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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 2, 2000
Commission File Number 333-40933
THE KRYSTAL COMPANY
(Exact name of registrant as specified in its charter)
Tennessee 62-0264140
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Union Square, Chattanooga, Tennessee 37402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 757-1550
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12 (b) of the Act:
None
----
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 to Regulation S-K 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 Form 10-K. [X]
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 [X] No [ ]
On September 26, 1997, the registrant was acquired by Port Royal Holdings,
Inc., ("Port Royal") pursuant to a merger in which a wholly-owned subsidiary
of Port Royal was merged with and into the Company. As a result of the merger,
Port Royal became the owner of 100% of the common stock of the Company. Thus,
the aggregate market value of the voting stock held by a non-affiliate is zero
as of March 23, 2000.
This report is filed by the Company pursuant to Section 15(d) of the
Securities Exchange Act of 1934. No annual report or proxy statement has been
sent to security holders and no such annual report or proxy statement is
anticipated to be sent to security holders.
PART I
Item 1. Business
(A) General Development of Business
The Company was founded in 1932 as a single restaurant in Chattanooga,
Tennessee by R. B. Davenport, Jr. and J. Glenn Sherrill. The Company expanded
steadily in subsequent years, entering the Georgia market in 1936, and during
the 1950's and 1960's, began relocating restaurants from urban to suburban
locations and transforming its format from "cook-to-order" items to a more
standardized quick-service menu.
The Company's centerpiece of growth was its namesake, the KRYSTAL, a small,
square hamburger with steamed-in flavor served hot and fresh off the grill.
As competition in the restaurant industry increased in the late 1980's, the
Company firmly maintained its market niche by emphasizing the unique KRYSTAL.
Krystal restaurants have continued to emphasize the KRYSTAL and have built
their customer base around this and other items such as "Krystal Chili,"
"Chili Pups," "Corn Pups," the "Sunriser", a specialty breakfast sandwich,
the "Krystal Chik", a specialty chicken sandwich and the "Country Breakfast."
On December 15, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code, solely for the purpose of
completely and finally resolving various claims of former and current employees
alleging violations of the Fair Labor Standards Act ("FLSA"). On
April 10, 1997 the Bankruptcy Court approved the Reorganization Plan including
the settlement of the FLSA claims which became effective April 23, 1997. All
allowed claims under the Reorganization Plan have been paid.
On September 26, 1997 (effective September 29, 1997 for accounting purposes),
the Company was acquired by Port Royal Holdings, Inc. ("Port Royal") (the
"Acquisition"). At the closing of the Acquisition, a wholly-owned subsidiary
of Port Royal was merged with and into the Company (the "Merger") and the
Company as the surviving corporation retained the name "Krystal." As a result
of the Acquisition and Merger, Port Royal became the owner of 100% of the
common stock of the Company.
(B) Financial Information about Industry Segments
See Part II, Item 7 Results of Operations.
(C) Narrative Description of Business
The Company develops, operates and franchises full-size KRYSTAL and smaller
"double drive-thru" KRYSTAL KWIK quick-service restaurants. The Company has
been in the quick service restaurant business since 1932, and believes it is
among the first fast food restaurant chains in the country. The Company began
to franchise KRYSTAL KWIK restaurants in 1990 and KRYSTAL restaurants in 1991.
In 1995, the Company began to develop and franchise KRYSTAL restaurants
located in non-traditional locations such as convenience stores. At
January 2, 2000, the Company operated 250 units (244 KRYSTAL restaurants
and 6 KRYSTAL KWIK restaurants) in eight states in the southeastern United
States. Franchisees operated 118 units (47 KRYSTAL restaurants, 31 KRYSTAL
KWIK restaurants and 40 KRYSTAL restaurants in non-traditional locations) as
of January 2, 2000.
The Company also leases 22 restaurant sites in the Baltimore, Washington, D.C.
and St. Louis metropolitan areas which it in turn subleases to Davco
Restaurants, Inc. ("Davco"), a Wendy's International, Inc. franchisee
and former affiliate of the Company.
Since 1977 the Company has operated a fixed base hangar and airplane fueling
operation through a subsidiary company ("Krystal Aviation") in Chattanooga,
Tennessee.
Products --
KRYSTAL restaurants offer a substantially uniform menu consisting of the well
known KRYSTAL hamburger, "Krystal Chiks", french fries, "Chili Pups",
"Corn Pups", "Krystal Chili", milk shakes, soft drinks and hot beverages, pies
and breakfast items including the "Sunriser" and the "Country Breakfast" during
certain morning hours. Most KRYSTAL KWIK restaurants feature essentially
the same menu as Krystal restaurants except breakfast offerings. From time
to time the Company test markets new products.
The Company and its franchisees purchase their food, beverages and supplies
from Company approved independent suppliers. All products must meet standards
and specifications set by the Company. Management constantly monitors the
quality of the food, beverages and supplies provided to the restaurants. The
restaurants prepare, assemble and package these products using specially
designed production techniques and equipment to obtain uniform standards of
quality.
Sources of raw materials --
The Company and its franchisees purchase food, supplies, restaurant equipment,
and signs from Company approved suppliers. The Company believes that
alternate suppliers are available or can be made available.
Trademarks and patents --
The Company has registered "Krystal", "Krystal Kwik" and variations of each,
as well as certain product names, with the United States Patent and Trademark
office. The Company is not aware of any infringing uses that could
materially affect its business or any prior claim to these service marks that
would prevent the Company from using or licensing the use thereof for
restaurants in any area of the United States. The Company's policy is
to pursue registration of its marks whenever possible and oppose vigorously
any infringement of its marks.
Seasonal operations --
The Company does not consider its operations to be seasonal to any material
degree. Revenues during its first fiscal quarter, comprising the months of
January, February and March, will, however, generally be lower than its other
quarters due to consumer shopping habits and the climate in the location of a
number of its restaurants.
Working capital practice --
See Part II, Item 7 Liquidity and Capital Resources.
Customers --
No material part of the business of the Company is dependent upon a single
customer or a small number of customers.
Backlog --
Company-owned restaurants operate in a quick-service environment and have
no backlog.
Government contracts --
No material portion of the business of the Company is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
U.S. Government.
Competition --
The quick-service restaurant industry is highly competitive and is dominated
by major chains with substantially greater financial resources than the
Company. The Company competes primarily on the basis of unique product
offerings, food quality, price and speed of service. A significant change
in pricing or other marketing strategies by one or more of these competitors
could have an adverse impact on the Company's sales, earnings and growth.
In addition, with respect to the sale of franchises, the Company competes
with many franchisors of restaurants and other business concepts.
Research and development --
The Company operates a research and development laboratory in Chattanooga,
Tennessee. While research and development activities are important to the
business of the Company, expenditures for these operations are not material.
Environmental matters --
While the Company is not aware of any federal, state or local environmental
regulations which will materially affect its operations or competitive
position or result in material capital expenditures, it cannot predict the
effect on its operations from possible future legislation or regulation.
During 1999, other than normal equipment expenditures, there were no
material capital expenditures for environmental control facilities and no
such material expenditures are anticipated.
Number of employees --
During 1999, the Company's average number of employees was approximately 8,488.
(D) Financial Information about Foreign and Domestic Operations and Export
Sales
The Company leases 22 restaurant sites in the Baltimore, Washington, D.C.
and St. Louis metropolitan areas which it in turn subleases to Davco
Restaurants, Inc. Revenue from this operation is less than 10% of the
Company's total revenue. All other operations of the Company are in the
southeastern United States and the Company has no export sales.
Item 2. Properties
See Notes 4 and 9 of the Company's Consolidated Financial Statements.
Item 3. Legal Proceedings
On September 21, 1999, the Company was named as a defendant in a lawsuit filed
in the Northern District of Alabama (Michael Jones vs. The Krystal Company)
alleging that the plaintiff was denied access to the restrooms in one of the
Company's restaurants in violation of the Americans with Disabilities Act.
The lawsuit seeks class action status on behalf of all wheelchair bound patrons
of the Company's restaurants who have been denied access to restrooms. The
Company intends to vigorously defend this suit. At this stage of the
proceedings the Company's legal counsel is unable to express an opinion as to
the probable outcome of this action. If the Company is unsuccessful in its
defense of this lawsuit, it could be forced to accelerate capital expenditures
on certain of its existing Krystal restaurants.
The Company is a party to various other legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management and the Company's
legal counsel, have a material adverse effect on the Company's financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
At a meeting of shareholder's held on October 21, 1999, the following persons
were elected to the Board of Directors: Philip H. Sanford, James F. Exum, Jr.,
W.A. Bryan Patten, Richard C. Patton, Benjamin R. Probasco and A. Alexander
Taylor II. Of the Company's 9,999,998 issued and outstanding shares,
9,629,998 were voted for the election of the Directors.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters
(a) Price Range of Common Stock. On September 26, 1997, the Company was
acquired by Port Royal through the merger of a wholly-owned subsidiary of
Port Royal with and into the Company. As a result of the merger, Port Royal
is the owner of 100% of the common stock of the Company and no public trading
market for the Company's stock exists. The Company's Common Stock formerly
traded over-the-counter on the NASDAQ National Market System under the symbol
KRYS.
(b) Holders of common stock. As noted above, Port Royal is the owner
of 100% of the common stock of the Company.
(c) Dividends. The Company has historically not declared dividends on its
common stock and has no present intention to do so in the near future.
Item 6. Selected Financial Data
The following tables present (i) selected historical data of the Company prior
to the Acquisition ("Pre-Merger Company") as of and for each of the years ended
December 31, 1995, December 29, 1996, and the nine month period ended
September 28, 1997, and (ii) selected historical data of the Company after
the Acquisition ("Post-Merger Company") as of and for the three month period
ended December 28, 1997, the years ended January 3, 1999 and January 2, 2000.
The selected historical financial data as of and for each of the years ended
December 31, 1995, December 29, 1996, and the nine month period ended
September 28, 1997 have been derived from the audited financial statements of
the Pre-Merger Company. The selected historical financial data as of and for
the three month period ended December 28, 1997, the years ended January 3, 1999
and January 2, 2000 have been derived from the audited financial statements of
the Post-Merger Company. The financial data set forth below should be read in
conjunction with Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements
and notes thereto included in Item 8 - "Financial Statements and Supplementary
Data".
Post-Merger Post-Merger Pre-Merger
Company Company Company
------------------Combined --------- -------------------------
Fiscal Fiscal Twelve Three Nine Fiscal Fiscal
Year Year Months Months Months Year Year
Ended Ended Ended Ended Ended Ended Ended
(53 weeks)
--------- -------- ------- --------- -------------------------
Jan. 2, Jan. 3, Dec. 28, Dec. 28, Sep. 28, Dec. 29, Dec. 31,
2000 1999 1997 1997 1997 1996 1995
--------- -------- ------- --------- -------------------------
(In thousands)
Statement of Operations data:
Revenues:
Restaurant sales $256,384 $248,152 $240,255 $ 61,440 $178,815 $236,470 $239,376
Franchise fees 499 333 349 130 219 349 618
Royalties 4,380 3,775 3,060 828 2,232 2,778 2,420
Other 5,755 5,188 4,759 1,290 3,469 4,671 5,614
---------------------------------------------------------------
$267,018 257,448 248,423 63,688 184,735 244,268 248,028
---------------------------------------------------------------
Cost and expenses 252,397 245,644 240,134 61,424 178,710 240,342 253,440
Operating income(loss) 14,621 11,804 8,289 2,264 6,025 3,926 (5,412)
Income (loss) before
extraordinary item $ 2,544 $ 1,345 $ 1,126 $ ( 539) $ 1,665 $(2,422)$ (5,324)
Balance Sheet Data:
Working capital(deficit) $(24,375) $(11,065)$ (8,886)$ (8,886) $ (4,760) $19,592 $ 13,442
Property owned and
leased, net 128,010 102,289 102,860 102,860 90,034 92,826 100,409
Total assets 198,511 179,488 190,121 190,121 119,130 143,870 132,695
Long term debt, net of
current portion 102,623 100,136 112,174 112,174 34,573 3,090 3,621
Long term debt subject
to compromise - - - - - 36,000 36,000
Capital lease obligations,
net of current portion 9,467 2,806 2,029 2,029 2,077 2,278 2,754
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the consolidated
audited financial statements of the Company (including the notes thereto)
contained elsewhere in this report. On September 26, 1997 (effective
September 29, 1997 for accounting purposes) the Company was acquired by,
and merged with a wholly owned subsidiary of Port Royal. The Acquisition
and Merger were accounted for using the purchase method of accounting. To
facilitate a meaningful comparison of the Company's fiscal years of 1997
(results of Pre-Merger Company for the nine months ended September 28, 1997
combined with the results of the Post-Merger Company for the three months
ended December 28, 1997), the years ended January 3, 1999 and January 2, 2000,
the following discussion of consolidated results of operations is presented
on a traditional comparison basis of twelve month periods.
