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KKD » Topics » Overview

This excerpt taken from the KKD DEF 14A filed May 11, 2009.

Overview

     During fiscal 2007 and fiscal 2008, the Compensation Committee reviewed all of the compensation arrangements and perquisites of management and the directors. The Compensation Committee’s independent compensation consultant, Frederic W. Cook & Co., Inc. (“Frederic Cook”), assisted the Compensation Committee in this compensation evaluation. In addition, the Compensation Committee, with the assistance of Frederic Cook, evaluated and adjusted our annual and long-term incentive compensation programs to reflect our current governance standards. In fiscal 2009, the Compensation Committee decided not to increase any base salaries or levels of equity awards for executive officers, in furtherance of the Company’s efforts to contain or reduce costs and expenses. The Committee consulted with Frederic Cook regarding its fiscal 2009 equity awards to executive officers.

These excerpts taken from the KKD 10-K filed Apr 17, 2009.

Overview

     Krispy Kreme is a leading branded retailer and wholesaler of high-quality doughnuts and packaged sweets. Our principal business, which began in 1937, is owning and franchising Krispy Kreme doughnut stores at which over 20 varieties of high-quality doughnuts, including our Original Glazed® doughnut, are made, sold and distributed together with complementary products, and where a broad array of coffees and other beverages are offered.

     As of February 1, 2009, there were 523 Krispy Kreme stores operated systemwide in 36 U.S. states and in the District of Columbia, Australia, Bahrain, Canada, Indonesia, Japan, Kuwait, Lebanon, Mexico, the Philippines, Puerto Rico, Qatar, Saudi Arabia, South Korea, the United Arab Emirates and the United Kingdom. The ownership and location of those stores is as follows:

      Domestic       International       Total
Company Stores 93   — 93
Franchise Stores 132   298     430
       Total   225   298 523

     Of the 523 total stores, there were 281 factory stores and 242 satellites.

     Factory stores (stores which contain a doughnut-making production line) often support multiple sales channels to more fully utilize production capacity and reach various consumer segments. These sales channels are comprised of on-premises sales (sales to customers visiting our factory and satellite stores) and off-premises sales (sales to convenience stores, grocery stores/mass merchants and other food service and institutional accounts) as described further under “Business Operations — Company Stores.” Other factory stores, including small factory stores which have less production capacity than relatively larger factory stores, serve only the on-premises distribution channel. Satellite stores, all of which serve only the on-premises distribution channel and which are supplied with doughnuts from a nearby factory store, consist primarily of the hot shop, fresh shop and kiosk store formats. Hot shops contain doughnut heating equipment that allows customers to have a hot doughnut experience throughout the day. Fresh shops and free-standing kiosk locations do not contain doughnut heating equipment.

     Approximately 56% of total domestic store sales (including sales by both Company and franchise stores) represent on-premises sales, and substantially all sales by stores outside the United States are on-premises.

Overview


     Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts and
packaged sweets. Our principal business, which began in 1937, is owning and
franchising Krispy Kreme doughnut stores at which over 20 varieties of
high-quality doughnuts, including our Original Glazed® doughnut, are
made, sold and distributed together with complementary products, and where a
broad array of coffees and other beverages are offered.


     As of
February 1, 2009, there were 523 Krispy Kreme stores operated systemwide in 36
U.S. states and in the District of Columbia, Australia, Bahrain, Canada,
Indonesia, Japan, Kuwait, Lebanon, Mexico, the Philippines, Puerto Rico, Qatar,
Saudi Arabia, South Korea, the United Arab Emirates and the United Kingdom. The
ownership and location of those stores is as follows:
















































      Domestic       International       Total
Company Stores 93   — 93
Franchise
Stores		 132   298     430
       Total   225   298 523


     Of the 523 total stores, there were
281 factory stores and 242 satellites.


     Factory
stores (stores which contain a doughnut-making production line) often support
multiple sales channels to more fully utilize production capacity and reach
various consumer segments. These sales channels are comprised of on-premises
sales (sales to customers visiting our factory and satellite stores) and
off-premises sales (sales to convenience stores, grocery stores/mass merchants
and other food service and institutional accounts) as described further under
“Business Operations — Company Stores.” Other factory stores, including small
factory stores which have less production capacity than relatively larger
factory stores, serve only the on-premises distribution channel. Satellite
stores, all of which serve only the on-premises distribution channel and which
are supplied with doughnuts from a nearby factory store, consist primarily of
the hot shop, fresh shop and kiosk store formats. Hot shops contain doughnut
heating equipment that allows customers to have a hot doughnut experience
throughout the day. Fresh shops and free-standing kiosk locations do not contain
doughnut heating equipment.


     Approximately 56% of total domestic store sales (including sales by both
Company and franchise stores) represent on-premises sales, and substantially all
sales by stores outside the United States are on-premises.


Overview


     Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts and
packaged sweets. Our principal business, which began in 1937, is owning and
franchising Krispy Kreme doughnut stores at which over 20 varieties of
high-quality doughnuts, including our Original Glazed® doughnut, are
made, sold and distributed together with complementary products, and where a
broad array of coffees and other beverages are offered.


