KRISPY KREME DOUGHNUTS INC - FORM 10-K/A - February 22, 2013

Attached files

file filename
EX-23.2 - CONSENT OF BLACKMAN KALLICK, LLP - KRISPY KREME DOUGHNUTS INCexhibit23-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) - KRISPY KREME DOUGHNUTS INCexhibit31-1.htm
EX-32.2 - CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - KRISPY KREME DOUGHNUTS INCexhibit32-2.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A) - KRISPY KREME DOUGHNUTS INCexhibit31-2.htm
EX-32.1 - CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - KRISPY KREME DOUGHNUTS INCexhibit32-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
———————— 
Form 10-K/A
 
(Mark one)
þ        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the fiscal year ended January 29, 2012
     
OR
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from       to

Commission file number 001-16485
KRISPY KREME DOUGHNUTS, INC.
(Exact name of registrant as specified in its charter)
 
North Carolina 56-2169715
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
370 Knollwood Street, 27103
Winston-Salem, North Carolina (Zip Code)
(Address of principal executive offices)  

Registrant’s telephone number, including area code:
(336) 725-2981
 
Securities registered pursuant to Section 12(b) of the Act:
 
  Name of
  Each Exchange
  on Which
Title of Each Class Registered
Common Stock, No Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
 
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
 
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
 
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
 
     The aggregate market value of voting and non-voting common equity of the registrant held by nonaffiliates of the registrant as of July 29, 2011 was $553.4 million.
 
     Number of shares of Common Stock, no par value, outstanding as of March 16, 2012: 68,097,098.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
     Portions of the definitive proxy statement for the registrant’s 2012 Annual Meeting of Shareholders to be held on June 12, 2012 are incorporated by reference into Part III hereof.
 

EXPLANATORY NOTE

     This Form 10-K/A (“Amendment No. 1”) amends the Registrant’s Annual Report on Form 10-K for the year ended January 29, 2012, filed with the Securities and Exchange Commission on March 30, 2012 (the “Original Report”). The purpose of this Amendment No. 1 is to amend the following items in the Original Report:

              1.        Item 15(a)(3), “Exhibits,” is amended to correct the spelling of Blackman Kallick, LLP in the Description of Exhibit 23.2.
 
2. Item 15(c)(1), “Separate Financial Statements of 50 Percent or Less Owned Persons,” is amended to provide the signed report of Blackman Kallick, LLP with respect to the financial statements of Kremeworks, LLC as of December 28, 2011 and December 29, 2010, and for each of the three years in the period ended December 28, 2011.

     This Amendment No. 1 has no effect on the Registrant’s consolidated financial statements. Except as described above, this amendment does not amend, update or change any other items or disclosures contained in the Original Report or otherwise reflect events that occurred subsequent to the filing of the Original Report.

     Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the certifications required pursuant to the rules promulgated under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, which were included as exhibits to the Original Report, have been amended, restated and re-executed as of the date of this Amendment No. 1 and are included as Exhibits 31.1, 31.2, 32.1 and 32.2 hereto.

3


PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Financial Statements and Schedules

1. Financial Statements. See Item 8, “Financial Statements and Supplementary Data.”
       
  2.   Financial Statement Schedules.  
      For each of the three fiscal years in the period ended January 29, 2012:  
             Schedule I — Condensed Financial Information of Registrant F-1
                 
  3.   Exhibits.  

Exhibit
Number		 Description of Exhibits
3.1 — Restated Articles of Incorporation of the Registrant (incorporated by reference to exhibit 3.1 to the Registrant’s Annual Report on Form 10-K filed on April 15, 2010)
3.2 — Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on December 15, 2008)
4.1 — Form of Certificate for Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 4 to Registration Statement on Form S-1 (Commission File No. 333-92909) filed on April 3, 2000)
4.2 — Shareholder Protection Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, dated as of January 14, 2010 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on January 19, 2010)
4.3 —       Warrant to purchase Common Stock issued by Krispy Kreme Doughnuts, Inc. in favor of Marsh & McLennan Risk Capital Holdings Ltd. (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on September 2, 2010)
4.4   —   Warrant Agreement, dated as of March 2, 2007, between Krispy Kreme Doughnuts, Inc. and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on March 8, 2007)
10.1   —   Trademark License Agreement, dated May 27, 1996, between HDN Development Corporation and Krispy Kreme Doughnut Corporation (incorporated by reference to Exhibit 10.22 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909), filed on February 22, 2000)
10.2   —   Amended and Restated Employment Agreement, dated as of March 11, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and James H. Morgan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 17, 2011)**
10.3   —   Employment Agreement, dated as of November 28, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Kenneth A. May (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 28, 2011)**
10.4   —   Amended and Restated Employment Agreement, dated as of March 11, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Douglas R. Muir (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 17, 2011)**
10.5   —   Amended and Restated Employment Agreement, dated as of March 11, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Jeffrey B. Welch (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 17, 2011)**

