CASE! ‘| Krispy Kreme Doughnuts, Inc. ‘As the millennium began, the future for Krispy Kreme Doughnuts, Inc., smelled ‘sweet, Not only could the company boast iconic status and a nearly cultlike follow. ing it had quickly become a darling of Wall Street. Less than a year after its initial public offering, in April 2000, Krispy Kreme shares were selling for 62 times earn- ings and, by 2003, Fortune magazine had dubbed the company “the hottest brand in “America.” With ambitious plans to open 500 doughnut shops over the first half of the ‘decade, the company's distinctive green-and-red vintage logo and unmistakable “Hot Doughnuts Now” neon sign had become ubiquitous, ‘At the end of 2004, however, the sweet story had begun to sour as the company made several accounting revelations, after which its stock price sank. From its peak in August 2003, Krispy Kreme’s stock price plummeted more than 80% in the next 416 months. Investors and analysts began asking probing questions about the com- pany’s fundamentals, but even by the beginning of 2005, many of those questions Temained unanswered, Exhibits 1 and 2 provide Krispy Kreme’s financial statements for fiscal-years 2000 through 2004, Was this « healthy company? What had happened to the company that some had thought would become the next Starbucks? If almost everyone loved the doughnuts, why were so many investors fleeing the popular doughnut maker? Company Background Krispy Kreme began as single doughnut shop in Winston-Salem, North Carolina, in 1937, when Vernon Rudolph, who had acquired the company's special dough rut recipe from a French chef in New Orleans, started making and selling dough- nuts wholesale to supermarkets. Within 2 short time, Rudolph’s products became 50 popular that he cut a hole in his factory’s wall to sell directly to customers— thus was born the central Krispy Kreme retail concept: the factory store. By the Jate 1950s, Krispy Kreme had 29 shops in 12 states, many of which were operated by franchisees. ‘Fs case was prepared by Sean Car (MBA "03), under the direction of Robert F. Bruner ofthe Darden Grade School of Busines Adminstration was wven a basis for lass discussion rather tant astra ‘ectve or neffetve handling ofan administrative suaton. Copyright © 2005 by the University of Virginia Darden School Foundation, Charlotesil, VA, Al ights reserved. To onder copes, send oneal sales @dardenbusinespublshng om. No port ofthis publicarion may Be reproduced stored in retrieval Ipstem sed ina spreadsheet, or transmited inary form or by any means—electroni, mechanical, ‘protcopying, recording. or ofhernise—withou the pemission ofthe Darden Schoo! Foundation126 Par Two Finacial Analysis and Forecasting fier Rudolph’s death, in 1973, Beatrice Foods bought the company and quickly expanded it to more than 100 locations. Beatrice introduced other products, such as soups and sandwiches, and cut costs by changing the appearance of the stores and substituting cheaper ingredients in the doughnut mixture. The business languished, however, and by the early 1980s, Beatrice put the company up forsale. AA group of franchisees led by Joseph McAleer, who had been the first Krispy Kreme franchisee, completed a leveraged buyout of the company for $24 million in 1982. ‘McAleer brought back the original doughnut formula and the company’s traditional logo, It was also around this time that the company introduced the “Hot Doughnuts Now” neon sign, which told customers when fresh doughnuts were coming off the line. The company stil struggled for a while, but by 1989, Krispy Kreme had become debt- free and had slowly begun to expand. The company focused on its signature dough- nuts and added branded coffee in 1996, Scott Livengood, who became CEO in 1998 and chair the following year, took the company public in April 2000 in what