     As of
February 1, 2009, there were 523 Krispy Kreme stores operated systemwide in 36
U.S. states and in the District of Columbia, Australia, Bahrain, Canada,
Indonesia, Japan, Kuwait, Lebanon, Mexico, the Philippines, Puerto Rico, Qatar,
Saudi Arabia, South Korea, the United Arab Emirates and the United Kingdom. The
ownership and location of those stores is as follows:
















































      Domestic       International       Total
Company Stores 93   — 93
Franchise
Stores		 132   298     430
       Total   225   298 523


     Of the 523 total stores, there were
281 factory stores and 242 satellites.


     Factory
stores (stores which contain a doughnut-making production line) often support
multiple sales channels to more fully utilize production capacity and reach
various consumer segments. These sales channels are comprised of on-premises
sales (sales to customers visiting our factory and satellite stores) and
off-premises sales (sales to convenience stores, grocery stores/mass merchants
and other food service and institutional accounts) as described further under
“Business Operations — Company Stores.” Other factory stores, including small
factory stores which have less production capacity than relatively larger
factory stores, serve only the on-premises distribution channel. Satellite
stores, all of which serve only the on-premises distribution channel and which
are supplied with doughnuts from a nearby factory store, consist primarily of
the hot shop, fresh shop and kiosk store formats. Hot shops contain doughnut
heating equipment that allows customers to have a hot doughnut experience
throughout the day. Fresh shops and free-standing kiosk locations do not contain
doughnut heating equipment.


     Approximately 56% of total domestic store sales (including sales by both
Company and franchise stores) represent on-premises sales, and substantially all
sales by stores outside the United States are on-premises.


Overview


     Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts and
packaged sweets. Our principal business, which began in 1937, is owning and
franchising Krispy Kreme doughnut stores at which over 20 varieties of
high-quality doughnuts, including our Original Glazed® doughnut, are
made, sold and distributed together with complementary products, and where a
broad array of coffees and other beverages are offered.


     As of
February 1, 2009, there were 523 Krispy Kreme stores operated systemwide in 36
U.S. states and in the District of Columbia, Australia, Bahrain, Canada,
Indonesia, Japan, Kuwait, Lebanon, Mexico, the Philippines, Puerto Rico, Qatar,
Saudi Arabia, South Korea, the United Arab Emirates and the United Kingdom. The
ownership and location of those stores is as follows:
















































      Domestic       International       Total
Company Stores 93   — 93
Franchise
Stores		 132   298     430
       Total   225   298 523


     Of the 523 total stores, there were
281 factory stores and 242 satellites.


     Factory
stores (stores which contain a doughnut-making production line) often support
multiple sales channels to more fully utilize production capacity and reach
various consumer segments. These sales channels are comprised of on-premises
sales (sales to customers visiting our factory and satellite stores) and
off-premises sales (sales to convenience stores, grocery stores/mass merchants
and other food service and institutional accounts) as described further under
“Business Operations — Company Stores.” Other factory stores, including small
factory stores which have less production capacity than relatively larger
factory stores, serve only the on-premises distribution channel. Satellite
stores, all of which serve only the on-premises distribution channel and which
are supplied with doughnuts from a nearby factory store, consist primarily of
the hot shop, fresh shop and kiosk store formats. Hot shops contain doughnut
heating equipment that allows customers to have a hot doughnut experience
throughout the day. Fresh shops and free-standing kiosk locations do not contain
doughnut heating equipment.


     Approximately 56% of total domestic store sales (including sales by both
Company and franchise stores) represent on-premises sales, and substantially all
sales by stores outside the United States are on-premises.


Company Overview

     Krispy Kreme is a leading branded retailer and wholesaler of high-quality doughnuts and packaged sweets. The Company’s principal business, which began in 1937, is owning and franchising Krispy Kreme stores at which over 20 varieties of high-quality doughnuts, including the Company’s Original Glazed® doughnut, are made, sold and distributed together with complementary products, and where a broad array of coffees and other beverages are offered.

     The Company’s stores include factory stores and satellite stores. Factory stores have a doughnut-making production line and are versatile in that many supply multiple sales channels to more fully utilize production capacity. These sales channels are comprised of:

Company Overview


     Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts and
packaged sweets. The Company’s principal business, which began in 1937, is
owning and franchising Krispy Kreme stores at which over 20 varieties of
high-quality doughnuts, including the Company’s Original Glazed®
doughnut, are made, sold and distributed together with complementary products,
and where a broad array of coffees and other beverages are offered.


     The
Company’s stores include factory stores and satellite stores. Factory stores
have a doughnut-making production line and are versatile in that many supply
multiple sales channels to more fully utilize production capacity. These sales
channels are comprised of:



Company Overview


     Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts and
packaged sweets. The Company’s principal business, which began in 1937, is
owning and franchising Krispy Kreme stores at which over 20 varieties of
high-quality doughnuts, including the Company’s Original Glazed®
doughnut, are made, sold and distributed together with complementary products,
and where a broad array of coffees and other beverages are offered.