4


Exhibit
Number		 Description of Exhibits
10.6   —   Amended and Restated Employment Agreement, dated as of March 11, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Kenneth J. Hudson (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on March 17, 2011)**
10.7   —   Amended and Restated Employment Agreement, dated as of March 11, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and M. Bradley Wall (incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on March 17, 2011)**
10.8   —   Amended and Restated Employment Agreement, dated as of March 11, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Cynthia A. Bay (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2011)**
10.9   —   Amended and Restated Employment Agreement, dated as of March 11, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and Darryl R. Marsch (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2011)**
10.10   —   Amended and Restated Employment Agreement, dated as of March 11, 2011, among Krispy Kreme Doughnuts, Inc., Krispy Kreme Doughnut Corporation and G. Dwayne Chambers (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2011)*
10.12       —   Krispy Kreme Doughnut Corporation Nonqualified Deferred Compensation Plan, effective October 1, 2000 (incorporated by reference to Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for fiscal 2005 filed on April 28, 2006)**
10.13   —   1998 Stock Option Plan dated August 6, 1998 (incorporated by reference to Exhibit 10.23 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-92909) filed on February 22, 2000)**
10.14   —   2000 Stock Incentive Plan, as amended as of January 31, 2011 (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2011)**
10.15   —   Form of Restricted Stock Agreement under the 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K filed on April 17, 2009) **
10.16   —   Form of Restricted Stock Unit Agreement under the 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed on March 17, 2011)**
10.17   —   Form of Director Restricted Stock Unit Agreement under the 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2011)**
10.18       —       Form of Nonqualified Stock Option Agreement under the 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed on March 17, 2011)**
10.19   —   Form of Incentive Stock Option Agreement under the 2000 Stock Incentive Plan (incorporated by reference Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 3, 2011)**
10.20     —   Annual Incentive Plan (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K filed on April 17, 2008)**
10.21     —   Compensation Recovery Policy (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K filed on April 17, 2009)**
10.22     —   Credit Agreement, dated as of January 28, 2011, among Krispy Kreme Doughnut Corporation, Krispy Kreme Doughnuts, Inc., the Lenders party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 1, 2011)

5


Exhibit
Number		 Description of Exhibits
10.23   —   Amendment No. 1, dated as of September 15, 2011, to the Credit Agreement dated as of January 28, 2011, among Krispy Kreme Doughnut Corporation, Krispy Kreme Doughnuts, Inc., the Lenders party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on December 2, 2011)
10.24     —   Security Agreement, dated as of January 28, 2011, among Krispy Kreme Doughnut Corporation, Krispy Kreme Doughnuts, Inc., the Pledgors party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 1, 2011)
10.25     —   Guaranty Agreement, dated as of January 28, 2011, among Krispy Kreme Doughnuts, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 1, 2011)
10.26   —   Form of Indemnification Agreement entered into between Krispy Kreme Doughnuts, Inc. and Lizanne Thomas and Michael Sutton (incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed on October 8, 2004)**
10.27     —   Form of Indemnification Agreement entered into between Krispy Kreme Doughnuts, Inc. and members of the Registrant’s Board of Directors (other than Lizanne Thomas and Michael Sutton) (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K for fiscal 2005 filed on April 26, 2006)**
10.28     —   Form of Indemnification Agreement entered into between Krispy Kreme Doughnuts, Inc. and Officers of the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 18, 2007)
21 *   —   List of Subsidiaries
23.1 *   —   Consent of PricewaterhouseCoopers LLP
23.2 ****   —   Consent of Blackman Kallick, LLP
24 *   —   Powers of Attorney of certain officers and directors of the Company (included on the signature page of this Annual Report on Form 10-K)
31.1 ****   —   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2 ****     —   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
32.1 ****   —   Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 ****   —   Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 — The following materials from our Annual Report on Form 10-K for the year ended January 29, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statement of Operations for each of the three years in the period ended January 29, 2012; (ii) the Consolidated Balance Sheet as of January 29, 2012 and January 30, 2011; (iii) the Consolidated Statement of Cash Flows for each of the three years in the period ended January 29, 2012; (iv) the Consolidated Statement of Changes in Shareholders’ Equity for each of the three years in the period ended January 29, 2012; and (v) the Notes to the Consolidated Financial Statements, tagged as block text***

6


____________________

* Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year ended January 29, 2012 under the same exhibit number.
 