was one ‘of the largest initial public offerings (IPO) in recent years: one day after the offering, Krispy Kreme's share price was $40.63, giving the firm a market capitalization of nearly $500 million. Krispy Kreme’s Business After the company’s IPO, Krispy Kreme announced an aggressive strategy to expand the number of stores from 144 to 500 over the next five years. In addition, the com- ppany planned to grow internationally, with 32 locations pianned for Canada and more for the United Kingdom, Mexico, and Australia. Exhibit 3 provides an overview of the company's store openings, Krispy Kreme Doughnuts generated revenues through four primary sources: on-premises retail sales at company-owned stores (accounting for 27% of rev- cenues); off-premises sales to grocery and convenience stores (40%); manufactur- ing and distribution of product mix and machinery (29%); and franchisee royalties and fees (4%). In addition to the traditional domestic retail locations, the company sought growth through smaller “satellite concepts,” which relied on factory stores to provide doughnuts for reheating, as well as the development of the international market + Onpremises sales: Each factory store allowed consumers to see the production of doughnuts; Krispy Kreme’s custom machinery and doughnut-viewing areas cre- ated what the company called a “doughnut theatec” In that way, Krispy Kreme attempted to differentiate itself from its competition by offering customers an ex- perience rather than simply a product. Each factory store could produce between 4,000-dozen and 10,000-dozen doughnuts a day, which were sold both on- and off-premise. + Off premises sales: About 60% of off-premises sales were to grocery stores, both in stand-alone cases and on store shelves. The remainder were sold to convenience stores (a small percentage were also sold as private label). The company main- tained a fleet of delivery trucks for off-premises sales.Case 8 Kespy Kreme Doughnuss, Ine. 127 + Manufacturing and distribuion: Krispy Kreme’s Manufacturing and Distribution (KKM&D) division provided the proprietary doughnut mixes and doughnut- making equipment to every company-owned and franchised factory store. This vertical integration allowed the company to maintain quality control and prod- uct consistency throughout the system. The company maintained its own manu- facturing facilities for its mixes and machines, and it provided quarterly service forall system units. All franchisees were required to buy mix and equipment from Krispy Kreme. KKM&D also included the company's coffee-roasting operation, which supplied branded drip coffee to both company-owned and franchised stores. + Franchise royalties and fees: In exchange for an initial franchise fee and annual royalties, franchisees received assistance from Krispy Kreme with operations, advertising and marketing, accounting, and other information-management systems. Franchisees that ha relationships with the company before the IPO in 2000 were called Associates, and they typically had locations in heritage markets in the south eastern United States. Associates were not responsible for opening new stores, [New franchisees were called Area Developers, and they were responsible for de- veloping new sites and building in markets with high potential. Area Developers typically paid $20,000 to $50,000 in initial franchise fees and between 4.5% and {6% in royalties. Franchisees also contributed 1% of their annual total salesto the corporate advertising fund. Roughly 60% of sales at a Krispy Kreme store were derived from the company’s signature product, the glazed doughnut, This differed from Dunkin’ Donuts, the com- pany’s largest competitor, for which the majority of sales came from coffee. Holes in the Krispy Kreme Story ‘On May 7, 2004, for the first time in its