     The
Company’s stores include factory stores and satellite stores. Factory stores
have a doughnut-making production line and are versatile in that many supply
multiple sales channels to more fully utilize production capacity. These sales
channels are comprised of:



Company Overview


     Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts and
packaged sweets. The Company’s principal business, which began in 1937, is
owning and franchising Krispy Kreme stores at which over 20 varieties of
high-quality doughnuts, including the Company’s Original Glazed®
doughnut, are made, sold and distributed together with complementary products,
and where a broad array of coffees and other beverages are offered.


     The
Company’s stores include factory stores and satellite stores. Factory stores
have a doughnut-making production line and are versatile in that many supply
multiple sales channels to more fully utilize production capacity. These sales
channels are comprised of:



This excerpt taken from the KKD DEF 14A filed May 2, 2008.

Overview

     Over the past several years, our Company has been affected by numerous significant events, including governmental investigations and litigation, restatements of our financial statements, declines in our business performance and significant management and director changes. As a result of these and other events, our compensation practices and policies have been significantly affected.

     As previously disclosed, the Special Committee of the Board of Directors issued a report of its findings and directives for remedial actions in August 2005. As part of that report, the Special Committee directed that remedial actions be taken with respect to our compensation policies and practices, including that the Board must take an entirely fresh look at the compensation arrangements and perquisites for management and the directors.

     During fiscal 2007 and fiscal 2008, as directed by the Special Committee, the Compensation Committee reviewed all of the compensation arrangements and perquisites of management and the directors. The Compensation Committee’s independent compensation consultant, Frederic W. Cook & Co., Inc. (“Frederic Cook”), assisted the Compensation Committee in its compensation evaluation. In addition, the Compensation Committee, with the assistance of Frederic Cook, evaluated and adjusted our annual and long-term incentive compensation programs to reflect our current governance standards.

These excerpts taken from the KKD 10-K filed Apr 17, 2008.

Company Overview

     Krispy Kreme is a leading branded retailer and wholesaler of high-quality doughnuts. The Company’s principal business, which began in 1937, is owning and franchising Krispy Kreme doughnut stores at which over 20 varieties of high-quality doughnuts, including the Company’s signature hot Original Glazed® doughnut, are made, sold and distributed together with complementary products, and where a broad array of coffees and other beverages are offered.

     The Company’s stores include factory stores and satellite stores. Factory stores have a doughnut-making production line and are versatile in that many supply multiple sales channels to more fully utilize production capacity. These sales channels are comprised of:

  • On-premises sales. Sales to customers visiting Company and franchise factory and satellite stores, including sales made through drive-through windows, along with discounted sales to community organizations that in turn sell doughnuts for fundraising purposes.
     
  • Off-premises sales. Daily sales of fresh doughnuts primarily on a branded basis to a variety of retail customers, such as convenience stores, grocery stores/mass merchants and other food service and institutional accounts. Doughnuts are sold to these customers on trays for display and sale in glass-enclosed cases and in packages for display and sale on both stand-alone display units and on customers’ shelves.

     Traditional factory stores have the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Commissaries, which are production facilities used principally to serve off-premises customers domestically and to supplement factory stores focused on on-premises sales internationally, have the highest production capacities of factory stores. As of February 3, 2008, there were 22 commissaries systemwide, six of which were operated by the Company. Other factory stores often engage in both on-premises and off-premises sales, with the allocation between such channels dependent on the particular capacity of the store and the characteristics of the markets in which the stores operate. Each factory store has significant fixed or semi-fixed costs, and margins and profitability are significantly affected by doughnut production volume and sales. As of February 3, 2008, there were 295 Krispy Kreme factory stores systemwide, consisting of 97 Company stores and 198 franchise stores.

     Satellite stores consist primarily of the hot shop, fresh shop and kiosk formats. The Company has begun introducing hot shops, which utilize tunnel oven doughnut heating and finishing technology scaled to accommodate principally on-premises sales in a store approximately one-half the size of a traditional factory store. Hot shop technology allows customers to have a hot doughnut experience throughout the day. Fresh shops and free-standing kiosks are satellite stores that do not contain doughnut heating technology, and are substantially smaller than a traditional factory store. In each of these three formats, the Company typically sells fresh doughnuts and beverages, with the doughnuts supplied by nearby factory stores. As of February 3, 2008, 48 hot shops, 67 fresh shops and 39 kiosks were open systemwide; the Company operated five of those hot shops and three of those fresh shops. The Company views the hot shop, fresh shop and kiosk formats as additional ways to achieve market penetration in a variety of market sizes and settings.

