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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 29, 2002
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 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 [ ]
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 is an accelerated filer (as
defined by Rule 12b-2 of the Act). [ ]
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 27, 2003.
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.
On December 31, 2001, the Company entered into a real estate sale and
leaseback transaction in which it sold commercial real property and
improvements of 32 restaurant locations to an unaffiliated third party and
leased the properties back for a period of twenty years. Proceeds from this
transaction were approximately $23.3 million, net of expenses of $1.0 million.
The Company has the option to extend the leases past the original twenty years
for four additional periods of five years each. The leases are accounted for
as operating leases.
The Company realized a gain on the above real estate sale and leaseback
transactions of approximately $4.1 million. This gain was deferred and
classified in the accompanying 2002 balance sheet as a deferred gain, and is
being amortized as a reduction of rental expense over the life of the leases.
On January 28, 2002, the Company entered into a Senior Secured Credit Agreement
with a bank for a $25.0 million credit facility (the "Credit Facility"). The
Credit Facility provides for $10.0 million in revolving loan commitments and a
$15.0 million term loan commitment, with maturity dates of June 1, 2004 and
January 28, 2007, respectively.
Essentially all assets of the Company are pledged as collateral on the new
credit facility. Additionally, the new credit facility is guaranteed by Port
Royal through a secured pledge of all of the Company's common stock held by
Port Royal and the common stock of each existing and future subsidiary of the
Company.
On October 17, 2002, the Company completed the sale of substantially all of
the assets of the Company's fixed base operation in Chattanooga, Tennessee to
the Truman Arnold Companies. The sales price was $10.8 million and resulted
in a gain on the sale of $2.1 million, net of tax.
The assets of the fixed base operation were classified as assets held for
sale in the accompanying 2001 balance sheet. In addition, the operating
results of Aviation for all periods presented, along with the 2002 gain
on the sale of the operations, have been classified as discontinued operations.
During fiscal 2002, the Company retired a total of $39.0 million aggregate
par value of its Senior Notes and $8.7 million of other debt and capital
leases.
The Company was incorporated in the State of Tennessee in 1932. The Company's
principal executive offices are located at One Union Square, Chattanooga,
Tennessee 37402. The Company's telephone number is (423) 757-1550 and its
website is www.krystal.com.
(B) Financial Information about Industry Segments
See Part II, Item 7 Consolidated Results of Operations and Note 12 of the
Company's Consolidated Financial Statements.
(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 29, 2002, the Company operated 245 units (240 KRYSTAL restaurants
and 5 KRYSTAL KWIK restaurants) and franchisees operated 176 units (104 KRYSTAL
restaurants, 26 KRYSTAL KWIK restaurants and 46 KRYSTAL restaurants in
non-traditional locations) in ten states in the Southeastern United States.
The Company also leases 17 restaurant sites in the Baltimore, Maryland and
Washington, D.C. metropolitan areas which it, in turn, subleases to Davco
Restaurants, Inc. ("Davco"), a Wendy's International, Inc. franchisee and
former affiliate of the Company.
Prior to October 2002, the Company operated a fixed base hangar and
airplane fueling operation through a subsidiary company in
Chattanooga, Tennessee. The Company sold substantially all the assets of
the subsidiary in October 2002.
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", 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 believes that its trademarks have significant value and
play an important role in its marketing efforts. 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 2002, 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 2002, the Company's average number of employees was approximately 6,966.
Government regulations -
The Company must comply with regulations adopted by the Federal Trade
Commission (the "FTC") and with several state laws that regulate the offer
and sale of franchises. The Company also must comply with a number of state
laws that regulate certain substantive aspects of the franchisor-franchisee
relationship. The FTC's Trade Regulation Rule on Franchising (the "FTC Rule")
requires that the Company furnish prospective franchisees with a franchise
offering circular containing information prescribed by the FTC Rule.
State laws that regulate the franchisor-franchisee relationship presently
exist in a substantial number of states. Those laws regulate the franchise
relationship, for example, by requiring the franchisor to deal with its
franchisees in good faith, by prohibition interference with the right of free
association among franchisees, by regulating discrimination among franchisees
with regard to charges, royalties, or fees, and by restricting the development
of other restaurants within certain prescribed distances from existing
franchised restaurants. Those laws also restrict a franchisor's rights with
regard to the termination of franchise agreement (for example, by requiring
"good cause" to exist as a basis for the termination), by requiring the
franchisor to give advance notice and the opportunity to cure the default to
the franchisee, and by requiring the franchisor to repurchase the franchisee's
inventory or provide other compensation upon termination. To date, those laws
have not precluded the Company from seeking franchisees in any given area and
have not had a significant effect on the Company's operations.
Each Krystal restaurant must comply with regulations adopted by federal
agencies and with licensing and other regulations enforced by state and local
health, sanitation, safety, fire, and other departments. Difficulties or
failures in obtaining the required licenses or approvals can delay and
sometimes prevent the opening of a new restaurant.
Krystal restaurants must comply with federal and state government regulations,
but those regulations have not had a material effect on their operations.
More stringent and varied requirements of local governmental bodies with
respect to zoning, land use, and environmental factors can delay and
sometimes prevent development of new restaurants in particular locations.
The owners of Krystal restaurants must comply with laws and regulations
governing labor and employment issues, such as minimum wages, overtime, and
other working conditions. Many of the food service personnel in Krystal
restaurants receive compensation at rates related to the federal minimum
wage and, accordingly, increases in the minimum wage will increase labor
costs at those locations.
(D) Financial Information about Foreign and Domestic Operations and Export
Sales
The Company leases 17 restaurant sites in the Baltimore, Maryland and
Washington, D.C. 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
Of the 245 Company-owned restaurants as of December 29, 2002, the Company
operated 137 of them on property leased from third parties and 108 of them on
property owned by the Company. The Company's corporate headquarters is located
in approximately 36,500 square feet of leased office space in Chattanooga,
Tennessee. The Company also leases office space at its regional office in
Atlanta, Georgia.
See Notes 3 and 8 of the Company's Consolidated Financial Statements.
Item 3. Legal Proceedings
As previously reported, in 2001 the Company settled a lawsuit that alleged
plaintiffs were denied access to the restrooms in one of the Company's
restaurants in violation of the Americans with Disabilities Act. Under the
terms of the settlement agreement the Company is required to renovate all
wheelchair inaccessible restrooms in Krystal owned restaurants over a ten year
period beginning in 2002.
The Company is a party to various 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 2002.
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. The
Company is restricted from paying dividends by the terms of the indenture under
which the 10.25% Senior Notes were issued.
Item 6. Selected Financial Data
The following tables present selected historical data of the Company for years
ended January 3, 1999 ("fiscal 1998"), January 2, 2000 ("fiscal 1999"),
December 31, 2000 ("fiscal 2000"), December 30, 2001 ("fiscal 2001") and
December 29, 2002 ("fiscal 2002"). The selected historical financial data for
the fiscal years 1998 through 2002 have been derived from the audited financial
statements of 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".
Fiscal Fiscal Fiscal Fiscal Fiscal
Year Year Year Year Year
Ended Ended Ended Ended Ended
(53 weeks)
--------- -------- ------- --------- ---------
Dec. 29, Dec. 30, Dec. 31, Jan. 2, Jan. 3,
2002 2001 2000 2000 1999
--------- -------- ------- --------- ----------
(In thousands)
Statement of Operations data:
Revenues:
Restaurant sales $246,245 $246,898 $253,967 $256,384 $248,152
Franchise fees 1,077 1,041 901 499 333
Royalties 6,890 5,958 4,927 4,380 3,775
------------------------------------------------
254,212 253,897 259,795 261,263 252,260
------------------------------------------------
Cost and expenses 240,292 248,038 255,939 248,000 241,656
------------------------------------------------
Operating income $ 13,920 $ 5,859 $ 3,856 $ 13,263 $ 10,604
================================================
Income (loss) from
continuing operations $ 3,337 $ (4,511) $ (6,266) $ 1,702 $ 587
===============================================
Income from discontinued
operations, net of taxes $ 2,859 $ 910 $ 955 $ 842 $ 758
================================================
Income (loss) before
extraordinary item $ 6,196 $ (3,601) $ (5,311) $ 2,544 $ 1,345
================================================
Pro forma income (loss)
before extraordinary item
if FAS No. 142 had been
adopted in all prior years $ 6,196 $ (1,633) $ (3,326) $ 4,541 $ 3,344
================================================
Balance Sheet Data:
Working capital deficit $(10,404) $(11,195) $(21,680) $(24,375) $(11,065)
Property owned and
leased, net 99,790 121,642 134,634 128,010 102,289
Total assets 158,308 197,990 203,201 198,511 179,488
Long term debt, net of
current portion 73,688 118,581 113,992 102,623 100,136
Capital lease obligations,
net of current portion 5,384 8,170 10,341 9,467 2,806
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.
