compared with these peer companies, is:
o COMPARABLE with the market when the Company is meeting its targeted
financial goals;
o ABOVE the market when the Company's targeted goals are exceeded; and
o BELOW the market when targeted performance goals are not achieved.
All executive officers, including the Chief Executive Officer,
participate in the same compensation programs as the other executives of the
Company, with the only differences being the amount of compensation that is at
risk, the overall magnitude of the potential awards and the performance criteria
for individual officers. Senior executive officers, such as the Chief Executive
Officer, have a larger percentage of their total compensation at risk on the
basis of Krispy Kreme's performance than do other officers.
EMPLOYMENT CONTRACTS WITH SENIOR EXECUTIVES. Krispy Kreme has entered
into employment contracts with Messrs. Livengood, Breitbach and John N. McAleer,
as described above under "Executive Compensation-- Executive Contracts,
Termination And Change-In-Control Arrangements." The Company also has an
employment contract with its Chief Operating Officer, Ms. Urquhart. The
Compensation Committee believes employment contracts with its most senior
executive officers are appropriate and beneficial to the Company and its
shareholders, as they promote retention of the most valuable and experienced
officers and continuity of high level management.
STOCK OWNERSHIP BY OFFICERS AND OTHER EMPLOYEES. The Committee believes
that executive officers should be encouraged to own the Company's Common Stock
to align further their interests with those of the Company's shareholders. In
fiscal years prior to Krispy Kreme's initial public offering, this goal was
implemented through stock options and restricted stock awards. The initial
public offering presented a new opportunity to review and reemphasize stock
27
<PAGE>
ownership by executives and other employees. In this Proxy Statement, Krispy
Kreme shareholders are being asked to approve two new compensation plans related
to stock ownership by executives and other employees: the 2000 Stock Incentive
Plan (which replaces the 1998 Stock Option Plan under which prior stock options
were granted) and the Employee Stock Purchase Plan. See the descriptions of
these plans appearing above. Other mechanisms recently added to promote stock
ownership by officers and employees include the Stock Bonus Plan and
Supplemental Retirement Plan, as described above under "Executive
Compensation--Other Compensation," and the Retirement Savings Plan, which allows
participants in Krispy Kreme's 401(k) plan to direct that some or all of their
accounts be invested in Krispy Kreme Common Stock. The Committee regularly
consults with advisors to determine the appropriate level of option grants and
other equity incentives for the Company's executives, with particular reference
to the practices of peer companies.
Principal Executive Compensation Elements
-----------------------------------------
Krispy Kreme's executive compensation program comprises the following
principal elements: base salaries; annual incentive stock or cash bonuses; and
long-term stock incentives.
BASE SALARY. Salaries for executive officers are established on the
basis of the qualifications and experience of the executive, the nature of the
job responsibilities and the range of salaries for similar positions at peer
companies. Base salaries for executive officers tend to be below the market for
similar companies, as the Company's compensation strategy is to emphasize
performance-based compensation. Base salaries may be increased periodically for
officers who meet or exceed their individual performance goals. Salaries for
executive officers were increased 7-10% in fiscal 2000 as compared to fiscal
1999. The increases were based upon performance measures, such as the Company's
strong balance sheet for fiscal 1999, the value created by the officers for the
Company and its shareholders and other successful business indicators.
ANNUAL INCENTIVES. Annual incentives for executive officers are
determined under Krispy Kreme's Senior Executive Incentive Compensation Plan
(the "Executive Incentive Plan"), which the Company's shareholders are being
asked to approve in this Proxy Statement. The Executive Incentive Plan ties the
incentive compensation payable to the Chief Executive Officer and other
executive officers directly to the attainment of specific, objective performance
targets, thereby aligning the interests of management with the interests of the
Company's shareholders.
The amount of bonuses potentially payable to executive officers is
determined as a range of percentages of an individual officer's salary. Bonus
amounts are generally established so that an individual's total annual
compensation, assuming a bonus is earned, will be comparable to or exceed the
total annual compensation paid by peer companies to similarly situated officers.
Cash or stock bonuses paid in accordance with the Executive Incentive Plan can
be based on the achievement of any number of enumerated performance criteria.
Exceeding targeted performance measures generally results in higher bonuses,
with caps on bonuses tied to certain criteria.