     The Company is working to refine its domestic store operating model to focus on a “hub and spoke” system, under which multiple satellite stores in a market are provided doughnuts from a single traditional factory store or commissary at which all doughnut production for the market takes place. The objectives of the hub and spoke model are to, among other things:

  • reduce the investment required to produce a given level of sales and reduce operating costs by operating smaller satellite stores instead of larger, more expensive factory stores;

28

  • achieve greater production efficiencies by centralizing doughnut production to minimize the burden of fixed costs;
     
  • achieve greater consistency of product quality through a reduction in the number of doughnut-making locations;
     
  • enable store employees to focus on achieving excellence in customer satisfaction and in-shop consumer experience; and
     
  • stimulate an increase in on-premises sales of doughnuts and complementary products by increasing the number of retail distribution points to provide customers more convenient access to the Company’s products.

     Because the hub and spoke concept has not been completely refined, the Company does not expect that the Company or its franchisees will open a significant number of domestic factory stores in the near future. The Company has converted several of its traditional factory stores to hot shops using tunnel oven technology to reduce operating costs and increase the number of hours each day the stores offer the Company’s hot Original Glazed® doughnuts. Certain franchisees also have converted factory stores to hot shops. The Company plans to convert additional factory stores to hot shops in fiscal 2009, and to begin construction of a limited number of satellite locations in order to continue development and demonstrate the operation of the hub and spoke concept.

     In addition, the Company is developing a strategy to refranchise certain geographic markets, expected to consist principally of, but not necessarily limited to, markets outside the Company’s traditional base in the Southeast. The franchise rights and other assets in many of these markets were acquired by the Company in business combinations in prior years. Because the Company has not completed the development of its detailed refranchising plans and has not entered into any new domestic franchise agreements in several years, the Company cannot predict the likelihood of refranchising any such markets or the amount of any proceeds which might be received therefrom, including the amounts which might be realized from the sale of store assets and the execution of any related franchise agreements. Refranchising could result in the recognition of impairment losses on the related assets.

     Like other retail and restaurant companies, the Company constantly evaluates the performance of its stores and from time to time decides to close locations whose performance no longer meets Company standards.

     Markets outside the United States are a source of growth. As of February 3, 2008, there were a total of 204 Krispy Kreme stores (including 119 satellites) operated internationally, which were located in Australia, Canada, Hong Kong, Indonesia, Japan, Kuwait, Mexico, the Philippines, Qatar, Saudi Arabia, South Korea, the United Arab Emirates and the United Kingdom. The Company owned five of the Canadian stores and had an equity interest in the franchisees operating stores in Mexico and Western Canada. The Company currently does not expect to own equity interests in international area developers formed in the future. Based on continued research and experience with international stores, the Company is focusing international development efforts primarily on opportunities in markets in Asia and the Middle East. The development and franchise agreements for territories outside the United States (which include the countries listed above) provide for the development of over 170 additional stores in fiscal 2009 and thereafter.

     The Company is vertically integrated to help maintain the consistency and quality of products throughout the Krispy Kreme system. In addition, through vertical integration, the Company utilizes volume-buying power, which the Company believes helps lower the cost of supplies to stores and enhances profitability. The supply chain business unit, KK Supply Chain, produces doughnut mixes and manufactures doughnut-making equipment, which all factory stores are required to purchase. Additionally, this business unit operates two distribution centers that are capable of supplying domestic stores and certain international stores with key supplies. This business unit is volume-driven, and its economics are enhanced by the opening of new stores and the growth of sales by existing stores.

29

     The Company has three reportable segments as defined in Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” as described below.

  • Company Stores. The Company Stores segment is comprised of the operating activities of the stores operated by the Company. These stores sell doughnuts and complementary products through the sales channels described above under “Company Overview.” Expenses for this business segment include store level expenses along with direct general and administrative expenses and certain allocated corporate costs.
     
  • Franchise. The Franchise segment consists of the Company’s store franchise operations. The Company has two principal franchise programs: the Associate program, which is the Company’s original franchising program developed in the 1940s, and the Area Developer program, which was developed in the mid-1990s. Associates generally pay royalties of 3.0% of on-premises sales and 1.0% of all other sales. Area Developers typically pay royalties of 4.5% to 6.0% of all sales and one-time development and franchise fees ranging from $20,000 to $50,000 per store. The Company has informed its area developers that it will reduce the royalty rate on off-premises sales to 3.5% in fiscal 2009. Domestic Area Developers are required to contribute 1.0% of their sales to the Brand Fund. International Area Developers generally are required to contribute 0.25% of their sales to the Brand Fund. Some Associates contribute 1.0% of their sales to the Brand Fund. The Company is reducing, for an indefinite period, the Brand Fund contribution rate for domestic Area Developers and for participating Associates to 0.75% effective at the beginning of fiscal 2009. Expenses for this business segment include costs incurred to recruit new franchisees, to assist with store openings, and to monitor and aid in the performance of these stores, as well as direct general and administrative expenses and certain allocated corporate costs.
          