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 29, December 30, December 31,
2002 2001 2000
-------- -------- --------
RESTAURANT SALES:
Company owned $246,245 $246,898 $253,967
Franchise 143,224 125,514 101,618
-------- -------- --------
SYSTEMWIDE RESTAURANT SALES $389,469 $372,412 $355,585
Percent change 4.58% 4.73% 3.07%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 245 246 251
Restaurant Sales $246,245 $246,898 $253,967
Percent change (0.26%) (2.78%) (0.94%)
Percent change in same restaurant sales 0.30% (0.34%) (4.41%)
Average check $ 4.74 $ 4.65 $ 4.55
Percent change 1.94% 2.20% 6.31%
Selected components are --
Cost of restaurant sales $199,082 $205,388 $214,824
As a percent of restaurant sales 80.85% 83.19% 84.59%
Food and paper cost $ 73,272 $ 78,379 $ 80,402
As a percent of restaurant sales 29.76% 31.75% 31.66%
Direct labor $ 54,117 $ 56,128 $ 61,336
As a percent of restaurant sales 21.98% 22.73% 24.15%
Other labor costs $ 17,975 $ 18,842 $ 19,885
As a percent of restaurant sales 7.30% 7.63% 7.84%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 176 165 139
Restaurant Sales $143,224 $125,514 $101,618
Percent change 14.11% 23.52% 14.70%
Percent change in same restaurant sales (2.14%) (1.68%) (2.60%)
Average check $ 5.05 $ 4.95 $ 4.71
Percent change 2.02% 5.10% 6.08%
Consolidated Results of Operations --
(Dollars in thousands)
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
----------- --------- ----------
Dec. 29, Dec. 30, Dec. 31,
2002 2001 2000
----------- --------- ----------
Revenues:
Restaurant sales $246,245 $246,898 $253,967
Franchise fees 1,077 1,041 901
Royalties 6,890 5,958 4,927
-------- -------- --------
254,212 253,897 259,795
-------- -------- --------
Cost and Expenses:
Cost of restaurant sales 199,082 205,388 214,824
Advertising expense 10,339 10,370 11,420
Depreciation and
amortization expense 10,988 14,148 14,297
General and administrative
expenses 19,484 16,510 15,843
Other expenses, net 399 1,622 ( 445)
-------- -------- --------
240,292 248,038 255,939
-------- -------- --------
Operating income 13,920 5,859 3,856
Gain (loss) on sale of assets ( 68) 483 647
Interest expense, net ( 9,279) (13,023) (12,954)
-------- -------- --------
Income (loss) before income
taxes and extraordinary item 4,573 ( 6,681) ( 8,451)
(Provision for) benefit from
income taxes ( 1,236) 2,170 2,185
-------- -------- --------
Income (loss)from continuing
operations 3,337 ( 4,511) ( 6,266)
Income from discontinued operations,
net of income taxes 2,859 910 955
Extraordinary item:
Gain on early retirement of debt,
net of income taxes
of $2,014 in 2002 3,010 -- --
-------- -------- --------
Net income (loss) $ 9,206 ( 3,601) $ ( 5,311)
======== ======== ========
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. 29, Dec. 30 Dec. 31,
2002 2001 2000
-------- -------- --------
Revenues:
Restaurant sales 96.9% 97.2% 97.8%
Franchise fees 0.4 0.4 0.3
Royalties 2.7 2.4 1.9
------- ------ ------
100.0 100.0 100.0
------- ------ ------
Costs and expenses:
Cost of restaurant sales 78.3 80.9 82.7
Advertising expense 4.1 4.1 4.4
Depreciation and amortization 4.3 5.6 5.5
General and administrative
expenses 7.7 6.5 6.1
Other expenses, net 0.1 0.6 (0.2)
------- ------ ------
94.5 97.7 98.5
------- ------ ------
Operating income 5.5 2.3 1.5
Gain (loss)on sale of assets 0.0 0.2 0.2
Interest expense, net (3.7) (5.1) (5.0)
------- ------ ------
Income (loss) before income taxes and
extraordinary item 1.8 (2.6) (3.3)
(Provision for) benefit from
income taxes (0.5) 0.8 0.9
------- ------ ------
Income (loss) from continuing
operations 1.3 (1.8) (2.4)
Income from discontinued operations,
net of income taxes 1.1 0.4 0.4
Extraordinary item:
Gain on early retirement of debt
net of income taxes 1.2 -- --
------- ------ ------
Net income (loss) 3.6% (1.4%) (2.0%)
======= ====== ======
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 29, 2002, December 30, 2001 and December 31, 2000
were 52 week fiscal year ends.
The Company's revenues are derived primarily from sales by Company-owned
restaurants. Total Company-owned restaurants decreased from 246 at the end of
2001 to 245 at the end of fiscal 2002. Royalties and franchise fees from
franchisees have been a relatively small, but growing, portion of the
Company's revenues to date. The total number of franchised restaurants grew
by 6.7% in fiscal 2002 from 165 at the end of fiscal 2001 to 176 at the end of
fiscal 2002. The Company expects its franchisees to develop up to 46 new
restaurants during fiscal 2003.
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 includes credits from the Company's Realty Division for the net of
rent income and rent expenses for the units subleased to Davco of $487,000 and
$523,000 in fiscal 2002 and fiscal 2001, respectively and a charge of $886,000
and $2.1 million in fiscal 2002 and fiscal 2001, respectively, to recognize
the impairment of certain assets.
On December 31, 2001, the Company entered into a real estate sale and
leaseback transaction in which it sold commercial real property and
improvements of 32 restaurant locations to an unaffiliated third party and
leased the properties back for a period of twenty years. Proceeds from this
transaction were approximately $23.3 million, net of expenses of $1.0 million.
The Company has the option to extend the leases past the original twenty years
for four additional periods of five years each. The leases are accounted for
as operating leases.
The Company realized a gain on the above real estate sale and leaseback
transactions of approximately $4.1 million. This gain was deferred and
classified in the accompanying 2002 balance sheet as a deferred gain, and is
being amortized as a reduction of rental expense over the life of the leases.
On January 28, 2002, the Company entered into a Senior Secured Credit Agreement
with a bank for a $25.0 million credit facility (the "Credit Facility"). The
Credit Facility provides for $10.0 million in revolving loan commitments and a
$15.0 million term loan commitment, with maturity dates of June 1, 2004 and
January 28, 2007, respectively.
Essentially all assets of the Company are pledged as collateral on the
Credit Facility. Additionally, the Credit Facility is guaranteed by Port
Royal through a secured pledge of all of the Company's common stock held by
Port Royal and the common stock of each existing and future subsidiary of the
Company.
On October 17, 2002, the Company completed the sale of substantially all of
the assets of the Company's fixed base operation in Chattanooga, Tennessee to
the Truman Arnold Companies. The sales price was $10.8 million and resulted
in a gain on the sale of $2.1 million, net of tax.
The assets of the fixed base operation were classified as assets held for
sale in the accompanying 2001 balance sheet. In addition, the operating
results of Aviation for all periods presented, along with the 2002 gain on
the sale of the operations, have been classified as discontinued operations.
The Company maintains 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 is 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. Effective for the year ending December 28, 2003 ("fiscal 2003"),
the Company has reduced its expected return on the defined benefit pension plan
assets to 8.50%.
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 fiscal 2002 was $24.9 million compared to $20.0
million for fiscal 2001, an increase of 24.5%. This increase in cash
operating profit was primarily attributable to a decrease in the cost of food
and paper and employee labor as a percentage of restaurant sales and an
increase in franchise related revenues.
A reconciliation of cash operating profit to operating income is presented in
the following table:
Fiscal Year Ended
----------------------------
Dec. 29, Dec. 30, Dec. 31,
2002 2001 2000
--------- -------- -------
(In thousands)
Operating income $13,920 $ 5,859 $ 3,856
Depreciation and amortization expense 10,988 14,148 14,297
------- ------- -------
Cash operating profit $24,908 $20,007 $18,153
======= ======= =======
Comparison of Fiscal 2002 to Fiscal 2001
Restaurant sales for the total Krystal system (Company and Franchise combined)
for fiscal 2002 increased 4.6% to $389.5 million compared to $372.4 million
for fiscal 2001.
