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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 December 31, 2000
Commission File Number 0-20040
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 15, 2001.
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 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
December 31, 2000, the Company operated 251 units (246 KRYSTAL restaurants
and 5 KRYSTAL KWIK restaurants) in eight states in the southeastern United
States. Franchisees operated 139 units (68 KRYSTAL restaurants, 27 KRYSTAL
KWIK restaurants and 44 KRYSTAL restaurants in non-traditional locations) as
of December 31, 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, frozen beverages, 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
or introduces new products as limited time offers.
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 2000, 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 2000, the Company's average number of employees was approximately 8,210.
(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 and plaintiff have reached a tentative settlement of this lawsuit and
have requested the court's preliminary approval of the settlement. Under the
proposed class action settlement, the Company will agree to renovate all
wheelchair inaccessible restrooms in Krystal-owned restaurants over a ten
year period. To become effective, the proposed settlement must receive final
approval by the court after notice to putative class members and a final
hearing is held. If the settlement is not approved, and the Company is
unsuccessful in the defense of the 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
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal 2000.
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 the year ended
December 29, 1996, and as of and for 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, and the years ended January 3, 1999, January 2, 2000 and
December 31, 2000. The selected historical financial data as of and for
the year ended December 29, 1996, and as of and for 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, and the years ended January 3,
1999, January 2, 2000 and December 31, 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 Fiscal Twelve Three Nine Fiscal
Year Year Year Months Months Months Year
Ended Ended Ended Ended Ended Ended Ended
(53 weeks)
--------- -------- ------- --------- -------------------------
Dec. 31, Jan. 2, Jan. 3, Dec. 28, Dec. 28, Sep. 28, Dec. 29,
2000 2000 1999 1997 1997 1997 1996
--------- -------- ------- --------- -------------------------
(In thousands)
Statement of Operations data:
Revenues:
Restaurant sales $253,967 $256,384 $248,152 $240,255 $ 61,440 $178,815 $236,470
Franchise fees 901 499 333 349 130 219 349
Royalties 4,927 4,380 3,775 3,060 828 2,232 2,778
Other 6,924 5,755 5,188 4,759 1,290 3,469 4,671
----------------------------------------------------------------
266,719 267,018 257,448 248,423 63,688 184,735 244,268
----------------------------------------------------------------
Cost and expenses 261,423 251,575 244,821 240,134 61,424 178,710 240,342
----------------------------------------------------------------
Operating income(loss) 5,296 15,443 12,627 8,289 2,264 6,025 3,926
================================================================
Income (loss) before
extraordinary item $ (5,311) $ 2,544 $ 1,345 $ 1,126 $ ( 539) $ 1,665 $(2,422)
================================================================
Balance Sheet Data:
Working capital(deficit) $(21,680) $(24,375) $(11,065)$ (8,886)$ (8,886) $ (4,760) $19,592
Property owned and
leased, net 134,634 128,010 102,289 102,860 102,860 90,034 92,826
Total assets 203,201 198,511 179,488 190,121 190,121 119,130 143,870
Long term debt, net of
current portion 113,992 102,623 100,136 112,174 112,174 34,573 3,090
Long term debt subject
to compromise - - - - - - 36,000
Capital lease obligations,
net of current portion 10,341 9,467 2,806 2,029 2,029 2,077 2,278
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.
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 may not be
comparable to similarly titled measures reported by other companies.
Cash operating profit for the fiscal year ended December 31, 2000 was $19.9
million compared to $28.7 million for the year ended January 2, 2000, a
decrease of 30.7%. This decrease in cash operating profit was primarily
attributable to a decrease in same store restaurant sales, an increase in the
cost of food, paper, labor and general and administrative expenses as a
percentage of restaurant sales, offset somewhat by an increase in average
check.
The following table reflects certain key operating statistics which impact the
Company's financial results:
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
-------- -------- --------
December 31, January 2, January 3,
2000 2000 1999
(53 weeks)
-------- -------- --------
RESTAURANT SALES:
Company owned $253,967 $256,384 $248,152
Franchise 101,618 88,594 80,492
-------- -------- --------
SYSTEMWIDE RESTAURANT SALES $355,585 $344,978 $328,644
Percent change 3.07% 4.97% 6.86%
Percent change adjusted for $6.7
million of sales in 53rd week in
fiscal year 1998 3.07% 7.15% 4.69%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 251 250 241
Restaurant Sales $253,967 $256,384 $248,152
Percent change (0.94%) 3.32% 3.29%
Percent change adjusted for $5.1
million of sales in 53rd week in
fiscal year 1998 (0.94%) 5.47% 1.18%
Percent change in same restaurant sales (4.41%) 1.70% 4.07%
Percent change adjusted for $5.0
million of same restaurant sales
in 53rd week in fiscal year 1998 (4.41%) 3.84% 1.95%
Transaction count per day 606 676 692
Percent change (10.36%) (2.31%) 1.01%
Average check $ 4.55 $ 4.28 $ 3.96
Percent change 6.31% 8.08% 2.59%
Selected components are --
Cost of restaurant sales $215,835 $210,767 $204,630
As a percent of restaurant sales 85.00% 82.21% 82.46%
Food and paper cost $ 81,413 $ 80,203 $ 76,582
As a percent of restaurant sales 32.06% 31.28% 30.86%
Direct labor $ 61,336 $ 61,395 $ 58,537
As a percent of restaurant sales 24.15% 23.95% 23.59%
Other labor costs $ 19,885 $ 19,646 $ 19,334
As a percent of restaurant sales 7.84% 7.66% 7.79%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 139 118 110
Restaurant Sales $101,618 $ 88,594 $ 80,492
Percent change 14.70% 10.07% 19.61%
Percent change adjusted for $1.6
million of sales in 53rd week
for fiscal year 1998 14.70% 12.41% 17.11%
Percent change in same restaurant sales (2.60%) 5.50% 3.17%
Percent change adjusted for $1.4
million of sales in 53rd week for
fiscal year 1998 (2.60%) 7.62% 0.09%
Transaction count per day 468 490 487
Percent change (4.49%) 0.62% (0.81%)
Average check $ 4.71 $ 4.44 $ 4.17
Percent change 6.08% 6.47% 2.21%
Consolidated Results of Operations --
(Dollars in thousands)
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
----------- --------- ----------
Dec. 31, Jan. 2, Jan. 3,
2000 2000 1999
(53 weeks)
----------- --------- ----------
Revenues:
Restaurant sales $253,967 $256,384 $248,152
Franchise fees 901 499 333
Royalties 4,927 4,380 3,775
Other 6,924 5,755 5,188
-------- -------- --------
266,719 267,018 257,448
-------- -------- --------
Cost and Expenses:
Cost of restaurant sales 215,835 210,767 204,630
Depreciation and
amortization expense 14,571 13,235 12,045
General and administrative
expenses 26,586 24,030 24,876
Other expenses, net 4,431 3,543 3,270
-------- -------- --------
261,423 251,575 244,821
-------- -------- --------
Operating income 5,296 15,443 12,627
Gain on settlement on deferred
compensation obligations -- -- 1,805
Gain on sale of investments -- 1,349 --
Gain on sale of assets 624 -- --
Interest expense, net (12,941) (11,230) (11,341)
-------- -------- --------
Income (loss) before provision
for (benefit from) income
taxes ( 7,021) 5,562 3,091
Provision for (benefit from)
income taxes ( 1,710) 3,018 1,746
-------- -------- --------
Net income (loss) $ ( 5,311) $ 2,544 $ 1,345
======== ======== ========
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items from the Company's statements of
operations.
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
-------- -------- --------
Dec. 31, Jan. 2, Jan. 3,
2000 2000 1999
-------- -------- --------
Revenues:
Restaurant sales 95.2% 96.0% 96.4%
Franchise fees 0.3 0.2 0.1
Royalties 1.9 1.6 1.5
Other 2.6 2.2 2.0
------- ------ ------
100.0 100.0 100.0
------- ------ ------
Costs and expenses:
Cost of restaurant sales 80.9 78.9 79.5
Depreciation and amortization 5.5 5.0 4.7
General and administrative
expenses 10.0 9.0 9.6
Other expenses, net 1.7 1.3 1.2
------- ------ ------
98.1 94.2 95.0
------- ------ ------
Operating income 1.9 5.8 5.0
Gain on settlement of deferred
compensation obligation - - 0.7
Gain on sale of assets 0.2 0.5 -
Interest expense:
Contractual rate interest, net ( 4.8) (4.2) (4.5)
------- ------ ------
Income (loss) before provision
for (benefit from) income taxes ( 2.7) 2.1 1.2
Provision for (benefit from)
income taxes ( 0.7) 1.1 0.7
------- ------ ------
Net income (loss) ( 2.0%) 1.0% 0.5%
======= ====== ======
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 December 31, 2000 and January 2, 2000 were 52 week fiscal
year ends but the fiscal year ended January 3, 1999 was a 53 week fiscal year
end.
The Company's revenues are derived primarily from sales by Company-owned
restaurants. Total Company-owned restaurants increased from 250 at the end of
1999 to 251 at the end of 2000. 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 17.8% in 2000 from 118 at the end
of 1999 to 139 at the end of 2000. The Company expects its franchisees to
develop up to 50 new restaurants during fiscal 2001. 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 three new Company-owned restaurants in
fiscal 2001. Management estimates that approximately $2.4 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 $5.0 million at December 31, 2000, and availability under its
revolving credit facility and sale and leaseback commitments.
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.
Comparison of the Fiscal Year Ended December 31, 2000
to the Fiscal Year Ended January 2, 2000
Total Krystal system (Company and Franchise combined) restaurant sales for the
fiscal year ended December 31, 2000 ("fiscal 2000") were $355.6 million
compared to $345.0 million for the twelve months ended January 2, 2000
("fiscal 1999"), a 3.1% increase. Total Company revenues decreased 0.1% to
$266.7 million for fiscal 2000 compared to $267.0 million for fiscal 1999.
Of this $.3 million decrease, restaurant sales accounted for a $2.4 million
decrease, franchise fees increased $0.4 million, royalties increased
$0.5 million, and the Company's aviation subsidiary revenues increased $1.2
million. Company-owned average same restaurant sales per week for fiscal 2000
were $19,269 compared to $20,157 for fiscal 1999, a decrease of 4.4%. The
per unit weekly sales decrease can be attributed to several factors, including
heavy discounting by competitors and a decrease in transaction counts which was
partially offset by an increase in the average customer check. The Company had
251 restaurants open at the end of fiscal 2000 compared to 250 at the end of
fiscal 1999.