Cash operating profit --
Cash operating profit (net income or loss before interest, taxes, depreciation,
amortization and other non-operating gains, losses or expenses) is one of the
key standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure of
liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles.
Cash operating profit for the fiscal year ended January 2, 2000 was $28.7
million compared to $24.7 million for the year ended January 3, 1999, an
increase of 16.2%. This increase in cash operating profit was primarily
attributable to increased same store restaurant sales, an increase in the
average check and reduced general and administrative expenses.
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
Post- Post-
Merger Merger Pre-Merger
Company Company Company
----------------- Combined ------- ----------
Fiscal Fiscal Twelve Three Nine
Year Months Months Months Months
Ended Ended Ended Ended Ended
-------- -------- -------- ------- ----------
Jan. 2, Jan. 3, Dec. 28, Dec. 28, Sept.27,
2000 1999 1997 1997 1997
(53 weeks)
-------- -------- -------- -------- ----------
SYSTEMWIDE RESTAURANT SALES $344,978 $328,644 $307,553 $79,351 $228,202
Percent change 4.97% 6.86% 3.35% 2.14% 3.78%
Percent change adjusted for $6.7
million of sales in 53rd week in
fiscal year 1998 7.15% 4.69%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 250 241 248 248 249
Restaurant Sales $256,384 $248,152 $240,255 $61,440 $178,815
Percent change 3.32% 3.29% 1.60% 0.61% 1.95%
Percent change adjusted for $5.1
million of sales in 53rd week in
fiscal year 1998 5.47% 1.18%
Percent change in same restaurant sales 1.70% 4.07% 2.60% 1.04% 3.14%
Percent change adjusted for $5.0
million of same restaurant sales
in 53rd week in fiscal year 1998 3.84% 1.95%
Transaction count per day 676 692 685 703 679
Percent change (2.31%) 1.01% (2.42%) 3.53% (0.88%)
Average check $ 4.28 $ 3.96 $ 3.86 $ 3.92 $ 3.84
Percent change 8.08% 2.59% 5.46% 2.08% 4.93%
Selected components are --
Cost of restaurant sales $210,767 $204,630 $198,963 $50,570 $148,393
As a percent of restaurant sales 82.21% 82.46% 82.81% 82.31% 82.99%
Food and paper cost $ 80,203 $ 76,582 $ 77,499 $19,786 $ 57,713
As a percent of restaurant sales 31.28% 30.86% 32.26% 32.20% 32.28%
Direct labor $ 61,395 $ 58,537 $ 53,834 $13,973 $ 39,861
As a percent of restaurant sales 23.95% 23.59% 22.41% 22.74% 22.29%
Other labor costs $ 16,496 $ 17,231 $ 18,812 $ 4,541 $ 14,271
As a percent of restaurant sales 6.44% 6.94% 7.83% 7.39% 7.98%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 118 110 101 101 95
Restaurant Sales $ 88,594 $ 80,492 $ 67,298 $17,911 $ 49,387
Percent change 10.07% 19.61% 10.14% 7.76% 11.03%
Percent change adjusted for $1.6
million of sales in 53rd week
for fiscal year 1998 12.41% 17.11%
Percent change in same restaurant sales 5.50% 3.17% (1.83%) (3.96%) (1.32%)
Percent change adjusted for $1.4
million of sales in 53rd week for
fiscal year 1998 7.62% 0.09%
Transaction count per day 490 487 491 498 489
Percent change 0.62% (0.81%) (5.03%) (5.68%) (4.86%)
Average check $ 4.44 $ 4.17 $ 4.08 $ 4.11 $ 4.07
Percent change 6.47% 2.21% 3.82% 0.74% 5.17%
Consolidated Results of Operations --
(Dollars in thousands)
Post- Post-
Merger Merger Pre-Merger
Company Company Company
-------------------- Combined -------- ----------
Fiscal Fiscal Twelve Three Nine
Year Year Months Months Months
Ended Ended Ended Ended Ended
----------- -------- ---------- ------- ----------
Jan. 2, Jan. 3, Dec. 28, Dec. 28, Sep. 28,
2000 1999 1997 1997 1997
(53 weeks)
----------- -------- ---------- -----------------
Revenues:
Restaurant sales $256,384 $248,152 $240,255 $ 61,440 $178,815
Franchise fees 499 333 349 130 219
Royalties 4,380 3,775 3,060 828 2,232
Other 5,755 5,188 4,759 1,290 3,469
-------- -------- --------- -------- -------
267,018 257,448 248,423 63,688 184,735
-------- -------- --------- -------- -------
Cost and Expenses:
Cost of restaurant sales 210,767 204,630 198,963 50,569 148,394
Depreciation and
amortization expense 14,057 12,868 11,558 3,342 8,216
General and administrative
expenses 24,030 24,876 26,269 6,612 19,657
Other expenses, net 3,543 3,270 3,344 901 2,443
-------- -------- --------- -------- -------
252,397 245,644 240,134 61,424 178,710
-------- -------- --------- -------- -------
Operating income 14,621 11,804 8,289 2,264 6,025
Reorganization item -- -- ( 1,218) -- (1,218)
Gain on settlement on deferred
compensation obligations -- 1,805 -- -- --
Gain on sale of investments 1,349 -- -- -- --
Interest expense, net:
Contractual rate interest, net(10,408) (10,518) ( 5,251) (2,941) (2,310)
Interest related to certain
pre-petition liabilities, net -- -- 96 -- 96
-------- -------- --------- -------- -------
Income (loss) before provision
for (benefit from) income
taxes and extraordinary item 5,562 3,091 1,916 (677) 2,593
Provision for (benefit from)
income taxes 3,018 1,746 790 (138) 928
-------- -------- --------- -------- --------
Income (loss) before
extraordinary item 2,544 1,345 1,126 (539) 1,665
Extraordinary charge for early
extinguishment of debt, net of
tax benefit of $134 -- -- (220) -- (220)
-------- -------- --------- -------- --------
Net income (loss) $ 2,544 $ 1,345 $ 906 $ (539)$ 1,445
======== ======== ========= ======== ========
General --
The Company's fiscal year ends on the Sunday nearest December 31.
Consequently, the Company will periodically have a 53-week fiscal year. The
fiscal years ended January 2, 2000 and January 3, 1999 were 52 week and 53
week fiscal year ends, respectively. The year ended December 28, 1997
(comprised of the nine months ended September 28, 1997 and the three months
ended December 28, 1997) was a 52 week fiscal year.
The Company's revenues are derived primarily from sales by Company-owned
restaurants. Total Company-owned restaurants increased from 241 at the end of
1998 to 250 at the end of 1999. Royalties and franchise fees from franchisees
have been a small, but growing, portion of the Company's revenues to date. The
total number of franchised restaurants grew by 7.3% in 1999 from 110 at the end
of 1998 to 118 at the end of 1999. The Company expects its franchisees to
develop up to 35 new restaurants during fiscal 2000. The Company also operates
through its wholly owned aviation subsidiary a fixed based aircraft hangar
operation in Chattanooga, Tennessee. Revenues from this operation in each of
the last three years were less than 3.0% of the Company's total revenues.
The Company expects to open approximately 14 new Company-owned restaurants in
fiscal 2000. Management estimates that approximately $15.0 million will be
required to finance the Company's cost of constructing these restaurants.
Funds required to finance the Company's restaurant expansion program are
expected to be provided by cash flow from operations, available cash of
approximately $5.3 million at January 2, 2000, an unused credit line of
approximately $19.9 million at January 2, 2000 and sale leaseback financing
through third party lenders.
Cost of restaurant sales relates to food and paper costs, labor and all other
restaurant costs for Company-owned restaurants. Depreciation and amortization
and general and administrative expenses relate primarily to Company-owned
restaurants and to the Company's franchise sales and support functions. Other
expenses relate primarily to Krystal Aviation.
Petition for relief under Chapter 11--
On December 15, 1995, Krystal filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United States Bankruptcy
Court for the Eastern District of Tennessee for the purpose of
completely and finally resolving the various claims filed against the Company
by current and former employees alleging violations of the Fair Labor
Standards Act of 1938 ("FLSA").
In early 1997, Krystal and the majority of the FLSA plaintiffs reached a
settlement providing for the payment of the FLSA claims and related legal
costs. A plan of reorganization (the "Plan") was formally filed on
February 24, 1997. On April 10, 1997, the Bankruptcy Court confirmed the
Company's plan of reorganization and on April 23, 1997, the Plan became
final resulting in the dismissal of the FLSA claims.
Results of Operations --
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items from the Company's statements of
operations.
Post-Merger Post-Merger Pre-Merger
Company Company Company
----------------- Combined -------- ---------
Fiscal Fiscal Twelve Three Nine
Year Year Months Months Months
Ended Ended Ended Ended Ended
--------- ------ ------- -------- ----------
Jan. 2, Jan. 3, Dec. 28, Dec. 28, Sep. 28,
2000 1999 1997 1997 1997
--------- ------- ------- -------- ---------
Revenues:
Restaurant sales 96.0% 96.4% 96.7% 96.5% 96.8%
Franchise fees 0.2 0.1 0.2 0.2 0.1
Royalties 1.6 1.5 1 2 1.3 1.2
Other 2.2 2.0 1.9 2.0 1.9
------- ------ ------ ------ ------
100.0 100.0 100.0 100.0 100.0
------- ------ ------- ------- ------
Costs and expenses:
Cost of restaurant sales 78.9 79.5 80.1 79.4 80.3
Depreciation and amortization 5.3 5.0 4.6 5.2 4.5
General and administrative
expenses 9.0 9.7 10.6 10.4 10.6
Other expenses, net 1.3 1.2 1.4 1.4 1.3
Special charge - - - - -
------- ------ ------ ------ ------
94.5 95.4 96.7 96.4 96.7
------- ------ ------ ------ ------
Operating income 5.5 4.6 3.3 3.6 3.3
Reorganization expense - - (0.5) - (0.7)
Gain on settlement of deferred
compensation obligation - 0.7 - - -
Gain on sale of investments 0.5 - - - -
Interest expense:
Contractual rate interest, net (3.9) (4.1) (2.1) (4.6) (1.3)
Interest related to certain
pre-petition liabilities, net - - - - 0.1
------- ------ ------ ------ ------
Income (loss) before provision
for income taxes and
extraordinary item 2.1 1.2 0.7 (1.0) 1.4
Provision for (benefit from)
income taxes 1.1 0.7 0.3 (0.2) 0.5
------- ------ ------ ------ ------
Income (loss) before extraordinary
item 1.0 0.5 0.4 (0.8) 0.9
Extraordinary charge for early
Retirement of debt - - (0.1) - (0.1)
------- ------ ------ ------ ------
Net income (loss) 1.0% 0.5% 0.3% (0.8)% 0.8%
======= ====== ======= ====== ======
Comparison of the Fiscal Year Ended January 2, 2000
to the Fiscal Year Ended January 3, 1999
The following discussion compares a 52 week period of operations in 1999 to a
53 week period in 1998.
Total Krystal system (Company and Franchise combined) restaurant sales for the
year ended January 2, 2000 increased 5.0% to $345.0 million compared to
$328.6 million for the year ended January 3, 1999. Excluding the 53rd
week of 1998, restaurant sales increased 7.2%.