Total Company revenues increased 0.1% to $254.2 million for fiscal 2002
compared to $253.9 million for fiscal 2001. Of this $300,000 increase,
restaurant sales decreased $650,000 and franchise royalties increased $950,000.
Company-owned average same restaurant sales per week for fiscal 2002 were
$19,250 compared to $19,192 for fiscal 2001, an increase of 0.30%. The
increase in same restaurant sales per week was attributable primarily to an
increase in the average customer check offset by a decrease in sales volume.
The Company operated 245 restaurants at December 29, 2002 compared to 246
restaurants at December 30, 2001.
The average customer check for Company-owned restaurants in fiscal 2002 was
$4.74 as compared to $4.65 in fiscal 2001, an increase of 1.9%. The increase
in average customer check was due primarily to product price increases of
approximately 1.32% implemented during fiscal 2002.
Franchise fee income increased 3.5% to $1.1 million in fiscal 2002 compared
to $1.0 million in fiscal 2001. Royalty revenue increased 15.6% to $6.9
million in fiscal 2002 from $6.0 million in fiscal 2001. The increase in
franchise royalties was due to a 14.1% increase in franchise system sales
in fiscal 2002 compared to fiscal 2001. This increase resulted primarily
from a 6.7% increase in the number of franchisee operated restaurants.
The franchise system operated 176 restaurants at December 29, 2002 compared
to 165 at December 30, 2001.
Cost of restaurant sales was $199.1 million in fiscal 2002 compared to $205.4
million in fiscal 2001. Cost of restaurant sales as a percentage of restaurant
sales decreased to 80.8% in fiscal 2002 from 83.2% in fiscal 2001. This
decrease was primarily the result of a reduction in labor and food and paper
costs as a percentage of restaurant sales, offset by an increase of
approximately $2.7 million in rent expense resulting from the sale and
leaseback transaction completed on December 31, 2001. Total food and paper
costs were $73.3 million in fiscal 2002 as compared to $78.4 million in
fiscal 2001. Food and paper costs as a percentage of restaurant sales
decreased to 29.8% in fiscal 2002 compared to 31.7% in fiscal 2001. This
decrease was primarily attributable to decreases in the price of beef, pork
and cheese combined with favorable menu mix shifts. Direct labor cost was
$54.1 million in fiscal 2002 versus $56.1 million in fiscal 2001. Direct
labor cost as a percentage of restaurant sales was 22.0% for fiscal 2002 and
22.7% for fiscal 2001. This decrease resulted primarily from an increase in
labor efficiency resulting from improvements in the utilization of the
Company's store level labor management system and other management controls.
Other labor cost, which includes restaurant General Managers' and Assistant
Managers' labor cost, was $18.0 million in fiscal 2002 compared to $18.8
million in fiscal 2001. Other labor cost as a percentage of restaurant sales
was 7.3% in fiscal 2002 versus 7.6% in fiscal 2001.
Advertising expense decreased $31,000, approximately 0.3%, to $10.3
million in fiscal 2002 versus $10.4 million in fiscal 2001. Advertising
expenditures as a percentage of revenues was 4.1% in 2002 and 2001.
Depreciation and amortization expenses were $11.0 million in fiscal 2002 as
compared to $14.1 million in fiscal 2001. The decrease in depreciation
expense was primarily due to the sale and leaseback of 32 restaurants on
December 31, 2001 and the implementation of FAS 142.
General and administrative expenses increased $3.0 million, approximately
18.0%, to $19.5 million in fiscal 2002 versus $16.5 million in fiscal 2001.
The increase resulted primarily from an increase of approximately $2.0 million
for the management incentive plan and an increase of approximately $956,000 in
expense associated with the Company's defined benefit plan. In fiscal 2001,
the Company's performance failed to meet the criteria for payment of
management incentive bonuses and, accordingly, no provision was made for
such bonuses. In fiscal 2002, the Company's performance was sufficient
for such bonuses to be earned. The increase in expense associated with the
defined benefit plan resulted from the actuarial impact of lower investment
returns and lower interest rates assumed in the actuarial valuation performed
for fiscal 2002 compared to the fiscal 2001 valuation.
Other expenses decreased $1.2 million, or 75.4%, to $399,000 in fiscal
year 2002. The decrease resulted primarily from a write-off of $886,000 for
impaired assets during fiscal 2002 versus $2.1 million in fiscal 2001. Other
expenses includes the net of rent income and rent expense from the subleased
restaurants to Davco of $487,000 and $523,000 in fiscal 2002 and fiscal 2001,
respectively.
The Company reported a loss on sale of assets of $68,000 in fiscal 2002
compared to a $483,000 gain in fiscal 2001. The loss for fiscal 2002 was
due primarily to the sale of unused properties and the gain in fiscal 2001
resulted from the sale of two Company owned restaurants to franchisees.
Income derived from the fixed based hangar operation (including the after tax
gain in 2002 of approximately $2.1 million from the sale of the operation) is
reported as Income from discontinued operations, net of taxes, and was $2.9
million for fiscal 2002 and $910,000 for fiscal 2001. The $2.0 million
increase resulted primarily from the gain on the sale of the Company's
fixed based hangar operations assets in October 2002.
Interest expense, net of interest income, for fiscal 2002 decreased $3.7
million to $9.3 million from $13.0 million in fiscal 2001. This decrease
resulted primarily from the reduction of approximately $45.0 million of
long-term debt and approximately $3.9 million of long-term capital leases in
fiscal 2002.
Income tax expense in fiscal 2002 was $1.2 million compared to an income tax
benefit of $2.2 million for fiscal 2001. The effective income tax rate for
fiscal years 2002 and 2001 was less than the statutory income tax rate
primarily as a result of the write off of goodwill associated with the sale
of the Company's fixed based hangar operation in fiscal 2002 and the
non-deductible portion of amortization expense associated with
Acquisition-related goodwill in fiscal 2001.
Comparison of Fiscal 2001 to Fiscal 2000
Restaurant sales for the total Krystal system (Company and Franchise combined)
for fiscal 2001 were $372.4 million compared to $355.6 million for fiscal 2000,
a 4.7% increase.
Total Company revenues decreased 2.3% to $253.9 million for fiscal 2001
compared to $259.8 million for fiscal 2000. Of this $5.9 million decrease,
restaurant sales accounted for a $7.1 million decrease, franchise fees
increased $0.2 million and royalties increased $1.0 million.
Company-owned average same restaurant sales per week for fiscal 2001 were
$18,894 compared to $18,959 for fiscal 2000, a decrease of 0.34%. The decrease
in same restaurant sales per week was attributable to several factors,
including heavy discounting by competitors and a decrease in sales volumes
which was partially offset by an increase in the average customer check. The
Company operated 246 restaurants at December 30, 2001 compared to 251
restaurants at December 31, 2000. The five store decrease in Company operated
units resulted from the Company's sale (re-franchising) of two restaurants,
which were sold in connection with the execution of new restaurant development
commitments by franchisees, and the closure of three under-performing units.
The average customer check for Company-owned restaurants in fiscal 2001 was
$4.65 as compared to $4.55 in fiscal 2000, an increase of 2.2%. The increase
in average customer check was due primarily to maintaining product price
increases of approximately 1.75% implemented during fiscal 2001.
Franchise fee income was $1.0 million in fiscal 2001 compared to $901,000 in
fiscal 2000. Royalty revenue increased 20.9% to $6.0 million in fiscal 2001
from $4.9 million in fiscal 2000. The increase in franchise fees, which are
earned upon the opening of new franchise restaurants, resulted primarily from
an increase in the number of new franchise restaurants opened in fiscal 2001
compared to the same period in 2000. During fiscal 2001, franchisees opened 32
new restaurants, and re-opened six additional restaurants that had been
temporarily closed. There were no franchise fees associated with the re-opened
restaurants. During fiscal 2000, franchisees opened 24 franchise restaurants.
The increase in franchise royalties was due to a 23.5% increase in franchise
system sales compared to fiscal 2000 resulting primarily from a 18.7% increase
in the number of franchisee operated restaurants. The franchise system
operated 165 restaurants at December 30, 2001 compared to 139 at
December 31, 2000.