The average customer check for Company-owned restaurants (both full size and
Kwik) in fiscal 2000 was $4.55 as compared to $4.28 in fiscal 1999, an increase
of 6.3%. The increase in average customer check was due primarily to increased
food volume per transaction resulting from the Sackful offering and to
maintaining product price increases of approximately 4.5% implemented in the
first three quarters of fiscal 2000. Transaction counts per restaurant day
decreased to 606 in fiscal 2000 compared to 676 in fiscal 1999, a decrease of
10.4%.
Franchise fees were $901,000 in fiscal 2000 compared to $499,000 for
fiscal 1999, an 80.6% increase. The franchise system had 139 restaurants
open at the end of fiscal 2000 compared to 118 at the end of fiscal 1999.
The increase in franchise fees was primarily due to the increased number of
franchised stores opened in fiscal 2000 versus 1999. Royalties increased
12.5% to $4.9 million in fiscal 2000 from $4.4 million in fiscal 1999.
The increase in royalties was primarily due to a 17.7% increase in
franchise restaurants offset by a 2.7% decrease in franchise same restaurant
sales in fiscal 2000 compared to fiscal 1999.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $6.9 million in fiscal 2000 compared to $5.8 million in
fiscal 1999.
Cost of restaurant sales was $215.8 million in fiscal 2000 compared to $210.8
million in fiscal 1999. Cost of restaurant sales as a percentage of restaurant
sales increased to 80.9% in fiscal 2000 from 78.9% in fiscal 1999. This
increase was primarily the result of the increased cost of food and paper
and increased labor costs. Total food and paper costs were $81.4 million in
fiscal 2000 as compared to $80.2 million in fiscal 1999. Food and paper costs
as a percentage of restaurant sales increased to 32.1% in fiscal 2000 compared
to 31.3% in fiscal 1999. This increase was primarily attributable to decreased
efficiency due to lower sales combined with increases in the price of beef and
pork. Direct labor cost was $61.3 million in fiscal 2000 versus $61.4 million
in fiscal 1999. Direct labor cost as a percentage of restaurant sales was 24.2%
for fiscal 2000 and 24.0% for fiscal 1999. This increase resulted primarily
from reduced labor efficiency caused by lower same store sales. Other labor
cost, which includes restaurant General Managers' and Assistant Managers'
labor cost, was $19.9 million in fiscal 2000 compared to $19.6 million in
fiscal 1999. Other labor as a percentage of restaurant sales was 7.8% in
fiscal 2000 versus 7.7% in fiscal 1999.
Depreciation and amortization expenses were $14.6 million in fiscal 2000 as
compared to $13.2 million in fiscal 1999. This increase was primarily due to
capital expenditures related to refurbishing restaurant buildings, upgrading
restaurant equipment, and opening new restaurants.
General and administrative expenses increased $2.6 million, approximately
10.6%, to $26.6 million in fiscal 2000 versus $24.0 million in fiscal 1999.
The increase in general and administrative expenses resulted primarily from
Management's increased emphasis in the newly created franchise development and
operations departments and franchise advertising which supports the Company's
growing franchise system, and the related recruiting and relocation expenses
associated with these new hires.
The Company reported a gain on sale of assets of $624,000 in fiscal 2000
related to the sale of Company owned restaurants to franchisees.
Interest expense, net of interest income, for fiscal 2000 increased $1.7
million to $12.9 million from $11.2 million in fiscal 1999. This increase
resulted from an increase in capitalized leases, an increase in short term
borrowings, and higher costs related to corporate debt maintenance.
The benefit from income taxes in fiscal 2000 was $1.7 million compared to a
provision of $3.0 million for fiscal 1999. The effective income tax rate for
fiscal years 2000 and 1999 was less than the statutory income tax rate
primarily as a result of the non-deductible portion of amortization expense
associated with Acquisition-related goodwill.
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 ended
January 2, 2000 ("fiscal 1999") to a 53 week period ended January 3, 1999
("fiscal 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 7.66% in the
year ended January 2, 2000 from 7.79% 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 9.9%, to
$13.2 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 $11.2 million
in the year ended January 2, 2000 from $11.3 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.
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 $22.5 million at December 31, 2000,
compared to a working capital deficit of $24.4 million at January 2, 2000.
Capital expenditures, net of proceeds received from sales and leaseback
transactions, totaled approximately $22.1 million for the 12 months of fiscal
2000, compared to $28.1 million in fiscal 1999. Approximately $13.5 million is
expected for capital expenditures during 2001. Expected capital expenditures
include three new restaurants to open in fiscal 2001, acquiring land
for future restaurant development, refurbishing of certain restaurants and
on-going capital improvements. The Company owns approximately 53.8% of its
restaurant locations and leases the remainder.
In August 2000, the Company obtained a sale and leaseback commitment from a
firm for up to $14.0 million of properties to be developed by the Company.
This commitment expires in August 2001. The primary term of leases under this
arrangement is 18 years, with two successive five year renewal options.
At December 31, 2000, the Company had existing cash balances of $5.0 million
and an unused credit line of $10.6 million. The Company expects these funds,
funds from operations and sale and leaseback financing through third party
lenders will be sufficient to meet its operating requirements and capital
expenditures through 2001.
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.
Recent Accounting Pronouncements--
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, ("SFAS No. 133") is effective
January 1, 2001 and establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The Company does not currently
hold any derivative financial instruments.
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 other than as required by law.
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 as of December 31, 2000
and January 2, 2000, and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 Krystal Company and
Subsidiary as of December 31, 2000 and January 2, 2000, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
February 12, 2001
The Krystal Company and Subsidiary
----------------------------------
Consolidated Balance Sheets
---------------------------
(Dollars in thousands)
December 31, January 2,
2000 2000
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 4,979 $ 5,302
Receivables, net 1,952 1,382
Inventories 1,992 2,099
Deferred income taxes 2,785 2,843
Prepayments and other 802 1,090
-------- -------
Total current assets 12,510 12,716
-------- -------
PROPERTY, BUILDINGS AND EQUIPMENT, net
of accumulated depreciation of $29,156
at December 31, 2000 and $22,586 at
January 2, 2000 123,311 117,492
-------- -------
LEASED PROPERTIES, net of accumulated
amortization of $3,206 at December 31, 2000
and $1,027 at January 2, 2000 11,323 10,518
-------- -------
OTHER ASSETS:
Goodwill, net 42,794 45,432
Prepaid pension asset 8,358 8,144
Deferred financing costs, net 3,278 3,754
Other 1,627 455
-------- -------
Total other assets 56,057 57,785
-------- -------
$203,201 $198,511
======== =======
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)
December 31, January 2,
2000 2000
----------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,445 $ 7,482
Accrued liabilities 21,918 24,110
Outstanding checks in excess
of bank balance 2,745 3,701
Current portion of long-term debt 120 53
Current portion of capital
lease obligations 1,962 1,745
-------- --------
Total current liabilities 34,190 37,091
-------- --------
LONG-TERM DEBT, excluding current portion 113,992 102,623
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 10,341 9,467
-------- --------
DEFERRED INCOME TAXES 10,279 9,828
-------- --------
OTHER LONG-TERM LIABILITIES 1,360 1,152
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 5, 8,
9 and 12)
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized, issued
and outstanding at December 31, 2000
and January 2, 2000 35,000 35,000
Retained earnings (deficit) ( 1,961) 3,350
-------- --------
Total shareholder's equity 33,039 38,350
-------- --------
$203,201 $198,511
======== ========
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)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
----------- ----------- -----------
December 31, January 2, January 3,
2000 2000 1999
(53 weeks)
----------- ----------- -----------
Revenues:
Restaurant sales $253,967 $256,384 $248,152
Franchise fees 901 499 333
Royalties 4,927 4,380 3,775
Other 6,924 5,755 5,188
-------- -------- --------
266,719 267,018 257,448
-------- --------- --------
Cost and Expenses:
Cost of restaurant sales 215,835 210,767 204,630
Depreciation and
amortization expense 14,571 13,235 12,045
General and administrative
expenses 26,586 24,030 24,876
Other expenses, net 4,431 3,543 3,270
-------- -------- --------
261,423 251,575 244,821
-------- -------- --------
Operating income 5,296 15,443 12,627
Gain on settlement of deferred
compensation obligations -- -- 1,805
Gain on sale of investments -- 1,349 --
Gain on sale of assets 624 -- --
Interest expense, net (12,941) (11,230) (11,341)
-------- -------- --------
Income (loss) before provision
for (benefit from) income
taxes ( 7,021) 5,562 3,091
Provision for (benefit from)
income taxes ( 1,710) 3,018 1,746
-------- -------- --------
Net income (loss) $( 5,311) $ 2,544 $ 1,345
======== ======== ========
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)
Retained
Common Earnings
Stock (Deficit)
------ --------
BALANCE, December 28, 1997 $35,000 $ (539)
Net income 1,345
------- -------
BALANCE, January 3, 1999 35,000 806
------- -------
Net income -- 2,544
------- -------
BALANCE, January 2, 2000 35,000 3,350
------- -------
Net loss -- (5,311)
------- -------
BALANCE, December 31, 2000 $35,000 $(1,961)
======= =======
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)
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
---------- -------- --------
December 31, January 2, January 3,
2000 2000 1999
(53 Weeks)
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,311) $ 2,544 $ 1,345
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities-
Depreciation and amortization 14,571 13,235 12,045
Deferred income taxes 509 (1,907) 1,398
Gain on sale of assets ( 624) -- --
Changes in operating assets and
liabilities:
Receivables, net ( 570) 923 (828)
Income tax receivable -- -- 4,582
Inventories 107 (415) 557
Prepayments and other 288 (370) 110
Outstanding checks in excess
of bank balance ( 956) 3,701 --
Accounts payable ( 37) 2,473 (1,810)
Accrued liabilities (2,192) 1,857 2,104
Other, net 1,404 (1,091) 4,016
------- ------- -------
Net cash provided by
operating activities 7,189 20,950 23,519
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment (26,778) (33,128) (10,917)
Proceeds from the sale and the
sale/leaseback of property,
buildings and equipment 9,621 6,645 1,978
Payments received on net
investment in direct
financing leases -- 58 247
------- ------- -------
Net cash used in investing
activities (17,157) (26,425) (8,692)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
revolving credit facility 9,539 2,551 (11,113)
Proceeds from issuance of
long-term debt 2,000 -- --
Repayments of long-term debt (103) (66) (53)
Principal payments of capital
lease obligations (1,791) (720) (156)
------- ------- -------
Net cash provided by (used in)
financing activities 9,645 1,765 (11,322)
------- ------- -------
NET INCREASE(DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 323) (3,710) 3,505
CASH AND TEMPORARY INVESTMENTS,
beginning of period 5,302 9,012 5,507
------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,979 $ 5,302 $ 9,012
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest, net of amounts
capitalized $12,353 $10,907 $11,260
======= ======= =======
Income taxes $ 715 $ 2,477 $ 958
======= ======= =======
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 Krystal
Company (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 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 --
The Krystal Company ("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.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
Krystal 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 December 31, 2000 and January 2, 2000 were 52 week fiscal
years and the year ended January 3, 1999 was a 53 week fiscal year.