Total Company revenues increased $9.6 million to $267.0 million (an increase
of 3.7%)for the year ended January 2, 2000 compared to $257.4 million for the
year ended January 3, 1999. Excluding sales achieved during the 53rd week of
1998, restaurant sales increased 5.5%. Of the $9.6 million increase, $8.2
million was attributable to an increase in restaurant sales and $605,000 was
attributable to an increase in royalty revenue. The Company had 250
restaurants open at January 2, 2000 and 241 restaurants open at
January 3, 1999. Company-owned same restaurant sales for the year ended
January 2, 2000 were $247.5 million compared to $243.3 million for the year
ended January 3, 1999, an increase of 1.7% (3.8% exclusive of the 53rd
week in 1998). The increase in same restaurant sales resulted primarily
from increased food volume sold and, to a lesser degree, product price
increases offset by a small decrease in transaction counts. Food volume sold
increased primarily as a result of the introduction of new products, new
promotional programs and continuing improvements in operations at the store
level.
The average customer check for Company-owned restaurants for the year
January 2, 2000 was $4.28 compared to $3.96 for the year ended January 3, 1999,
an increase of 8.1%. The increase in average customer check was due primarily
to a movement in the mix of products sold toward higher priced product
offerings such as the Krystal Chik and Krystal Chik Combos and increased food
volume per transaction resulting from higher volume offerings such as the new
Sackful offering (sacks of eight and twelve Krystal hamburgers) and to
maintaining product price increases of approximately 2.1% implemented in the
first quarter of 1999. During the year ended January 2, 2000, sales of Krystal
Chiks and Chik Combos accounted for $32.5 million, or 12.7% of restaurant sales
compared to $22.2 million, or 8.9% of restaurant sales, for the year ended
January 3, 1999. During the year ended January 2, 2000, Sackfuls accounted
for $31.5 million, or 12.3% of restaurant sales compared to $10.5 million,
or 4.1% of restaurant sales, for the year ended January 3, 1999. Transaction
counts per restaurant day, which represent a count of orders taken rather than
actual customers served, decreased to 676 per day in the year ended
January 2, 2000 compared to 692 per day in the year ended January 3, 1999, a
decrease of 2.3%. This decrease reflected the growing number of Sackful
transactions, which serve multiple customers, and is offset by an increase
in beef and chicken patties served per customer.
The Company's franchisees opened eight franchised restaurants in the year ended
January 2, 2000 compared to nine opened in the year ended January 3, 1999.
Franchise fee income was $499,000 in the year ended January 2, 2000 as compared
to $333,000 in the year ended January 3, 1999. Royalty revenue increased 16.0%
to $4.4 million in the year ended January 2, 2000 from $3.8 million in the year
ended January 3, 1999 (18.9% exclusive of the 53rd week in 1998). This
increase was primarily due to a 5.5% increase in franchise same restaurant
sales (7.6% exclusive of 53rd week in 1998) and an increase in royalties from
the sale of frozen Krystals of $216,000. Royalties from the sale of frozen
Krystals were negligible in the year ended January 3, 1999. The franchise
system operated 118 restaurants at the end of the year ended January 2, 2000
compared to 110 at the end of the year ended January 3, 1999.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $5.8 million in the year ended January 2, 2000 compared to $5.2
million in the year ended January 3, 1999, a 11.0% increase.
Cost of restaurant sales was $210.8 million in the year ended January 2, 2000
compared to $204.6 million in the year ended January 3, 1999. The increase in
cost resulted primarily from an increase in the volume of food sold. Food and
paper costs as a percent of restaurant sales increased to 31.28% in the year
ended January 2, 2000 from 30.86% in the year ended January 3, 1999. The
increase in food and paper costs as a percent of restaurant sales resulted
from increases in beef prices, the purchase of higher quality pork items and
from increased sales volume of the new Krystal Chik, which has a higher percent
of food costs relative to its sales price than most of the Company's other menu
items. Direct labor costs as a percent of restaurant sales increased to 23.95%
in the year ended January 2, 2000 from 23.59% in the year ended
January 3, 1999. The increase in direct labor costs as a percentage of
restaurant sales resulted from a 5.9% increase in the average pay rate of
the Company's hourly restaurant employee, offset by operating leverage achieved
through higher same store sales volumes and more efficient labor utilization.
Other labor costs as a percent of restaurant sales decreased to 6.44% in the
year ended January 2, 2000 from 6.94% in the year ended January 3, 1999. The
decrease in other labor costs as a percent of restaurant sales resulted from
higher same store restaurant sales and more efficient labor utilization.
Other labor, which includes restaurant General Managers' and Assistant
Managers' labor cost, is affected primarily by the number of operating
restaurants rather than sales volumes, and therefore tends to drop as a
percentage of restaurant sales when same store revenues increase.
Depreciation and amortization expenses increased $1.2 million, or 9.2%, to
$14.1 million in the year ended January 2, 2000 compared to the year ended
January 3, 1999. The increase resulted primarily from capital expenditures
related to refurbishing restaurant buildings, upgrading restaurant equipment,
opening new restaurants and the installation of new restaurant computer
systems.
General and administrative expenses decreased $900,000, or 3.4%, to $24.0
million in the year ended January 2, 2000 compared to $24.9 million in the
ear ended January 3, 1999. The decrease in general and administrative
expenses resulted primarily from decreases in expenditures related to
corporate office activities, group insurance expense and pension plan expense,
partially offset by higher advertising expenses which was the largest
contributor to the increase in general and administrative expenses.
Advertising expense increased $586,000, or 5.9%, to $10.5 million in the year
ended January 2, 2000 compared to $9.9 million in the year ended
January 3, 1999. Advertising expense as a percentage of restaurant sales
increased to 4.1% in the year ended January 2, 2000 compared to 4.0% during
the year ended January 3, 1999.
During 1998, the Company agreed to settle its obligations under its deferred
compensation plan by making lump sum cash payments to two retired
executives. The cash payments were funded with the proceeds from redeeming
the cash surrender value ("CSV") of life insurance policies on the lives of
these executives. The Company realized gains in 1998 of $925,000 from the
settlement of its obligations under the deferred compensation plan and
realized an additional gain of $880,000 related to the receipt of life
insurance proceeds in excess of the CSV.
During 1999, the insurer in which the Company had the life insurance policies,
demutualized forming a publicly traded company. Because the demutalization had
an effective date prior to the Company's 1998 redemption of the CSV of the
policies, the Company was a stockholder of record in the insurance company.
The Company elected to sell all of the shares it received in connection with
the demutualization, and as a result, realized a gain on sale of investments
of $1,349,000. The gain is reflected as a sale of investments in the
Consolidated Statements of Operations.
Interest expense, net of interest income, decreased $100,000 to $10.4 million
in the year ended January 2, 2000 from $10.5 million in the year ended
January 3, 1999. The decrease resulted from a decrease in average debt of
approximately $1.1 million during the year ended January 2, 2000 as compared
to the year ended January 3, 1999.
The Company's provision for income taxes increased $1.3 million, or 72.9% to
$3.0 million in the year ended January 2, 2000 as compared to $1.7 million for
the year ended January 3, 1999. The effective income tax rate was 54.2% for
the year ended January 2, 2000 as compared to 56.5% for the year ended
January 3, 1999. The effective tax rate was more than the statutory income
tax rate primarily because of the non-deductible portion of amortization
expense associated with acquisition-related goodwill.
Comparison of the Fiscal Year January 3, 1999
to the Combined Twelve Months Ended December 28, 1997
Total Krystal system (Company and Franchise combined) restaurant sales for the
fiscal year ended January 3, 1999 ("fiscal 1998") were $328.6 million
compared to $307.6 million for the combined twelve months ended
December 28, 1997 ("fiscal 1997"), a 6.8% increase. Total Company revenues
increased 3.6% to $257.4 million for fiscal 1998 compared to $248.4
million for fiscal 1997. Of this $9.0 million increase, restaurant sales
accounted for $7.9 million (of which $5.1 million occurred during the fifty
third week in fiscal 1998). The balance of the increase resulted from an
increase in franchise fees and royalties of $699,000, and increased revenue
from the Company's aviation subsidiary of $429,000. Company-owned average
same restaurant sales per week for fiscal 1998 were $19,300 compared to
$18,900 for fiscal 1997, an increase of 2.1%. The Company's management
believes the fiscal 1998 per unit weekly sales increase can be attributed to
several factors, including price increases, new promotional programs, reduced
price discounting, introduction of new products, and continuing improvements
in operations at the restaurant level. The Company had 241 restaurants open
at the end of fiscal 1998 compared to 248 at the end of fiscal 1997.
The average customer check for Company-owned restaurants (both full size and
Kwik) in fiscal 1998 was $3.96 as compared to $3.86 in fiscal 1997,
an increase of 2.6%. The increase in average customer check was due
primarily to product price increases of approximately 2.0% in fiscal 1998
over fiscal 1997, the introduction of the Krystal Chik and new menu
combinations. Transaction counts per restaurant day increased to 692 in fiscal
1998 compared to 685 in fiscal 1997, an increase of 1.2%. The transaction
count and check average was adjusted for fiscal 1997 for the installation
of new cash registers installed throughout the system during fiscal 1997.
The new registers record a customer with each sale registered rather than
each time the cash drawer is opened. The conversion was completed during 1997.
Franchise fees were $333,000 in fiscal 1998 compared to $349,000 for
fiscal 1997, a 4.6% decrease. Royalties increased 23.4% to $3.8 million in
fiscal 1998 from $3.1 million in fiscal 1997. Expressed on a per week basis,
in fiscal 1998 franchise fees and royalties increased 18.1% to $77,500
compared to $65,600 for fiscal 1997. The increase in royalties is primarily
due to an 8.9% increase in franchise restaurants and a 3.2% increase in
franchise same restaurant sales in fiscal 1998 compared to fiscal 1997. The
franchise system had 110 restaurants open at the end of fiscal 1998 compared
to 101 at the end of fiscal 1997.
Other revenue which is generated primarily from the Company's aviation
subsidiary, was $5.2 million in fiscal 1998 compared to $4.8 million in
fiscal 1997. Expressed on a per week basis, fiscal 1998 increased 7.0%
to $97,900 compared to $91,500 for fiscal 1997.
Cost of restaurant sales was $204.6 million in fiscal 1998 compared to $199.0
million in fiscal 1997. Cost of restaurant sales as a percentage of restaurant
sales decreased to 82.5% in fiscal 1998 from 82.8% in fiscal 1997. This
decrease was primarily the result of negotiated decreases in food and paper
costs but was partially offset by the increase in direct labor. Total food
and paper costs were $76.6 million in fiscal 1998 as compared to $77.5 million
in fiscal 1997. Food and paper costs as a percentage of restaurant sales
decreased to 30.9% in fiscal 1998 compared to 32.3% in fiscal 1997. Direct
labor cost was $58.5 million in fiscal 1998 versus $53.8 million in fiscal
1997. Direct labor cost as a percentage of restaurant sales was 23.6% for
fiscal 1998 and 22.4% for fiscal 1997. This increase resulted primarily from
a 5.4% increase in the minimum wage effective September 1, 1997. Other
labor cost, which includes restaurant General Managers' and Assistant
Managers' labor cost, was $17.2 million in fiscal 1998 compared to $18.8
million in fiscal 1997. Other labor as a percentage of restaurant sales
was 6.9% in fiscal 1998 versus 7.8% in fiscal 1997.
Depreciation and amortization expenses were $12.9 million in fiscal 1998 as
compared to $11.6 million in fiscal 1997. This increase in fiscal 1998 was
due to the revaluation of Company assets on September 29, 1997 resulting from
the acquisition of the Company by Port Royal.
General and administrative expenses decreased $1.4 million, approximately
5.3%, to $24.9 million in fiscal 1998 versus $26.3 million in fiscal 1997.
The decrease in general and administrative expenses resulted primarily from
overall reductions in expenditures related to corporate office activities.
Advertising expense was approximately $9.9 million in fiscal 1998 compared
to $10.1 million in fiscal 1997. Advertising expense as a percentage of
restaurant sales was 4.0% in fiscal 1998 compared to 4.1% in fiscal 1997.
Salaries were $7.0 million in fiscal 1998 compared to $7.9 million in
fiscal 1997. Other areas of reduction included corporate office rent expense,
supplies expense, and auto expense.
In accordance with Statement of Position 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, issued by the American Institute
of Certified Public Accountants, the Company expensed Reorganization Items as
incurred. The Company incurred no such professional fees and expenses during
fiscal 1998, compared to $1.2 million in fiscal 1997.
During 1998, the Company agreed to settle its obligations under certain
deferred compensation plans by making lump sum cash payments to two
retired executives. The Company realized a gain of $925,000 from this
transaction. The cash payments were funded with the proceeds from redeeming
the cash surrender value of life insurance policies on the lives of the
retired executives. Also during fiscal 1998 the Company realized a gain of
$880,000 related to receipt of life insurance proceeds in excess of cash
surrender value.