Cost of restaurant sales was $205.4 million in fiscal 2001 compared to $214.8
million in fiscal 2000. Cost of restaurant sales as a percentage of restaurant
sales decreased to 83.2% in fiscal 2001 from 84.6% in fiscal 2000. This
decrease was primarily the result of a reduction in labor cost as a percentage
of restaurant sales, offset by an increase in food and paper costs as a
percentage of restaurant sales. Total food and paper costs were $78.4
million in fiscal 2001 as compared to $80.4 million in fiscal 2000. Food and
paper costs as a percentage of restaurant sales increased to 31.8% in fiscal
2001 compared to 31.7% in fiscal 2000. This increase was primarily
attributable to lower sales combined with increases in the price of beef and
cheese. Direct labor cost was $56.1 million in fiscal 2001 versus $61.3
million in fiscal 2000. Direct labor cost as a percentage of restaurant sales
was 22.7% for fiscal 2001 and 24.2% for fiscal 2000. This decrease resulted
primarily from an increase in labor efficiency resulting from improvements in
the utilization of the Company's store level labor management system. Other
labor cost, which includes restaurant General Managers' and Assistant
Managers' labor cost, was $18.8 million in fiscal 2001 compared to $19.9
million in fiscal 2000. Other labor cost as a percentage of restaurant sales
was 7.6% in fiscal 2001 versus 7.8% in fiscal 2000.
Advertising expense decreased $1.0 million, approximately 9.2%, to $10.4
million in fiscal 2001 versus $11.4 million in fiscal 2000. Advertising
expenses as a percentage of revenues decreased to 4.1% in 2001 compared
to 4.4% in 2000. The Company bases its advertising on a percentage of
restaurant sales rather than total revenues. During fiscal 2001, the
Company's advertising expenses were 4.2% of restaurant sales compared to
4.5% of restaurant sales in fiscal 2000.
Depreciation and amortization expenses were $14.1 million in fiscal 2001 as
compared to $14.3 million in fiscal 2000.
General and administrative expenses increased $0.7 million approximately
4.2%, to $16.5 million in fiscal 2001 versus $15.8 million in fiscal 2000.
Other expenses increased $2.1 million to $1.6 million in fiscal 2001. The
increase resulted primarily from a write-off of $2.1 million for impaired
assets during fiscal 2001.
The Company reported a gain on sale of assets of $483,000 in fiscal 2001
compared to $647,000 in fiscal 2000 related to the sale of Company owned
restaurants to franchisees.
Interest expense, net of interest income, for fiscal 2001 increased $0.1
million to $13.0 million from $12.9 million in fiscal 2000. This increase
resulted from an increase during much of fiscal 2001 in short term
borrowings.
Income derived from the fixed based hangar operation is reported as income from
discontinued operations, and was $910,000 for fiscal 2001 and $955,000 for
fiscal 2000.
The benefit from income taxes in fiscal 2001 was $2.2 million compared to a
benefit of $2.2 million for fiscal 2000. The effective income tax rate for
fiscal years 2001 and 2000 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.
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 $10.4 million at December 29, 2002,
compared to a working capital deficit of $11.2 million at December 30, 2001.
Capital expenditures totaled approximately $9.8 million during fiscal 2002,
compared to $5.8 million in fiscal 2001. Approximately $2.7 million
was used to purchase certain assets previously leased under capital leases.
Approximately $9.8 million is expected to be spent for capital
expenditures during 2003. Capital expenditures will primarily be
used for refurbishing of certain restaurants, technology and systems
improvements and on-going capital improvements. The Company owns
approximately 44.1% of its restaurant locations and leases the remainder.
At December 29, 2002, the Company had existing cash balances of $8.3 million
and availability under its Credit Facility of $5.5 million. The Company
expects these funds and funds from operations will be sufficient to meet its
operating requirements and capital expenditures through fiscal 2003.
On December 31, 2001, the Company entered into a real estate sale and
leaseback transaction in which it sold the commercial real estate and
improvements of 32 Company operated restaurant locations to an unaffiliated
third party and leased the properties back for a period of 20 years. Net
proceeds from this transaction of approximately $23.3 million were primarily
used to purchase a portion of the Company's 10.25% Senior Notes during
fiscal 2002.
The above transaction resulted in an increase in rent expense of
approximately $2.7 million and a reduction in interest expense of approximately
$3.7 million in fiscal 2002.
On October 17, 2002, the Company completed its sale of substantially all of the
assets of its fixed based hangar operations to Truman Arnold Companies for
$10.8 million, resulting in estimated net gain of approximately $5.2
million. The net gain was used to retire a portion of the Company's
10.25% Senior Notes during the fourth quarter of 2002.
During fiscal 2002, the Company retired a total of $39.0 million aggregate
par value of its Senior Notes and $8.7 million of other debt and capital
leases.
Contractual Obligations Table--
Future Contractual Obligations. The following table summarizes the
Company's contractual obligations at December 29, 2002, and the effect such
obligations are expected to have on the Company's liquidity and cash flow in
future periods (in thousands):
Year Ending December 29, 2002
----------------------------------------------------------
Total Maturity Maturity Maturity Maturity
less than 1-3 yrs 4-5 yrs Over 5 yrs
1 yr
-------- -------- ------- -------- ---------
Senior Notes $ 60,980 $ -- $ -- $60,980 $ --
Lines of Credit 13,958 1,250 2,500 2,500 7,708
Capital Lease
Obligations 6,426 1,042 1,230 1,062 3,092
Operating Leases 77,052 7,909 13,120 10,790 45,233
-------- -------- -------- ------- --------
Total commitments $158,416 $10,201 $16,850 $75,332 $56,033
======== ======== ======== ======= ========
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.
Critical Accounting Policies --
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States,
which require management to make estimates that affect the amounts of
revenues, expenses, assets and liabilities reported. The following are
critical accounting matters which are both very important to the portrayal
of the Company's financial condition and results and which require some of
management's most subjective and complex judgments. The accounting for
these matters involves the making of estimates based on current facts,
circumstances and assumptions which, in management's judgment, could change
in a manner that would materially affect management's future estimates with
respect to such matters and, accordingly, could cause future reported
financial condition and results to differ materially from financial results
reported based on management's current estimates.
Accounts Receivable. The Company performs ongoing credit evaluations of
its franchisees based upon payment history and the franchisees current credit
worthiness. The Company continuously monitors collections from its franchisees
and maintain a provision for estimated credit losses based upon its review of
its franchisees financial condition and other relevant franchisee specific
credit information. While such credit losses have historically been within the
Company's expectations and the provisions established, it is possible that its
credit loss rates could be higher or lower in the future.
Impairment of Long-Lived Assets and Goodwill. The Company periodically
evaluates fixed assets and goodwill for indicators of potential impairment.
The Company's judgments regarding potential impairment are based on legal
factors, market conditions and operational performance. Future events could
cause the Company to conclude that assets associated with a particular
operation are impaired. Evaluating the extent of an impairment also requires
the Company to estimate future operating results and cash flows which also
require judgment by management. Any resulting impairment loss could have a
material adverse impact on the Company's financial condition and results of
operations.
Self-Insurance. The Company is self-insured for the majority of its
group health insurance costs, workers' compensation insurance costs, and
general liabilities subject to specific retention levels. Benefits
administrators assist the Company in evaluating claims data to determine its
liability for self-insured claims. While the Company's management believes
that its assumptions are appropriate, significant differences in its actual
experience or significant changes in the Company's assumptions may materially
affect these self insured costs.
Accounting for Income Taxes. As part of the process of preparing the
Company's consolidated financial statements, the Company is required to
estimate its income taxes in each of the jurisdictions in which it operates.
This process involves the Company estimating its actual current tax exposure
together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within the
Company's consolidated balance sheet. While the Company's management believes
that its assumptions are appropriate, significant differences in its actual
experience or significant changes in its assumptions may materially affect
the Company's income tax exposure.
Pension and Other Post-retirement Benefits. The determination of the
Company's obligation and expense for pension and other post-retirement
benefits is dependent on its selection of certain assumptions used by
actuaries in calculating such amounts. Those assumptions are disclosed in
Note 6 to the consolidated financial statements and include, among others,
the discount rate, expected long-term rate of return on plan assets and rates
of increase in compensation levels and health care costs. These assumptions
are periodically adjusted based on management's judgement and consultations
with actuaries and others. In accordance with accounting principles
generally accepted in the United States, actual results that differ from the
Company's assumptions are accumulated and amortized over future periods and,
therefore, generally affect its recognized expense, recorded obligation and
funding requirements in future periods. While the Company's management
believes that its assumptions are appropriate, significant differences in
its actual experience or significant changes in its assumptions may
materially affect its pension and other post-retirement benefit obligations
and its future expense.