history as a public company, Krispy Kreme ‘announced adverse results. The company told investors to expect earnings to be 10% lower than anticipated, claiming that the recent low-carbohydrate diet trend in the United States had hurt wholesale and retail sles. The company also said it planned to divest Montana Mills, a chain of 28 bakery cafés acquired in January 2003 for $40 nillion in stock, and would take a charge of $35 million to $40 million in the first ‘quareer. In addition, Krispy Kreme indicated that its new Hot Doughnut and Coffee Shops were falling short of expectations and that it had plans to close three of them (tesulting in charge of $7 million to $8 million). Krispy Kreme’s shares closed down 30%, at $22.51 a share. ‘Then, on May 25, the Wall treet Journal published a story describing aggressive accounting treatment for franchise acquisitions made by Krispy Kreme.' According to "ark Maremon snd Rick Brooks, “Krispy Kreme Franchise Buybacks May Spur New Conces” Well, Set Joural, 25 May 200818 Part Two. Financial Analysis and Forecasting the article, in 2003, Krispy Kreme had begun negotiating to purchase a struggling seven-store Michigan franchise, The franchisee owed the company several million dl, Jars for equipment, ingredients, and franchise fees and, as part ofthe deal, Krispy Kreng asked the franchisee to close two underperforming stores and to pay Krispy Kreme the ‘accrued interest on past-due loans. In retumn for those moves, Krispy Kreme promise to raise its purchase price on the franchise. ‘According to the Journal, Krispy Kreme recorded the interest paid by the fra: ‘chisee as interest income and, thus, as immediate profit; however, the company booked the purchase cost of the franchise as an intangible asset, under reacquired franchise rights, which the company did not amortize. Krispy Kreme also allowed the Michigas' franchise's top executive to remain employed at the company after the deal, but shot after the deal was completed, that executive left. In accordance with a severance agree. tment, this forced Krispy Kreme to pay the executive an additional $5 million, an ‘expense the company also rolled into the unamortized-asset category as reacquired franchise rights. ‘The company denied any wrongdoing with this practice, maintaining it had accounted for its franchise acquisitions in accordance with generally accepted accounting principles (GAAP). On July 29, however, the company disclosed that the U.S. Securities and Exchange Commission (SEC) had launched an informal investigation related to “franchise reacquisitions and the company’s previously. ‘announced reduction in earnings guidance.” Observers remained skeptical. “Krispy Kreme’s accounting for franchise acquisitions is the most aggressive we have found,” said one analyst at the time. “We surveyed 18 publicly traded companies, with franchise operations, four of which had reacquired franchises, and they had amortized them. That clearly seems like the right thing to do.” Over the previous three years, Krispy Kreme had recorded $174.5 million as intangible assets (reac! ‘quired franchise rights), which the company was not required to amortize. On the date of the SEC announcement, Krispy Kreme’s shares fell another 15%, closing at $15.71 a share. Analysts’ Reactions Since the heady days of 2001, when 80% of the equity analysts following Krispy Kreme were making buy recommendations for the company’s shares, the conventional wisdom about the company had changed. By the time the Wal! Street Journal pub- lished the article about Krispy Kreme’s franchise-reacquisition accounting practices in May 2004, only 25% of the analysts following Krispy Kreme were recommending the company as a buy; another 50% had downgraded the stock to a hold. Exhibits 4 and 5 provide tables of aggregate analysts’ recommendations and EPS (earnings pet share) estimates. As Krispy Kreme’s troubles mounted during the second half of 2004, analysts became increasingly pessimistic about the stock: ® pia Someone Say Dovghnas? Yes, the SEC.” New ork Time, 20 July 2004,Case 8 Krispy Kreme Doughnuts, Ine. 129 ee ‘Analyst ‘Comment Date ohn wankce, In aiton to the possibly of an earings restatement, we believe many July 29, 2004 SP Morgan fundamental problems persist, exclusive of any“ow-carb" impact. Secures, ne. Declining new-store volumes are indicative af a worsening investment ‘madel, and we believe restructured store-development contact, @ smaller slore format, and reduced fees charged lor equipment and ingredients sold to franchises are necessary. Jonathan M. ‘We believe that the challenges KKD faces, incusing margin compression, Oct 12,2004 Waite, lower returns, an SEC investigation, and product saturation, curently KeyBane Capita outweigh the company's positive drivers. In addon, shares of KKD are Markots trading at 16.6 COS earnings versus its 16% growth rate. As such we rae KKD shares HOLO. ohn S.Glass, Krispy Kreme's balance sheet became boated over the past two years ty Nov. 8, 2004 (IBC Worle acquisition goodiil that wal likely need to be written down. Asa result Markets KD’ return on invested capital has plunged to about 10% versus 18% two years ago prior to these acquisitions, Weld view a balance ‘sheet wille-down, incuding eliminating a sigricant portion ofthe 8170+ milion in“reacquired franchise rights” asa fist stop in the ‘ight direction Glenn M. Guard, In our opinion, management was not focused on operations the wayit Nov. 28, 2004 ‘Legg Mason "should have been, As a resull, too many uns were opened in poor locations asthe company tripled its unit base since 2000. Adionaly, \we believe that franchisees were no rained properly as te how best to ‘un thei olf-premises business. Asa result, we befeve many units are losing money of-premises, and franchisees are not motivated to grow that business. I lso appears to us thal basic blocking and tacking, ‘execution, and cost discipline were seriously lacking in both the company systems, resulting in ineficiences. and franch rr EE As the headlines about the SEC investigation and Krispy Kreme’s other man- agement issues continued (eg., Krispy Kreme's chief operating officer stepped down con August 16, 2004), observers looked more critically atthe fundamentals of Krispy Kreme’s business. In September, the Wall Street Journal published an article that focused attention on the company's growth: ‘The biggest problem for Krispy Krese may be thatthe company grew too quickly and di- luted its cut satus by selling its doughnuts in too many outlets, while trying to impress Wall Steet. The number of Krispy Kreme shops has nearly tripled since eaely 2000, with 427 stores in 45 states and four foreign countries. Some 20,000 supermarkets, convenience stores, truck stops, and other outside locations also sell the company’s doughnuts. ‘Another issue is that Krispy Kreme ha relied fora significant chunk of profits on high profit-margin equipment that it equires franchisees to buy for each new store. ts profits hhave also been ted to growth inthe numberof franchised stores, because of the upfront fee each must pay? icky Situation." Wall Street Journal 3 September 2004.130 Part Two. Financial Analysis and Forecasting In September 2004, Krispy Kreme announced that it would reduce its number of new stores for the year to about 60 from the previously announced 120. | On January 4, 2005, Krispy Kreme’s board of directors announced thatthe company’ Previously issued financial statements for the fiscal year ended February 1, 2004) (FY2004) would be restated to “correct certain errors.” The board determined that the adjustments, which principally related to