Cash and Temporary Investments --
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.
Property, Buildings and Equipment --
Property, buildings and equipment 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 Company includes the allocation of
purchase accounting goodwill of $49,258,000 (net of $662,000 written off in
connection with the subsequent sale of certain assets) and deferred financing
costs of $5,785,000. Goodwill is amortized over 25 years. Deferred financing
costs are amortized over the life of the debt agreement. The financing costs
related to the Senior Notes are amortized over 10 years. The financing costs
associated with the Company's Credit Facility are being amortized through
May 2003. Amortization expense for goodwill for the fiscal years ended
December 31, 2000, January 2, 2000 and January 3, 1999 was $1,985,000,
$1,997,000 and $1,999,000 respectively. Amortization expense for deferred
financing cost for the fiscal years ended December 31, 2000, January 2, 2000
and January 3, 1999 was $657,000, $823,000 and $823,000, respectively.
Accumulated amortization of goodwill at December 31, 2000 and
January 2, 2000 was $6,464,000 and $4,478,000,respectively. Accumulated
amortization of deferred financing costs at December 31, 2000 and
January 2, 2000 was $2,507,000 and $1,850,000, 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 December 31, 2000, there were 139
franchised or licensed restaurants of which 110 restaurants were operated
under 28 multi-unit agreements. At January 2, 2000, there were 118 franchised
or licensed restaurants of which 51 restaurants were operated under 18
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 December 31, 2000 and January 2, 2000, total deferred franchise
and license fees were approximately $898,000 and $458,000, 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.
Recent Accounting Pronouncements--
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, ("SFAS No. 133") is effective
January 1, 2001 and establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The Company does not currently
hold any derivative financial instruments.
Reclassifications --
Certain reclassifications have been made to prior year financial statements to
conform with the 2000 presentation.
3. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment at December 31, 2000 and January 2, 2000,
consisted of the following:
December 31, January 2,
2000 2000
----------- -----------
(In thousands)
Land $ 42,177 $ 42,045
Buildings and improvements 42,355 39,049
Equipment 48,583 40,480
Leasehold improvements 16,125 12,645
Construction in progress 3,227 5,859
--------- ---------
152,467 140,078
Accumulated depreciation
and amortization (29,156) (22,586)
--------- ---------
$ 123,311 $ 117,492
========= =========
4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2000 and January 2, 2000, consisted of
the following:
December 31, January 2,
2000 2000
------------ -----------
(In thousands)
Salaries, wages and benefits $ 5,200 $ 7,199
Workers' compensation 4,241 3,233
State sales taxes 1,465 1,510
Accrued interest 2,643 2,692
Deferred franchise advertising and fees 1,773 1,250
Other 6,596 8,226
-------- --------
$ 21,918 $ 24,110
======== ========
5. INDEBTEDNESS
Revolving Credit Agreement:
In September 1997, the Company entered into a credit agreement with a bank for
a $25 million credit facility, which was amended and restated in May 2000
(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 3.5%) that is determined by certain financial covenants. At
December 31, 2000, the margin applicable to the Eurodollar interest rate
was 3.00%. The weighted average interest rate for borrowings outstanding under
the Credit Facility during 2000 was approximately 9.41%. Availability under
the Credit Facility as of December 31, 2000 is $10.6 million which reflects
$2.4 million in letters of credit primarily for the Company's workers'
compensation plans. The Credit Facility matures May 2003.
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 December 31, 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 December 31, 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 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. 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 December 31, 2000 and January 2, 2000, consisted of the
following:
December 31, January 2,
2000 2000
----------- -----------
(In thousands)
Revolving credit facility,
due May 20, 2003 $ 12,000 $ 2,461
10.25% senior notes,
due October 2007 100,000 100,000
Other 2,112 215
--------- --------
114,112 102,676
Less--
Current maturities ( 120) ( 53)
--------- --------
$113,992 $102,623
========= ========
Scheduled maturities of long-term debt at December 31, 2000, are as follows:
(In thousands):
2001 $ 120
2002 231
2003 12,158
2004 149
2005 155
Thereafter 101,299
At December 31, 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 December 31, 2000 was $58,000,000. The fair value was estimated based upon
quoted market prices for the same or similar issues.
6. 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. The Company's funding policy is
consistent with the requirements of the Employee Retirement Income Security
Act of 1974.
The status of the pension benefits and postretirement benefits as of
December 31, 2000 and January 2, 2000 are as follows:
(Dollars in thousands)
Pension Benefits Postretirement Benefits
-----------------|-----------------------
Dec. 31, Jan. 2, | Dec. 31, Jan. 2,
2000 2000 | 2000 2000
------- --------| ------- -------
Change in benefit obligation -- |
Benefit obligation at beginning |
of period $25,235 $28,582 | $ 1,257 $1,017
Service costs 2,077 2,295 | 77 68
Interest cost 1,955 1,780 | 119 83
Plan participants' contributions -- -- | 34 51
Actuarial loss (gain) 264 (5,202)| 365 282
Benefits paid (2,296) (2,220)| (168) ( 244)
------- ------- | ------- ------
Benefit obligation at |
end of period 27,235 25,235 | 1,684 1,257
------- ------- | ------- ------
Change in plan assets -- |
Fair value of plan assets at |
beginning of period 38,986 34,918 | -- --
Actual return on plan assets 1,484 5,387 | -- --
Employer contributions -- -- | 134 193
Plan participants' contributions 911 901 | 34 51
Benefits paid (2,296) (2,220)| (168) ( 244)
------- ------- | ------- ------
Fair value of plan assets at |
end of period 39,085 38,986 | -- --
------- ------- | ------- ------
|
Funded status 11,850 13,751 | (1,684) (1,257)
|
Unrecognized prior service cost (2,347) (2,581)| -- --
Unrecognized net loss (gain) (1,146) (3,026)| 652 327
------- ------- | ------- ------
Asset (liability) recognized |
in the consolidated balance |
sheets $ 8,358 $ 8,144 | $(1,032) $( 930)
======= ======= | ======= ======
|
Weighted-average assumptions as |
of the end of period -- |
|
Discount rate 8.0% 8.0% | 8.0% 7.0%
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 --
Pension Benefits Postretirement Benefits
-----------------|-----------------------
Dec. 31, Jan. 2, | Dec. 31, Jan. 2,
2000 2000 | 2000 2000
------- --------| ------- -------
Service cost $2,077 $ 2,295 | $ 77 $ 68
Interest cost 1,955 1,780 | 119 83
Expected return on plan assets (3,431) (3,064)| -- --
Net amortization and deferral -- -- | 39 17
------ ------ | ------ -----
$ 601 $1,011 | $ 235 $ 168
====== ====== | ====== =====
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 $ 171 $ 225
Accumulated postretirement benefit obligation 1,525 1,865
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. 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.
7. INCOME TAXES
The provision for (benefit from) income taxes included the following
components:
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
---------- ------ --------
Dec. 31, Jan. 2, Jan. 3,
2000 2000 1999
------ ------ --------
(In thousands)
Current tax provision
(benefit):
Federal ($1,905) $4,629 $ 242
State ( 314) 296 106
------ ------ ------
( 2,219) 4,925 348
Deferred income taxes 509 (1,907) 1,398
------ ------ ------
Provision for (benefit
from) income taxes ($1,710) $3,018 $1,746
====== ====== ======
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
December 31, 2000 and January 2, 2000, were as follows:
Dec. 31, Jan. 2,
2000 2000
----------- -----------
(In thousands)
Current deferred tax asset:
Insurance reserves $ 1,611 $ 1,228
Deferred franchise fees 341 174
Miscellaneous payables 317 562
Other 515 879
------ ------
Current deferred tax asset $ 2,785 $ 2,843
====== ======
Noncurrent net deferred tax liability:
Noncurrent deferred tax asset:
Net operating loss carryforwards $ 659 $ 844
Tax credit carryforwards 1,942 2,217
Accrued postretirement benefit cost 392 396
Other 517 349
------- -------
Noncurrent deferred tax asset $ 3,510 $ 3,806
------- -------
Noncurrent deferred tax liability:
Property, buildings and equipment $(10,611) $(10,552)
Pension asset ( 3,176) ( 3,082)
------- -------
Noncurrent deferred tax liability (13,787) (13,634)
------- -------
Noncurrent net deferred tax liability $(10,279) $( 9,828)
======= =======
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:
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
------- ------- -------
Dec. 31, Jan. 2, Jan. 3,
2000 2000 1999
------- ------- -------
(In thousands)
Computed "expected" tax
provision (benefit) ($2,387) $1,892 $ 1,051
Goodwill amortization 634 639 639
State income taxes (net of
federal income tax effect) ( 207) 299 164
Other, net 250 188 (108)
----- ----- -----
Reported tax provision (benefit) ($1,710) $3,018 $ 1,746
===== ===== =====
8. 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 December 31, 2000,
are summarized as follows:
Capital Operating
Leases Leases
------- ---------
Year (In thousands)
2001 $ 2,840 $ 5,235
2002 2,822 4,513
2003 2,543 3,648
2004 1,607 2,985
2005 1,163 2,595
Thereafter 5,715 12,425
------ -------
Total minimum lease payments 16,690 $31,401
=======
Less amount representing interest ( 4,387)
------
Total obligations under capital leases 12,303
Less current portion ( 1,962)
------
Long-term obligations under capital leases $ 10,341
======
Rental expense under operating leases was $5,423,000, $4,940,000 and $5,158,000
for the periods ended December 31, 2000, January 2, 2000 and January 3, 1999,
respectively.