Interest expense, net of interest income, for fiscal 1998 increased $5.2
million to $10.5 million from $5.3 million in fiscal 1997. This increase was
due to the acquisition related increase in long-term debt in the fourth
quarter of fiscal 1997.
Provision for income taxes was $1.7 million for fiscal 1998 compared to
$790,000 for fiscal 1997. The effective income tax rate of 56% for
fiscal 1998 and 41% for fiscal 1997 was more than the statutory income tax
rate primarily as a result of the non-deductible portion of amortization
expense associated with acquisition-related goodwill.
The Company recorded a loss of $220,000, net of tax benefit, in 1997
related to the early extinguishment of debt.
Liquidity and Capital Resources --
The Company does not maintain significant inventory or accounts receivable
since substantially all of its restaurants' sales are for cash. Like many
restaurant businesses, the Company receives several weeks of trade credit
in purchasing food and supplies. The Company's receivables from franchisees
are closely monitored and collected weekly. The Company normally operates
with working capital deficits (current liabilities exceeding current assets),
and had a working capital deficit of $24.4 million at January 2, 2000,
compared to a working capital deficit of $11.1 million at January 3, 1999.
Capital expenditures, net of proceeds received from sales and leaseback
transactions, totaled approximately $28.1 million for the 12 months of
1999, compared to $8.9 million in 1998. Approximately $20.0 million, net of
proceeds from sale and leaseback transactions, is expected for capital
expenditures in fiscal 2000. Expected capital expenditures include
approximately 14 new restaurants to open in fiscal 2000, acquiring land for
future restaurant development, refurbishing of certain restaurants and
on-going capital improvements. The Company owns approximately 52.0% of its
restaurant locations and leases the remainder.
In December 1998, the Company obtained a sale and leaseback commitment with
a firm for up to $6.0 million of properties which are to be developed and
operated as Company-owned Krystal restaurants. During 1999, the
commitment was increased to $9.0 million. As of January 2, 2000, $5.4
million remains available to the Company under this commitment.
At January 2, 2000, the Company had existing cash balances of $5.3 million
and an unused credit line of $19.9 million. The Company expects these funds,
funds from operations and sale leaseback financing through third party lenders
will be sufficient to meet its operating requirements and capital expenditures
through 2000.
Impact of Inflation --
Although increases in labor, food and other operating costs could adversely
affect the Company's operations, management does not believe that inflation
has had a material effect on income during the past several years.
Seasonality --
The Company does not expect seasonality to affect its operations in a
materially adverse manner. The Company's revenues during its first fiscal
quarter, comprising the months of January, February and March, will, however,
generally be lower than its other quarters due to consumer shopping habits
and the climate in the location of a number of its restaurants.
Year 2000 --
During 1998,the Company established a Year 2000 strategic plan which adopts a
series of initiatives necessary to upgrade the Company's computer systems and
to minimize the impact of failures of other computer systems to process
date-sensitive information after December 31, 1999. The Company completed
its Year 2000 initiatives for all mission critical systems prior to
December 31, 1999 and experienced no significant system problems.
Additionally, the Company experienced no significant problems regarding
Year 2000 compliance with respect to its major vendors and other third party
suppliers. A recap of the results of the Company's Year 2000 initiative is
provided below.
A portion of the Company's Year 2000 initiatives involved the replacement
of the Company's hardware and software environment used to run application
software, including the Company's centralized financial systems. During 1998,
approximately $2.0 million was expended and capitalized by the Company in
connection with this replacement. For each Company restaurant location, new
restaurant reporting and management systems were installed and software,
selected hardware and telecommunication systems were upgraded to bring
restaurant systems into Year 2000 compliance. The total cost associated with
the updating of Company restaurant locations was approximately $7.9 million
as compared to approximately $7.0 million which was initially budgeted in 1999.
Management believes it has effectively addressed the Year 2000 issue and does
not expect to encounter any issues into fiscal year 2000. The Company plans
to continually update restaurant reporting and management systems
(non-Year 2000 related) to ensure both customers and management receive the
most effective service and information available.
Forward looking statements --
Certain written and oral statements made by or on behalf of the Company may
constitute "forward-looking" statements" as defined under the Private
Securities Litigation Reform Act of 1995 (the "PSLRA"). The PSLRA contains
a safe harbor for forward-looking statements. The Company relies on this safe
harbor in making such disclosures. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from the Company's historical experience and its present
expectations or projections. These risks and uncertainties include, but are
not limited to, unanticipated economic changes, interest rate movements,
changes in governmental policies, the impact of competition, changes in
consumer tastes, increases in costs for food and/or labor, the availability
and adequate supply of hourly-paid employees, the ability of the Company to
attract and retain suitable franchisees and the impact of governmental
regulations. The Company cautions that such factors are not exclusive.
Caution should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date of the making of
such statements and are based on certain expectations and estimates of the
Company which are subject to risks and changes in circumstances that are not
within the Company's control. The Company does not undertake to update
forward-looking statements.
Item 7a. Quantitative and qualitative disclosures about market risks
Not applicable
Item 8. Financial Statements and Supplementary Data
(commencing on the following page)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Krystal Company:
We have audited the accompanying consolidated balance sheets of The Krystal
Company (a Tennessee corporation) and subsidiary ("Post-Merger Company") as of
January 2, 2000 and January 3, 1999(see Note 1) and the related consolidated
statements of operations, shareholder's equity and cash flows for the years
then ended and the three month period ended December 28, 1997. We have also
audited the accompanying consolidated statements of operations, shareholder's
equity and cash flows of The Krystal Company (a Tennessee corporation) and
subsidiary ("Pre-Merger Company") for the nine months ended September 28, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
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 financial statements referred to above present fairly, in
all material respects, the financial position of the Post-Merger Company as of
January 2, 2000 and January 3, 1999 and the results of its operations and its
cash flows for the years then ended and the three month period ended
December 28, 1997 and the Pre-Merger Company's results of operations and cash
flows for the nine months ended September 28, 1997, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
February 15, 2000
The Krystal Company and Subsidiary
----------------------------------
Consolidated Balance Sheets
---------------------------
(Dollars in thousands)
January 2, January 3,
2000 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 5,302 $ 9,012
Receivables, net 1,382 2,305
Inventories 2,099 1,684
Deferred income taxes 2,843 2,817
Prepayments and other 1,090 778
-------- -------
Total current assets 12,716 16,596
-------- -------
PROPERTY, BUILDINGS AND EQUIPMENT, net
of accumulated depreciation of $22,586
at January 2, 2000 and $16,221 at
January 3, 1999 117,492 99,694
-------- -------
LEASED PROPERTIES, net of accumulated
amortization of $1,027 at January 2, 2000
and $271 at January 3, 1999 10,518 2,595
-------- -------
OTHER ASSETS:
Prepaid pension asset 8,144 8,329
Deferred financing costs, net 3,754 4,577
Goodwill, net 45,432 47,429
Other 455 268
-------- -------
Total other assets 57,785 60,603
-------- -------
$ 198,511 $ 179,488
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
The Krystal Company And Subsidiary
----------------------------------
Consolidated Balance Sheets
---------------------------
(Dollars in thousands)
January 2, January 3,
2000 1999
----------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,482 $ 5,009
Accrued liabilities 24,110 22,253
Outstanding checks in excess
of bank balance 3,701 --
Current portion of long-term debt 53 53
Current portion of capital
lease obligations 1,745 346
-------- -------
Total current liabilities 37,091 27,661
-------- -------
LONG-TERM DEBT, excluding current portion 102,623 100,136
-------- -------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 9,467 2,806
-------- -------
DEFERRED INCOME TAXES 9,828 11,735
-------- -------
OTHER LONG-TERM LIABILITIES 1,152 1,344
-------- -------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized, issued
and outstanding at January 2, 2000
and January 3, 1999 35,000 35,000
Retained earnings 3,350 806
-------- -------
Total shareholder's equity 38,350 35,806
-------- -------
$ 198,511 $ 179,488
======== =======
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Operations
-------------------------------------
(Dollars in thousands)
Post-Merger |Pre-Merger
Company |Company
----------------------------------|----------
Three | Nine
Fiscal Year Fiscal Year Months | Months
Ended Ended Ended | Ended
----------- ----------- ----------|----------
Jan. 2, Jan. 3, Dec. 28, | Sep. 28,
2000 1999 1997 | 1997
(53 weeks) |
----------- ----------- ----------|----------
Revenues: |
Restaurant sales $256,384 $ 248,152 $ 61,440 | $178,815
Franchise fees 499 333 130 | 219
Royalties 4,380 3,775 828 | 2,232
Other 5,755 5,188 1,290 | 3,469
---------- ---------- --------- | --------
267,018 257,448 63,688 | 184,735
----------- ---------- --------- | --------
Cost and Expenses: |
Cost of restaurant sales 210,767 204,630 50,569 | 148,394
Depreciation and |
amortization expense 14,057 12,868 3,342 | 8,216
General and administrative |
expenses 24,030 24,876 6,612 | 19,657
Other expenses, net 3,543 3,270 901 | 2,443
----------- ---------- --------- | --------
252,397 245,644 61,424 | 178,710
----------- ---------- --------- | --------
Operating income 14,621 11,804 2,264 | 6,025
Reorganization item -- -- -- | (1,218)
Gain on settlement of deferred |
compensation obligations -- 1,805 -- | --
Gain on sale of investments 1,349 -- -- | --
Interest expense, net: |
Contractual rate interest, net (10,408) (10,518) (2,941) | (2,310)
Interest related to certain |
pre-petition liabilities, net -- -- -- | 96
----------- ---------- --------- | ---------
Income (loss) before provision |
for (benefit from) income |
taxes and extraordinary item 5,562 3,091 (677) | 2,593
Provision for (benefit from) |
income taxes 3,018 1,746 (138) | 928
----------- ---------- --------- | ---------
Income (loss) before |
extraordinary item 2,544 1,345 (539) | 1,665
Extraordinary charge for early |
extinguishment of debt, net of |
tax benefit of $134 -- -- -- | (220)
----------- ---------- --------- | ---------
Net income (loss) $ 2,544 $ 1,345 $ (539) | $ 1,445
=========== ========== ========= | =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Shareholder's Equity
-----------------------------------------------
(Dollars in thousands)
Common Retained Deferred
Stock Earnings Compensation
------ -------- ------------
BALANCE, December 29, 1996 $ 40,556 $ 5,873 $(1,741)
Issuance of 720 common shares
to management & non-employee
director under restricted stock
plans 4 -- (4)
Forfeiture of 16,400 restricted
shares (197) -- 197
Amortization of deferred
compensation -- -- 1,548
Net income -- 1,445 --
------- ------- -------
BALANCE, September 28, 1997
Pre-Merger Company $ 40,363 $ 7,318 $ --
======= ======= =======
- ---------------------------------------------------------------------
Cancellation of Pre-Merger
balances upon merger $(40,363) $(7,318) $ --
Capital Contribution by
Port Royal Holdings, Inc. 35,000 -- --
Net loss -- (539) --
------- ------- -------
BALANCE, December 28, 1997
Post-Merger Company 35,000 (539) --
Net income 1,345 --
------- ------- ------
BALANCE, January 3, 1999
Post-Merger Company 35,000 806 --
------- ------- -------
Net income -- 2,544 --
------- ------- -------
BALANCE, January 2, 2000 $ 35,000 $ 3,350 $ --
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Dollars in thousands)
------------------------------------------
Post-Merger |Pre-Merger
Company | Company
------------------------------ |----------
Fiscal Fiscal Three | Nine
Year Year Months | Months
Ended Ended Ended | Ended
---------- -------- -------- | ---------
Jan. 2, Jan. 3, Dec. 28, | Sep.28,
2000 1999 1997 | 1997
(53 Weeks) |
---------- -------- -------- | ---------
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss) $ 2,544 $ 1,345 $ (539)| $ 1,445
Adjustments to reconcile net |
income (loss) to net cash provided |
by (used in) operating activities- |
Depreciation and amortization 14,057 12,868 3,342 | 8,216
Deferred income taxes (1,907) 1,398 (187)| 5,152
Loss on early extinguishment |
of debt -- -- -- | 220
Changes in operating assets and |
liabilities: |
Receivables, net 923 (828) 2,535 | (1,446)
Income tax receivable -- 4,582 2,541 | (4,524)
Inventories (415) 557 (174)| 266
Prepayments and other (370) 110 245 | 905
Outstanding checks in excess |
of bank balance 3,701 -- -- | --
Accounts payable 2,473 (1,810) 2,063 | 221
Income taxes payable -- -- (212)| (822)
Accrued liabilities 1,857 2,104 (986)| 271
Other, net (1,913) 3,193 (1,189)| (840)
Liabilities from |
reorganization activities -- -- -- | (22,317)
-------- ------- ---------| ---------
Net cash (used in) provided by |
operating activities 20,950 23,519 7,439 | (13,253)
-------- ------- ---------| ---------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Acquisition of |
The Krystal Company -- -- (111,256)| --
Additions to property, buildings |
and equipment (33,128) (10,917) (1,643)| (5,437)
Proceeds from the sale and the |
sale/leaseback of property, |
buildings and equipment 6,645 1,978 20 | 635
Payments received on net |
investment in direct |
financing leases 58 247 100 | 462
-------- ------- ---------| ---------
Net cash used in investing |
activities (26,425) (8,692) (112,779)| (4,340)
-------- ------- ---------| ---------
CASH FLOWS FROM FINANCING ACTIVITIES: |
Decrease in debt from |
reorganization activities -- -- -- | (36,000)
Borrowings (repayments)under |
revolving credit facility 2,551 (11,113) 5,113 | 6,000
Proceeds from issuance of |
long-term debt -- -- -- | 30,000
Repayments of Pre-Merger |
Company long-term debt (66) (53) (29,512)| (3,431)
Issuance of 10.25% senior notes -- -- 100,000 | --
Principal payments of capital |
lease obligations (720) (156) (83)| (385)
Capital contribution from |
Port Royal Holdings, Inc. -- -- 35,000 | --
Deferred financing costs -- -- (5,597)| (1,430)
-------- ------- ---------|----------
Net cash provided by (used in) |
financing activities 1,765 (11,322) 104,921 | (5,246)
-------- -------- ---------|----------
NET INCREASE(DECREASE) IN CASH AND |
TEMPORARY INVESTMENTS (3,710) 3,505 (419)| (22,839)
|
CASH AND TEMPORARY INVESTMENTS, |
beginning of period 9,012 5,507 5,926 | 28,765
-------- -------- ---------|----------
CASH AND TEMPORARY INVESTMENTS, |
end of period $ 5,302 $ 9,012 $ 5,507 | $ 5,926
======== ======== =========|==========
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
INFORMATION: |
Cash paid during the period for: |
Interest, net of amounts |
capitalized $ 10,907 $11,260 $ 653 | $ 6,797
======= ======= =========| =========
Income taxes $ 2,477 $ 958 $ 23 | $ 862
======= ======= =========| =========
Reorganization item $ -- $ -- $ -- | $14,955
======= ======= ========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER WITH PORT ROYAL HOLDINGS INC.