the company’s “accounting forthe acquisitions of certain franchisees" would reduce pretax income for FY2004 by between $62 mil: Jion and $8.1 million. The company also expected to restate its Financial statements for the frst and second quarters of FY2005. Krispy Kreme also said it would delay the filing of its financial reports until the SEC's investigation had been resolved and the company’s own internal inquiry was complete. However, the failure of the company to provide its lenders with finan cial statements by January 14, 2005, could constitute a default under the company's $150-million credit facility. In the event of such a default, Krispy Kreme’s banks had the right to terminate the facility and to demand immediate payment for any out- standing amounts. Krispy Kreme’s failure to file timely report also placed the company at risk of having its stock delisted from the New York Stock Exchange (NYSE). By the end of the next day, Krispy Kreme’s shares were trading at less than $10 a share, ‘Most analysts felt that Krispy Kreme’s lenders would grant the company a waiver on its credit-facility default, and few felt the company was truly at risk of being delisted from the NYSE. The board’s announcement, however, served only to raise ‘more questions about the company. Since August 2003, the company had lost nearly ‘$2.5 billion in its market value of equity. Exhibit 6 illustrates the stock-price patterns for Krispy Kreme relative to the S&P 500 Composite Index. Were the revelations about the company’s franchise accounting practices sufficient to drive that much value ‘ut of the stock? Were there deeper issues at Krispy Kreme that deserved scrutiny? Exhibits 7, 8, and 9 provide analytical financial ratio for Krispy Kremé and a group ‘of comparable companies in the franchise food-service industry. Restatement Announced jEXHIBIT 1 | Income Statements (GUS thousands, except per-share amounts ) Three Months Ended Three Months Ended Jan.90, Jan.28, Feb.3,Feb.2,Feb.1, May, May2, AUg.3, Al Income Statement 2000 2001 002,003 2008” = 0032004. = 20ca| 2004 “otal revenues 200,249 900,715 304,954 491,549 665,502 148,660 184,958 159,176 177,448 Operating expenses 190,003 250.690 316.946 $81,489 $07,386 112.480 141,989 120573 145,603 General and administrative expenses 14956 20061 27,562 «28897 96,912, 8902 10,064 9.060 11,045, Depreciation and ‘amortization expenses 4546 6457 7,959 12271 19,723 4401. 6.190 4.698028 Arbitration award go7s 528) (525) Provision for restructuring Impairment charges and closing costs 754 1802 Income from operations togse 23507 41,887 88.817 2a702 18,698. 25,007 11,840 Interest income 283 2.905 2980 1,986 227 178205 228 Interest expense (1525) (607), (837)_—(4.781) e68) ” (1.433) (997) (1,886) Equity loss njint ventures (705) (602) (2008) (1,898) (694) (575) (602) ——(309), Minority interest (716) (1,187), @287) 07) B16) (1286)(616) 267 Other expense, net 20) (235) (934) (13) 25) (158) (34) 114 Income before income taxes «9, 606.-««23, 783 «A2,S48 $4,779 94.677 172818522 22.4S4 10,682 Provision for income taxes 3650 9058 «16,168.««21.205. «37,500 85886675 9.014 4,498 Discontinued operations! 34285 ‘439 ‘480 Net income 5956 14725 «26078 «93.478 87,087 13,140 (24,498) 19.001 5,764 Diluted earnings per share CC Share price (sca! year close) 1622 9985 s0.41 85.68 Number of shares outstanding (ilions) a e766 eet ead "Resulting rm dost of Montana Mis ‘Source of data: Company ling wit he Secures and Exchange Commission (SEC).EXHIBIT 2 | Balance Sheets Fiscal Year ‘Three Months Ended Ended ‘Jon.90, Jan.28, Feb.3, Feb.2, Feb.t, May2, Aug.1, {in thousands) 2000' 20012002, 20082004 20082004 ‘ASSETS ‘Current Assets: ‘Gash and cash equivalents 3183 7.026 21,904 92.203 20.00 13715 19,009 Short-taem investments 0 18,103 15292 © 22.976 ‘Accounts receivable 17,965 19.855 