** Identifies management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item 15(b), “Exhibits and Financial Statement Schedules — Exhibits,” of this Annual Report on Form 10-K.
 
***       Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
****       Filed herewith.

Our SEC file number for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 001-16485.

(c) Separate Financial Statements of 50 Percent or Less Owned Persons
 
      1.       Financial Statements of Kremeworks, LLC  
      Index to Financial Statements F-1

7


SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  Krispy Kreme Doughnuts, Inc.
   
   
Date: February 22, 2013 By: /s/ Douglas R. Muir  
  Name:     Douglas R. Muir
  Title: Executive Vice President and Chief
    Financial Officer
    (Duly Authorized Officer and Principal Financial Officer)

8


KREMEWORKS, LLC AND SUBSIDIARY

Page
Index to Financial Statements:
Independent Auditor’s Report F-2
Consolidated Balance Sheet as of December 28, 2011 and December 29, 2010 F-3
Consolidated Statement of Operations for each of the Three Years in the Period Ended December 28, 2011 F-5
Consolidated statement of Cash Flows for Each of the Three Years in the Period Ended December 28, 2011 F-6
Consolidated Statement of Changes in Equity for Each of the Three Years in the Period Ended December 28, 2011 F-7
Notes to Consolidated Financial Statements F-8

F-1


Independent Auditor’s Report

Members
KremeWorks, LLC and Subsidiary

We have audited the accompanying consolidated balance sheets of KremeWorks, LLC and Subsidiary as of December 28, 2011 and December 29, 2010, and the related consolidated statements of loss, cash flows and changes in equity for each of the years in the three-year period ended December 28, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KremeWorks, LLC and Subsidiary as of December 28, 2011 and December 29, 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 2011 in conformity with accounting principles generally accepted in the United States of America.

/s/ Blackman Kallick, LLP
Chicago, Illinois
March 26, 2012

F-2


KremeWorks, LLC and Subsidiary

Consolidated Balance Sheets
December 28, 2011 and December 29, 2010

Assets

      2011       2010
Current Assets
       Cash $      575,834 $      660,582
       Receivables
              Credit cards 35,875 33,721
              Wholesale 33,845 42,141
              Other 14,010 14,871
       Inventories 371,895 307,815
       Prepaid expenses 5,523 9,901
                     Total Current Assets 1,036,982 1,069,031
 
Property and Equipment (Net of accumulated
       depreciation and amortization) 12,279,990 13,808,472
 
Deferred Area Development and Franchise Fees, Net 100,227 242,398
 
$ 13,417,199 $ 15,119,901

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

F-3


Liabilities and Equity

      2011       2010
Current Liabilities
       Notes payable to affiliates $      3,600,000 $      3,600,000
       Current portion of long-term debt 3,975,789 5,120,212
       Accounts payable
              Trade 124,442 134,986
              Affiliated entities 534,265 534,117
       Accrued expenses
              Salaries and wages 334,405 365,315
              Sales tax 20,368 18,388
              Rent and real estate taxes 15,424 27,897
              Accrued legal fees 55,633 94,519
              Accrued interest 1,334,469 1,203,702
              Other 114,307 103,578
 
                     Total Current Liabilities 10,109,102 11,202,714
 
Deferred Rent 1,887,096 1,956,719
 
                     Total Liabilities 11,996,198 13,159,433
 
Equity
       KremeWorks, LLC members' equity 5,763 15,670
       Noncontrolling interest 1,415,238 1,944,798
 
                     Total Equity 1,421,001 1,960,468
 
$ 13,417,199 $ 15,119,901

F-4


KremeWorks, LLC and Subsidiary

Consolidated Statements of Loss
Years Ended December 28, 2011, December 29, 2010 and December 30, 2009