  • KK Supply Chain. The KK Supply Chain segment buys and processes ingredients it uses to produce doughnut mixes and manufactures doughnut-making equipment that all factory stores are required to purchase. The KK Supply Chain segment also purchases and sells key supplies, including icings and fillings, other food ingredients, juices, signage, display cases, uniforms and other items. In October 2007, the Company ceased production at its coffee roasting facility and sold its coffee roasting assets, and simultaneously entered into an agreement with the purchaser to supply the Company’s coffee needs. All intersegment sales from the KK Supply Chain segment to the Company Stores segment have been eliminated in consolidation. Expenses for this business unit include all expenses incurred at the manufacturing and distribution level along with direct general and administrative expenses and certain allocated corporate costs.

     The FTC’s Trade Regulation Rule on Franchising (“FTC Rule”) and certain state and foreign laws require the Company to furnish prospective franchisees with a franchise disclosure document containing information prescribed by the FTC Rule and applicable state and foreign laws and regulations. The Company has amended its Franchise Disclosure Document (“FDD”) to conform it to new FTC disclosure requirements, and has submitted the amended FDD for registration in those states in which the Company has registered its franchise offering. The Company currently is able to offer franchises in all states except Maryland.

     Several franchisees have been experiencing financial pressures which, in certain instances, became more exacerbated during fiscal 2008. The Company has guaranteed certain obligations of franchisees in which it has an equity interest, as described in “Other Commitments and Contingencies” in Note 12 to the consolidated financial statements appearing elsewhere herein. In the fourth quarter of fiscal 2008, the Company recorded a provision for estimated payments under guarantees related to a franchisee of $3.0 million; during the quarter, the franchisee defaulted on certain of the obligations guaranteed by the Company. During the year ended February 3, 2008, two of the Company’s other franchisees filed for reorganization under Chapter 11 of the United States Bankruptcy Code. One of these bankruptcy cases was substantially concluded in February 2008 upon the sale of the franchisee’s assets to, and assumption of most of its franchise agreements by, a successor franchisee; the other franchise operation is continuing to operate under court supervision. Franchisees opened 88 stores and closed 26 stores in fiscal 2008. While franchisees have contractual commitments to open over 170 additional stores in

30

fiscal 2009 and thereafter, the Company believes franchisees also will close additional stores in the future, and the number of such closures may be significant. Royalty revenues and most of KK Supply Chain revenues are directly correlated to sales by franchise stores and, accordingly, franchise store closures have an adverse effect on the Company’s revenues, results of operations and cash flows.

Company Overview


     Krispy Kreme
is a leading branded retailer and wholesaler of high-quality doughnuts. The
Company’s principal business, which began in 1937, is owning and franchising
Krispy Kreme doughnut stores at which over 20 varieties of high-quality
doughnuts, including the Company’s signature hot Original Glazed®
doughnut, are made, sold and distributed together with complementary products,
and where a broad array of coffees and other beverages are offered.


     The
Company’s stores include factory stores and satellite stores. Factory stores
have a doughnut-making production line and are versatile in that many supply
multiple sales channels to more fully utilize production capacity. These sales
channels are comprised of:



  • On-premises sales. Sales to customers
    visiting Company and franchise factory and satellite stores, including sales
    made through drive-through windows, along with discounted sales to community
    organizations that in turn sell doughnuts for fundraising
    purposes.
     
  • Off-premises sales. Daily sales of fresh
    doughnuts primarily on a branded basis to a variety of retail customers, such
    as convenience stores, grocery stores/mass merchants and other food service
    and institutional accounts. Doughnuts are sold to these customers on trays for
    display and sale in glass-enclosed cases and in packages for display and sale
    on both stand-alone display units and on customers’ shelves.

     Traditional
factory stores have the capacity to produce from 4,000 dozen to over 10,000
dozen doughnuts daily. Commissaries, which are production facilities used
principally to serve off-premises customers domestically and to supplement
factory stores focused on on-premises sales internationally, have the highest
production capacities of factory stores. As of February 3, 2008, there were 22
commissaries systemwide, six of which were operated by the Company. Other
factory stores often engage in both on-premises and off-premises sales, with the
allocation between such channels dependent on the particular capacity of the
store and the characteristics of the markets in which the stores operate. Each
factory store has significant fixed or semi-fixed costs, and margins and
profitability are significantly affected by doughnut production volume and
sales. As of February 3, 2008, there were 295 Krispy Kreme factory stores
systemwide, consisting of 97 Company stores and 198 franchise stores.


     Satellite
stores consist primarily of the hot shop, fresh shop and kiosk formats. The
Company has begun introducing hot shops, which utilize tunnel oven doughnut
heating and finishing technology scaled to accommodate principally on-premises
sales in a store approximately one-half the size of a traditional factory store.
Hot shop technology allows customers to have a hot doughnut experience
throughout the day. Fresh shops and free-standing kiosks are satellite stores
that do not contain doughnut heating technology, and are substantially smaller
than a traditional factory store. In each of these three formats, the Company
typically sells fresh doughnuts and beverages, with the doughnuts supplied by
nearby factory stores. As of February 3, 2008, 48 hot shops, 67 fresh shops and
39 kiosks were open systemwide; the Company operated five of those hot shops and
three of those fresh shops. The Company views the hot shop, fresh shop and kiosk
formats as additional ways to achieve market penetration in a variety of market
sizes and settings.