Rental expense includes contingent rentals of $130,000, $162,000, and $150,000,
for the periods ended December 31, 2000, January 2, 2000 and January 3, 1999,
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 December 31, 2000:
Operating
Leases
---------
Year (In thousands)
2001 $ 1,468
2002 833
2003 366
2004 163
2005 163
Thereafter 1,929
------
Total minimum lease
payments to be received $ 4,922
======
Rental income under operating leases was $1,553,000, $1,234,000 and $1,006,000
for the periods ended December 31, 2000, January 2, 2000 and January 3, 1999,
respectively, and is included in other expenses in the accompanying
consolidated income statements.
9. 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 and plaintiff have reached a tentative settlement of this lawsuit and
have requested the court's preliminary approval of the settlement. Under the
proposed class action settlement, the Company will agree to renovate all
wheelchair inaccessible restrooms in Krystal-owned restaurants over a ten
year period. To become effective, the proposed settlement must receive final
approval by the court after notice to putative class members and a final
hearing is held. If the settlement is not approved, and the Company is
unsuccessful in the defense of the 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.
10. 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 became vested under the acceleration provisions in 2000. No
options were granted or exercised in 1999 or 2000.
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 on the grant date. 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 (loss) would have adjusted to the pro forma amounts
indicated below:
2000 1999 1998
------ ------ ------
Net Income (loss)(in thousands):
As reported $(5,311) $2,544 $1,345
Pro forma (5,444) 2,436 1,321
A summary of the Company's stock option activity is as follows:
(shares in thousands)
2000 1999 1998
------------------ ---------------- ----------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
------- --------- --------- ------- ------- ------
Outstanding at beginning of year 700 $4.50 700 $4.50 - $ -
Granted - - - - 700 4.50
----- ----- ----- ----- ----- -----
Outstanding at end of year 700 $4.50 700 $4.50 700 $4.50
===== ===== ===== ===== ===== =====
Exercisable at end of year 230 $4.50 115 $4.50 20 $ 4.50
Weighted average fair value of
options granted $ -- $ -- $1.84
===== ===== =====
Of the 700,000 shares subject to options outstanding at December 31, 2000,
(i) options to purchase 100,000 shares have an exercise price of $4.50, with a
remaining contractual life of 7.7 years, of which 60,000 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 7.6
years, of which 170,000 are exercisable.
11. QUARTERLY INFORMATION (unaudited)
(In thousands of dollars)
Fiscal 2000
Operating Net
Income Income
Revenues (Loss) (Loss)
-------- --------- ------
Quarter Ended:
April 2 $ 64,365 $(1,171) $(2,894)
July 2 69,763 3,178 ( 181)
October 1 67,186 2,326 ( 648)
December 31 65,405 963 (1,588)
-------- ------- -------
$266,719 $ 5,296 $(5,311)
======== ======= =======
Fiscal 1999
Net
Operating Income
Revenues Income (Loss)
-------- --------- ------
Quarter Ended:
April 4 $ 65,647 $ 3,888 $ 475
July 4 67,358 3,998 513
October 3 67,560 3,542 273
January 2, 2000 66,453 4,015 1,283
-------- ------- --------
Total $267,018 $15,443 $ 2,544
======== ======= ========
12. SUBSIDIARY GUARANTORS
The Company's subsidiaries have fully and unconditionally guaranteed the
Notes of the Company. The guarantees do not restrict the ability of the
subsidiary guarantors to declare dividends, or make loans or advances to the
Company.
Set forth below are condensed consolidating financials for the Company and the
Subsidiary Guarantors for the years ended December 31, 2000, January 2, 2000
and January 3, 1999. The equity method has been used by the Company with
respect to investments in subsidiaries.
CONDENSED CONSOLIDATING BALANCE SHEET
At December 31, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
----------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 4,554 $ 425 $ -- $ 4,979
Receivables, net (6,411) 515 7,848 1,952
Inventories 1,942 50 -- 1,992
Deferred income taxes 2,752 33 -- 2,785
Prepayments and other 735 67 -- 802
-------- ------- ------- --------
Total current assets 3,572 1,090 7,848 12,510
-------- ------- ------- --------
Property, Buildings, and Equipment 146,917 5,550 -- 152,467
Accumulated depreciation (28,381) (775) -- (29,156)
-------- ------- ------- --------
Net property, buildings, and equipment 118,536 4,775 -- 123,311
-------- ------- ------- --------
Leased Properties, net 11,323 -- -- 11,323
Investment in Subsidiary 1 1 (2) --
Other Assets:
Goodwill, net 42,794 -- -- 42,794
Prepaid pension asset 8,358 -- -- 8,358
Deferred financing costs, net 3,278 -- -- 3,278
Other 1,608 19 1,627
-------- ------- ------- --------
Total other assets 56,038 19 -- 56,057
-------- ------- ------- --------
Total Assets $189,470 $ 5,885 $ 7,846 $203,201
======== ======= ======= ========
Current Liabilities:
Accounts payable $ (1,469) $ 1,066 $ 7,848 $ 7,445
Accrued liabilities 21,458 460 21,918
Outstanding checks in excess
of bank balance 2,745 -- -- 2,745
Current portion of long-term debt -- 120 120
Current portion of capital lease
obligations 1,962 -- -- 1,962
-------- ------- ------- --------
Total current liabilities 24,696 1,526 7,968 34,190
-------- ------- ------- --------
Long Term Debt, excluding current
portion 112,100 2,012 (120) 113,992
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 10,341 -- -- 10,341
-------- ------- ------- --------
Deferred Income Taxes 10,808 (529) 10,279
-------- ------- ------- --------
Other Long-Term Liabilities 1,360 -- -- 1,360
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings (4,835) 2,874 -- (1,961)
-------- ------- ------- --------
Total shareholder's equity 30,165 2,876 (2) 33,039
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $189,470 $ 5,885 $ 7,846 $203,201
======== ======= ======= ========
CONDENSED CONSOLIDATING BALANCE SHEET
At January 2, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
---------- ---------- ----------- -----------
Current Assets:
Cash and temporary investments $ 5,228 $ 74 $ -- $ 5,302
Receivables, net (4,889) 225 6,016 1,382
Inventories 2,039 60 -- 2,099
Deferred income taxes 2,810 33 -- 2,843
Prepayments and other 1,042 48 - 1,090
-------- ------- ------- --------
Total current assets 6,230 470 6,016 12,716
-------- ------- ------- --------
Property, Buildings, and Equipment 136,585 3,493 -- 140,078
Accumulated depreciation (19,516) (382) -- (19,898)
Reserve for restaurant
closings/dispositions (2,688) -- -- (2,688)
-------- ------- ------- --------
Net property, buildings, and equipment 114,381 3,111 -- 117,492
-------- ------- ------- --------
Leased Properties, net 10,518 -- -- 10,518
-------- ------- ------- --------
Investment in Subsidiary 1 1 (2) -
-------- ------- ------- --------
Other Assets:
Goodwill, net 45,432 -- -- 45,432
Prepaid pension asset 8,144 -- -- 8,144
Deferred financing costs, net 3,754 -- -- 3,754
Other 454 1 -- 455
-------- ------- ------- --------
Total other assets 57,784 1 -- 57,785
-------- ------- ------- --------
Total assets $188,914 $ 3,583 $ 6,014 $198,511
======== ======= ======= ========
Current Liabilities:
Accounts payable $ 185 $ 1,281 $ 6,016 $ 7,482
Accrued liabilities 23,443 667 -- 24,110
Outstanding checks in excess
of bank balance 3,568 133 -- 3,701
Current portion of long-term debt -- 53 53
Current portion of capital lease
obligations 1,745 -- -- 1,745
-------- ------- ------- --------
Total current liabilities 28,941 2,081 6,069 37,091
-------- ------- ------- --------
Long Term Debt, excluding current
portion 102,566 110 (53) 102,623
-------- ------- ------- --------
Capital Lease Obligations, excluding
current portion 9,467 -- -- 9,467
-------- ------- ------- --------
Deferred Income Taxes 10,163 (335) - 9,828
-------- ------- ------- --------
Other Long-Term Liabilities 1,152 -- -- 1,152
-------- ------- ------- --------
Shareholder's Equity:
Common Stock 35,000 2 (2) 35,000
Retained Earnings 1,625 1,725 -- 3,350
-------- ------- ------- --------
Total shareholder's equity 36,625 1,727 (2) 38,350
-------- ------- ------- --------
Total Liabilities and Shareholder's
Equity $188,914 $ 3,583 $ 6,014 $198,511
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended December 31, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant Sales $253,967 $ -- $ -- $253,967
Franchise fees 901 -- 901
Royalties 4,927 -- 4,927
Other - 6,924 -- 6,924
-------- ------- ------- --------
Total Revenues 259,795 6,924 -- 266,719
-------- ------- ------- --------
Cost and Expenses:
Cost of restaurant sales 215,835 -- -- 215,835
Depreciation and amortization
expense 14,113 458 -- 14,571
General and administrative
expenses 26,336 250 -- 26,586
Other expenses, net (445) 4,876 -- 4,431
-------- ------- ------- --------
255,839 5,584 -- 261,423
-------- ------- ------- --------
Operating Income 3,956 1,340 -- 5,296
Gain on sale of asset 647 (23) -- 624
Interest expense, net (12,861) (80) -- (12,941)
-------- ------- ------- --------
Income (loss) before provision
for (benefit from) income taxes (8,258) 1,237 -- (7,021)
Provision for (benefit from)
income taxes (1,798) 88 -- (1,710)
-------- ------- ------- --------
Net income (loss) $ (6,460) $ 1,149 $ -- $ (5,311)
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended January 2, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant sales $256,384 $ -- $ -- $256,384
Franchise fees 499 -- -- 499
Royalties 4,380 -- -- 4,380
Other - 5,755 -- 5,755
-------- ------- ------- --------
Total Revenues 261,263 5,755 -- 267,018
-------- ------- ------- --------
Cost and Expenses:
Cost of restaurant sales 210,767 -- -- 210,767
Depreciation and amortization
expense 13,032 203 -- 13,235
General and administrative
expenses 23,756 274 -- 24,030
Other expenses, net (400) 3,943 -- 3,543
-------- ------- ------- --------
Total Operating Expenses 247,155 4,420 -- 251,575
-------- ------- ------- --------
Operating income 14,108 1,335 -- 15,443
Gain on sale of investments 1,349 -- -- 1,349
Interest expense, net (11,245) 15 -- (11,230)
-------- ------- ------- --------
Income (loss) before provision
for (benefit from) income taxes 4,212 1,350 -- 5,562
Provision for (benefit from)
income taxes 2,496 522 -- 3,018
-------- ------- ------- --------
Net income (loss) $ 1,716 $ 828 $ -- $ 2,544
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended January 3, 1999