26804 94.573 4528347404 44,020 ‘Accounis receivable, afflates «1,608 «2,598 «017 11,062 20482 20,740 19,889 Other receivables ‘794 22792771 BBA 23883 3,169 4.868 Noles receivable, afliates 0 0 ° 0 458 440d 5.440 Inventories 9979 12031 16.159 24,965 28579 92974 3078 Prepaid expenses 3148 1909-258) 347359994675 G74] Income taxes refundable ‘861 2504 1.909 79467449 8.199 Deterred income taxes 3500 3809 «4607 ««azd 6.459 13,280 20,005 ‘Assets held forsale 96855-3374 3.305 Total current assets, 4 2 1 Property and equipment, net 60,504 78,340 112,577 202,558 281,103 301.160 297,154 Defered income taxes 1,308 0 ° ° 0 Long-term investments 0 17877 12,700 4,944 ° Long-term notes recoivatie, alfitates ° ° 0 1,000 7,609 2988925 Investments in unconsolidated Jolt ventures 2ecr 3400687112428 «(10,728 aa Reacquied franchise rights, ‘goodwill, ther intangibles ° 0 16621 49,954 175957 176078 176.048 Other assets 19984898 -9.909 5282 9.456 ‘Total assets 104,958 171,499 255,376 410,487 660,664Case 8 Krispy Kreme Doughnuts ne. 133 IT 2_|_Balance Sheets (continued) Fiscal Year ‘Three Months Ended vJon.30, Jan.28, Feb.3, Feb.2, Feb.1, May2, Aug. 1, (in thousands) 200020012002’ 2003' 200820042008 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: ‘Accounts payable 13108 8.211 1209514055 18,784 18.865 18,817 ‘Book overdraft 0 8147 907113758123. 12670 13,107 ‘Accrued expenses 14080 21/243 26,729 age 8,744 © 27,107 32249 ‘biration award ° ° 0 9075 ° evolving lin of credit 0 3828 ga7t ° ° Current maturities of longrterm debt 2.400 0 731 gaat ae 4.863.586 Short-term debt ° ° 0 900 ° Income taxes payable o “a ° ° ° ‘otal current iabitties «29,686 38.168 2.633 59.687 _83.493 63.306 _ 69.739 Dotered income taxes o 579 «3.90 9849.87 16.468 5.564 Compensation defered (unpaid) 980 1,106 ° ° ° evolving lines of eect ° ° 0 7.288 87,000 72,000 2,000 Long-irm debt, net of curent portion 20,802 0 3912 49.900 48.056 © $8,489 50,195 ‘Acctued restructuring expenses 4,259 9,109 ° 0 ° (ther longterm obligations 486841735 °=««4.843 521821110774 12.078, Total long-term liablties 27,617 6.529 12,685 72255 152.641 157,711 149,777 Minot interest 47 249151932823 28IS 58 ‘SHAREHOLDERS’ EQUITY: ‘Common stock, no par value, 300,000 shares authorized sued and outstanding 85060 121,052 173,112 294477 296.812 299,085 Common stock, 10 par val 1,000 shares authorized: Issued and outstanding 470 Palen capital 10,805 Unearned compensation (13) (186) (11) 7) SHY Notes receivable, employees (2,547) (2,349) (2,580) (558) (389) (98) ——(383) Nonqualiled employee benefit plan assets (125) (138) (638) (88)—28) (28K) [Nonqualfied employee benefit plan fabity a ‘Acoumulated other Comprehensive income (oss) 609456 (1.488) (1,915) (783) (768) Fetained earrings 34827 42547 68,925 102.403 159,490 195,052 140,816 Total shareholders’ equity 47,755 125,678 187,667 273,952 452,207 490,651 499,409 ‘otal liabilities and shareholders’ equity 108,958 171493 256,378 410,487 660.664 654,489 661,608 ‘Source of data: Company flings wih the Sacutes and Exchange Coreision (SEC),EXHIBIT 3_| Store Growth ‘Store growth ‘Total company factory stores Beginning of period Stores openings ‘Sore closings Stores acquired from franchisees End of period ‘Net change $6 year-overyear growth ‘otal franchised factory stores Beginning of period Unit openings Unit closings ‘Stores transfered to company End of period ‘Net change 4% year-over-year growth Total factory stores Beginning of period ‘Store openings ‘Store closings End of period ‘Net change 96 year-over-year growth %ot total stores Company-owned Franchises ‘Jan. 90, 72000 6 2 © 0 58 @ 70 18 ° 6 131 ® 148 13 40.3% 507% Source ot data: Company epons, case wits ena. Jan. 28, 2001 58 8 o 0 6 5 9% 148 © 174 30 21% 962% 38% Feb.3, 2002 a 7 @ 7 5 2 19% m 4 @ a) 143 32 20% 174 8 «) 28 25% 344% 65.6% Feb.2, 2008 