On September 26, 1997, (effective September 29, 1997 for accounting purposes),
pursuant to an Agreement and Plan of Merger by and among the Company,
Port Royal Holdings, Inc. ("Port Royal") and TKC Acquisition Corp. dated
July 3, 1997, Port Royal acquired the Company for an aggregate purchase
price of $112,009,000 (the "Acquisition"). As a result of the merger, each
share of the Company's issued and outstanding stock prior to the merger
was converted into the right to receive $14.50 cash, and the Company became
a wholly-owned subsidiary of Port Royal. The Company prior to the Acquisition
is referred to herein as the "Pre-Merger Company." The Company after the
Acquisition is referred to as the "Post-Merger Company."
The purchase price for the Acquisition was funded through (i) a $35 million
equity contribution from Port Royal funded by a private equity placement,
(ii) borrowings under a revolving credit facility of $25 million with a bank
and (iii) the sale of the Company's 10.25% senior notes due 2007 in the
aggregate principal amount of $100 million (the "Senior Notes").
The acquisition and merger were completed on September 26, 1997 (September 29,
1997 for accounting purposes) and were accounted for using the purchase method
of accounting. Accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based on fair market values at the date of
acquisition, with the remainder to goodwill. The historical shareholders'
equity of Krystal was eliminated on the Post-Merger Company's consolidated
balance sheet. The fair value adjustments to the historical consolidated
balance sheet were as follows:
(In thousands)
Net assets acquired on September 29, 1997
at historical cost $ 46,279
Revaluation of Krystal's property, buildings
and equipment to estimated fair value 15,797
Adjustment to fair value of other
assets acquired and liabilities assumed 3,075
Deferred income taxes associated with
the revaluation of Krystal's assets
and liabilities (3,052)
Goodwill 49,910
---------
Total purchase price allocated $ 112,009
=========
2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities --
Krystal (a Tennessee corporation) is engaged primarily in the development,
operation and franchising of quick-service restaurants in the Southeastern
United States. Krystal's wholly-owned subsidiary, Krystal Aviation Co.
("Aviation") operates a fixed base airport hangar operation in Chattanooga,
Tennessee. Aviation's revenues in each of the last three years were less than
3% of the Company's total revenues. As discussed in Note 3, on
December 15, 1995, Krystal filed a petition for relief under Chapter 11 of
the federal bankruptcy laws. Krystal emerged from Chapter 11 bankruptcy
with the confirmation of Krystal's plan of reorganization by the U.S.
Bankruptcy Court on April 10, 1997.
Basis of Presentation --
The consolidated financial statements for the nine months ended
September 28, 1997 were prepared using the Pre-Merger Company's historical
basis of accounting. The accompanying consolidated financial statements for
the three months ended December 28, 1997 and for the years ended
January 3, 1999 and January 2, 2000 were prepared under a new basis of
accounting that reflects the allocation of the fair value of assets acquired
and liabilities assumed, the related financing and acquisition costs and all
debt incurred in connection with the acquisition of Krystal by Port Royal.
Accordingly, the consolidated financial statements for periods prior to
September 29, 1997 are not comparable to consolidated financial statements
on or subsequent to September 29, 1997. A black line on the accompanying
consolidated financial statements distinguishes between the Pre-Merger and
Post-Merger Company.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
The Krystal Company and Aviation (herein after referred to collectively as
The "Company"). All significant intercompany balances and transactions have
been eliminated.
Fiscal Year End --
The Company's fiscal year ends on the Sunday nearest December 31.
Consequently, the Company will periodically have a 53-week fiscal year. The
fiscal years ended January 2, 2000 and January 3, 1999 were 52 week and 53
week fiscal year ends, respectively. The year ended December 28, 1997
(comprised of the nine months ended September 28, 1997 and the three months
ended December 28, 1997) was a 52 week fiscal year.
Cash and Temporary Investments --
For purposes of the consolidated statements of cash flows, the Company
considers repurchase agreements and other temporary cash investments with a
maturity of three months or less to be temporary investments.
Inventories --
Inventories are stated at cost and consist primarily of food, paper products
and other supplies. Prior to the acquisition of Krystal by Port Royal, the
Company used the last-in, first-out (LIFO) method of accounting for a
substantial portion of its inventories. Effective September 29, 1997, the
Company changed to the first-in, first-out (FIFO) method. The change in
accounting principle was made primarily to reflect inventory on the
consolidated balance sheet at a value that more closely represents current
cost at the date of the acquisition and merger. This accounting change was
not material to the financial statements on an annual or quarterly basis, and
accordingly, no retroactive restatement of prior years' financial statements
was made.
Property, Buildings and Equipment --
Prior to September 29, 1997, property, buildings and equipment are stated at
cost. Effective with the acquisition by Port Royal, property, buildings and
equipment were adjusted to their estimated fair values. Properties acquired
after September 29, 1997 are stated at cost.
Expenditures which materially increase useful lives are capitalized, whereas
ordinary maintenance and repairs are expensed as incurred. Depreciation of
fixed assets is computed using the straight-line method for financial reporting
purposes and accelerated methods for tax purposes over the estimated useful
lives of the related assets as follows:
Buildings and improvements 10 - 39 years
Equipment 3 - 10 years
Leasehold improvements Life of lease up to 20 years
Long-lived Assets --
The Company periodically evaluates the carrying value of its long-lived assets.
The carrying value of specific long-lived assets are reviewed for potential
impairment when the projected undiscounted future cash flow of such assets
is less than its carrying value.
Leased Property-
The lower of fair market value or the discounted value of that portion of a
capital lease attributable to building costs is capitalized and amortized by
the straight-line method over the term of such leases and included with
depreciation expense. The portions of such leases relating to land are
accounted for as operating leases.
Intangibles --
The consolidated balance sheet of the Post-Merger Company includes the
allocation of purchase accounting goodwill of $49,910,000 and deferred
financing costs of $5,604,000. Intangibles are amortized on a
straight-line basis over 10 to 25 years. Amortization expense for goodwill
and deferred financing costs for the years ended January 2, 2000 and
January 3, 1999 was $1,997,000 and $823,000, and $1,999,000 and $823,000,
respectively. Accumulated amortization of goodwill at January 2, 2000 and
January 3, 1999 was $4,478,000 and $2,481,000,respectively. Accumulated
amortization of deferred financing costs at January 2, 2000 and January 3,
1999 was $1,850,000 and $1,027,000, respectively.
Franchise and License Agreements --
Franchise or license agreements are available for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants
the franchisee or licensee is to construct and open in the franchised area
during the term of the agreement. At January 2, 2000, there were 118
franchised or licensed restaurants of which 51 restaurants were operated
under 18 multi-unit agreements. At January 3, 1999, there were 110 franchised
or licensed restaurants of which 40 restaurants were operated under 12
multi-unit agreements.
Franchisees and licensees are required to pay the Company an initial franchise
or license fee plus a weekly royalty and service fee of either 4.5% or 6.0% of
the restaurants' gross receipts, depending on the duration of the franchise
agreement. The initial franchise and license fees are recorded as income as
related restaurants begin operations. Royalty and service fees, which are
based on restaurant sales of franchisees and licensees, are recognized as
earned. Franchise fees received prior to the opening of the restaurant are
deferred and included in accrued liabilities on the consolidated balance
sheets. At January 2, 2000 and January 3, 1999, total deferred franchise
and license fees were approximately $458,000 and $396,000, respectively.
Fair market value of financial instruments --
Unless otherwise indicated elsewhere in the notes to the consolidated financial
statements, the carrying values of the Company's financial instruments
approximate their fair values.
Use of Estimates --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications --
Certain reclassifications have been made to prior year financial statements to
conform with the 1999 presentation.
Effects of Accounting Changes --
The American Institute of Certified Public Accountant's (AICPA) Statement of
Position 98-5, "Reporting on the Cost of Start-Up Activities"("SOP 98-5")
requires companies to expense all pre-opening costs as they are incurred.
There was no effect to the Company for the adoption of SOP 98-5 as the
Company has historically expensed all start-up costs related to new restaurant
openings as incurred.
3. PETITION FOR RELIEF UNDER CHAPTER 11
On December 15, 1995, Krystal filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code with the United States Bankruptcy Court for
the Eastern District of Tennessee for the purpose of completely and finally
resolving the various claims filed against the Company by current and former
employees alleging violations of the Fair Labor Standards Act of 1938.
In early 1997, Krystal and the majority of the FLSA plaintiffs reached a
settlement providing for the payment of the FLSA claims and related legal
costs. A plan of reorganization (the "Plan") was formally filed on
February 24, 1997. On April 10, 1997, the Bankruptcy Court confirmed the
Company's plan of reorganization and on April 23, 1997, the Plan became final
resulting in the dismissal of the FLSA claims.
4. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment at January 2, 2000 and January 3, 1999,
consisted of the following:
January 2, January 3,
2000 1999
----------- -----------
(In thousands)
Land $ 42,045 $ 40,254
Buildings and improvements 39,049 32,026
Equipment 40,480 30,204
Leasehold improvements 12,645 9,654
Construction in progress 5,859 3,777
--------- ---------
140,078 115,915
Accumulated depreciation
and amortization (22,586) (16,221)
--------- ---------
$ 117,492 $ 99,694
========= =========
5. ACCRUED LIABILITIES
Accrued liabilities at January 2, 2000 and January 3, 1999, consisted of
the following:
January 2, January 3,
2000 1999
------------ -----------
(In thousands)
Salaries, wages and benefits $ 7,199 $ 7,185
Workers' compensation 3,233 3,258
State sales taxes 1,510 1,836
Accrued interest 2,692 2,676
Deferred Franchise advertising and fees 1,250 761
Other 8,226 6,537
-------- --------
$ 24,110 $ 22,253
======== ========
6. INDEBTEDNESS
Revolving Credit Agreement:
In September 1997, the Company entered into a credit agreement with a bank for
a $25 million credit facility (the "Credit Facility"). Borrowings under the
Credit Facility bear interest rates, at the option of the Company, equal to
either: (a) the greater of the prime rate, or the federal funds rate plus 0.5%,
plus a margin of 0.5%; or (b) the rate offered in the Eurodollar market for
amounts and periods comparable to the relevant loan, plus a margin (which
changes from 1.0% to 2.5%) that is determined by certain financial covenants.
At January 2, 2000, the margin applicable to the Eurodollar interest rate
was 1.75%. The weighted average interest rate for borrowings outstanding under
the Credit Facility during 1999 was approximately 7.99%. Availability under
the Credit Facility as of January 2, 2000 is $19.9 million which has been
offset by $2.7 million in letters of credit primarily for the Company's
workers' compensation plans. The Credit Facility matures August 2001.
The Credit Facility contains restrictive covenants including, but not limited
to: (a) the Company's required maintenance of minimum levels of tangible net
worth; (b) limitations regarding additional indebtedness; (c) the Company's
required maintenance of a minimum amount of fixed charges coverage; and
(d) limitations regarding liens on assets. Additionally, the Credit Facility
contains a provision that, in the event of a defined change of control, the
Credit Facility will be terminated. As of January 2, 2000, and for the year
then ended, the Company was in compliance with, or had obtained waivers for,
all loan covenants.
Essentially all assets of the Company at January 2, 2000, are pledged as
collateral on the Credit Facility. Additionally, the Credit Facility is
guaranteed by Port Royal through a secured pledge of all the Company's common
stock held by Port Royal and the common stock of each existing and future
subsidiary of the Company.
Senior Notes:
In September 1997, Port Royal issued $100,000,000 in unsecured 10.25% senior
notes ("the Notes") which mature on October 1, 2007. Following the acquisition
and merger, the Post-Merger Company became the obligor of the Notes. The Notes
pay interest semi-annually on April 1 and October 1 of each year. The Notes
are redeemable at the option of the Company at prices decreasing from 105 1/8%
of the principal amount on April 1, 2002 to 100% of the principal amount on
April 1, 2005. On or prior to April 1, 2000, the Company may redeem up to 35%
of the original principal amount with the proceeds of one or more public
equity offerings at a redemption price of 110 1/4%. Additionally, upon a
change of control of the Company, the holders of the Notes will have the right
to require the Company to purchase all or a portion of the Notes at a price
equal to 101% of the original principal amount. The proceeds of the Notes were
used to fund the acquisition by Port Royal.
Long-term debt at January 2, 2000 and January 3, 1999, consisted of the
following:
January 2, January 3,
2000 1999
----------- -----------
(In thousands)
Revolving credit facility,
due August 2001 $ 2,461 $ --
10.25% senior notes,
due October 2007 100,000 100,000
Other 215 189
--------- --------
102,676 100,189
Less--
Current maturities ( 53) ( 53)
--------- --------
$102,623 $100,136
========= ========
Scheduled maturities of long-term debt at January 2, 2000, are as follows:
(In thousands):
2000 $ 53
2001 2,484
2002 113
2003 18
Thereafter 100,008
At January 2, 2000, the estimated fair value of the Credit Facility
approximates the carrying amount of such debt because the interest rate
changes with market interest rates. The estimated fair value of the Notes
at January 2, 2000 exceeds their carrying value by approximately $2,000,000.
The fair value was estimated based upon quoted market prices for the same or
similar issues.
7. BENEFIT PLANS
Retirement Plans --
Effective October 1, 1998, the Company amended and restated its defined benefit
pension plan. The plan, as amended, is a defined benefit pension plan covering
each employee who was participating in the plan on September 30, 1998 and each
salaried employee or salaried benefits employee who is employed on or after
October 1, 1998. The cost of the plan shall be borne by actuarially determined
contributions made by the employer and by contributions made by the
participants. The plan provides benefits of stated amounts based on years of
service and the employee's compensation. This event was accounted for as a
plan amendment. The Company's funding policy is consistent with the
requirements of the Employee Retirement Income Security Act of 1974.
Effective March 31, 1998, the Company terminated its hourly benefit program to
retired employees for all current and future participants. The Company's
obligation for any future obligation under this plan was settled. This event
was accounted for as a plan termination.
(Dollars in thousands)
Pension Benefits Postretirement Benefits
-----------------|-----------------------
Jan. 2, Jan. 3, | Jan. 2, Jan. 3,
2000 1999 | 2000 1999
------- --------| ------- -------
Change in benefit obligation -- |
Benefit obligation at beginning |
of period $28,582 $26,653 | $ 1,017 $1,097
Service costs 2,295 1,641 | 68 68
Interest cost 1,780 1,981 | 83 67
Plan participants' contributions -- -- | 51 37
Amendments -- (2,816)| -- --
Gain from plan termination -- -- | -- ( 137)
Actuarial loss (gain) (5,202) 3,141 | 282 21
Benefits paid (2,220) (1,991)| (244) ( 136)
------- ------- | ------- ------
Benefit obligation at |
end of period 25,235 28,582 | 1,257 1,017
------- ------- | ------- ------
|
Change in plan assets -- |
Fair value of plan assets at |
beginning of period 34,918 33,197 | -- --
Actual return on plan assets 5,387 3,519 | -- --
Employer contributions -- 193 | 193 99
Plan participants' contributions 901 -- | 51 37
Benefits paid (2,220) (1,991)| (244) ( 136)
------- ------- | ------- ------
Fair value of plan assets at |
end of period 38,986 34,918 | -- --
------- ------- | ------- ------
|
Funded status 13,751 6,336 | (1,257) (1,017)
|
Unrecognized prior service cost (2,581) (2,816)| -- --
Unrecognized net loss (gain) (3,026) 4,809 | 327 61
------- ------- | ------- ------
Asset (liability) recognized |
in the consolidated balance |
sheet $ 8,144 $ 8,329 | $ (930) $( 956)
======= ======= | ======= ======
|
Weighted-average assumptions as |
of the end of period -- |
|
Discount rate 8.0% 7.0% | 7.0% 7.5%
Expected return on plan assets 9.0% 9.0% | n/a n/a
Rate of compensation increase 3.0% 3.0% | n/a n/a
For measurement purposes, a 6.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal year 2000 and
assumed to remain constant thereafter.
Components of net periodic benefit cost --
Service cost $2,295 $ 1,614 | $ 68 $ 68
Interest cost 1,780 1,981 | 83 67
Gain from plan termination -- -- | -- ( 137)
Expected return on plan assets (3,064) (2,916)| -- --
Net amortization and deferral -- -- | 17 --
------ ------ | ------ -----
$1,011 $ 679 | $ 168 $( 2)
====== ====== | ====== =====
Assumed health care cost trend rates have a significant effect on the amount
reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-Percentage-Point
---------------------
Decrease Increase
-------- --------
Aggregate service and interest costs $ 130 $ 175
Accumulated postretirement benefit obligation 1,143 1,386
The Company had a supplemental executive retirement plan for certain former
officers. The plan provided additional benefits upon retirement. The
supplemental retirement benefit was to be paid over the officers' lifetime
but for no less than a period of 10 years following retirement. The Company
provided an annual amount necessary to amortize the total cost of the
estimated deferred compensation at retirement. Total deferred compensation
accrued for this plan at December 27, 1997, was $3,261,000. During 1998,
the Company agreed to settle its obligations under this deferred compensation
plan by making lump sum cash payments to the two retired executives. The cash
payments were funded with the proceeds from redeeming the cash surrender
value ("CSV") of life insurance policies on the lives of these executives.
The Company realized gains in 1998 of $925,000 from the settlement of its
obligations under the deferred compensation plan and realized an additional
gain of $880,000 related to the receipt of life insurance proceeds in excess
of the CSV.
During 1999, the insurer in which the Company had the life insurance policies,
demutualized forming a publicly traded company. Because the demutalization had
an effective date prior to the Company's 1998 redemption of the CSV of the
policies, the Company was a stockholder of record in the insurance company.
The Company elected to sell all of the shares it received in connection with
the demutualization, and as a result realized a gain on sale of investments
of $1,349,000. The gain is reflected as a sale of investments in the
Consolidated Statements of Operations.
8. INCOME TAXES
The provision for (benefit from) income taxes included the following
components:
Post-Merger |Pre-Merger
Company | Company
-------------------------------|----------
Fiscal Fiscal Three | Nine
Year Year Months | Months
Ended Ended Ended | Ended
---------- ------ -------- |----------
Jan. 2, Jan. 3, Dec. 28, | Sep. 28,
2000 1999 1997 | 1997
------ ------ -------- |----------
(In thousands) |
Current tax provision |
(benefit): |
Federal $4,629 $ 242 $ 40 | $(3,613)
State 296 106 9 | (611)
------ ------ ------ |---------
4,925 348 49 | (4,224)
Deferred income taxes (1,907) 1,398 (187) | 5,152
------ ------ ------ |---------
Provision for (benefit |
from) income taxes $3,018 $1,746 $ (138) | $ 928
====== ====== ====== |=========
The income tax effects of temporary differences that give rise to the current
deferred tax asset and the noncurrent net deferred tax liability as of
January 2, 2000 and January 3, 1999, were as follows:
Jan. 2, Jan. 3,
2000 1999
----------- -----------
(In thousands)
Current deferred tax asset:
Insurance reserves $ 1,228 $ 1,238
Deferred franchise fees 174 151
Miscellaneous payables 562 249
Other 879 1,179
------ ------
Current deferred tax asset $ 2,843 $ 2,817
====== ======
Noncurrent net deferred tax liability:
Noncurrent deferred tax asset:
Net operating loss carryforwards 844 842
Tax credit carryforwards 2,217 1,847
Accrued postretirement benefit cost 396 502
Other 349 254
------- -------
Noncurrent deferred tax asset 3,806 3,445
------- -------
Jan. 2, Jan. 3,
2000 1999
----------- -----------
(In thousands)
Noncurrent deferred tax liability:
Property, buildings and equipment (10,552) (12,015)
Pension asset (3,082) ( 3,165)
------- -------
Noncurrent deferred tax liability (13,634) (15,180)
------- -------
Noncurrent net deferred tax liability $( 9,828) $(11,735)
======= =======
The difference between the reported income tax provision (benefit) and
the "expected" tax provision (benefit) based on the current statutory federal
income tax rate is as follows:
Post-Merger | Pre-Merger
Company | Company
-------------------------------| ----------
Fiscal Fiscal Three | Nine
Year Year Months | Months
Ended Ended Ended | Ended
------- ------- ------- | -------
Jan. 2, Jan. 3, Dec. 28, | Sept. 28,
2000 1999 1997 | 1997
------- ------- ------- | -------
(In thousands) |
|
Computed "expected" tax |
provision (benefit) $1,892 $ 1,051 $ (230) | $ 882
Goodwill amortization 639 639 144 | --
State income taxes (net of |
federal income tax effect) 299 164 6 | 2
Other, net 188 (108) (58) | 44
----- ----- ----- | -----
Reported tax provision (benefit)$3,018 $1,746 $ (138) | $ 928
===== ===== ===== | =====
9. LEASES
The Company leases certain buildings and equipment and a number of restaurants
(land and/or building) under noncancellable lease agreements, some of which are
subleased to third parties. The restaurant lease terms are normally for a
period of 15 to 20 years with options that permit renewals for additional
periods. Certain leases provide for additional contingent rentals based on
sales. Generally, the building portions of the restaurant leases have been
recorded as capital leases, while the land portions have been recorded as
operating leases.