Franchise Revenue Recognition. The Company recognize revenues related to
Franchise fees when the related stores are opened. Changes in the timing of
planned store openings and defaults on agreements can have a material impact
on the timing of the recognition of such revenues.
Recent Accounting Pronouncements--
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections,("SFAS 145"). Among other things, SFAS 145
rescinds Statement of Financial Accounting Standards No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" ("SFAS 4"), which required
all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion
No. 30 will now be used to classify those gains and losses. The provisions
of SFAS 145 are effective for financial statements issued for fiscal years
beginning after May 15, 2002, and interim periods within those fiscal years.
During fiscal 2002, prior to the required adoption of SFAS 145, the Company
reported extraordinary gains aggregating $3.0 million associated with the
extinguishment of the Company's debt. Under SFAS 145, any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods that does not meet the criteria in APB 30 for classification as an
extraordinary item shall be reclassified. The Company plans to adopt
SFAS 145 on December 30, 2002. Accordingly, in financial reporting periods
after adoption, the extraordinary gains reported in 2002 will be
reclassified.
In June 2002, FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146
requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to the date
of an entity's commitment to an exit plan. SFAS 146 also establishes fair
value as the objective for initial measurement of the liability. SFAS 146
is effective for exit or disposal activities that are initiated after
December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires an entity to
disclose in its interim and annual financial statements information with
respect to its obligations under certain guarantees that it has issued. It
also requires an entity to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for interim
and annual periods ending after December 15, 2002. The Company is not party to
any guarantees as of December 29, 2002. The initial recognition and
measurement requirements of FIN 45 are effective prospectively for guarantees
issued or modified after December 31, 2002. Based on the Company's current
activities management does not believe that the recognition requirements will
have a material impact on the Company's financial position, cash flows or
results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company is
currently evaluating the effect that the adoption of FIN 46 will have on
its financial statements.
In January 2003, the Emerging Issues Task Force of the FASB issued
EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16
addresses accounting and reporting issues related to how a reseller should
account for cash consideration received from vendors. Generally, cash
consideration received from vendors is presumed to be a reduction of the
prices of the vendor's products or services and should, therefore, be
characterized as a reduction of cost of sales when recognized in the
customer's income statement. However, under certain circumstances this
presumption may be overcome and recognition as revenue or as a reduction of
other costs in the income statement may be appropriate. The Company adopted
the provisions of EITF 02-16 in fiscal 2002, and has restated its prior
years' results to conform with the 2002 presentation.
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 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 including the following: any statements regarding
future sales or expenses, any statements regarding the continuation of
historical trends and any statements regarding the Company's future liquidity
and capital resources needs. Without limiting the foregoing, the words
"believe", "anticipates", "plans", "expects", and similar expressions are
intended to identify forward-looking statements. 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, the success of new product offerings, 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 rate of growth of new franchise restaurant openings, the
Company's ability to obtain funding sufficient to meet operation requirements
and capital expenditures 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
Our market risk is limited to fluctuations in interest rates as it
pertains to our borrowings under our credit facility.
Borrowings under the revolving loan commitment bear interest rates, at the
option of the Company, and depending on certain financial covenants,
equal to either (a) the greater of the prime rate, or the federal
funds rate plus 0.5%, plus a margin (which ranges from 0.25% to 2.0%) or
(b) the rate offered in the Eurodollar market for amounts and periods
comparable to the relevant loan, plus a margin (which ranges from 1.75%
to 3.5% and is determined by certain financial covenants).
Borrowings under the term loan commitment bear interest rates equal to the rate
offered in the Eurodollar market for 30 day borrowings, plus an applicable
margin (which ranges from 3.5% to 4.0% and is determined by certain
financial covenants). If the interest rates on our borrowings average
100 basis points more in fiscal 2003 than they did in fiscal 2002, our interest
expense would increase and income before income taxes would decrease by
approximately $50,000. This amount is determined solely by considering the
impact of the hypothetical change in the interest rate on our borrowing cost
without consideration for other factors such as actions management might take
to mitigate its exposure to interest rate changes.
The Company is also exposed to the impact of commodity price fluctuations
related to unpredictable factors such as weather and various other market
conditions outside its control. From time to time the Company enters into
commodity futures and option contracts to manage these fluctuations. The
Company had no futures and options contracts as of December 29, 2002.
Item 8. Financial Statements and Supplementary Data
(commencing on the following page)
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Krystal Company
We have audited the accompanying consolidated balance sheets of The Krystal
Company and Subsidiary as of December 29, 2002 and December 30, 2001, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 29, 2002. Our
audits also included the financial statement schedule listed in Item 15(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial position of The Krystal
Company and Subsidiary at December 29, 2002 and December 30, 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 29, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth herein.
As discussed in Note 1, effective December 31, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.
Ernst & Young, LLP
Atlanta, Georgia
February 7, 2003
The Krystal Company and Subsidiary
----------------------------------
Consolidated Balance Sheets
---------------------------
(Dollars in thousands)
December 29, December 30,
2002 2001
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 10,690 $ 13,042
Receivables, net 1,456 1,418
Inventories 1,783 2,033
Deferred income taxes 4,615 2,877
Prepayments and other 951 823
-------- -------
Total current assets 19,495 20,193
-------- -------
PROPERTY, BUILDINGS AND EQUIPMENT, net
of accumulated depreciation of $40,635
at December 29, 2002 and $36,516 at
December 30, 2001 94,374 112,498
-------- -------
LEASED PROPERTIES, net of accumulated
amortization of $4,517 at December 29, 2002
and $5,385 at December 30, 2001 5,416 9,144
-------- -------
OTHER ASSETS:
Goodwill, net 36,186 37,968
Prepaid pension asset -- 8,754
Deferred financing costs, net 1,851 2,735
Other 986 1,605
Assets held for sale -- 5,093
-------- -------
Total other assets 39,023 56,155
-------- -------
$158,308 $197,990
======== =======
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 29, December 30,
2002 2001
----------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,505 $ 5,175
Accrued liabilities 22,102 22,719
Current portion of long-term debt 1,250 1,361
Current portion of capital
lease obligations 1,042 2,133
-------- --------
Total current liabilities 29,899 31,388
-------- --------
LONG-TERM DEBT, excluding current portion 73,688 118,581
-------- --------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 5,384 8,170
-------- --------
DEFERRED INCOME TAXES 9,392 8,912
-------- --------
OTHER LONG-TERM LIABILITIES 7,825 1,501
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 5, 8,
9 and 12)
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized, issued
and outstanding 35,000 35,000
Accumulated other comprehensive loss ( 6,524) --
Retained earnings (deficit) 3,644 ( 5,562)
-------- --------
Total shareholder's equity 32,120 29,438
-------- --------
$158,308 $197,990
======== ========
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 Ended
----------------------------------------
Dec. 29, Dec. 30, Dec. 31,
2002 2001 2000
---------- ---------- ---------
Revenues:
Restaurant sales $246,245 $246,898 $253,967
Franchise fees 1,077 1,041 901
Royalties 6,890 5,958 4,927
-------- -------- --------
254,212 253,897 259,795
-------- --------- --------
Cost and Expenses:
Cost of restaurant sales 199,082 205,388 214,824
Advertising expense 10,339 10,370 11,420
Depreciation and
amortization expense 10,988 14,148 14,297
General and administrative
expenses 19,484 16,510 15,843
Other expenses, net 399 1,622 ( 445)
-------- -------- --------
240,292 248,038 255,939
-------- -------- --------
Operating income 13,920 5,859 3,856
Gain (loss) on sale of assets ( 68) 483 647
Interest expense, net ( 9,279) (13,023) (12,954)
-------- -------- --------
Income (loss) before income
taxes and items below 4,573 ( 6,681) ( 8,451)
(Provision for) benefit from
income taxes ( 1,236) 2,170 2,185