8 1“ ° 13 2 2 2% 143 ° @ (3) w7 26% 218 6 276 27% 35.9% 64.1% Feb. , 2004 9 28 (2) 6 141 2 42% 7 8 @ 6) 216 39 2% 278 8 © 357 at 2% 295% 605%EXHIBIT 4 Period tent 19.01 s6-Aug-01 20-Sep-01 18.02.01 15Nov.0t 20-Dec-01 Palan-02 14Feb-02 14Mara2 seaproe 16-May-02 20-Jun-02 reu.02 15-Aug-02 19-Sep-02 170102 14-Nov-02 19-6002, 16an-03 20-Feb-03 20-Mar-03 A7-Apr03 15-May-03 19un-03 Y7h-03 14-Aug-03 18-Sep-03 16.0203 20-Nov-03 18:D2003, 1Blan-06 19Feb-04 18-Mar-04 15-Apr-08 20-May-04 Yatun-08 15Jul04 19-Aug-04 16-Sep-04 14-Oct-04 18.Nov-od 1602004 20-Jan-05 Source of data: VB/ES (Tomson Financials Cal) (Case 8 Krispy Kreme Doughnuts, ne Analysts’ Recommendations Percentage Recommending: Buy 25.0% 143% 143% 143% 143% Sell Hole 0.0% 0.0% 135EXHIBIT 5 | Consensus EPS Estimates E-timate (Mean) Estimate Date S038 ator sos 24-Aug-01 sot 25.0001 $0.44 16Nov-01 $043 21-Decot $0. 8 Mar-02 S063 2eMay-02 sos un-02 $083 tsuhon $088 2-Aug.02 Sosa ‘3Sep-02 $063 B0ct02 $0.88 22.Nov-02 sass 10Van-03, $086 14-Feb-05 $087 20-Mar-03 3089 2oaay-03 $090 Soula3 $0.90 21-Aug-03 saat 18-Sep-09 soot ¥7-060-03 sage 2lan-08 star 10-Mar-08 $1.00 Tay 04 $0.99 26-May-04 $0.98 2tetuno8 sose 16-Aug-04 soso 27-Aug-04 8089 10Sep-04 $065 13-Sep-04 $0ss SNov.04 $045 2.Nov.04 Source of datz: UVEIS (Thomson Faanclalt Call,Case 8 Krispy Kreme Doughaurs ne EXHIBIT 6 | Stock-Price Patterns Relative to the S&P 500 Composite Index Krispy Krome a SBP 500 Ag aia i i I a TPEDOTT IDL ITPR ERGATA Source of ata: Datsroamact EXHIBIT 7 | Analytical Financial Ratios for Krispy Kreme Fiscal Year Ended Jan.90, Jan.28,—Feb.3,Fab.2,—Feb.t, 2000 2001 2002 20031 2004 Ratio definitions Liquidity ratio Quick (acie-test rato. 4.05 146. 1.63 1.98 272 (current assote-Inventories)euria. Current ratio 1.38 uw 194 238 325 current assots/eurctiab. Leverage ratios : Debio eqully (book) 47.96% 0.00% 247% 19.40% 11.26% —_LT deblishareholders' equity Debt-o-capital 2.41% 0.00% 241% 16.20% «10.12% LT debushareholders'eqully + debt) Times inorest earned Tat 3873 (12420 3350 2315 EBITinterast exponce ‘Assets to equity 220 1.38 1.38 150 1.46 total assets/shareholders equity Activity ratios Receivables turnover to8t 1216 10.19 t061 9.70 sales/accounts receivables Inventory turnover 19.04 20.84 1961 15.68 1778 —_costof goods soldnwentary ‘Asset turnover 2.10 175 154 120 1101 salestotal assots Cash tunover 69.19 4280 18.00 15.26 32.79 _salesicash and cash equivalents Profitability ratios Return on assole 567% 850% 10.83% 8.16% 8.64% not ncorhefassets Return on equity 1247% 14.72% 14.06% 12.25% 12.62% net ncomalshareholders equity (Operating profit margin 492% 7.82% «10.62% ©—«12.17% 15.34% operating incomenet sales Not profit margin 270% 490% 6.60% 681% 858% not incomelsales ‘Source of data: Company fnge wih te Secults and Exchange Commission (SEC).or EXHIBIT 8 |: Analytical Financial Ratios: Quick-Service Restaurants at End of FY2003, “eckin the Krlepy manera Papa Yor company Name [Checkers CKE Domino's Box” Kreme McDonald's Bread dohna Sonic Starbucks Wendy's Brand ‘Sales not ition) S190 S141 S48 «SBOSE S665 ««SIT.141 «$956 «SOIT SHA? S407S «$8,149 SHE Liquity ratios Quek rao og 47-0021 OOOO ‘Curent ato {42078 0s3sS 3257S t58C7? 2182 eos Leverage ratios LT debvoquty C2) mag? 26297 (19.07) tz 1125-7787 000890 2ST oz 889 teas Longiomdeoiota capital's) 25:26 724s 421.00 ©9820 1012 44B1 0.00888 8102] eas wa. Inerestcoworegetolowtiax” 6.2908) 205-—=— B44 BIS BSD 10TAO BHD 140B nmi 025 “ota acseatotl equ fe ‘29 (0e2) 250 1MG = 21S 888] Activity eatios Racehaios turnover e508 35:45 «20697122070 tse aza2 5029 ara aas 82 HOT. Inventory turnover soso $990 4888 See 1778 «008875 MABT 11124 © TOs8 7888 O13 Total aret tower 150 173 8N6 uae tot 089 Nk 287 0062S Cash wmover 1200 98634090712 9279 416H 74 NHO.73 aS Ret a8 Prottabity ratios tur an once) y22. eos) ee