     The Company
is working to refine its domestic store operating model to focus on a “hub and
spoke” system, under which multiple satellite stores in a market are provided
doughnuts from a single traditional factory store or commissary at which
all doughnut production for the market takes place. The objectives of the hub
and spoke model are to, among other things:



  • reduce the investment required to produce a given
    level of sales and reduce operating costs by operating smaller satellite
    stores instead of larger, more expensive factory stores;

28





  • achieve greater production efficiencies by
    centralizing doughnut production to minimize the burden of fixed
    costs;
     
  • achieve greater consistency of product quality
    through a reduction in the number of doughnut-making
    locations;
     
  • enable store employees to focus on
    achieving excellence in customer satisfaction and in-shop consumer
    experience; and
     
  • stimulate an increase in on-premises sales of
    doughnuts and complementary products by increasing the number of retail
    distribution points to provide customers more convenient access to the
    Company’s products.

     Because the
hub and spoke concept has not been completely refined, the Company does not
expect that the Company or its franchisees will open a significant number of
domestic factory stores in the near future. The Company has converted several of
its traditional factory stores to hot shops using tunnel oven technology to
reduce operating costs and increase the number of hours each day the stores
offer the Company’s hot Original Glazed® doughnuts. Certain
franchisees also have converted factory stores to hot shops. The Company plans
to convert additional factory stores to hot shops in fiscal 2009, and to begin
construction of a limited number of satellite locations in order to
continue development and demonstrate the operation of the hub and spoke
concept.


     In addition,
the Company is developing a strategy to refranchise certain geographic markets,
expected to consist principally of, but not necessarily limited to, markets
outside the Company’s traditional base in the Southeast. The franchise rights
and other assets in many of these markets were acquired by the Company in
business combinations in prior years. Because the Company has not completed the
development of its detailed refranchising plans and has not entered into any new
domestic franchise agreements in several years, the Company cannot predict the
likelihood of refranchising any such markets or the amount of any proceeds which
might be received therefrom, including the amounts which might be realized from
the sale of store assets and the execution of any related franchise agreements.
Refranchising could result in the recognition of impairment losses on the
related assets.


     Like other
retail and restaurant companies, the Company constantly evaluates the
performance of its stores and from time to time decides to close locations whose
performance no longer meets Company standards.


     Markets
outside the United States are a source of growth. As of February 3, 2008, there
were a total of 204 Krispy Kreme stores (including 119 satellites) operated
internationally, which were located in Australia, Canada, Hong Kong, Indonesia,
Japan, Kuwait, Mexico, the Philippines, Qatar, Saudi Arabia, South Korea, the
United Arab Emirates and the United Kingdom. The Company owned five of the
Canadian stores and had an equity interest in the franchisees operating stores
in Mexico and Western Canada. The Company currently does not expect to own
equity interests in international area developers formed in the future. Based on
continued research and experience with international stores, the Company is
focusing international development efforts primarily on opportunities in markets
in Asia and the Middle East. The development and franchise agreements for
territories outside the United States (which include the countries listed above)
provide for the development of over 170 additional stores in fiscal 2009 and
thereafter.


     The Company
is vertically integrated to help maintain the consistency and quality of
products throughout the Krispy Kreme system. In addition, through vertical
integration, the Company utilizes volume-buying power, which the Company
believes helps lower the cost of supplies to stores and enhances profitability.
The supply chain business unit, KK Supply Chain, produces doughnut mixes and
manufactures doughnut-making equipment, which all factory stores are required to
purchase. Additionally, this business unit operates two distribution centers
that are capable of supplying domestic stores and certain international stores
with key supplies. This business unit is volume-driven, and its economics are
enhanced by the opening of new stores and the growth of sales by existing
stores.


29




     The Company
has three reportable segments as defined in Statement of Financial Accounting
Standards No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” as described below.



  • Company Stores. The Company Stores segment
    is comprised of the operating activities of the stores operated by the
    Company. These stores sell doughnuts and complementary products through the
    sales channels described above under “Company Overview.” Expenses for this
    business segment include store level expenses along with direct general and
    administrative expenses and certain allocated corporate
    costs.
     
  • Franchise. The Franchise segment consists
    of the Company’s store franchise operations. The Company has two principal
    franchise programs: the Associate program, which is the Company’s original
    franchising program developed in the 1940s, and the Area Developer program,
    which was developed in the mid-1990s. Associates generally pay royalties of
    3.0% of on-premises sales and 1.0% of all other sales. Area Developers
    typically pay royalties of 4.5% to 6.0% of all sales and one-time development
    and franchise fees ranging from $20,000 to $50,000 per store. The Company has
    informed its area developers that it will reduce the royalty rate on
    off-premises sales to 3.5% in fiscal 2009. Domestic Area Developers are
    required to contribute 1.0% of their sales to the Brand Fund. International
    Area Developers generally are required to contribute 0.25% of their sales to
    the Brand Fund. Some Associates contribute 1.0% of their sales to the Brand
    Fund. The Company is reducing, for an indefinite period, the Brand Fund
    contribution rate for domestic Area Developers and for participating
    Associates to 0.75% effective at the beginning of fiscal 2009. Expenses for
    this business segment include costs incurred to recruit new franchisees, to
    assist with store openings, and to monitor and aid in the performance of these
    stores, as well as direct general and administrative expenses and certain
    allocated corporate costs.
          