      2011       2010       2009
Sales $      17,730,626 $      16,984,430 $      17,091,291
Cost of Sales - Food and Beverage 4,510,068 4,011,224 3,656,477
Gross Profit after Food and Beverage 13,220,558 12,973,206 13,434,814
Store Payroll and Benefits 5,362,607 5,111,451 5,252,585
Gross Profit 7,857,951 7,861,755 8,182,229
Store Operating Expenses (Income)
       Direct operating 1,428,112 1,447,017 1,442,366
       Marketing 329,608 328,569 670,991
       Occupancy 1,993,210 1,968,432 1,910,504
       Depreciation and amortization 1,253,987 2,090,873 2,718,167
       Impairment charge 446,042 - 615,000
       Gain on sale of assets (35,500 ) - -
       Gain on lease termination (221,874 ) - -
       Store general and administrative 601,169 536,756 507,634
       Delivery 21,466 25,672 23,010
       Other 87,110 87,405 82,039
              Total Store Operating Expenses, Net 5,903,330 6,484,724 7,969,711
Income from Store Operations 1,954,621 1,377,031 212,518
Other Operating Expenses
       Other general and administrative 753,404 965,288 765,994
       Divisional payroll and benefits 443,367 571,712 589,879
       Royalty fees 788,576 753,407 769,140
       Management fee 709,084 679,635 682,599
       Franchise expense 142,172 16,333 16,334
       Marketing fees 174,498 127,118 128,187
              Total Other Operating Expenses 3,011,101 3,113,493 2,952,133
Loss from Operations (1,056,480 ) (1,736,462 ) (2,739,615 )
Interest Expense 268,530 299,557 398,820
Net Loss (1,325,010 ) (2,036,019 ) (3,138,435 )
Less Net Loss Attributable to the
       Noncontrolling Interest 492,763 1,299,696 646,090
Net Loss Attributable to KremeWorks, LLC $ (832,247 ) $ (736,323 ) $ (2,492,345 )

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

F-5


KremeWorks, LLC and Subsidiary

Consolidated Statements of Cash Flows
Years Ended December 28, 2011, December 29, 2010 and December 30, 2009

      2011       2010       2009
Cash Flows from Operating Activities
       Net loss $      (1,325,010 ) $      (2,036,019 ) $      (3,138,435 )
       Adjustments to reconcile net loss to net
              cash provided by operating activities
       Depreciation and amortization 1,270,320 2,107,206 2,766,510
       Deferred rent 152,251 172,816 92,076
       Gain on lease termination (221,874 ) - -
       Impairment charge 446,042 - 615,000
       Gain on sale of assets (35,500 ) - -
       Deferred area development and
              franchise fee write off 125,838 - -
       (Increase) decrease in
              Receivables 7,003 (37,311 ) 15,104
              Inventories (64,080 ) 28,698 52,270
              Prepaid expenses 4,378 3,620 160,143
       Increase in
              Accounts payable 751,933 798,079 617,222
              Accrued expenses 86,221 178,299 61,466
 
                     Total Adjustments 2,522,532 3,251,407 4,379,791
 
                     Net Cash Provided by
                            Operating Activities 1,197,522 1,215,388 1,241,356
 
Cash Flows from Investing Activities
       Capital expenditures (171,547 ) (196,746 ) (84,055 )
       Proceeds from sale of assets 35,500 - -
 
                     Net Cash Used in
                            Investing Activities (136,047 ) (196,746 ) (84,055 )
 
Cash Flows from Financing Activities
       Principal payments on long-term debt (1,144,423 ) (1,664,423 ) (2,149,928 )
       Ownership redemption (200,000 ) - -
       Member contributions 200,000 439,800 1,035,200
       Distributions to noncontrolling interest (1,800 ) - -
 
                     Net Cash Used in
                            Financing Activities (1,146,223 ) (1,224,623 ) (1,114,728 )
 
Net (Decrease) Increase in Cash (84,748 ) (205,981 ) 42,573
 
Cash, Beginning of Year 660,582 866,563 823,990
 
Cash, End of Year $ 575,834 $ 660,582 $ 866,563

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

F-6


KremeWorks, LLC and Subsidiary

Consolidated Statements of Changes in Equity
Years Ended December 28, 2011, December 29, 2010 and December 30, 2009

KremeWorks, LLC Members' Equity
Kreme-
Works, LLC
Member Accumulated Members’ Noncontrolling Total
      Contributions       Deficit       Equity (Deficit)       Interest       Equity
Balance, December 31, 2008 $      4,921,657 $      (4,603,597 ) $      318,060 $      3,890,584 $      4,208,644
       Net loss - (2,492,345 ) (2,492,345 ) (646,090 ) (3,138,435 )
       Member contributions 2,003,430 - 2,003,430 - 2,003,430
 
Balance, December 30, 2009 6,925,087 (7,095,942 ) (170,855 ) 3,244,494 3,073,639
       Net loss - (736,323 ) (736,323 ) (1,299,696 ) (2,036,019 )
       Member contributions 922,848 - 922,848 - 922,848
 
Balance, December 29, 2010 7,847,935 (7,832,265 ) 15,670 1,944,798 1,960,468
       Net loss - (832,247 ) (832,247 ) (492,763 ) (1,325,010 )
       Ownership interest redemption - (139,989 ) (139,989 ) (34,997 ) (174,986 )
       Member distributions - - - (1,800 ) (1,800 )
       Member contributions 962,329 - 962,329 - 962,329
 