aaa mts tnms om 7811 Ratu on eau) aise i) nm tSG5— 12621250 TSS NSS 9G] 18D 1342S BIT margin (2) So; aaa) 120 aoe 1538962 ta 638 2342481385 1aT Not rot margin) 8s @2y (201 ass asB B80 st a7 1706887478 ‘nt = nota meaning igure. Source of data: Sandard & Poors Research insighton EXHIBIT 8 | Descriptions of Comparable Firms (continued) (Chockers Drive-in Restaurants, Ine: Checks the #1 operator of divestough {asticaa restaurants, wih more than 780 owned and rancid locations, Healy 20% o is locations are company-owned, ‘CKE Restaurants, Ino. CKE sa lading operate of quck sence lod chin, ‘ith abou 3100 loeaons. CKE owns and operates more than ad of sta: ‘ani; the rest are operated by tranehisees. Domino's Pizza, ne: Domino's is the works #2 pizza chain wih more than 7.750, locaton in more than 0 counties. Domine’ sores are pinay dover loca: tons and goneral donot have any dne-n seating. ‘Jackin the Box inc: Jack nthe Box operates and ranchises over 2,000 ts ‘agship hamburger culos in 17 slalex Moro than 1,550 locations ae cman ‘onmed, while thaest are Franchised McDonald's Corp. MDonal' i the wots #1 tat fod company by ae th ‘moc han 31,000 flagship restaurants serving burgers and ios mn more than 100, ‘counties. Almas 20% a it lcatons ae company-ouned the thers areun by Panera Bread Company: Panera Greats loader in he quck-casualresaurant bussess, with more than 740 bakery cal n about 25 states, Approimatly 70% lis tcation aro porated by tranches. ‘Source of eae: Hoovers, Ine Papa John's international, ne: Papa Johns te #3 plaza chain, wit 3,000 pt i arose tho Utd States and in 17 ntratcnal markets, Papa Jfn's owns 2 ‘pera about 20% ois oeaons. ‘Sonic Corp The largest chain of quick sence evens inthe Utd States, Sor ‘operates about 55 restaurants and ranchises more than 2,225 lealon 30st Starbucks Corp: The wort’ #1 specially ote rele, Slabucks operas ane 'censes more than 8,00 catlee shops in more tan 20 counties. n acon, Star bucks marks is coleeUwough grocery stores, and lcenees is brand lor oer food and baverage posvels. Wondy’s international, ne: Wendy she #3 hamburger chain by sales. There 1a alot 6,700 Wendy restaurants words about 78% of tem are anche ‘Yuu Brands, Inc: YUM Brand sone ofthe largest fs4ood fencers in tho wri, wating only MeDonel'e novel als unset ge la, MOY ‘ve, nso locations, wih more than 33,000 units n about #09 caus (The ‘Company ome and operates almost a qualr ota stores and Kanchaos ost ol the others) The company’s tagship brands include KFC, Piza Hut and Taco Be ‘Yur also owns ABW Al-Amercan Food Restaurants and Long Jahn sive’ he long-term mutibranding strategy ering more than one ole Brands atone te) has proven sucesstlCase 8 Krispy Kreme Doughnus, Ine m1 EXHIBIT 9 | Common-Sized Financial Statements: Limited-Service Restaurant Averages and Krispy Kreme (KKD) ‘Balance Sheet: Assets (%) Cash & equivalents “Trade recelvabes (net) Inventory Allother current Total current Freed assets (net) Intangibies (net) ‘other noncurrent Total assets Balance Sheet: Liabilities & Equity (%) "Notes payable, short-term (Current maturity, long-term debt Trade payables Income taxes payable Alother current Total curent Long-term debt Doterred taxes ‘Allother non-current ‘Sharoholders equity “ola iaities & equity Income Statement (%) Not sales Operating expenses Operating eo ‘Alother expenses (net) Profit before taxes zor 2002 ——2003KKD 2008 8124137 aa 16 0918 104 40 as a8) 43 28 888 86 200-192 ae 24 547570550 25 133042128, 268 10 96100 45 1000 © 1000 © 10001000 (7 ce eel 00 cio Ga) oa Co 7a aa) 28 02 020. 00 139 69140 48 341381884 84 2 86 419 73 or 02 10 47 8387 143 m9 99129 ea 1000 1000 © 1000» 1000 100 1000 © 100010000 563-5560 SA 762 400 47040 153 1300 1818 14 ay oe as 142 ee ‘Source of dea: Annuel Statement Stuces: 2004-200, The Fisk Management Association