The future minimum lease payments under non-cancelable capital and operating
leases (excluding real estate taxes, insurance and maintenance costs), together
with the present value of such minimum lease payments as of January 2, 2000,
are summarized as follows:
Capital Operating
Leases Leases
------- ---------
Year (In thousands)
2000 $ 2,537 $ 5,024
2001 2,537 4,477
2002 2,519 3,706
2003 2,240 2,917
2004 1,302 2,333
Thereafter 3,664 9,966
------ -------
Total minimum lease payments 14,799 $28,423
=======
Less amount representing interest ( 3,587)
------
Total obligations under capital leases 11,212
Less current portion ( 1,745)
------
Long-term obligations under capital leases $ 9,467
======
Rental expense under operating leases was $4,940,000, $5,158,000, $1,324,000,
and $3,974,000 for the periods ended January 2, 2000, January 3, 1999,
December 28, 1997, and September 28, 1997, respectively.
Rental expense includes contingent rentals of $162,000, $150,000, $31,000,
and $95,000 for the periods ended January 2, 2000, January 3, 1999,
December 28, 1997, and September 28, 1997, respectively.
Operating Leases/Subleases with Third Parties --
The Company owns or leases from outside parties certain land and buildings
which are leased/subleased to third parties. Generally, the building portions
of the leases/subleases are treated as direct financing leases while the land
portions of the leases/subleases are treated as operating leases.
The following summarizes the minimum future rentals on operating
leases/subleases as of January 2, 2000:
Operating
Leases
---------
Year (In thousands)
2000 $ 1,501
2001 1,335
2002 700
2003 234
2004 30
Thereafter 53
------
Total minimum lease
payments to be received $ 3,853
======
Rental income under operating leases was $1,234,000,$1,006,000, $185,000, and
$557,000, for the periods ended January 2, 2000, January 3, 1999,
December 28, 1997, and September 28, 1997, respectively.
10. CONTINGENCIES
On September 21, 1999, the Company was named as a defendant in a lawsuit filed
in the Northern District of Alabama (Michael Jones vs. The Krystal Company)
alleging that the plaintiff was denied access to the restrooms in one of the
Company's restaurants in violation of the Americans with Disabilities Act.
The lawsuit seeks class action status on behalf of all wheelchair bound patrons
of the Company's restaurants who have been denied access to restrooms. The
Company intends to vigorously defend this suit. At this stage of the
proceedings the Company's legal counsel is unable to express an opinion as to
the probable outcome of this action. If the Company is unsuccessful in its
defense of this lawsuit, it could be forced to accelerate capital expenditures
on certain of its existing Krystal restaurants.
The Company is party to various other legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material
adverse effect on the Company's financial condition or results of operations.
11. EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK PLANS
Employee stock options plan--
On July 30, 1998, the Board of Directors of Port Royal Holdings, Inc.,
authorized a nonqualified Incentive Stock Option Plan (the "Plan") for key
employees of the Company and its subsidiary. The Plan is administered by the
Compensation Committee (the "Committee") of the Board of Directors. Under the
Plan, the Committee may grant options of up to 1,000,000 shares of Port Royal
common stock. The Committee granted 700,000 options in 1998 of which 100,000
vest ratably over 5 years and the remaining 600,000 vest in 2007, or upon a
change of control of the Company. These 700,000 options also contain a vesting
acceleration provision if the Company achieves certain cash flow targets. The
acceleration provisions resulted in 75,000 options becoming vested in 1999.
No options were granted or exercised in 1999.
The Company accounts for its stock-based compensation plans under APB No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
expense has been recognized as all employee stock options have been granted
with an exercise price equal to the estimated fair value of Port Royal common
stock. SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation plans. The Company has
adopted the disclosure requirements as detailed below.
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of the grant using the minimum value option pricing
model because there is no established fair market value of the Company's stock
as it is not available on the open market. The following weighted average
assumptions were used for fiscal year 1998 grants: expected dividend yield
of 0%, a risk-free interest rate of 5.49% and expected life of 10 years.
Using these assumptions, the fair value of the employee stock options granted
in 1998 is $1,303,000, which would be amortized as compensation expense over
the vesting period of the options. Had compensation cost been determined in
accordance with SFAS No. 123, utilizing the assumptions detailed above, the
Company's net income would have adjusted to the pro forma amounts indicated
below:
1999 1998
------------ -----------
Net Income (in thousands):
As reported $2,544 $1,345
Pro forma 2,431 1,284
A summary of the Company's stock option activity is as follows:
(shares in thousands)
1999 1998
-------------------- --------------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------- ---------- --------- ---------
Outstanding at beginning of year 700 $4.50 - $ -
Granted - - 700 4.50
--------- ---------- --------- ---------
Outstanding at end of year 700 $4.50 700 $ 4.50
========= ========== ========= =========
Exercisable at end of year 115 $4.50 20 $ 4.50
Weighted average fair value of
options granted $4.50 $4.50
========= =========
Of the 700,000 shares subject to options outstanding at January 2, 2000,
(i) options to purchase 100,000 shares have an exercise price of $4.50, with a
remaining contractual life of 8.6 years, of which 40,000 shares are
exercisable; and (ii) options to purchase 600,000 shares have an exercise
price of $4.50, with a weighted average remaining contractual life of 8.5
years, of which 75,000 are exercisable.
Restricted stock plan --
The Company's 1990 Restricted Stock Plan ("Restricted Stock Plan") provided for
the granting of shares of common stock to certain directors and key employees
of the Company. The maximum number of shares that were issuable under the
Restricted Stock Plan was 1,100,000 shares. The shares issued under the
Restricted Stock Plan were restricted when issued and subject to forfeiture
under certain circumstances. Due to the change in control and the merger
with Port Royal, restrictions on the Restricted Stock Plan were terminated and
restricted stockholders were entitled to receive $14.50 per share in cash and
the Restricted Stock Plan was terminated.
A summary of the Company's restricted stock activity is as follows:
Restricted
Stock Plan
----------
(Number of shares)
Issued at December 29, 1996 949,360
Issued at an average market
value of $5.38 per share 720
Forfeitures (16,400)
-------
Issued at September 28, 1997 933,680
Cancelled upon merger (933,680)
-------
Issued at September 29,1997 --
=======
Deferred compensation related to the restricted stock awards was recorded based
on the market value of the Company's common stock at the date of grant and such
deferred compensation was amortized to expense over the period the restrictions
lapsed. Compensation expense related to the restricted stock plans
was $146,538 for the nine months ended September 28, 1997.
12. QUARTERLY INFORMATION (unaudited)
(In thousands of dollars)
Fiscal 1999
Net
Operating Income
Revenues Income (Loss)
-------- --------- ------
Quarter Ended:
April 4 $ 65,647 $ 3,682 $ 475
July 4 67,358 3,792 513
October 3 67,560 3,336 273
January 2, 2000 66,453 3,811 1,283
-------- ------- --------
Total $267,018 $14,621 $ 2,544
======== ======= ========
Fiscal 1998
Net
Operating Income
Revenues Income (Loss)
-------- --------- ------
Quarter Ended:
March 29 $ 59,625 $ 2,016 $ 228
June 28 61,546 2,593 ( 83)
September 27 66,271 2,214 ( 287)
January 3,1999 70,006 4,981 1,487
-------- ------- -------
$257,448 $11,804 $ 1,345
======== ======= =======
13. SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS
The Senior Notes are guaranteed by each of the Company's subsidiaries. The
guarantees are full, unconditional, joint and several obligations of each of
the subsidiary guarantors. Summarized financial information for the subsidiary
guarantors is set forth below. Separate financial statements for the
subsidiary guarantors of the Company are not presented because the Company has
determined that such financial statements would not be material to investors.
The subsidiary guarantors comprise all of the direct and indirect subsidiaries
of the Company. There are no restrictions on the ability of the subsidiary
guarantors to declare dividends, or make loans or advances to the Company.
The following table presents summarized financial information for subsidiary
guarantors in connection with the Company's Senior Notes:
January 2, January 3,
2000 1999
---------- -----------
(in thousands)
Balance Sheet Data:
Current assets $ 470 $ 872
Noncurrent assets $3,475 $ 954
Current Liabilities $ 985 $1,220
Non Current Liabilities $ 138 $ 79
Post-Merger | Pre-Merger
Company | Company
------------------------- ----------- |------------
Fiscal Year Fiscal Year Three Months| Nine Months
Ended Ended Ended | Ended
------------ ----------- ----------- |------------
Jan. 2, Jan. 3, Dec. 28, | Sept. 28,
2000 1999 1997 | 1997
----------- ----------- ----------- |------------
(in thousands) |
Income Statement Data: |
Net sales $5,755 $5,188 $1,290 | $3,469
Gross profit $1,812 $1,647 $ 334 | $ 889
Income before provision |
for Federal and State |
Income Taxes $1,350 $1,222 $ 228 | $ 471
Net Income $ 828 $ 758 $ 140 | $ 293
14. BUSINESS SEGMENTS
The Company and its subsidiary operate in two industry segments, quick-service
restaurants and fixed base airport hangar operations ("FBO"). See Note 13,
Summarized Financial Information-Subsidiary Guarantor, for summarized financial
information for the FBO segment.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with accountants on accounting and financial
disclosure in 1999.
Item 10. Directors and Executive Officers of the Company
The directors of the Company, which serve until the next annual meeting
of shareholders or until their successors are elected and qualified or until
their earlier resignation or removal, are:
Name Age Position
---- --- --------
Philip H. Sanford 46 Chairman, Chief Executive Officer
and Director
James F. Exum, Jr. 43 President, Chief Operating Officer
and Director
W. A. Bryan Patten 59 Director
Richard C. Patton 38 Director
Benjamin R. Probasco 40 Director
A. Alexander Taylor II 46 Director
Philip H. Sanford has been Chairman, Chief Executive Officer and a
Director of the Company since September 1997. Prior to that time, Mr. Sanford
was Senior Vice President, Finance and Administration, of Coca-Cola
Enterprises Inc., from 1991 to 1997. Mr. Sanford was a senior executive with
Johnston Coca-Cola Bottling Group until 1991. Mr. Sanford is a director of
Chattem, Inc. (consumer products) and SunTrust Bank, Chattanooga, N.A.
James F. Exum, Jr. has been President, Chief Operating Officer and a
Director of the Company since September 1997. From 1995 to September 1997, Mr.
Exum served as President and Chief Executive Officer of Pennant Foods Corp.,
Knoxville, Tennessee. He was President and Chief Executive Officer of Southern
California Food Services Corp. from 1991 to 1995.
W. A. Bryan Patten has been a Director of the Company since September 1997
and is the President of Patten & Patten Inc., a registered investment
advisory firm in Chattanooga, Tennessee.
Richard C. Patton has been a Director of the Company since September
1997 and has been President of Investments at Ingram Industries Inc., a
diversified holding company, since January of 1996. Prior to joining
Ingram Industries Inc., Mr. Patton was self-employed as an investor. From June
1992 to June 1995, Mr. Patton was an equity analyst and portfolio manager with
Fidelity Investments. From June 1984 to September 1990 Mr. Patton developed
the San Antonio Taco Co. and Granite Falls restaurants.
Benjamin R. Probasco has been a Director of the Company since September
1997 and has been employed as Vice President, Real Estate, for Big River
Breweries, Inc. since April 1998. Prior to joining Big River Breweries, Inc.,
Mr. Probasco was employed for two years at Probasco & Company, a real estate
development company, six years at Leonard, Kinsey & Associates from 1991 to
1997 and from 1983 to 1988 was employed at Johnston Coca-Cola Bottling Group.
A. Alexander Taylor II has been a Director of the Company since
April 22, 1998 and has been President and Chief Operating Officer of
Chattem, Inc. since January 1998. Prior to joining Chattem, Inc. Mr. Taylor
was a partner in the law firm of Miller & Martin and was affiliated with that
firm from 1978 to 1998. Mr. Taylor is a director of Chattem, Inc. (consumer
products) and U.S. Xpress Enterprises, Inc. (transportation).
The Executive Officers of the Company, in addition to Messrs. Sanford
and Exum, each of whom serves at the discretion of the board of directors,
are:
Name Age Position
---- --- --------
Gordon L. Davenport, Jr. 40 Vice President, Marketing - Development
Larry D. Bentley 43 Vice President and Chief Financial
Officer
Michael C. Bass 53 Vice President, Administration.