Balance, December 28, 2011 $ 8,810,264 $ (8,804,501 ) $ 5,763 $ 1,415,238 $ 1,421,001

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

F-7


KremeWorks, LLC and Subsidiary

Notes to Consolidated Financial Statements

Note 1 - Industry Operations

KremeWorks, LLC and Subsidiary (the Company) have franchise rights to develop 23 Krispy Kreme doughnut stores in the states of Washington, Oregon, Hawaii and Alaska. As of December 28, 2011, the Company owns and operates 11 Krispy Kreme stores, of which eight are located in Washington, two are located in Oregon and one is located in Hawaii. The Company opened its first store on October 30, 2001. The Company opened one store in 2001, two stores in 2002, five stores in 2003 and three stores in 2004.

During 2011, the Company terminated its lease and franchise agreements related to its Burlington, WA location. Under the terms of the lease termination agreement, the Company received gross proceeds of $350,000 subsequent to year-end and was responsible for closing costs including the landlord’s closing costs. Net proceeds of $271,104 were received subsequent to year-end. During 2011, the Company recorded an impairment charge of approximately $446,000 on the location’s property and equipment and a gain on lease termination of approximately $222,000 as a result of writing off the deferred rent liability associated with the location’s terminated lease. In accordance with the provisions of the lease termination agreement, the Burlington, WA store ceased operations on January 8, 2012.

KremeWorks, LLC (KremeWorks) owns 80% of its subsidiary, KremeWorks USA, LLC (KW USA), which in turn owns 95% of its subsidiary, KremeWorks Oregon (KWO) and 100% of its subsidiaries, KremeWorks Washington (KWW), KremeWorks Hawaii (KWH) and KremeWorks Alaska (KWA).

KremeWorks is owned 67.8% by Stone Dozen, LLC (Stone Dozen), 25% by Krispy Kreme Doughnut Corporation (KKDC), 3.5% by partners of Lettuce Entertain You Enterprises, Inc. (Lettuce) and 3.7% by a member of Stone Dozen.

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of KremeWorks and its 80%-owned subsidiary, KW USA. All significant intercompany balances and transactions have been eliminated.

The Company operating agreements contain a provision stating that the amount of loss allocated to a member cannot create or increase a deficit in a member’s capital account if and to the extent that any other member has a positive capital account balance. If losses are ever allocated disproportionately as a result of this arrangement, an equal amount of subsequent profits will be allocated disproportionately until the member’s capital account is in accordance with the member’s respective interest on a cumulative basis.

In 2011 and 2010, a disproportionate amount of KW USA’s loss was allocated to the noncontrolling interest of KW USA to prevent KremeWorks from having a deficit balance in its capital account. A portion of this allocation, in the amount of $196,320, related to loss that was incorrectly allocated to KremeWorks in 2009.

In 2011 and 2010, a disproportionate amount of KWO’s loss was allocated to KW USA as the noncontrolling interest of KWO did not have a positive capital balance. As of December 30, 2009, KW USA’s capital account was in accordance with its ownership interest in KWO on a cumulative basis.

Fiscal Year

The Company has a 52/53-week fiscal year ending on the last Wednesday in December. The fiscal years ended on December 28, 2011, December 29, 2010 and December 30, 2009 each contained 52 weeks.

Revenue Recognition

Sales of food and beverages are recognized as revenue at the point of sale.

F-8


KremeWorks, LLC and Subsidiary

Notes to Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies (Continued)

Cash

Substantially all cash is held at Bank of America, N.A. The cash held in this institution may exceed federally insured limits from time to time. The Company has not experienced any losses in this account. The Company believes it is not exposed to any significant credit risk on cash.

Inventories

Inventories are valued at lower of cost (first-in, first-out) or market.

Property and Equipment

The Company’s policy is to depreciate the cost of property and equipment over the estimated useful lives of the assets using the straight-line method. The cost of leasehold improvements is amortized over the remaining term of the lease or the useful lives, if shorter, using the straight-line method. The average estimated depreciable lives for financial reporting purposes are as follows:

      Years
Leasehold improvements 20
Furniture, fixtures and equipment 7
Automobiles 3
Computer equipment 3

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (typically a store) might not be recoverable. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the estimated fair value of the asset. As previously discussed in Note 1, the Company recognized an impairment charge of $446,042 on its Burlington, WA store in 2011. The Company also recognized an impairment charge of $615,000 on one of its Washington stores in 2009. (See Note 3.)

