1100270--10/31/2006--KRISPY_KREME_DOUGHNUTS

related topics

{financial, litigation, operation}

{cost, contract, operation}

{stock, price, operating}

{customer, product, revenue}

{control, financial, internal}

{interest, director, officer}

{debt, indebtedness, cash}

{competitive, industry, competition}

{condition, economic, financial}

{property, intellectual, protect}

{operation, international, foreign}

{personnel, key, retain}

We have identified numerous material weaknesses in our internal control over financial reporting, which could continue to impact our ability to report our results of operations and financial condition accurately and in a timely manner. The implementation of certain remedial measures set forth in the Special Committee s report may take time and be costly to implement. Continuing negative publicity may adversely affect our business. We are not in compliance with our periodic reporting obligations under the Exchange Act, and until we are, our securities are not able to be registered with the SEC. RISKS RELATING TO OUR BUSINESS Our management team has undergone significant change. Sales at company and franchised stores have been declining and may continue to decline. We rely in part on our franchisees. Disputes with our franchisees, or failures by our franchisees to operate successfully, to develop or finance new stores or build them on suitable sites or open them on schedule, could adversely affect our growth and our operating results. Our growth strategy depends on opening new Krispy Kreme stores internationally. Our ability to expand our store base is influenced by factors beyond our and our franchisees control, which may slow store development and impair our strategy. Currency, economic, political and other risks associated with our international operations could adversely affect our operating results. We are the exclusive supplier of doughnut mixes, other key ingredients and flavors to all domestic Krispy Kreme company stores. If we have any problems supplying these ingredients, our stores ability to make doughnuts will be negatively affected. In addition, changes in vendor credit terms or the failure to manage risks associated with ingredient purchases could adversely affect our profitability and liquidity. We are the only manufacturer of our doughnut-making equipment. If we have any problems producing this equipment, our stores ability to make doughnuts will be negatively affected. We have only one supplier of glaze flavoring, and any interruption in supply could impair our ability to make our signature Hot Original Glazed tm . We are subject to franchise laws and regulations that govern our status as a franchisor and regulate some aspects of our franchise relationships. Our ability to develop new franchised stores and to enforce contractual rights against franchisees may be adversely affected by these laws and regulations, which could cause our franchise revenues to decline. Off-premises sales represent a significant portion of our sales. The infrastructure necessary to support off-premises sales results in significant fixed and semi-fixed costs. Also, the loss of one of our large wholesale customers could adversely affect our financial condition and results of operations. Our failure or inability to enforce our trademarks could adversely affect the value of our brands. We have substantial indebtedness under our senior secured credit facilities that could adversely impact cash availability for growth and operations and may increase our vulnerability to general adverse economic and industry conditions. Our senior secured credit facilities impose restrictions and obligations upon us that significantly limit our ability to operate our business, and in the past we have sought and received waivers relating to these restrictions and obligations. We currently have substantial ongoing liquidity needs arising from expenditures to professional advisors, and we will require a significant amount of cash to meet these liquidity needs. If these expenditures continue and we cannot generate the required cash, we may not be able to continue to obtain necessary services from our professional advisors and our ability to fund our operations may be significantly impaired. RISKS RELATING TO THE FOOD SERVICE INDUSTRY The food service industry is affected by consumer preferences and perceptions. Changes in these preferences and perceptions may lessen the demand for our doughnuts, which would reduce sales and harm our business. The food service industry is affected by litigation, regulation and publicity concerning food quality, health and other issues, which can cause customers to avoid our products and result in liabilities. Our success depends on our ability to compete with many food service businesses. RISKS RELATING TO OWNERSHIP OF OUR COMMON STOCK The market price of our common stock has been volatile and may continue to be volatile, and the value of any investment may decline.

Full 10-K form ▸

1100270--10/31/2006--KRISPY_KREME_DOUGHNUTS_INC