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
Revenues:
Restaurant sales $248,152 $ -- $ -- $248,152
Franchise fees 333 -- -- 333
Royalties 3,775 -- -- 3,775
Other - 5,188 -- 5,188
-------- ------- ------- --------
Total Revenues 252,260 5,188 -- 257,448
-------- ------- ------- --------
Cost and Expenses:
Cost of restaurant sales 205,030 -- (400) 204,630
Depreciation and amortization
expense 11,902 143 -- 12,045
General and administrative
expenses 24,172 304 400 24,876
Other expenses, net (271) 3,541 -- 3,270
-------- ------- ------- --------
240,833 3,988 -- 244,821
-------- ------- ------- --------
Operating income 11,427 1,200 -- 12,627
Gain on settlement of deferred
compensation obligations 1,805 -- -- 1,805
Interest expense, net (11,363) 22 -- (11,341)
-------- ------- ------- --------
Income (loss) before provision
for (benefit from) income taxes 1,869 1,222 -- 3,091
Provision for (benefit from)
income taxes 1,282 464 -- 1,746
-------- ------- ------- --------
Net income (loss) $ 587 $ 758 $ -- $ 1,345
======== ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- ------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,460) $ 1,149 $ -- $ (5,311)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities -
Depreciation and amortization 14,178 393 -- 14,571
Deferred income taxes 509 -- -- 509
Gain on sale of asset (624) -- -- (624)
Changes in operating assets and
liabilities:
Receivables, net 1,522 (260) (1,832) (570)
Inventories 97 10 -- 107
Prepayments and other 307 (19) -- 288
Outstanding checks in excess
of bank balance (823) (133) -- (956)
Accounts payable (1,654) (215) 1,832 (37)
Income taxes payable - -- -- -
Accrued liabilities (1,985) (207) -- (2,192)
Other, net 1,616 (212) -- 1,404
-------- ------- ------- --------
Net cash provided by
operating activities 6,683 506 -- 7,189
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment (24,721) (2,057) -- (26,778)
Proceeds from the sale and the
sale/leaseback of property,
buildings and equipment 9,621 -- -- 9,621
-------- ------- ------- --------
Net cash used in investing
activities (15,100) (2,057) -- (17,157)
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under
revolving credit facility 9,539 -- -- 9,539
Proceeds from issuance of
long-term debt 98 1,902 -- 2,000
Repayments of long-term debt (103) -- -- (103)
Principal payments of capital
lease obligations (1,791) -- -- (1,791)
-------- -------- -------- --------
Net cash provided by
financing activities 7,743 1,902 -- 9,645
-------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS (674) 351 -- (323)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 5,228 74 -- 5,302
-------- -------- ------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 4,554 $ 425 $ -- $ 4,979
======== ======== ======= ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended January 2, 2000
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- -------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,716 $ 828 $ -- $ 2,544
Adjustments to reconcile net
income to net cash provided
by operating activities -
Depreciation and amortization 13,032 203 -- 13,235
Deferred income taxes (1,949) 42 -- (1,907)
Gain on sale of asset - -- -- -
Changes in operating assets and
liabilities:
Receivables, net 5,058 (22) (4,113) 923
Income tax receivable - -- -- -
Inventories (398) (17) -- (415)
Prepayments and other (350) (20) -- (370)
Outstanding checks in excess
of bank balance 3,568 133 -- 3,701
Accounts payable (2,284) 644 4,113 2,473
Income taxes payable (90) 90 -- -
Accrued liabilities 1,868 (11) -- 1,857
Other, net (1,091) -- -- (1,091)
-------- -------- ------- -------
Net cash provided by
operating activities 19,080 1,870 -- 20,950
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment (30,767) (2,361) -- (33,128)
Proceeds from the sale and the
sale/leaseback of property,
buildings and equipment 6,645 -- -- 6,645
Payments received on net
investment in direct
financing leases 58 -- -- 58
-------- ------- ------- -------
Net cash used in investing
activities (24,064) (2,361) -- (26,425)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under
revolving credit facility 2,520 31 -- 2,551
Repayments of long-term debt (66) -- -- (66)
Principal payments of capital
lease obligations (720) -- -- (720)
-------- ------- ------- -------
Net cash provided by
financing activities 1,734 31 -- 1,765
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS (3,250) (460) -- (3,710)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 8,478 534 -- 9,012
-------- ------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 5,228 $ 74 $ -- $ 5,302
======== ======= ======= =======
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended January 3, 1999
The Krystal
Company Subsidiary Consolidated
(Parent) Guarantors Adjustments Total
-------- -------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 587 $ 758 $ -- $ 1,345
Adjustments to reconcile net
income to net cash provided
by operating activities -
Depreciation and amortization 11,902 143 -- 12,045
Deferred income taxes 1,403 (5) -- 1,398
Gain on sale of asset - -- -- -
Changes in operating assets and
liabilities:
Receivables, net 2,502 16 (3,346) (828)
Income tax receivable 4,582 -- -- 4,582
Inventories 538 19 -- 557
Prepayments and other 111 (1) -- 110
Outstanding checks in excess
of bank balance - -- -- --
Accounts payable (4,344) (812) 3,346 (1,810)
Income taxes payable (212) 212 -- --
Accrued liabilities 2,059 45 -- 2,104
Other, net 4,016 -- -- 4,016
-------- ------- ------- -------
Net cash provided by
operating activities 23,144 375 -- 23,519
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment (10,800) (117) -- (10,917)
Proceeds from the sale and the
sale/leaseback of property,
buildings and equipment 1,978 -- -- 1,978
Payments received on net
investment in direct
financing leases 247 -- -- 247
-------- ------- ------- -------
Net cash used in investing
activities (8,575) (117) -- (8,692)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under
revolving credit facility (11,065) (48) -- (11,113)
Proceeds from issuance of
long-term debt - -- -- -
Repayments of long-term debt (53) -- -- (53)
Principal payments of capital
lease obligations (156) -- -- (156)
-------- ------- ------- -------
Net cash used in
financing activities (11,274) (48) -- (11,322)
-------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 3,295 210 -- 3,505
CASH AND TEMPORARY INVESTMENTS,
beginning of period 5,183 324 -- 5,507
-------- ------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 8,478 $ 534 $ -- $ 9,012
======== ======= ======= =======
14. Segment Reporting
The Company has three defined reportable segments: restaurants, franchising,
and fixed base airport hanger operations ("FBO"). The restaurant segment
consists of the operations of all Company-owned restaurants and derives its
revenues from retail sales of food products to the general public. The
franchising segment consists of franchise sales and support activities and
derives its revenues from fees related to the sales of franchise and
development rights and collection of royalties from franchisees of the Krystal
brand. The FBO operation consists primarily of aircraft fuel sales and the
leasing of aircraft hanger space. All of the Company's revenues are derived
within the United States.
The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies.
Segment information is as follows:
(in thousands) 2000 1999 1998
Revenues:
Restaurants $253,967 $256,384 $248,152
Franchising 5,828 4,879 4,108
FBO 6,924 5,755 5,188
- -------------------------------------------------------------------------------------------
Total segment revenues $266,719 $267,018 $257,448
===========================================================================================
Depreciation and Amortization
Restaurants $ 14,042 $ 12,966 $ 11,836
Franchising 4 3 3
FBO 274 156 143
- -------------------------------------------------------------------------------------------
Total segment depreciation and amortization $ 14,320 $ 13,125 $ 11,982
===========================================================================================
Earnings before Interest, Taxes, Depreciation,
and Amortization ("EBITDA")
Restaurant $ 14,106 $ 24,110 $ 21,676
Franchising 4,165 3,979 3,187
FBO 1,691 1,514 1,343
- -------------------------------------------------------------------------------------------
Total segment EBITDA $ 19,962 $ 29,603 $ 26,206
===========================================================================================
Capital Expenditures:
Restaurants $ 22,463 $ 30,767 $ 10,792
Franchising 0 0 0
FBO 1,305 344 125
- -------------------------------------------------------------------------------------------
Total segment capital expenditures $ 23,768 $ 31,111 $ 10,917
===========================================================================================
Total Assets:
Restaurants $194,326 $193,763 $175,433
Franchising 1,599 594 1,395
FBO 3,515 1,597 1,833
- -------------------------------------------------------------------------------------------
Total segment assets $199,440 $195,954 $178,661
===========================================================================================
A reconciliation of segment depreciation and
amortization to consolidated depreciation and
amortization is as follows:
Segment depreciation and amortization $ 14,320 $ 13,125 $ 11,982
Unreported segments (1) 251 110 63
- -------------------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 14,571 $ 13,235 $ 12,045
===========================================================================================
A reconciliation of segment EBITDA to consolidated
EBITDA is as follows:
Segment EBITDA $ 19,962 $ 29,603 $ 26,206
Unreported segments (1) 529 424 271
- -------------------------------------------------------------------------------------------
Total consolidated EBITDA $ 20,491 $ 30,027 $ 26,477
===========================================================================================
A reconciliation of segment total assets to
consolidated total assets is as follows:
Total segment assets $199,440 $195,954 $178,661
Unreported segments (1) 3,761 2,557 827
- -------------------------------------------------------------------------------------------
Total consolidated assets $203,201 $198,511 $179,488
===========================================================================================
(1) Unreported segments do not meet the quantitative thresholds for segment
reporting.
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 2000.