Thomas C. Ragan 49 Vice President, Franchising
Roger A. Rendin 51 Vice President, Human Resources
Gordon L. Davenport, Jr. has been Vice President Marketing -
Development at Krystal since February 1997. From 1995 to 1997, Mr. Davenport
served as Vice President of New Business and Strategic Planning and Vice
President of Marketing and New Business. From 1986 to 1995, Mr. Davenport
served in various marketing and sales management positions with Warner
Lambert Company.
Larry D. Bentley was elected Vice President and Chief Financial Officer
of the Company in December 1997. From 1991 to 1996, Mr. Bentley was Executive
Vice President and Chief Financial Officer of U.S. Xpress Enterprises, Inc.
Michael C. Bass was appointed Vice President - Administration on
April 22, 1998. He has served in various capacities with the Company since
1979, including Director of Purchasing, Director of Administration and Vice
President of Administration. From 1969 to 1979 he held various management
positions with Marriott Corporation.
Thomas C. Ragan was appointed Vice President of Franchising on
May 14, 1998. From 1997 to 1998, Mr. Ragan served as Vice President of
Franchising for Famous Dave's of America, Inc. From 1992 to 1997, he
served as Vice President of Franchise Sales for Papa John's International,
Inc. He served as Area Director of Operations for Rally's Hamburger, Inc.
from 1986 to 1992.
Roger A. Rendin was appointed Vice President, Human Resources in November
1999. From 1991 to 1999, Mr. Rendin served as Vice President, Human Resources
of Pep Boys Manny Moe & Jack. He served as Human Resources Director-Restaurant
Operations of Burger King Corporation from 1987 to 1991.
Item 11. Executive Compensation
The following table summarizes the total compensation for the last three
fiscal years of the following five highest compensated named executive officers
of the Company during the last fiscal year.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
-------------------------------------- ------------
Other Securities
Annual underlying
Name and Compen- Options
Principal Position Year Salary Bonus sation(1) Awarded(2)
Philip H. Sanford (3) 1999 $375,521 $153,974 $ 14,244 0
Chairman of the Board of 1998 351,120 193,073 165,292(4) 0
Directors and Chief 1997 92,361 0 0 0
Executive Officer
James F. Exum, Jr. (5) 1999 325,555 133,475 12,000 0
President and Chief 1998 301,117 165,573 47,714(6) 500,000
Operating Officer 1997 79,167 0 3,167 0
And Director
Larry D. Bentley (7) 1999 161,725 46,905 9,725 0
Vice President, Chief 1998 146,664 58,674 9,702 100,000
Financial Officer 1997 16,111 0 0 0
Gordon L. Davenport, Jr.(8) 1999 181,836 68,842 12,037 0
Vice President Marketing 1998 172,107 78,966 11,789 100,000
and Development 1997 163,623 7,500 5,314 0
Michael C. Bass (9) 1999 138,088 52,605 12,387 0
Vice President 1998 131,513 7,560 12,387 0
Administration 1997 125,534 10,000 271,907(10) 0
(1) Includes an automobile allowance of $12,000 for Messrs. Sanford and
Exum in 1999 and 1998, and $9,600 for Messrs. Bentley, Davenport
and Bass in 1999 and 1998.
(2) Represents stock options granted during fiscal 1998 under the Port
Royal Holdings, Inc. Stock Incentive Plan for the Krystal Company.
(3) Mr. Sanford was appointed Chairman and Chief Executive Officer of the
Company on September 26, 1997.
(4) Includes $153,292 paid to Mr. Sanford for moving expenses.
(5) Mr. Exum was appointed President and Chief Operating Officer of the
Company on September 26, 1997.
(6) Includes $35,714 paid to Mr. Exum for moving expenses.
(7) Mr. Bentley was appointed Vice President and Chief Financial Officer
on December 18, 1997.
(8) Mr. Davenport, Jr. was appointed Vice President Marketing
and Development on February 17, 1997.
(9) Mr. Bass was appointed Vice President, Administration
on April 22, 1998.
(10) This amount includes benefits of $264,250 from restricted stock,
$2,782 from a group life insurance policy and a $4,875 automobile
allowance.
There are no employment agreements with any of these individuals. The
Company has adopted performance-based incentive compensation plans for
senior management of the Company, including a cash management bonus plan and
a stock ownership plan, under which total awards may, in the aggregate,
equal 10% of the outstanding common stock of the Company on a fully-diluted
basis, assuming exercise of options, of which an amount equal to 7% of the
outstanding common stock of the Company on a fully-diluted basis has been
granted. Non-employee directors receive a fee of $1,000 for each Board of
Directors and committee meeting attended.
OPTION EXERCISES AND HOLDINGS
The option activity by the Company's chief executive officer and the
other named executive officers during the fiscal year ended January 2, 2000,
as well as the number and total value of unexercised in-the-money options at
January 2, 2000, are shown in the following table. All references to options
and shares refer to Port Royal Stock.
Aggregate Option Exercises in Last Fiscal Year
and Option Values at January 2, 2000
Name Number of Value Number of Value of
Shares Realized Unexercised Unexercised
Acquired Options at Options
on Exercise Jan. 2, 2000 In-the-Money
Exercisable/ Exercisable/
Unexercisable Unexercisable(1)
- --------------------- -------- -------- ------------- -------------
Philip H. Sanford -- -- --/-- -/-
James F. Exum, Jr. -- -- 90,000/410,000 -/-
Larry D. Bentley -- -- 12,500/87,500 -/-
Gordon L. Davenport, Jr. -- -- 12,500/87,500 -/-
Michael C. Bass -- -- --/-- -/-
Roger A. Rendin -- -- --/-- -/-
Thomas C. Ragan -- -- --/-- -/-
(1) Since the shares of Port Royal Stock do not trade on any market, it is
assumed that the fair market value of the Port Royal Stock is equal
to the exercise price of the option.
Item 12. Security Ownership of Certain Beneficial Owners and Management
All of the outstanding capital stock of the Company is held by Port Royal.
The following table sets forth certain information regarding beneficial
ownership of the common stock of Port Royal by: (i) each person who holds more
than 5% of the common stock of Port Royal, (ii) each Director of the Company
and nominee for election, (iii) each of the Executive Officers of the Company
and (iv) all Directors and Executive Officers as a group.
Name Amount of Percent of
Beneficial Ownership Class (1)
Directors
Philip H. Sanford(2) 2,600,000 26.0
James F. Exum, Jr.(3) 110,000 1.1
W. A. Bryan Patten(4) 863,333(5) 8.6
Richard C. Patton(6) 1,233,333(7) 12.3
Benjamin R. Probasco(8) 863,333(9) 8.6
A. Alexander Taylor II 123,333 1.2
Andrew G. Cope(13) 123,333 1.2
Executive Officers
Larry D. Bentley(3) 12,500 0.1
Gordon L. Davenport, Jr.(3) 279,167 2.8
Michael C. Bass 0 0
Roger A. Rendin 0 0
Thomas C. Ragan 0 0
5% Shareholders
Katherine J. Johnston Trust(10) 1,233,333 12.3
Woodmont Capital, LLC(11) 1,233,333 12.3
P&P Port Royal Investors, LP(12) 863,333 8.6
All Directors, Director Nominees and
Executive Officers as a group
(12 persons) 6,208,332 62.1
(1) For purposes of computing percentage of outstanding shares owned by each
beneficial owner, the shares issued pursuant to stock options
held by such beneficial owner that are deemed outstanding. Such shares
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(2) The address for this beneficial owner is The Krystal Building,
One Union Square, Chattanooga, Tennessee 37402.
(3) Includes 110,000 shares for Mr. Exum, 12,500 shares for Mr. Bentley and
12,500 shares for Mr. Davenport, Jr. subject to purchase within sixty
days of March 20, 2000.
under the Company's Incentive Stock Plan.
(4) The address for this beneficial owner is 520 Lookout Street,
Chattanooga, Tennessee 37403.
(5) Includes shares held by P&P Port Royal Investors, LP, an investment fund
for which an affiliate of Patten & Patten, Inc. serves as general
partner. Mr. Patten is a director, officer and shareholder of Patten
& Patten, Inc. Mr. Patten disclaims ownership of all but 5,920 of
these shares.
(6) The address for this beneficial owner is 4400 Harding Road, Nashville,
Tennessee 37205.
(7) Includes shares held by Woodmont Capital, LLC, an investment fund for
which Mr. Patton is the President.
(8) The address for this beneficial owner is 100 East Tenth Street,
Suite 600, Chattanooga, Tennessee 37402.
(9) Includes shares held by various trusts of which Mr. Probasco is a
beneficiary.
(10) The address for this beneficial owner is Suite 600, The Krystal Building,
Chattanooga, Tennessee 37402.
(11) The address for this beneficial owner is 4400 Harding Road, Nashville,
Tennessee 37205.
(12) The address for this beneficial owner is 520 Lookout Street, Chattanooga,
Tennessee 37403.
(13) Mr. Cope is a nominee for election as a director at the annual meeting
of shareholders to be held in April, 2000. Includes shares held by
High Hemlock Partners, an investment fund for which Mr. Cope is
managing partner.
PART IV
Item 13. Certain Relationships and Related Transactions
In accordance with the Company's executive relocation policy, in
September, 1999 the Company acquired the Knoxville, Tennessee home of
James F. Exum, Jr., the Company's President and Chief Operating Officer,
for a purchase price of $501,799. The purchase price was determined based
on independent appraisals.
Item 14. Exhibits , Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements are included herein by reference.
2. Financial statement schedules
All schedules are omitted because the information is either not
required or is included in the financial statements or notes hereto.
3. Exhibits
See exhibit index
(b) Reports on Form 8-K -
The registrant did not file a Form 8-K during the fourth quarter of
1999.
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.
The Krystal Company
Dated: March 23, 2000 By: /s/Larry D. Bentley
------------------------------
Larry D. Bentley, Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Signature Title Date
/s/Philip H. Sanford
- ----------------------
Philip H. Sanford Chairman of the Board of
Directors and Chief Executive
Officer and Director March 23, 2000
/s/James F. Exum, Jr.
- ----------------------
James F. Exum, Jr. President, Chief Operating
Officer and Director March 23, 2000
/s/W. A. Bryan Patten
- ----------------------
W. A. Bryan Patten Director March 23, 2000
/s/Richard C. Patton
- ----------------------
Richard C. Patton Director March 23, 2000
/s/Benjamin R. Probasco
- ----------------------
Benjamin R. Probasco Director March 23, 2000
/s/A. Alexander Taylor II
- -----------------------
A. Alexander Taylor II Director March 23, 2000
Supplemental information to be furnished with Reports filed pursuant
to Section 15(d) of the Act by Registrants which have not registered securities
pursuant to Section 12 of the Act --
The Company has not sent an annual report or proxy statement to its sole
shareholder, Port Royal Holdings, Inc.
THE KRYSTAL COMPANY AND SUBSIDIARY
EXHIBIT INDEX
Exhibit
Number Description
2.1* Agreement and Plan of Merger dated July 3, 1997 by and
among Port Royal Holdings, Inc., TKC Acquisition Corp.
and The Krystal Company.
3.1** Charter of the Company.
3.2** By-laws of the Company.
4.1** Indenture, dated as of September 26, 1997 between TKC
Acquisition Corp. and SunTrust Bank, Atlanta, N.A.
4.2** Supplemental Indenture No. 1 dated as of September 26,
1997, between The Krystal Company, Krystal Aviation Co.,
Krystal Aviation Management Co. and SunTrust Bank, Atlanta.
4.3** Form of Exchange Note (included in Exhibit 4.1).
4.4** Registration Rights Agreement, dated as of September 26,
1997, between TKC Acquisition Corp. and UBS Securities, LLC.
10.1** Credit Agreement dated as of September 26, 1997 among TKC
Acquisition Corp., to be merged with and into the Krystal
Company, SunTrust Bank, Atlanta, as agent, and Union
Bank of Switzerland, New York Branch, as syndication agent.
10.2**** Port Royal, Inc. Stock Incentive Plan for The Krystal
Company, adopted July 30, 1998.
21.1** Subsidiaries of the Company.
27*** Financial Data Schedule.
* Incorporated by reference from the Definitive Proxy Statement of
the Company filed on September 15, 1997.
** Incorporated by reference from the Company's Registration Statement
on Form S-4 filed November 25, 1997.
*** Submitted only with the electronic filing of this document with the
Commission pursuant to Regulation S-T under the Securities Act.
**** Reported on Form 10-K for the fiscal year ended January 3, 1999.