Deferred Area Development and Franchise Fees

KremeWorks had entered into an area development agreement with KKDC to develop and operate 23 Krispy Kreme stores. On March 9, 2011, KKDC provided written confirmation that KremeWorks had no further obligations under this development agreement. As of the date of these consolidated financial statements, KremeWorks has no present or future plans to open additional stores. Therefore, the Company wrote off $120,000 of deferred area development fees in 2011.

KremeWorks originally paid KKDC a $230,000 development fee, or $10,000 per store. In conjunction with the development agreement with KKDC, KremeWorks has also entered into a franchise fee agreement with KKDC whereby KremeWorks is required to pay a $25,000 franchise fee for each Krispy Kreme store that it opens. The $10,000 per store development fee is credited toward this franchise fee. These fees are being amortized over the lives of the respective stores’ leases on a straight-line basis. During 2011, the Company wrote off $5,838 of unamortized franchise fees related to the closing of its Burlington, WA store. As of December 28, 2011 and December 29, 2010, the Company has capitalized area development and franchise fees in the amount of $250,000 and $395,000, respectively. As of December 28, 2011 and December 29, 2010, accumulated amortization for area development and franchise fees totaled $149,773 and $152,602, respectively.

F-9


KremeWorks, LLC and Subsidiary

Notes to Consolidated Financial Statements

Note 2 - Summary of Significant Accounting Policies (Continued)

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense was $221,595, $197,321 and $248,031 in 2011, 2010 and 2009, respectively, and is included in store operating expenses in the consolidated statements of loss.

Financial Instruments

A financial instrument is cash, evidence of ownership interest in an entity or certain contracts involving future conveyances of cash or other financial instruments. The carrying values of the Company’s financial instruments approximate fair value.

Aspects of the Limited Liability Company

The Company is treated as a partnership for federal income tax purposes. Consequently, federal income taxes are not payable by, or provided for, the Company. Members are taxed individually on their shares of the Company’s earnings. Accordingly, the consolidated financial statements do not reflect a provision for income taxes. The operating agreement provides for the allocation of profits, losses and distributions in proportion to each member’s respective interest.

All member units are identical in rights, preferences and privileges.

The Company has a limited life and, according to its Articles of Organization, will dissolve no later than December 31, 2052.

Income Taxes

The Company’s application of accounting principles generally accepted in the United States of America (GAAPUSA) regarding uncertain tax positions had no effect on its financial position as management believes the Company has no uncertain tax positions. The Company would account for any potential interest or penalties related to possible future liabilities for unrecognized income tax benefits as income tax expense. The Company is no longer subject to examination by tax authorities for federal, state or local income taxes for periods before 2008.

Management Estimates

The preparation of financial statements in conformity with GAAPUSA requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 3 - Fair Value Measurements

GAAPUSA defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAPUSA describes three approaches to measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. GAAPUSA does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the hierarchy while Level 3 inputs are given the lowest priority.

F-10


KremeWorks, LLC and Subsidiary

Notes to Consolidated Financial Statements

Note 3 - Summary of Significant Accounting Policies (Continued)

Assets and liabilities carried at fair value are classified in one of the following three categories based on the nature of the inputs used to determine their respective fair values:

  • Level 1 - Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
     
  • Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.
     
  • Level 3 - Unobservable inputs that are not corroborated by market data. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.

As required by GAAPUSA, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect their placement within the fair value hierarchy levels.

The following table sets forth by level within the fair value hierarchy the Company’s assets that were accounted for at fair value on a nonrecurring basis as of December 28, 2011:

2011
            Quoted Prices       Significant             Total Gains
Fair Values in Active Other Significant (Losses) for the
as of Markets for Observable Unobservable Year Ended
December 28, Identical Assets Inputs Inputs December 28,
Description 2011 (Level 1) (Level 2) (Level 3) 2011
Property and
       equipment held
       and used $      271,104 $      - $      - $      271,104 $           (446,042 )

During 2011, the Company wrote-down its property and equipment associated with its Burlington, WA store. The fair value reflects the proceeds received in connection with this location’s lease termination agreement which was previously described in Note 1.