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 47 Chairman, Chief Executive Officer
and Director
James F. Exum, Jr. 44 President, Chief Operating Officer
and Director
Andrew G. Cope 59 Director
W. A. Bryan Patten 60 Director
Richard C. Patton 39 Director
Benjamin R. Probasco 41 Director
A. Alexander Taylor II 47 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.
Andrew G. Cope has been a Director of the Company since April 2000 and is
President of Johnston Southern Company, LLC, an investment holding company.
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 Woodmont Capital, LLC since 1997, and 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. Mr. Patton is a director of Williamson-Dickie
Manufacturing Co. (work apparel).
Benjamin R. Probasco has been a Director of the Company since September
1997 and has been employed as Vice President, Real Estate, for Gordon Biersch
Brewery Restaurant Group, Inc. ("Biersch"), since April 1998. Prior to
joining Biersch, 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. 41 Vice President, Marketing - Development
Larry D. Bentley 44 Vice President and Chief Financial
Officer
Michael C. Bass 54 Vice President, Administration.
Roger A. Rendin 52 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. From 1979 to 1991, Mr. Bentley served in various capacities
with Arthur Andersen & Co.
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.
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 2000 $387,500 -- -- 0
Chairman of the Board of 1999 375,521 $153,974 -- 0
Directors and Chief 1998 351,120 193,073 $165,292(3) 0
Executive Officer
James F. Exum, Jr. 2000 337,500 -- -- 0
President and Chief 1999 325,555 133,475 -- 0
Operating Officer 1998 301,117 165,573 47,714(4) 500,000
And Director
Larry D. Bentley 2000 176,835 -- -- 0
Vice President, Chief 1999 161,725 46,905 -- 0
Financial Officer 1998 146,664 58,674 -- 100,000
Gordon L. Davenport, Jr. 2000 191,163 -- -- 0
Vice President Marketing 1999 181,836 68,842 -- 0
and Development 1998 172,107 78,966 -- 100,000
Michael C. Bass 2000 146,216 -- -- 0
Vice President 1999 138,088 52,605 -- 0
Administration 1998 131,513 7,560 -- 0
(1) Except as disclosed in the table, the value of perquisites received
by the named executive officers did not exceed the lesser of either
$50,000 or 10.0% of their total salary and bonus for such year.
(2) Represents stock options granted during fiscal 1998 under the Port
Royal Holdings, Inc. Stock Incentive Plan for the Krystal Company.
(3) Includes $153,292 paid to Mr. Sanford for moving expenses.
(4) Includes $35,714 paid to Mr. Exum for moving expenses.
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 Port Royal 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 December 31, 2000,
as well as the number and total value of unexercised in-the-money options at
December 31, 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 December 31, 2000
Name Number of Value Number of Value of
Shares Realized Unexercised Unexercised
Acquired Options at Options
on Exercise Dec. 31, 2000 In-the-Money
Exercisable/ Exercisable/
Unexercisable Unexercisable(1)
- --------------------- -------- -------- ------------- -------------
Philip H. Sanford -- -- --/-- -/-
James F. Exum, Jr. -- -- 180,000/320,000 -/-
Larry D. Bentley -- -- 25,000/75,000 -/-
Gordon L. Davenport, Jr. -- -- 25,000/75,000 -/-
Michael C. Bass -- -- --/-- -/-
Roger A. Rendin -- -- --/-- -/-
(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 (the address for each such person is
set forth in the notes following the table), (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) 180,000 1.8
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) 25,000 0.3
Gordon L. Davenport, Jr.(3) 291,667 2.9
Michael C. Bass 0 0
Roger A. Rendin 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
(11 persons) 6,303,332 63.0
(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 180,000 shares for Mr. Exum, 25,000 shares for Mr. Bentley and
25,000 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) Includes shares held by High Hemlock Partners, an investment fund for
which Mr. Cope is managing partner.
Item 13. Certain Relationships and Related Transactions
None
PART IV
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
2000.
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 15, 2001 By: /s/Larry D. Bentley
------------------------------
Larry D. Bentley, Vice President
and Chief Financial Officer
(Principal Accounting 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 15, 2001
/s/James F. Exum, Jr.
- ----------------------
James F. Exum, Jr. President, Chief Operating
Officer and Director March 15, 2001
/s/Andrew G. Cope
- ----------------------
Andrew G. Cope Director March 15, 2001
/s/W. A. Bryan Patten
- ----------------------
W. A. Bryan Patten Director March 15, 2001
/s/Richard C. Patton
- ----------------------
Richard C. Patton Director March 15, 2001
/s/Benjamin R. Probasco
- ----------------------
Benjamin R. Probasco Director March 15, 2001
/s/A. Alexander Taylor II
- -----------------------
A. Alexander Taylor II Director March 15, 2001
/s/Andrew G. Cope
- -----------------------
Andrew G. Cope Director March 15, 2001
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. (1)
3.1 Charter of the Company. (2)
3.2 By-laws of the Company. (2)
4.1 Indenture, dated as of September 26, 1997 between TKC
Acquisition Corp. and SunTrust Bank, Atlanta, N.A. (2)
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. (2)
4.3 Form of Exchange Note (included in Exhibit 4.1). (2)
4.4 Registration Rights Agreement, dated as of September 26,
1997, between TKC Acquisition Corp. and UBS Securities, LLC. (2)
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. (2)
10.2 Port Royal, Inc. Stock Incentive Plan for The Krystal
Company, adopted July 30, 1998. (3)
10.3 Amended and Restated Credit Agreement dated as of May, 2000
among The Krystal Company, SunTrust Bank, as agent, and
SunTrust Equitable Securities Corporation, as arranger.
21.1 Subsidiaries of the Company. (2)
(1)Incorporated by reference from the Definitive Proxy Statement of
the Company filed on September 15, 1997.
(2)Incorporated by reference from the Company's Registration Statement
on Form S-4 filed November 25, 1997.
(3)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
Exhibit 10.3-
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of May 23, 2000
THE KRYSTAL COMPANY, a Tennessee corporation (the "Borrower"), the banks,
financial institutions and other institutional lenders (collectively, the
"Initial Lenders") party hereto, SUNTRUST BANK, as administrative agent
(together with any successor thereto appointed pursuant to Article IX of the
Existing Credit Agreement referred to below, in such capacity, the "Agent") and
as collateral agent (in such capacity, the "Collateral Agent") for such
Lenders, BANK OF AMERICA, N.A., as documentation agent (in such capacity, the
"Documentation Agent"), and SUNTRUST EQUITABLE SECURITIES CORPORATION, a
Georgia corporation, as lead arranger (in such capacity, the "Arranger") under
the Credit Documents (as defined in the Existing Credit Agreement described
below), hereby agree as follows:
PRELIMINARY STATEMENTS
(1) The Borrower is party to a Credit Agreement, dated as of September 26,
1997, as amended by that certain Waiver and Amendment No. 1 to Credit
Agreement, dated as of May 5, 2000 (as so amended and as amended, supplemented
or otherwise modified from time to time to, but not including, the date
hereof, the "Existing Credit Agreement") with the banks, financial
institutions and other institutional lenders party thereto (the "Existing
Lenders"), SunTrust Bank, as Agent for the Existing Lenders, and UBS AG,
Stamford Branch, as successor to Union Bank of Switzerland, New York Branch,
as Syndication Agent for the Existing Lenders. Capitalized terms not otherwise
defined in this Amended and Restated Credit Agreement (this "Amendment and
Restatement") shall have the same meanings as specified in the Existing Credit
Agreement.
The Borrower has requested that the Lenders agree to extend credit to it from
time to time in an aggregate principal amount of up to $25,000,000 for general
corporate purposes of the Borrower and its Subsidiaries not otherwise
prohibited under the terms of this Amendment and Restatement. The Lenders have
indicated their willingness to agree to extend credit to the Borrower from
time to time in such amount on the terms and conditions of this Amendment and
Restatement.
The parties to this Amendment and Restatement desire to amend the Existing
Credit Agreement as set forth herein and to restate the Existing Credit
Agreement in its entirety to read as set forth in the Existing Credit Agreement
with the following amendments.
SECTION 1. Amendments to the Existing Credit Agreement. Effective as of the
date of this Amendment and Restatement and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof:
Section 1.01 of the Existing Credit Agreement is hereby amended by deleting the
definitions of "Applicable Commitment Fee Rate", Applicable Margin", "Cash
Taxes Paid", "Consolidated Cash Flow", "Credit Parties", "Funded Debt",
"Guarantors", "Guaranty Agreement", "Maturity Date", "Parent Guaranty
Agreement", "Parent Pledge and Security Agreement", "Pledge Agreements",
"Pledged Stock", "Pro Rata Share", and "Swing Line Subcommitment" set forth
therein and (ii) where appropriate, replacing them with the following new
definitions:
"Applicable Commitment Fee Rate" shall mean, with respect to any
calculation of the Commitment Fee hereunder, (i) through the fourth
Fiscal Quarter of 2000, one half of one percent (0.50%) per annum,
and (ii) thereafter, the percentage per annum determined by reference
to the following chart set forth below based on Borrower's
Funded Debt Coverage Ratio calculated as of the relevant
determination date in accordance with Section 6.08(b):
Funded Debt Applicable Commitment
Coverage Ratio Fee Rate
Less than 2.75:1.0 0.200%
Greater than or equal to 2.75:1.0, but
less than 3.25:1.0 0.250%
Greater than or equal to 3.25:1.0, but
less than 4.0:1.0 0.250%
Greater than or equal to 4.0:1.0, but
less than 4.5:1.0 0.375%
Greater than or equal to 4.5:1.0, but
less than 5.0:1.0 0.500%
Greater than or equal to 5.0:1.0 0.500%
Each change in the Applicable Commitment Fee Rate resulting from a change in
the Funded Debt Coverage Ratio shall be effective from and after the date that
any change in the Applicable Margin is effective. Notwithstanding the
foregoing, at any time during which Borrower has failed to deliver the
financial statements and certificates when required by Section 6.07(a),
(b), and (c), as applicable, the Applicable Commitment Fee Rate shall
be 0.500%.