-------- -------- --------
Income (loss) from continuing
operations 3,337 ( 4,511) ( 6,266)
Income from discontinued operations,
net of income taxes 2,859 910 955
-------- -------- -------
Income (loss) before extraordinary item 6,196 ( 3,601) ( 5,311)
Extraordinary item:
Gain on early retirement of debt, net
of taxes of $2,014 in 2002 3,010 -- --
-------- -------- -------
Net income (loss) $ 9,206 $( 3,601) $( 5,311)
======== ======== =======
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)
Accumulated
Other Retained
Common Comprehensive Earnings
Stock loss (Deficit) Total
------ ------------- -------- ----------
BALANCE, January 2, 2000 $35,000 $ -- $ 3,350 $38,350
Net loss -- -- (5,311) (5,311)
------- ------- -------- --------
BALANCE, December 31, 2000 35,000 -- (1,961) 33,039
Net loss -- -- (3,601) (3,601)
------- ------- -------- --------
BALANCE, December 30, 2001 35,000 -- (5,562) 29,438
Minimum pension liability
(net of taxes of $3,998) -- (6,524) -- (6,524)
Net income -- -- 9,206 9,206
-------
Comprehensive income 2,682
------- ------- -------- --------
BALANCE, DECEMBER 29, 2002 $35,000 $(6,524) $ 3,644 $32,120
======= ======= ======== ========
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 Year Ended
---------------------------------------
Dec. 29, Dec. 30, Dec. 31,
2002 2001 2000
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,206 $(3,601) $(5,311)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities-
Depreciation and amortization 11,128 14,457 14,571
Increase (decrease) in
deferred income taxes 2,740 (1,459) 509
(Gain) loss on sale of assets 68 ( 483) ( 624)
Gain on sale of Aviation (2,100) -- --
Gain on early extinguishment of debt (5,024) -- --
Loss on impairment of assets 886 2,145 --
Changes in operating assets and
liabilities:
Receivables, net ( 38) 534 ( 570)
Inventories 250 ( 41) 107
Prepayments and other ( 508) ( 21) 288
Accounts payable 330 (5,015) ( 993)
Accrued liabilities ( 842) 801 (2,192)
Other, net 434 398 1,404
------- ------- -------
Net cash provided by
operating activities 16,530 7,715 7,189
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment ( 9,765) ( 5,831) (26,778)
Proceeds from the sale of
property, buildings and equipment 34,465 2,349 9,621
------- ------- -------
Net cash provided by (used in)
investing activities 24,700 ( 3,482) (17,157)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under
revolving credit facility ( 4,042) 6,000 9,539
Proceeds from issuance of
long-term debt -- -- 2,000
Repayments of long-term debt (35,663) ( 170) ( 103)
Principal payments of capital
lease obligations ( 3,877) (2,000) (1,791)
------- ------- -------
Net cash (used in) provided by
financing activities (43,582) 3,830 9,645
------- ------- -------
NET INCREASE(DECREASE) IN CASH AND
TEMPORARY INVESTMENTS ( 2,352) 8,063 ( 323)
CASH AND TEMPORARY INVESTMENTS,
beginning of period 13,042 4,979 5,302
------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $10,690 $13,042 $ 4,979
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest, net of amounts
capitalized $ 9,937 $12,400 $12,353
======= ======= =======
Income taxes $ 3,948 $ 97 $ 715
======= ======= =======
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. 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. The Company recognizes revenues from
restaurant sales upon delivery of the product to the customer.
On September 2, 2002, the Company entered into a letter of intent with Truman
Arnold Companies for the sale of substantially all of the assets of the
Company's fixed base operation in Chattanooga, Tennessee ("Aviation"). The
sale was completed on October 17, 2002 for a sales price of $10.8 million and
resulted in a gain on the sale of $2.1 million, net of tax.
The operating results of Aviation for all periods, along with the 2002 gain on
the sale of Aviation, are classified as discontinued operations, net of taxes.
In the 2001 Balance Sheet, the assets of the fixed base operation are
classified as assets held for sale.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
Krystal and its subsidiary (herein after referred to collectively as
the "Company"). All significant intercompany balances and transactions have
been eliminated. The Company is wholly-owned by Port Royal Holdings, Inc.
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 29, 2002, December 30, 2001 and December 31, 2000
were 52 week fiscal years.
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.
Accounts Receivable and the Allowance for Doubtful Accounts--
Accounts receivable arise primarily from franchise fees, royalties owed by
franchisees and sales of products to franchisees. The Company evaluates the
collectibility of accounts receivable based on reviews of its customer's
ability to meet its financial obligations or as a result of changes in the
overall aging of accounts receivable. While the Company has a large customer
base that is geographically dispersed, a general economic downturn could
result in higher than expected defaults and, therefore, the need to revise
estimates for bad debts. The Company generally does not require collateral
for accounts receivable.
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 Other Than Goodwill --
Management assesses its long-lived assets other than goodwill for impairment
whenever facts and circumstances indicate that the carrying amount may not be
fully recoverable. To analyze recoverability, the Company considers such
factors as the anticipated future cash flows from the asset; the age,
condition and remaining useful life of the asset; and the carrying amount
of the asset. If management determines that an asset is impaired, the
asset is written down and a corresponding charge to earnings is made.
Impairment losses, if any, are measured based upon the difference between
the carrying amount and the fair value of the assets.
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.
Deferred Financing Costs --
Deferred financing costs of $5,779,000, are amortized over the life of the
related debt agreement. The financing costs related to the Senior Notes are
amortized over 10 years. The financing costs associated with the revolving
loan commitment portion of the Company's Credit Facility are being
amortized through June 2004 and the financing costs associated with the term
loan portion of the Credit Facility are being amortized through
January 2007. Amortization expense for deferred financing costs for the
fiscal years ended December 29, 2002, December 30, 2001 and
December 31, 2000 was $662,000, $541,000 and $657,000, respectively.
Accumulated amortization of deferred financing costs at December 29, 2002
and December 30, 2001 was $3,653,000 and $3,048,000, respectively.
Intangibles --
Goodwill represents the excess of the purchase price paid over the fair value
of the net assets acquired in connection with the acquisition of the Company
by Port Royal Holdings, Inc. Effective December 31, 2001, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 142 requires that entities
assess the fair value of the net assets underlying all acquisition-related
goodwill on a reporting unit basis effective beginning in 2002. When the fair
value is less than the related carrying value, entities are required to reduce
the amount of goodwill. The approach to evaluating the recoverability of
goodwill as outlined in SFAS 142 requires the use of valuation techniques
utilizing estimates and assumptions about projected future operating results
and other variables. The impairment only approach required by SFAS 142
may have the effect of increasing the volatility of the Company's earnings if
additional goodwill impairment occurs at a future date.
SFAS 142 also requires that entities discontinue amortization of all goodwill.
Accordingly, the Company no longer amortized goodwill beginning in 2002.
Amortization expense for goodwill for the fiscal years ended
December 30, 2001 and December 31, 2000 was $1,967,500 and $1,985,000,
respectively. Accumulated amortization of goodwill at December 29, 2002
and December 30, 2001 was $8,431,000.
The net carrying value of goodwill at December 29, 2002 and December 30, 2001
was $36,186,000 and $37,968,000, respectively. The change in the carrying
value of goodwill during 2002 was due to the adjustment of a portion of
goodwill related to contingent liabilities established in purchase accounting.
Prior to the adoption of SFAS 142, the Company amortized goodwill over 25
years. Had the Company accounted for goodwill consistent with the
provisions of SFAS 142 in prior periods, the Company's loss from continuing
operations would have been affected as follows (in thousands):
For the Fiscal
Year Ended
-----------------------------------
Dec. 29, Dec. 30, Dec. 31,
2002 2001 2000
-------- ------- -------
Income (loss) from
continuing operations $3,337 $(4,511) $(6,266)
Add back: Goodwill amortization -- 1,968 1,985
------ ------- -------
Adjusted income (loss) from
continuing operations $3,337 $(2,543) $(4,281)
====== ======= =======
Franchise and License Agreements --
Franchise or license agreements are available for single Krystal restaurants
and multi-unit development agreements are available for the development of
several Krystal restaurants over a specified period of time. The multi-unit
development 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 29, 2002, there were 176 franchised or licensed
restaurants of which 149 restaurants were operated under 32 multi-unit
development agreements. At December 30, 2001, there were 165 franchised or
licensed restaurants of which 135 restaurants were operated under 33 multi-unit
development 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 when
the 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 29, 2002 and December 30, 2001, total deferred franchise
and license fees were approximately $1,048,500 and $1,023,000, respectively.