  • KK Supply Chain. The KK Supply Chain
    segment buys and processes ingredients it uses to produce doughnut mixes and
    manufactures doughnut-making equipment that all factory stores are required to
    purchase. The KK Supply Chain segment also purchases and sells key supplies,
    including icings and fillings, other food ingredients, juices, signage,
    display cases, uniforms and other items. In October 2007, the Company ceased
    production at its coffee roasting facility and sold its coffee roasting
    assets, and simultaneously entered into an agreement with the purchaser to
    supply the Company’s coffee needs. All intersegment sales from the KK Supply
    Chain segment to the Company Stores segment have been eliminated in
    consolidation. Expenses for this business unit include all expenses incurred
    at the manufacturing and distribution level along with direct general and
    administrative expenses and certain allocated corporate costs.

     The FTC’s
Trade Regulation Rule on Franchising (“FTC Rule”) and certain state and foreign
laws require the Company to furnish prospective franchisees with a franchise
disclosure document containing information prescribed by the FTC Rule and
applicable state and foreign laws and regulations. The Company has amended its
Franchise Disclosure Document (“FDD”) to conform it to new FTC disclosure
requirements, and has submitted the amended FDD for registration in those states
in which the Company has registered its franchise offering. The Company
currently is able to offer franchises in all states except Maryland.


     Several
franchisees have been experiencing financial pressures which, in certain
instances, became more exacerbated during fiscal 2008. The Company has
guaranteed certain obligations of franchisees in which it has an equity
interest, as described in “Other Commitments and Contingencies” in Note 12 to
the consolidated financial statements appearing elsewhere herein. In the fourth
quarter of fiscal 2008, the Company recorded a provision for estimated
payments under guarantees related to a franchisee of $3.0 million; during the
quarter, the franchisee defaulted on certain of the obligations guaranteed by
the Company. During the year ended February 3, 2008, two of the Company’s other
franchisees filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. One of these bankruptcy cases was substantially concluded in
February 2008 upon the sale of the franchisee’s assets to, and assumption of
most of its franchise agreements by, a successor franchisee; the other franchise
operation is continuing to operate under court supervision. Franchisees opened
88 stores and closed 26 stores in fiscal 2008. While franchisees have
contractual commitments to open over 170 additional stores in


30




fiscal 2009 and thereafter, the Company
believes franchisees also will close additional stores in the future, and the
number of such closures may be significant. Royalty revenues and most of KK
Supply Chain revenues are directly correlated to sales by franchise stores and,
accordingly, franchise store closures have an adverse effect on the Company’s
revenues, results of operations and cash flows.


This excerpt taken from the KKD 10-Q filed Sep 6, 2007.

  Overview

     Systemwide sales for the first six months of fiscal 2008 decreased approximately 1.7% compared to the first six months of fiscal 2007. The decrease was attributable to a 2.0% decrease in average weekly sales per store partially offset by a 0.6% increase in store operating weeks. The systemwide sales decrease reflects a 5.6% decrease in Company Stores sales and a 1.1% increase in franchise store sales. On a same store basis (as described below), systemwide on-premises sales decreased 2.1% in the first six months of fiscal 2008 compared to the first six months of fiscal 2007.

33

This excerpt taken from the KKD 10-Q filed Jun 4, 2007.
  Overview 

     Systemwide sales for the first quarter of fiscal 2008 decreased approximately 2.8% from the first quarter of fiscal 2007. The decrease was attributable to a 1.5% decrease in average weekly sales per store and a 1.0% decrease in store operating weeks. The systemwide sales decrease reflects a 6.4% decrease in Company Stores sales, while franchise store sales were essentially unchanged from the prior year quarter. On a same store basis (as described below), systemwide on-premises sales decreased 2.4% in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007.

This excerpt taken from the KKD DEF 14A filed Apr 27, 2007.

Overview

     Over the past several years, our company has been affected by numerous significant events, including governmental investigations and litigation, restatements of our financial statements, declines in our business performance and significant management and director changes. As a result of these and other events, our compensation practices and policies have been significantly affected.