"Applicable Margin" shall mean, (i) with respect to all Eurodollar Advances
outstanding through the fourth Fiscal Quarter of 2000, two and one-half of one
percent (2.50%) per annum, (ii) with respect to all Base Rate Advances
outstanding through the fourth Fiscal Quarter of 2000, one and one-half of one
percent (1.50%) per annum, and (iii) with respect to all Advances outstanding
thereafter, the relevant percentage indicated below for the Borrower's Funded
Debt Coverage Ratio, as determined quarterly, based upon the financial
statements delivered to the Lenders pursuant to Section 6.07(a) or Section
6.07(b) hereof, as the case may be in accordance with Section 6.08(b), with
such Applicable Margin to be effective with respect to calculations based upon
the financial statements delivered pursuant to Section 6.07 as of the first
day of the second Fiscal Quarter immediately following the Fiscal Quarter for
which such financial statements are delivered (for example, the Applicable
Margin effective as of the first day of the third Fiscal Quarter shall be
calculated based upon the financial statements delivered for the first Fiscal
Quarter of the Borrower):
Funded Debt Applicable Margin for Applicable Margin
Coverage Ratio Eurodollar Advances for Base Rate Advances
Less than 2.75:1.0 0.75% 0%
Greater than or equal to
2.75:1.0, but less than 3.25:1.0 1.00% 0%
Greater than or equal to
3.25:1.0, but less than 4.0:1.0 1.50% 0%
Greater than or equal to
4.0:1.0, but less than 4.5:1.0 1.75% 0.25%
Greater than or equal to
4.5:1.0, but less than 5.0:1.0 2.00% 0.50%
Greater than or equal to 5.0:1.0 2.50% 1.50%
Notwithstanding the foregoing, at any time during which Borrower has failed to
deliver the financial statements and certificates when required by Section
6.07(a), (b), and (c), as applicable, the Applicable Margin with respect to
Eurodollar Advances then outstanding shall be 2.50% and the Applicable Margin
with respect to Base Rate Advances shall be 1.50%.
"Consolidated Cash Flow" shall mean, with respect to any fiscal period of
the Borrower, the sum of (i) Consolidated EBITDA for such period, plus (ii)
Rental Expense for such period, minus (iii) Consolidated Capital Expenditures
made during such period, minus (iv) Taxes Paid during such period, in each
case, calculated on a consolidated basis in accordance with GAAP.
"Credit Parties" shall mean, collectively, each of the Borrower and the
Guarantors (including all Persons that are currently Guarantors and all Persons
who may at any time in the future become Guarantors), and every other Person
who from time to time executes a Security Document with respect to all or any
portion of the Obligations.
"Existing Credit Agreement" shall mean that certain Credit Agreement,
dated as of September 26, 1997, by and among the Borrower, the Lenders, the
Agent, and the Syndication Agent.
"Fee Letter" shall mean that certain fee letter, dated as of the
Restatement Effective Date, executed by SunTrust Bank and acknowledged and
agreed to by the Borrower.
"Funded Debt" shall mean all indebtedness for borrowed money, purchase
money mortgages, capitalized leases, obligations under asset securitization
vehicles, guaranties of Borrower, including eighty-five percent (85%) of any
synthetic lease obligations, conditional sales contracts and similar title
retention debt instruments, including any current maturities of such
indebtedness, which by its terms matures more than one year from the date of
any calculation thereof and/or which is renewable or extendable at the option
of the obligor to a date beyond one year from such date.
"Guarantors" shall mean, collectively, (i) Krystal Aviation Co., (ii)
Krystal Aviation Management Co. and (iii) all other Material Subsidiaries of
the Borrower, whether now existing or hereafter created, and their respective
successors and permitted assigns.
"Guaranty Agreement" shall mean the Subsidiary Guaranty Agreement executed
by the Guarantors in favor of the Lenders and the Agent, substantially in the
form of Exhibits C-1, as the same may be amended, restated or supplemented from
time to time.
"Maturity Date" means the earlier of (i) May 26, 2003 as such date may be
extended pursuant to Section 2.03(d) and (ii) the date on which all amounts
outstanding under this Agreement have been declared or have automatically
become due and payable pursuant to the provisions of Article VIII.
"Pledge Agreements" shall mean, collectively, that certain Stock Pledge
Agreement, executed in favor of the Agent, substantially in the form of Exhibit
F-1, and any other pledge agreement executed in favor of the Agent, in all
cases providing for the grant of first priority Liens on the Pledged Stock or
other pledged stock.
"Pledged Stock" shall mean, collectively, all issued and outstanding
capital stock together with all warrants, stock options, and other purchase and
conversion rights with respect to such capital stock, of the Material
Subsidiaries (other than Krystal Aviation Management Co.).
"Pro Rata Share" shall mean, with respect to each of the Commitments of
each Lender, each Revolving Loan to be made by, each Letter of Credit issued
hereunder, and each payment (including, without limitation, any payment of
principal, interest or fees) to be made to each Lender with respect to the
Revolving Loans, the percentage designated as such Lender's Pro Rata Share of
the Revolving Loan Commitments, such Loans, such Letters of Credit or such
payments, as applicable, set forth under the name of such Lender on the
respective signature page for such Lender, in each case as such Pro Rata Share
may change from time to time as a result of assignments or amendments made
pursuant to this Agreement.
"Restatement Effective Date" shall have the meaning assigned to such term
in Section 3 of that certain Amended and Restated Credit Agreement, dated as of
May 23, 2000, by and among the Borrower, the Agent, the Arranger, the
Documentation Agent, and the Collateral Agent.
"Swing Line Subcommitment" shall mean $5,000,000.00, as such amount may
be reduced pursuant to Section 2.04 or amended or modified pursuant to
Section 10.2 hereof.
"Taxes Paid" shall mean, for any fiscal period of Borrower, the provision
of the Borrower and its Subsidiaries for taxes paid as shown on the income
statement of Borrower for such period minus any increase (or plus any decrease)
in the provision for deferred taxes of the Borrower and its Subsidiaries,
determined on a consolidated basis in accordance with GAAP.
Section 1.01 of the Existing Credit Agreement is hereby amended by
deleting clauses (l) and (m) of the definition of "Permitted Liens" and
replacing such clauses with the following clauses (l), (m), and (n):
(l) Liens securing Hedging Obligations so long as the related
Indebtedness is, and is permitted to be hereunder, secured by a Lien on the
same property securing such Hedging Obligations;
(m) Liens on the assets of the Borrower, securing not more than
$250,000 of the Indebtedness permitted under Section 7.01(i); and
(n) Liens to secure any refinancing, refunding, extension, renewal or
replacement (or successive refinancings, refundings, extensions, renewals or
replacements) as a whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clauses (a), (h), (i) and (j); provided, however,
that (x) such new Lien shall be limited to all or part of the same property
that secured the original Lien (plus improvements on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses (a), (h), (i) or
(j) at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement. This clause (n)
shall not be deemed to limit the provisions of clauses (b) through (g),
(k), or (l).
(c) Section 2.01(b) of the Existing Credit Agreement is amended in
full to read as follows:
(b) Amount and Terms of Loans. Each Revolving Loan shall, at the
option of Borrower, be made or continued as, or converted into, part of one or
more Borrowings that shall consist entirely of Base Rate Advances or Eurodollar
Advances. Each Swing Line Loan shall consist of Swing Rate Advances made by the
Swing Line Lender in accordance with the procedure described in Section 2.02.
Each Base Rate or Eurodollar Borrowing shall be in a principal amount of not
less than $1,000,000 or a greater integral multiple of $500,000. At no time
shall the aggregate number of Eurodollar Borrowings outstanding under this
Article II exceed five.
(d) Section 2.04 of the Existing Credit Agreement is amended in full
to read as follows:
Section 2.04. Voluntary Reduction of Commitments. Upon at least five (5)
Business Days' prior telephonic notice (promptly confirmed in writing) to the
Agent, Borrower shall have the right, without premium or penalty, to terminate
the unutilized Revolving Loan Commitments, in part or in whole, provided that
(i) any such termination shall apply to proportionately and permanently reduce
the Revolving Loan Commitments of each of the Lenders, and (ii) any partial
termination pursuant to this Section 2.04 shall be in an amount of at least
$1,000,000 and integral multiples of $1,000,000. Unless otherwise specified by
the Borrower in the applicable notice, the Swing Line Subcommitment and the L/C
Subcommitment shall not be reduced by any such reduction unless and until the
aggregate Revolving Loan Commitments are reduced to an amount less than the
Swing Line Subcommitment and the L/C Subcommitment in which case the Swing Line
Subcommitment and the L/C Subcommitment shall be reduced to such amount.
(e) Section 3.05(a) of the Existing Credit Agreement is amended in
full to read as follows:
(a) Commitment Fee. Borrower shall pay to the Agent, for the ratable
benefit of each Lender, a commitment fee (the "Commitment Fee") for the period
commencing on the Restatement Effective Date to and including the Maturity Date,
payable quarterly in arrears on the last day of each calendar quarter,
commencing on the last day of the second Fiscal Quarter of 2000, and on the
Maturity Date, equal to Applicable Commitment Fee Rate per annum multiplied by
the average daily unused portion of the Revolving Loan Commitment of each
Lender. For the purposes of computing the Commitment Fee, in addition to the
utilization by Revolving Loans, the Revolving Loan Commitment of each Lender
shall be deemed to be utilized by the amount of L/C Exposure and Swing Line
Loans extended by such Lender (or in which such Lender has purchased a
participation) but in no event shall the computation of any other Lender's
Commitment Fee be affected by the Swing Line Loans extended by the Swing Line
Lender unless and until a participation in such Swing Line Loans is purchased by
the other Lenders pursuant to Section 2.02(e) hereof.
(f) Section 3.06(a) of the Existing Credit Agreement is amended in
full to read as follows:
(a) Borrower may, at its option, prepay Borrowings consisting of
Base Rate Advances at any time in whole, or from time to time in part, in
amounts aggregating $500,000 or any greater integral multiple of $100,000, by
paying the principal amount to be prepaid together with interest accrued and
unpaid thereon to the date of prepayment. Borrowings consisting of Swing Rate
Advances may be prepaid at any time in whole, or from time to time in part, in
amounts aggregating $50,000 or any greater integral multiple of $10,000, by
paying the principal amount to be prepaid together with interest accrued and
unpaid thereon to the date of prepayment. Borrowings consisting of Eurodollar
Advances may be prepaid, at Borrower's option, in whole, or from time to time in
part, in amounts aggregating $500,000 or any greater integral multiple of
$100,000, by paying the principal amount to be prepaid, together with interest
accrued and unpaid thereon to the date of prepayment, and all compensation
payments pursuant to Section 3.12 if such prepayment is made on a date other
than the last day of an Interest Period applicable thereto. Each such optional
prepayment shall be applied in accordance with Section 3.06(c) below.