For fiscal 2000, bonuses for all executive officers were contingent
upon the Company meeting or exceeding targets for two performance measures: (1)
attainment by the Company of a certain level of earnings before interest, taxes
and depreciation and amortization, divided by the Company's assets and (2) a
percentage increase in earnings per share of Common Stock. Both targets were met
or exceeded for fiscal 2000. Bonuses for individual executive officers were
further contingent upon the Company meeting or exceeding other performance
criteria, selected as appropriate for the individual officer's duties. These
individual criteria include systemwide sales growth, store income as a
percentage of sales, store openings, customer satisfaction and other measures.
LONG-TERM STOCK INCENTIVES. The Company's philosophy regarding
long-term incentive compensation is to provide stock option grants that
approximate the median of peer company practices. No options were granted in
fiscal 2000. For details on previous stock option grants under the Company's
1998 Stock Option Plan, see "Executive Compensation--Stock Options" above. The
Company believes that stock options and and other stock incentives play an
integral role in the ability of the Company to attract and retain employees and
directors and to provide incentives for such persons to promote the financial
success of the Company. Moreover, stock incentives benefit the Company by
closely aligning the interests of grantees with the interests of the Company's
shareholders. In furtherance of this policy, the Company's shareholders are
being asked in this Proxy Statement to approve the 2000 Stock Incentive Plan
(the "Stock Incentive Plan") to replace the 1998 Stock Option Plan. Under the
28
<PAGE>
Stock Incentive Plan, employees, including executive officers, non-employee
directors and independent advisors and consultants to the Company and its
subsidiaries, may be granted long-term stock incentives generally in the form of
stock options, stock appreciation rights, restricted stock and performance
units. In addition, shares available for grant under the Stock Incentive Plan
may be used as the currency for payouts under any other compensation plan or
arrangement maintained by the Company.
Other Compensation and Benefits
-------------------------------
The following are some other elements of executive compensation, some
of which are available to non-executive employees.
RETIREMENT INCOME PLAN. The Retirement Income Plan is described in this
Proxy Statement in "Executive Compensation -- Retirement Income Plan for Key
Employees." Benefits under the retirement plan are based on years of service
after 1993 and average final compensation during the employee's career.
STOCK BONUS PLAN. Under the Stock Bonus Plan, described in this Proxy
Statement under "Executive Compensation -- Other Compensation--Stock Bonus
Plan," Krispy Kreme, in its discretion, may make annual contributions to the
plan in the form of either Krispy Kreme stock or, if made in cash, invested
primarily in Krispy Kreme stock. Contributions are allocated to eligible
employees based on a specific percentage of compensation. The Stock Bonus Plan
and the Supplemental Retirement Plan were considered and formulated by the
Company during fiscal 2000 to make the Company's former retirement plans for
executives and non-executive employees more competitive with those of peer
companies.
SUPPLEMENTAL RETIREMENT PLAN. The Supplemental Retirement Plan is
described in this Proxy Statement in "Executive Compensation--Other
Compensation--Supplemental Retirement Plan." The supplemental retirement plan
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.
BENEFITS AND PERQUISITES. Executives also participate in Krispy Kreme's
regular employee benefit programs, including group medical and dental coverage,
group life insurance and group long-term disability insurance. Perquisites
include items such as automobile allowances and club dues.
The Chief Executive Officer's Compensation for Fiscal 2000
----------------------------------------------------------
Compensation decisions for Mr. Livengood, as Chief Executive Officer,
are made under the same methodology used in determining the compensation of
other executives. Mr. Livengood has a greater proportion of his total
compensation at risk than do the other executive officers.
In January 1999, the Committee recommended that the Board increase Mr.
Livengood's annual base salary from $302,223 to $332,446, a 10% increase. The
Committee made its decision based upon the significant value created by Mr.
Livengood's leadership, the Company's strong balance sheet for fiscal 1999 and
other successful business indicators.
The Committee recommended payment to Mr. Livengood of an annual bonus
of $450,339 for fiscal 2000. Mr. Livengood's bonus was earned on the basis of
performance in four Company measures: earnings before interest, taxes and
depreciation and amortization, divided by assets; earnings per share of Common
Stock; total sales; and customer satisfaction.
No stock options or other stock incentives were granted to Mr.
Livengood during fiscal 2000.
Compensation Deductibility Policy
---------------------------------
An income tax deduction under federal law will generally be available
for annual compensation in excess of one million dollars paid to the Chief
Executive Officer and the named officers of a public corporation only if such
29
<PAGE>
compensation is "performance-based" and complies with certain other tax law
requirements. Please see "Compliance with Section 162(m) of the Internal Revenue
Code" under the description of the Stock Incentive Plan above for more details.