The following table sets forth by level within the fair value hierarchy the Company’s assets that were accounted for at fair value on a nonrecurring basis as of December 30, 2009:

      2009
      Quoted Prices       Significant             Total Gains
Fair Values in Active Other Significant (Losses) for the
as of Markets for Observable Unobservable Year Ended
December 30, Identical Assets Inputs Inputs December 30,
Description 2009 (Level 1) (Level 2) (Level 3) 2009
Property and
       equipment held  
       and used $       685,000 $       - $       - $       685,000 $            (615,000 )

F-11


KremeWorks, LLC and Subsidiary

Notes to Consolidated Financial Statements

Note 3 - Fair Value Measurements (Continued)

During 2009, the Company wrote-down its property and equipment associated with its Puyallup, Washington store. The fair value reflected the sales price at which the property and equipment was being marketed based on local market conditions. The Company was unable to sell the property and equipment due to the refusal of the landlord to consent to a sale and assignment of the Company’s property and lease. The Company was engaged in litigation with the landlord in the state of Ohio to determine whether the landlord had the right to deny consent. Such litigation was settled in the Company’s favor during 2011, but management has decided not to sell this property and equipment since the Puyallup store’s operating results have improved significantly since 2009.

Note 4 - Inventories

      2011       2010
Food and beverages $       274,172 $       198,350
Packaging 65,453 59,019
Merchandise 32,270 50,446
 
$ 371,895 $ 307,815

Note 5 - Property and Equipment

      2011       2010
Leasehold improvements $       19,369,967 $       20,622,008
Furniture, fixtures and equipment 13,707,117 14,383,205
Automobiles 189,059 408,468
Computer equipment 160,730 165,220
 
33,426,873 35,578,901
Less accumulated depreciation
       and amortization (21,146,883 ) (21,770,429 )
 
$ 12,279,990 $ 13,808,472
 

Note 6 - Long-Term Debt

      2011       2010
Note payable to Bank of America in monthly principal
installments of $50,994 plus interest at the 30-day LIBOR rate
plus 2.50%. A final balloon payment of $1,927,733 is due on
October 31, 2012. $       2,437,677 $       3,229,611
Note payable to Bank of America in monthly principal
installments of $29,374 plus interest at the 30-day LIBOR rate
plus 2.50%. A final balloon payment of $1,244,371 is due on
October 31, 2012. 1,538,112 1,890,601
       Total long-term debt 3,975,789 5,120,212
 
Less current maturities (3,975,789 ) (5,120,212 )
$ - $ -

F-12


KremeWorks, LLC and Subsidiary

Notes to Consolidated Financial Statements

Note 6 - Long-Term Debt (Continued)

The notes payable to Bank of America were renewed and amended on October 31, 2011, are collateralized by substantially all of the Company’s assets and are guaranteed by the members of Stone Dozen and by KKDC up to an aggregate original amount of $10,666,667. Of that amount, the members of Stone Dozen have personally guaranteed $8,000,000 and KKDC has guaranteed $2,666,667. The borrowings under these notes are also subject to certain restrictive covenants including financial covenants related to leverage and cash flow ratios. It is management’s expectation that these notes will be refinanced in 2012.

Interest expense on the above notes was $134,133, $173,902 and $264,812 in 2011, 2010 and 2009, respectively.

Total interest expense was $268,530, $299,557 and $399,023 in 2011, 2010 and 2009, respectively.

Note 7 - Operating Leases

The Company conducts its operations in facilities under operating leases. Minimum rent is recognized over the term of the leases using the straight-line method. The Company’s substantial investment in long-lived leasehold improvements was deemed to constitute a penalty under GAAPUSA in determining the lease term for each lease. In addition to minimum rent, the leases require the payment of common area expenses and real estate taxes. Total rental expense for the facilities was $1,728,915, $1,726,135 and $1,677,048 in 2011, 2010 and 2009, respectively. See Note 1 for information regarding termination of the lease agreement for the Burlington, WA location.

The following is a schedule by year of future minimum lease payments required under the operating leases as of December 28, 2011:

Fiscal Year Ending:      
2012 $       1,455,883
2013 1,509,405
2014 1,675,523
2015 1,677,446
2016 1,697,070
Later years 11,699,016
 
$ 19,714,343

Note 8 - Related Party Transactions

The Company is affiliated through common ownership with KremeWorks Canada, LP, Stone Dozen and various entities associated with Lettuce, as well as Lettuce itself. In the normal course of business, the affiliated entities transfer inventory and share personnel and record such transfers at cost.

The Company has entered into a management agreement with Lettuce and Stone Dozen whereby it pays a management fee for services provided based on 4% of sales. The management fee amounted to $709,084, $679,635 and $682,599 for 2011, 2010 and 2009, respectively. Lettuce’s portion of this management fee was $137,500 in 2011, 2010 and 2009, with the remainder payable to Stone Dozen. Services provided include, but are not limited to, accounting and payroll services, human resources, licensing and marketing. Stone Dozen also serves as a disbursing agent and paymaster for the Company’s payroll. Lettuce serves as a workers’ compensation and health insurance administrator in a group self-insurance program.