(g) Section 6.07(e) of the Existing Credit Agreement is amended in
full to read as follows:
(e) Litigation. Promptly after (i) the occurrence thereof, notice of
the institution of or any material adverse development in any material action,
suit or proceeding or any governmental investigation or any arbitration, before
any court or arbitrator or any governmental or administrative body, agency or
official, against Borrower or any of its Subsidiaries, or any material property
of any thereof seeking money damages in excess of $1,000,000 (unless any such
judgment, award or fine is unequivocally covered by Borrower's insurance
policies) or which, if adversely determined, would otherwise reasonably be
expected to have a Materially Adverse Effect, or (ii) actual knowledge thereof,
notice of the threat of any such action, suit, proceeding, investigation or
arbitration;
(h) Section 6.08 of the Existing Credit Agreement is amended in full
to read as follows:
(a) Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage
Ratio at all times, measured as of the last day of each Fiscal Quarter of the
Borrower, commencing with the last day of the second Fiscal Quarter of 2000, of
not less than the ratio set forth opposite the period in which such Fiscal
Quarter ended as set forth below:
Period Ratio
Restatement Effective Date
through fourth Fiscal Quarter of 2000 1.20:1.00
First day of first Fiscal Quarter of 2001
through last day of third Fiscal Quarter of 2001 1.25:1.00
First day of fourth Fiscal Quarter of 2001
and thereafter 1.30:1.00
The calculation of the Fixed Charge Coverage Ratio of the Borrower for the last
day of the second Fiscal Quarter of 2000 shall be based solely upon the period
of such second Fiscal Quarter. The calculation of the Fixed Charge Coverage
Ratio of the Borrower for the last day of the third Fiscal Quarter shall be
based upon the period consisting of the second and third Fiscal Quarters of
2000. The calculation of the Fixed Charge Coverage Ratio of the Borrower as of
the last day of the fourth Fiscal Quarter of 2000 shall be based upon the period
consisting of the second, third and fourth Fiscal Quarters of 2000. Following
the fourth Fiscal Quarter of 2000, the Fixed Charge Coverage Ratio shall be
calculated in accordance with the definition thereof.
(b) Funded Debt Coverage Ratio. Maintain a Funded Debt Coverage
Ratio at all times, measured as of the last day of each Fiscal Quarter of the
Borrower, commencing with the last day of the second Fiscal Quarter of 2000, of
not greater than the ratio set forth opposite the period in which such Fiscal
Quarter ended as set forth below:
Period Ratio
Second Fiscal Quarter of 2000 5.50:1.00
Third Fiscal Quarter of 2000 5.35:1.00
Fourth Fiscal Quarter of 2000 5.25:1.00
First Fiscal Quarter of 2001 4.75:1.00
Second Fiscal Quarter of 2001
and thereafter 4.50:1.00
(c) Consolidated Net Worth. Maintain at all times, as calculated on
the last day of each Fiscal Quarter of the Borrower, Consolidated Net Worth in
an amount not less than $25,000,000.
(i) Section 8.05 of the Existing Credit Agreement is amended in full to
read as follows:
Section 8.05. Non-Payments of Other Indebtedness. Parent or any Consolidated
Company shall fail to make when due (whether at stated maturity, by
acceleration, on demand or otherwise, and after giving effect to any applicable
grace period) any payment of principal of or interest on any Indebtedness (other
than the Obligations) exceeding $500,000 individually or in the aggregate, other
than such payments that are in dispute for less than 60 days;
SECTION 2. Termination of Parent Guaranty Agreement and Parent Stock Pledge
Agreement. The Parent Guaranty Agreement and the Parent Stock Pledge Agreement
are hereafter no longer in full force and effect, and all duties and obligations
of the parties thereunder are terminated. The lien against the Pledged
Collateral created pursuant to the Parent Stock Pledge Agreement is hereby
released.
SECTION 3. Conditions of Effectiveness of this Amendment and Restatement.
This Amendment and Restatement shall become effective as of May 26, 2000 (the
"Restatement Effective Date") when:
(a) The Agent shall have received counterparts of this Amendment and
Restatement executed by the Borrower and all of the Initial Lenders or, as to
any of the Initial Lenders, advice satisfactory to the Agent that such Initial
Lender has executed this Amendment and Restatement. The Agent also shall have
received updated Schedules from the Existing Credit Agreement, except that
Schedules 4.01 and 7.02 need only be updated with respect to relevant
jurisdictions in Georgia and Tennessee.
(b) The Agent shall have received on or before the Restatement Effective
Date the following, each dated such date and (unless otherwise specified below)
in form and substance satisfactory to the Agent and (except for the Revolving
Credit Notes) in sufficient copies for each Initial Lender:
(i) The duly executed Amended and Restated Revolving Credit Notes.
(ii) The duly executed Amended and Restated Swing Line Note.
(iii) The duly executed Reaffirmation Agreements from each of
the Guarantors.
(iv) A certificate of the Secretary or an Assistant Secretary for each
Credit Party, attaching and certifying true and correct copies of resolutions of
the board of directors approving this Amendment and Restatement and the
transactions contemplated hereunder, and all documents evidencing other
necessary corporate action and governmental approvals, if any, with respect to
this Amendment and Restatement, and further certifying (i) that the articles of
incorporation and bylaws of such Credit Party, delivered to the Agent on
September 26, 1997, have not been amended, restated, supplemented or otherwise
modified since such date and are in full force and effect and (ii) that the
names and true signatures of the officers of such Credit Party authorized to
execute each of the Credit Documents.
(v) A favorable opinion of Miller & Martin, counsel for the
Borrower, in substantially the form of Exhibit G to the Existing Credit
Agreement, but with such modifications as are required to address the Existing
Credit Agreement, as amended by this Amendment and Restatement, in each such
case in form and substance reasonably satisfactory to the Initial Lenders.
(vi) A favorable opinion of Parker, Hudson, Rainer & Dobbs, LLP,
special collateral counsel for the Agent, in form and substance reasonably
satisfactory to the Agent.
(vii) Certified copies of all consents, authorizations and filings
required or advisable under any Requirement of Law or by any Contractual
Obligation of the Borrower, in connection with the execution, delivery,
performance, validity and enforceability of the Credit Documents and the other
documents to be executed and delivered hereunder, and such consents,
authorizations, filings and orders shall be in full force and effect and all
applicable waiting periods (including without limitation all Hart-Scott-Rodino
waiting periods) shall have expired.
(viii) The duly executed Fee Letter.
(ix) A certificate, signed by the President of the Borrower, stating
that on the Restatement Effective Date (A) no Default or Event of Default has
occurred and is continuing, (B) the representations and warranties set forth in
the Existing Credit Agreement are true and correct in all material respects, (C)
there have been no material adverse changes from the financial condition of the
Borrower or its Subsidiaries as reflected in the financial statements filed in
connection with the 10-Q dated April 2, 2000, and (D) all conditions and
requirements have been satisfied and performed or waived in writing by the
Required Lenders.
(x) All obligations of the Borrower to pay any fees and expenses
payable to the Agent, the Collateral Agent, and the Arranger shall have been
satisfied.
SECTION 4. Reference to and Effect on the Existing Credit Agreement and the
Notes.
(a) On and after the effectiveness of this Amendment and Restatement, each
reference in the Existing Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Existing Credit Agreement, and
each reference in the Notes to "the Credit Agreement", "thereunder", "thereof"
or words of like import referring to the Existing Credit Agreement, shall mean
and be a reference to the Existing Credit Agreement, as amended by this
Amendment and Restatement.
(b) The Existing Credit Agreement and the Notes, as specifically amended by
this Amendment and Restatement, are and shall continue to be in full force and
effect and are hereby in all respects ratified and confirmed. This Amendment and
Restatement is not being entered into by the parties as, and does not
constitute, a novation with respect to the Obligations.
(c) Without limiting any of the other provisions of the Existing Credit
Agreement, as amended by this Amendment and Restatement, any references in the
Existing Credit Agreement to the phrases "on the date hereof", "on the date of
this Agreement" or words of similar import shall mean and be a reference to the
date of the Existing Credit Agreement.
SECTION 5. Costs and Expenses. The Borrower agrees to pay on demand all
reasonable out-of-pocket costs and expenses of the Agent in connection with the
preparation, execution, delivery and administration, modification and amendment
of this Amendment and Restatement, the Notes and the other documents to be
delivered hereunder (including, without limitation, the reasonable and
documented fees and expenses of counsel for the Agent with respect hereto and
thereto) in accordance with the terms of Section 8.04 of the Existing Credit
Agreement.
SECTION 6. Execution in Counterparts. This Amendment and Restatement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment and Restatement by telecopier shall be effective as delivery of an
original executed counterpart of such signature page.
SECTION 7. Governing Law. This Amendment and Restatement shall be governed
by, and construed in accordance with, the laws of the State of Georgia.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
THE KRYSTAL COMPANY, as Borrower
By:
--------------------------------------
Name:
Title:
SUNTRUST BANK, as a Lender, as Agent and as Collateral Agent
By:
---------------------------------------
Name:
Title:
By:
Name:
Title:
Domestic and Eurodollar Lending Office:
SunTrust Bank
303 Peachtree St. NE, 2nd Fl.
Atlanta, GA 30308
Attn: Chris Deisley
T: (404) 588-8684
F: (404) 588-8833
REVOLVING LOAN COMMITMENT: $12,500,000.00
SUNTRUST EQUITABLE SECURITIES
CORPORATION, as Arranger
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
BANK OF AMERICA, N.A., as a Lender and as Documentation Agent
By:
---------------------------------------
Name:
Title:
By:
---------------------------------------
Name:
Title:
Domestic and Eurodollar Lending Office:
Bank of America
231 S. La Salle Street
Chicago, IL 60697
Attn: Ingrid M. Eaton-Byias
T: (925) 675-7156
F: (925) 675-7531
REVOLVING LOAN COMMITMENT: $12,500,000.00
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