The Company's policy is to maximize the deductibility of all executive
compensation. In this regard, shareholders are being asked to approve the Stock
Incentive Plan and the Executive Incentive Plan in this Proxy Statement. Also in
furtherance of this policy, the Committee expects to undertake responsibility in
the future for compensation decisions for all the named officers, in addition to
officers at the Executive Vice President level and above. Notwithstanding this
policy, the Committee retains the discretion to award compensation that is not
deductible under Section 162(m) when it is in the best interests of the Company
and its shareholders to do so.
Summary
-------
The Committee believes the executive compensation policies and programs
maintained by the Company and described in this report serve the interests of
Krispy Kreme and its shareholders and that executive compensation has been
strongly linked to the Company's performance and the enhancement of shareholder
value. The Committee intends to continually reevaluate these compensation
policies and plans, with the assistance of management and advisors, to ensure
that they are appropriately configured to help continue to achieve the Company's
long-term goals of performance, growth and enhancement of shareholder value.
Robert L. Strickland, Chairman--Robert L. McCoy--Joseph A. McAleer, Jr.
30
<PAGE>
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return of the Company's Common Stock against the
cumulative total return of The Nasdaq Composite Index and the Standard & Poor's
Restaurants Index for the period commencing on April 5, 2000 (the first day of
trading of Krispy Kreme's Common Stock on The Nasdaq Stock Market) and ending on
June 5, 2000. The graph assumes an initial investment of $100 and the
reinvestment of any dividends.
[STOCK PERFORMANCE GRAPH APPEARS HERE AND THE NUMBERS ARE REFLECTED IN THE
TABLE BELOW]
<TABLE>
<CAPTION>
Cumulative Total Return
----------------------------------
April 5, 2000 June 5, 2000
------------- ------------
<S> <C> <C>
Krispy Kreme Doughnuts, Inc.......................... 100 161
Nasdaq Composite Index............................... 100 92
Standard & Poor's Restaurants Index.................. 100 94
</TABLE>
VIEW PROXY STATEMENTS AND ANNUAL REPORTS ON THE INTERNET
Krispy Kreme may in the future give its shareholders the option of
viewing Proxy Statements and Annual Reports to Shareholders on the Internet
instead of receiving them by mail. If we make this option available to
shareholders, and if you agree to access future Proxy Statements and Annual
Reports to Shareholders online, we expect you will continue to receive a proxy
card in the mail, but not paper copies of the Proxy Statement and Annual Report
to Shareholders. These proxy cards will contain the web site address and other
necessary information to view the Proxy Statement and Annual Report to
Shareholders online, and to submit your vote. In order to take advantage of the
Internet viewing option, you will need access to a computer, an Internet access
account and may need software such as Adobe Acrobat Reader.
If you wish to take advantage of this option (if and when Krispy Kreme
offers it), you may make this election when completing the enclosed proxy card
for this year's Annual Meeting by checking the appropriate box next to the
statement concerning the viewing of Proxy Statements and Annual Reports of
Shareholders on the Internet. If we offer the option to view these materials
31
<PAGE>
online in the future, your consent to view them online rather than receiving
them by mail will be effective until you cease being a shareholder, until we
cease offering the Internet viewing option or until you revoke your consent. If
you elect to view these materials on the Internet, and then later change your
mind, you may revoke your election at any time by sending a letter to Krispy
Kreme Doughnuts, Inc., 370 Knollwood Street, Winston-Salem, North Carolina
27103, Att'n: Secretary. We will resume sending you paper copies if you revoke
your election.
SHAREHOLDERS' PROPOSALS FOR 2001 ANNUAL MEETING
Any shareholder who wishes to present a proposal appropriate for
consideration at Krispy Kreme's 2001 Annual Meeting of Shareholders must submit
the proposal in proper form to Krispy Kreme at the address set forth on the
first page of this Proxy Statement no later than December 14, 2000 for the
proposal to be considered for inclusion in Krispy Kreme's proxy statement and
form of proxy relating to such Annual Meeting. Krispy Kreme must be notified of
any other shareholder proposal intended to be presented for consideration at the
2001 Annual Meeting not later than February 27, 2001 or else proxies may be
voted on such proposal at the discretion of the persons named in the proxy. The
Company believes these two deadlines are a reasonable time prior to the date it
intends to first mail its Proxy Statement for the 2001 Annual Meeting.