In conjunction with the development agreement between KremeWorks and KKDC described in Note 2, the Company is required to pay royalty fees to KKDC on a weekly basis equal to 4.5% of gross sales, excluding wholesale sales, for which the royalty fee is equal to 1.75%. Royalty fees paid to KKDC totaled $788,576, $753,407 and $769,140 in 2011, 2010 and 2009, respectively.

F-13


KremeWorks, LLC and Subsidiary

Notes to Consolidated Financial Statements

Note 8 - Related Party Transactions (Continued)

The Company’s franchise agreement with KKDC requires the Company to purchase furnishings, fixtures, equipment, signs, doughnut mixes and other supplies that have been approved by KKDC for Krispy Kreme stores. KKDC is the sole supplier for certain doughnut production equipment and all doughnut mixes. Purchases from KKDC totaled $4,256,484, $3,443,303 and $3,136,431 in 2011, 2010 and 2009, respectively. As of December 28, 2011 and December 29, 2010, the amount due to KKDC for the previously described purchases totaled $350,737 and $359,347, respectively. This liability is included in the accounts payable to affiliated entities in the Company’s consolidated balance sheets. 

As of December 28, 2011 and December 29, 2010, KW USA had a note payable to Stone Dozen in the amount of $2,700,000. The note is due on demand and bears interest at the prime rate plus ½%. Interest expense on this note for 2011, 2010 and 2009 was $100,739, $94,241 and $100,973, respectively. As of December 28, 2011 and December 29, 2010, KW USA also had a note payable to KKDC, due on demand in the amount of $900,000, bearing interest at the prime rate plus ½%. Interest expense on this note for 2011, 2010 and 2009 was $33,658, $31,414 and $33,658, respectively. The loans from Stone Dozen and KKDC are pursuant to an agreement between the two companies and are in amounts that approximate the ratio of their respective ownership interests in KW USA.

A member of Stone Dozen is an attorney and his law firm provides legal services to the Company. The total expense for these services was $79,826, $26,689 and $253 for 2011, 2010 and 2009, respectively.

See Note 9 for additional related party transactions.

Note 9 - Other Cash Flow Information

Cash paid for interest amounted to $137,763, $178,375 and $296,637 for 2011, 2010 and 2009, respectively.

During 2011, Stone Dozen and KKDC made capital contributions in the amounts of $571,747 and $190,582, respectively, by forgiving amounts owed to them by the Company.

During 2010, Stone Dozen and KKDC made capital contributions in the amounts of $542,136 and $180,712, respectively, by forgiving amounts owed to them by the Company.

During 2009, Stone Dozen and KKDC made capital contributions in the amounts of $546,322 and $182,108, respectively, by forgiving amounts owed to them by the Company.

During 2009, there were capital contributions totaling $1,275,000, of which $239,800 was a receivable at year-end. Payment was received in January 2010.

Note 10 - Ownership Redemption

An officer’s employment with the Company terminated on November 16, 2005, and the Company had been accruing a $25,014 liability for the officer’s 5% restricted interest since that time. This amount was calculated based on an agreement between the officer and the Company, but the officer questioned the amount and filed a complaint in the state of Washington contesting the valuation. In 2011, the Company reached a settlement with the former officer for an amount of $200,000. The $174,986 difference between the settlement amount and the original accrual has been recognized as ownership redemption in the Company’s 2011 consolidated statement of changes in equity.

F-14


KremeWorks, LLC and Subsidiary

Notes to Consolidated Financial Statements

Note 11 - Status of Operations

The Company has experienced significant losses over the last seven years. While the Company is still generating positive cash flows from operations, members of KremeWorks made significant cash contributions to enable the Company to meet its cash flow needs and debt service requirements in 2011, 2010 and 2009. The Company’s current debt agreement with Bank of America expires on October 31, 2012 at which time approximately $3,700,000 in principal payments will become due. Management believes that it will be able to negotiate a new debt agreement with Bank of America or a similar institution. Management also believes operating cash flows will recover in the near future to a level that will allow the Company to meet its ongoing cash flow needs.

In the event that management’s expectations mentioned above are not realized, alternative sources of financing might be required for the Company to continue operations beyond the near term.

Note 12 - Subsequent Events

The Company has evaluated subsequent events through March 26, 2012, the date the 2011 consolidated financial statements were available to be issued, and March 25, 2011 with respect to the comparative 2010 consolidated financial statements.

F-15

KRISPY KREME DOUGHNUTS INC Reports

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