Advertising -
Production expenses are expensed upon first showing of the advertising and
other advertising costs are expensed as incurred.
Fair Market Value of Financial Instruments --
The carrying amount reflected in the consolidated balance sheets for cash and
temporary investments, accounts receivable and accounts payable approximate
their respective fair values based on the short-term nature of these
instruments. The fair value of the fixed rate debt is disclosed in Note 5.
Benefit Plans --
The determination of obligations and expenses under the Company's retirement
and post retirement benefit plans is dependent on the selection of certain
assumptions used by actuaries in calculating such amounts. Those assumptions
are described in Note 6 to the consolidated financial statements and include
among others, the discount rate, expected return on plan assets and the
expected rates of increase in employee compensation and health care costs. In
accordance with accounting principles generally accepted in the United States,
actual results that differ from assumptions are accumulated and amortized over
future periods and, therefore, generally affect our recognized expense and
the recorded obligation in such periods. Significant differences in actual
experience or significant changes in the assumptions used may materially
affect the pension and post retirement obligations and future expenses.
Accumulated Other Comprehensive Income -
Accumulated other comprehensive income is comprised of a minimum pension
liability of $6.5 million, net of taxes, at December 29, 2002.
Stock Compensation --
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
Interpretations in accounting for stock compensation. Under APB 25, no
compensation expense is recognized if the exercise price of stock options
equals the market price of the underlying stock on the date of grant.
Note 10 contains a tabular presentation as if the Company had applied the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", to
all stock options.
Use of Estimates --
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 and the differences could be material.
Recent Accounting Pronouncements--
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections,("SFAS 145"). Among other things, SFAS 145
rescinds Statement of Financial Accounting Standards No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" ("SFAS 4"), which required
all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion
No. 30 will now be used to classify those gains and losses. The provisions
of SFAS 145 are effective for financial statements issued for fiscal years
beginning after May 15, 2002, and interim periods within those fiscal years.
During fiscal 2002, prior to the required adoption of SFAS 145, the Company
reported extraordinary gains aggregating $3.0 million associated with the
extinguishment of the Company's debt. Under SFAS 145, any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods that does not meet the criteria in APB 30 for classification as an
extraordinary item shall be reclassified. The Company plans to adopt
SFAS 145 on December 30, 2002. Accordingly, in financial reporting periods
after adoption, the extraordinary gains reported in 2002 will be
reclassified.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146
requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to the date
of an entity's commitment to an exit plan. SFAS 146 also establishes fair
value as the objective for initial measurement of the liability. SFAS 146
is effective for exit or disposal activities that are initiated after
December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires an entity to
disclose in its interim and annual financial statements information with
respect to its obligations under certain guarantees that it has issued. It
also requires an entity to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for interim
and annual periods ending after December 15, 2002. The Company is not party to
any guarantees as of December 29, 2002. The initial recognition and
measurement requirements of FIN 45 are effective prospectively for guarantees
issued or modified after December 31, 2002. Based on the Company's current
activities management does not believe that the recognition requirements will
have a material impact on the Company's financial position, cash flows or
results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company is
currently evaluating the effect that the adoption of FIN 46 will have on
its financial statements.
In January 2003, the Emerging Issues Task Force of the FASB issued
EITF Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16
addresses accounting and reporting issues related to how a reseller should
account for cash consideration received from vendors. Generally, cash
consideration received from vendors is presumed to be a reduction of the
prices of the vendor's products or services and should, therefore, be
characterized as a reduction of cost of sales when recognized in the
customer's income statement. However, under certain circumstances this
presumption may be overcome and recognition as revenue or as a reduction of
other costs in the income statement may be appropriate. The Company adopted
the provisions of EITF 02-16 in fiscal 2002, and has restated its prior
years' results to conform with the 2002 presentation.
Reclassifications --
Certain reclassifications have been made to prior year financial statements to
conform with the 2002 presentation.
2. SALE OF KRYSTAL AVIATION
On October 17, 2002, the Company sold substantially all of the assets of its
fixed based hangar operations ("Aviation") in a cash transaction to
Truman Arnold Companies for approximately $10.8 million. The gain of $5.2
million ($2.1 million net of taxes) resulting from this transaction is
reflected in discontinued operations in the accompanying Consolidated
Statement of Operations.
As of the date of the transaction, Aviation assets and liabilities were
recorded at a net book value of approximately $4,977,000. Aviation revenues
were $5,393,000, $6,781,000 and $6,924,000, and Income Before Income Taxes
were $1,121,000, $1,467,000 and $1,430,000, for fiscal years ended
December 29, 2002, December 30, 2001 and December 31, 2000, respectively,
and are included in Income from discontinued operations, net of taxes in the
accompanying Consolidated Statement of Operations. In connection with the
sale, the Company retired approximately $2.8 million in net goodwill
associated with the assets of Aviation.
3. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment at December 29, 2002 and December 30, 2001,
consisted of the following:
Fiscal Year Ended
------------------------------
December 29, December 30,
2002 2001
----------- -----------
(In thousands)
Land $ 32,467 $ 41,785
Buildings and improvements 31,012 41,878
Equipment 53,149 48,263
Leasehold improvements 15,884 16,259
Construction in progress 2,497 829
--------- ---------
135,009 149,014
Accumulated depreciation
and amortization (40,635) (36,516)
--------- ---------
$ 94,374 $ 112,498
========= =========
The Company recorded depreciation expense of $9.5 million during fiscal 2002,
$10.0 million during fiscal 2001 and $10.3 million during fiscal 2000.
During fiscal 2002 and fiscal 2001, the Company recorded a charge of $886,000
and $2.1 million, respectively, to write down to fair value the carrying value
of certain restaurant properties and other assets within the Company's
restaurant business segment. These charges are reflected in Other Expenses
in the accompanying Consolidated Statement of Operations.
4. ACCRUED LIABILITIES
Accrued liabilities at December 29, 2002 and December 30, 2001, consisted of
the following:
December 29, December 30,
2002 2001
------------ -----------
(In thousands)
Salaries, wages and benefits $ 8,201 $ 5,613
Workers' compensation 4,076 4,152
State sales taxes 1,502 1,562
Accrued interest 1,598 2,782
Deferred franchise advertising and fees 2,001 2,144
Other 4,724 6,466
-------- --------
$22,102 $22,719
======== ========
5. INDEBTEDNESS
Senior Secured Credit Agreement
On January 28, 2002, the Company entered into a Senior Secured Credit
Agreement with a bank for a $25.0 million credit facility (the "Credit
Facility"). The Credit Facility provides for $10.0 million in revolving
loan commitments and a $15.0 million term loan commitment, with maturity
dates of June 1, 2004 and January 28, 2007, respectively.
Borrowings under the revolving loan commitment bear interest rates, at the
option of the Company, and depending on certain financial covenants,
equal to either (a) the greater of the prime rate, or the federal
funds rate plus 0.5%, plus a margin (which ranges from 0.25% to 2.0%) or
(b) the rate offered in the Eurodollar market for amounts and periods
comparable to the relevant loan, plus a margin (which ranges from 1.75%
to 3.5% and is determined by certain financial covenants).
At December 29, 2002, the rate applicable to outstanding borrowings was 4.88%.
The weighted average interest rate for borrowings under the Credit Facility
during 2002 was 5.4%. Availability under the Credit Facility at
December 29, 2002 was $5.5 million which includes $4.5 million in letters of
credit issued primarily related to the Company's workers compensation plans
and general liability insurance.
Borrowings under the term loan commitment bear interest rates equal to the rate
offered in the Eurodollar market for 30 day borrowings, plus an applicable
margin (which ranges from 3.5% to 4.0% and is determined by certain
financial covenants).
The credit facility contains restrictive covenants including, but not
limited to (a) the Company's required maintenance of a minimum amount of
tangible net worth; (b) the Company's required maintenance of certain levels
of funded debt coverage; (c) limitations regarding additional indebtedness;
(d) the Company's required maintenance of a minimum amount of fixed charges
coverage; (e) limitations regarding consolidated capital expenditures and
(f) limitations regarding liens on assets.
Essentially all assets of the Company are pledged as collateral on the new
credit facility. Additionally, the new credit facility is guaranteed by Port
Royal through a secured pledge of all of 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, the Company issued $100.0 million in unsecured 10.25% senior
notes ("the Notes") which mature on October 1, 2007. 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.