     As discussed above under “Election of Directors—Board and Committee Information—Board Committees—Special Committee,” the Special Committee of the Board of Directors issued a report of its findings and directives for remedial actions in August 2005. As part of that report, the Special Committee directed that the following remedial actions be taken with respect to our compensation policies and practices:

  • The Board must take an entirely fresh look at the compensation arrangements and perquisites for management and the directors;
     
  • The current stock option and incentive compensation programs must be discontinued and, with the assistance of an independent compensation consultant, replaced with new programs that reflect current governance standards;
     
  • With respect to the equity components of new programs, the Board must institute a requirement that all or a very substantial portion be held by recipients until one year after they terminate employment or Board service or be subject to forfeiture provisions;
     
  • Targets for any cash or equity-based incentive plan must be carefully established and, in particular, must not be based, implicitly or explicitly, on meeting or exceeding earnings guidance;
     
  • The proper accounting for all compensation plans must be ascertained by Krispy Kreme, and the independent auditors asked to comment specifically on the appropriateness of Krispy Kreme’s accounting for compensation plans that are material to the financial statements as part of their quarterly and annual discussions with the Audit Committee; and
     
  • Krispy Kreme’s SEC filings must contain clear and complete disclosure about any material financial impact of its compensation plans and the accounting for those plans.

     During fiscal 2007, as directed by the Special Committee, the Compensation Committee began the process of reviewing all of the compensation arrangements and perquisites of management and the directors. The Compensation Committee’s independent compensation consultant, Frederic W. Cook & Co., Inc. (“Frederic Cook”), is assisting the Compensation Committee in its compensation evaluation. In addition, the Compensation Committee, with the assistance of Frederic Cook, is in the process of evaluating and adjusting our annual and long-term incentive compensation programs to reflect our current governance standards.

     On October 24, 2006, the Compensation Committee granted (effective November 2, 2006) stock options to certain of our executive officers under our 2000 Stock Incentive Plan and on December 4, 2006, the Compensation Committee approved cash incentive awards to certain of our executive officers under a newly-designed annual incentive plan and awards of restricted stock to certain of our executive officers under our 2000 Stock Incentive Plan. Other than pursuant to certain employment and services agreements, these were the first such awards made to executive officers since August 2004.

This excerpt taken from the KKD 10-K filed Apr 12, 2007.

   Overview

     Systemwide sales for fiscal 2006 decreased 16.6% compared to fiscal 2005, reflecting an 18.0% decrease in average weekly sales per store, slightly offset by a 1.7% increase in store operating weeks. The systemwide sales decrease reflects a 21.6% decrease in Company Stores sales and a 12.6% decrease in franchise store sales. During fiscal 2006, three new company factory stores and 13 new franchise factory stores were opened and 47 company factory stores and 42 franchise factory stores were closed, for a net decrease of 73 factory stores. As a result, the total number of factory stores at the end of fiscal 2006 was 323, consisting of 128 company stores (including 15 owned by Glazed Investments), 148 Area Developer franchise stores (including 49 owned by franchisees in which the Company has a minority equity interest) and 47 Associate franchise stores.

     Total revenues decreased 23.2% to $543.4 million in fiscal 2006 from $707.8 million in fiscal 2005. This decrease was comprised of a 21.6% decrease in Company Stores revenues to $398.5 million, a 25.6% decrease in Franchise revenues to $18.4 million and a 27.7% decrease in KK Supply Chain revenues to $126.5 million.

This excerpt taken from the KKD 10-K filed Oct 31, 2006.
Overview
 
Systemwide sales for fiscal 2005 increased 8.5% compared to fiscal 2004. This increase was primarily attributable to a 10.9% increase in systemwide factory stores to 396 at the end of fiscal 2005 from 357 at the


47

Table of Contents

end of fiscal 2004 and the full year impact of factory stores opened in fiscal 2004. The systemwide sales increase reflects a 15.0% increase in Company Store sales and a 3.3% increase in franchise store sales. During fiscal 2005, 24 new company factory stores and 36 new franchise factory stores were opened and 14 company factory stores and seven franchise factory stores were closed, for a net increase of 39 factory stores. Additionally, 24 Area Developer franchise stores became company stores as a result of the consolidation of KremeKo and New England Dough pursuant to FIN 46(R) as explained more fully in Note 1 to the consolidated financial statements appearing elsewhere herein. As a result, the total number of factory stores at the end of fiscal 2005 was 396, consisting of 175 company stores (including 51 which are owned by consolidated franchisees), 167 Area Developer franchise stores (including 60 owned by franchisees in which the Company has an equity interest) and 54 Associate franchise stores.
 
Total revenues increased 9.0% to $707.8 million in fiscal 2005 from $649.3 million in fiscal 2004. This increase was comprised of a 15.0% increase in Company Stores revenues to $508.1 million and a 5.2% increase in Franchise revenues to $24.7 million partially offset by a 5.0% decrease in KKM&D revenues to $174.9 million.
 

EXCERPTS ON THIS PAGE:

DEF 14A
May 11, 2009
10-K (8 sections)
Apr 17, 2009
DEF 14A
May 2, 2008
10-K (2 sections)
Apr 17, 2008
10-Q
Sep 6, 2007
10-Q
Jun 4, 2007
DEF 14A
Apr 27, 2007
10-K
Apr 12, 2007
10-K
Oct 31, 2006

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