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124 JOHN BURBRIDGE AND COLEMAN RICH

2. Franchise fees and royalties from franchisees (Franchise). Revenues are generated
through the collection of franchise fees and royalties resulting from sales of the
Krispy Kreme products by the franchisees.
3. Vertically integrated supply chain (KK Supply Chain). The KK Supply Chain produces
doughnut mixes and also manufactures the doughnut-making equipment, which all fac-
tory stores are required to purchase. KK Supply Chain also operates two distribution
centers that provide stores with supplies. The Supply Chain also is responsible for the
purchasing of the necessary raw materials, which are primarily flour, sugar, and short-
ening. Other ingredients are purchased through various commodity markets.
There are four business units within KK Supply:
• Mix manufacturing. All proprietary doughnut mixes are produced in Winston-Salem,
North Carolina. All franchisees are required to use these proprietary mixes. For inter-
national operations, a concentrate is produced in Winston-Salem, shipped interna-
tionally, and mixed with local sources of supply.
• Equipment. Krispy Kreme manufactures its doughnut-making equipment, which all
franchisees are required to use. The line of machines can produce from 65 to 1,000
dozen doughnuts per hour. Smaller machines such as the tunnel ovens used in hot
shops are sold by Krispy Kreme but manufactured by others.
• Beverage program. Many of the beverages purchased from third parties are provided
by Krispy Kreme.
• Distribution centers. The distribution centers are located in Winston-Salem and the
greater Los Angeles area. These centers supply the domestic stores and some interna-
tional operations with supplies.

Exhibit 4 shows Krispy Kreme revenues and expenses by business segment for the
last three fiscal years.

EXHIBIT 4 Krispy Kreme Doughnuts Segmented Revenues and Expenses

(in thousands)
YEAR ENDED Feb. 1, 2009 Feb. 3, 2008 Jan. 28, 2007
REVENUES BY BUSINESS
SEGMENT:
Company Stores $ 265,890 $ 304,444 $326,199
Franchise 25,537 22,958 21,075
KK Supply Chain 92,557 101,917 113,921
Total Revenues $ 388,984 $ 429,319 $ 461,195
OPERATING EXPENSES BY
BUSINESS MANAGEMENT :
Company Stores $ 268,098 $ 299,806 $ 307,635
Franchise 8,936 8,746 4,602
KK Supply Chain 67,973 71,462 77,142
Total Operating Expenses $ 345,007 $ 380,014 $ 389,379
DEPRECIATION AND
AMORTIZATION EXPENSES :
Company Stores $ 6,402 $ 11,558 $ 15,979
Franchise 86 92 119
KK Supply Chain 1,019 5,586 3,469
Corporate administration 1,202 1,197 1,479
Total depreciation and
amortization expenses $ 8,709 $ 18,433 $ 21,046

Source: Krispy Kreme Doughnuts Inc. 2009 Annual Report, p. 34, 92.