OTHER MATTERS
All of the expenses involved in preparing, assembling, and mailing this
Proxy Statement and the materials enclosed herewith and soliciting proxies will
be paid by Krispy Kreme. We may reimburse banks, brokerage firms and other
custodians, nominees and fiduciaries for expenses reasonably incurred by them in
sending proxy materials to beneficial owners of stock. The solicitation of
proxies will be conducted primarily by mail but may include telephone, telegraph
or oral communications by directors, officers, or regular employees of Krispy
Kreme, acting without special compensation.
The Board of Directors is aware of no other matters, except for those
incidental to the conduct of the Annual Meeting, that are to be presented to
shareholders for formal action at the Annual Meeting. If, however, any other
matters properly come before the Annual Meeting or any postponement,
adjournment, or adjournments thereof, it is the intention of the persons named
in the proxy to vote the proxy in accordance with their judgment.
If you plan to attend the Annual Meeting, please check the appropriate
box on the enclosed proxy. Whether or not you plan to attend, you are urged to
fill in, date and sign the accompanying form of proxy and return it as soon as
possible. If you do attend and wish to vote at the Annual Meeting, you may
revoke your proxy at that time.
BY ORDER OF THE BOARD OF DIRECTORS,
RANDY S. CASSTEVENS
Secretary
<PAGE>
COMMON STOCK
OF KRISPY KREME DOUGHNUTS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE JULY 11, 2000
ANNUAL MEETING OF SHAREHOLDERS.
The undersigned hereby appoints Scott A. Livengood and Randy S.
Casstevens, and each of them, the proxy of the undersigned to vote the Common
Stock of the undersigned at the Annual Meeting of Shareholders of Krispy Kreme
Doughnuts, Inc. (the "Company") to be held on July 11, 2000, and any adjournment
or postponement thereof.
1. Election of directors
Frank E. Guthrie Mary Davis Holt
Robert L. McCoy James H. Morgan
Togo D. West, Jr.
|_| FOR all nominees for director listed above (except as marked
to the contrary).
|_| WITHHOLD AUTHORITY to vote for all nominees
listed above
|_| WITHHOLD AUTHORITY to vote for an individual
nominee. Write name(s) below.
------------------------------------------------------------
2. Approval of the 2000 Stock Incentive Plan.
|_| FOR approval.
|_| AGAINST approval.
|_| ABSTAIN.
3. Approval of the Senior Executive Incentive Compensation Plan.
|_| FOR approval.
|_| AGAINST approval.
|_| ABSTAIN.
4. Approval of the Employee Stock Purchase Plan.
|_| FOR approval.
|_| AGAINST approval.
|_| ABSTAIN.
5. Ratification of the appointment of PricewaterhouseCoopers LLP as the
independent public accountants for the 2001 fiscal year.
|_| FOR ratification.
|_| AGAINST ratification.
|_| ABSTAIN.
6. In accordance with their best judgment with respect to any other
matters that may properly come before the meeting.
<PAGE>
If you agree to view future Proxy Statements and Annual Reports to Shareholders
of the Company on the Internet instead of receiving paper copies in the mail as
described in the accompanying Proxy Statement (to the extent the Company makes
such option available), please check the following box: |_|
If you plan to attend the Annual Meeting of Shareholders in person, please check
the following box: |_|
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THIS PROXY AND ACCOMPANYING PROXY STATEMENT, "FOR" APPROVAL OF
THE 2000 STOCK INCENTIVE PLAN, "FOR" APPROVAL OF THE SENIOR EXECUTIVE INCENTIVE
COMPENSATION PLAN, "FOR" APPROVAL OF THE EMPLOYEE STOCK PURCHASE PLAN, AND "FOR"
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS, AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE
INDICATED IN THE SPACE PROVIDED, THIS PROXY WILL BE SO VOTED.
Date: _________________________, 2000
-----------------------------------
Please sign this
Proxy exactly as
name appears on
the Proxy.
NOTE: WHEN SIGNING AS ATTORNEY, TRUSTEE,
ADMINISTRATOR, OR GUARDIAN, PLEASE GIVE YOUR
TITLE AS SUCH. IN THE CASE OF JOINT TENANTS,
EACH JOINT OWNER MUST SIGN.