During fiscal 2002, the Company purchased and retired $39.0 million aggregate
par value of its Notes. The retirement of the Notes resulted in an
extraordinary gain of $3.0 million net of income taxes.
Long-term debt at December 29, 2002 and December 30, 2001, consisted of the
following:
December 29, December 30,
2002 2001
----------- -----------
(In thousands)
Revolving and term loan
credit facility $ 13,958 $ 18,000
10.25% senior notes 60,980 100,000
Other -- 1,942
-------- --------
74,938 119,942
Less--
Current maturities ( 1,250) (1,361)
-------- --------
$ 73,688 $118,581
======== ========
Scheduled maturities of long-term debt are as follows:
(In thousands):
2003 $ 1,250
2004 1,250
2005 1,250
2006 1,250
2007 69,938
-------
Total $74,938
=======
At December 29, 2002, 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 29, 2002 was $56,101,000. The fair value was estimated based upon
quoted market prices for the same or similar issues.
6. BENEFIT PLANS
The Company maintains 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 is 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 other postretirement benefits as of
December 29, 2002 and December 30, 2001 is as follows:
(Dollars in thousands)
Pension Benefits Postretirement Benefits
-----------------|-----------------------
Dec. 29, Dec. 30,| Dec. 29, Dec. 30,
2002 2001 | 2002 2001
------- --------| ------- -------
Change in benefit obligation -- |
Benefit obligation at beginning |
of period $31,274 $27,235 | $ 1,932 $ 1,684
Service costs 1,421 1,144 | 61 86
Interest cost 2,298 2,105 | 135 129
Plan participants' contributions 855 873 | 31 64
Actuarial loss (gain) 1,032 2,353 | 200 323
Benefits paid (2,199) (2,436)| (212) ( 354)
------- ------- | ------- -------
Benefit obligation at |
end of period 34,681 31,274 | 2,147 1,932
------- ------- | ------- -------
Change in plan assets -- |
Fair value of plan assets at |
beginning of period 37,034 39,085 | -- --
Actual return on plan assets (4,264) ( 488)| -- --
Employer contributions -- -- | 181 289
Plan participants' contributions 855 873 | 31 65
Benefits paid (2,199) (2,436)| (212) ( 354)
------- ------- | ------- -------
Fair value of plan assets at |
end of period 31,426 37,034 | -- --
------- ------- | ------- -------
|
Funded status (3,255) 5,760 | (2,147) (1,932)
|
Unrecognized prior service cost (1,877) (2,111)| -- --
Unrecognized net loss 13,327 5,105 | 1,067 867
------- ------- | ------- -------
Net amount recognized in the |
consolidated balance sheets |
$ 8,195 $ 8,754 | $(1,080) $(1,065)
======= ======= | ======= =======
|
Amount recognized in the consolidated balance sheet
(Accrued) prepaid expense $(2,327) $ 8,754 | $(1,080) $(1,065)
Accumulated other comprehensive |
loss 10,522 -- | -- --
------- ------- | ------- -------
Net amount recognized in the |
consolidated balance sheet $ 8,195 $ 8,754 | $(1,080) $(1,065)
======= ======= | ======= =======
Weighted-average assumptions as |
of the end of period -- |
|
Discount rate 6.75% 7.25% | 6.75% 7.25%
Expected return on plan assets 9.00% 9.00% | n/a n/a
Rate of compensation increase 3.00% 3.00% | n/a n/a
Effective for fiscal 2003, the Company has reduced its expected return on
plan assets to 8.50%.
For measurement purposes, a 10.0%-5.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed for fiscal year
2002 and trended over five years.
Components of net periodic benefit cost --
Pension Benefits Postretirement Benefits
-----------------|-----------------------
Dec. 29, Dec. 30,| Dec. 29, Dec. 30,
2002 2001 | 2002 2001
------- --------| ------- -------
Service cost $ 1,421 $ 1,144 | $ 61 $ 86
Interest cost 2,298 2,105 | 135 129
Expected return on plan assets (3,197) (3,410)| -- --
Net amortization and deferral 36 ( 234)| 68 40
------- ------- | ------- ------
$ 558 $( 395)| $ 264 $ 255
======= ======= | ======= ======
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 $ 178 $ 218
Accumulated postretirement benefit obligation 1,973 2,350
7. INCOME TAXES
The provision for (benefit from) income taxes included the following
components:
Fiscal Year Ended
-------------------------------
Dec. 29, Dec. 30, Dec. 31,
2002 2001 2000
------ ------ --------
(In thousands)
Current tax provision
(benefit):
Federal $(1,446) $( 613) $(2,460)
State ( 58) ( 98) ( 234)
------- ------- -------
(1,504) ( 711) (2,694)
Deferred income taxes 2,740 (1,459) 509
------- ------- -------
Provision for (benefit
from) income taxes $ 1,236 $(2,170) $(2,185)
======= ======= =======
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 29, 2002 and December 30, 2001, were as follows:
Dec. 29, Dec. 30,
2002 2001
----------- -----------
(In thousands)
Current deferred tax asset:
Insurance reserves $ 1,549 $ 1,578
Deferred franchise fees 398 389
Miscellaneous payables 365 254
Deferred rent expense 1,488 --
Other 815 656
------- -------
Current deferred tax asset $ 4,615 $ 2,877
======= =======
Noncurrent net deferred tax liability:
Noncurrent deferred tax asset:
Minimum pension liability $ 3,998 $ --
Net operating loss carryforwards 393 962
Tax credit carryforwards -- 2,504
Accrued postretirement benefit cost 411 405
Other 572 554
------- -------
Noncurrent deferred tax asset $ 5,374 $ 4,425
------- -------
Noncurrent deferred tax liability:
Property, buildings and equipment $(11,992) $(10,011)
Pension asset ( 3,114) ( 3,326)
Other 340 --
------- --------
Noncurrent deferred tax liability (14,766) (13,337)
------- --------
Noncurrent net deferred tax liability $( 9,392) $( 8,912)
======= =======
The Company has state net operating loss carryfowards amounting to $17.8
million at December 29, 2002 which expire in various years over the next
20 years.
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 Year Ended
---------------------------
Dec. 29, Dec. 30, Dec. 31,
2002 2001 2000
------- ------- -------
(In thousands)
Expected Federal tax
provision (benefit) $1,600 $(2,310) $(2,843)
Goodwill retired/amortized -- 629 634
State income taxes (net of
federal income tax effect) 183 ( 145) ( 226)
Other, net ( 547) ( 344) 250
----- ----- -----
Reported tax provision (benefit) $1,236 $(2,170) $(2,185)
===== ===== =====
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 29, 2002,
are summarized as follows:
Capital Operating
Leases Leases
------- ---------
Year (In thousands)
2003 $ 1,474 $ 7,909
2004 1,059 6,896
2005 889 6,224
2006 889 5,770
2007 719 5,020
Thereafter 4,106 45,233
------ -------
Total minimum lease payments 9,136 $77,052
=======
Less amount representing interest ( 2,710)
------
Total obligations under capital leases 6,426
Less current portion ( 1,042)
------
Long-term obligations under capital leases $ 5,384
======
Total capital leases consist of the following property, buildings and
equipment:
Fiscal Year Ended
-----------------------------
Dec. 29, 2002 Dec. 30, 2001
------------- -------------
(In thousands)
Buildings and improvements $ 6,699 $ 6,699
Equipment 3,234 7,830
------- -------
9,933 14,529
Accumulated amortization (4,517) (5,385)
------- ------
Total leased properties $ 5,416 $ 9,144
======= =======
Rental expense under operating leases was $8,664,000, $5,921,000, and
$5,423,000 for the years ended December 29, 2002, December 30, 2001, and
December 31, 2000, respectively.
Rental expense includes contingent rentals of $261,000, $253,000, and $278,000
for the years ended December 29, 2002, December 30, 2001 and
December 31, 2000, respectively.
On December 31, 2001, the Company entered into a real estate sale and
leaseback transaction in which it sold commercial real property and
improvements of 32 restaurant locations to an unaffiliated third party and
leased the properties back for a period of twenty years. Proceeds from this
transaction were approximately $23.3 million, net of expenses of $1 million.
The Company has the option to extend the leases past the original twenty years
for four additional periods of five years each. The leases are accounted for
as operating leases.
The gain that the Company realized on the above real estate transactions was
approximately $4.1 million and was deferred and classified in the accompanying
2002 balance sheet as a deferred gain, and is being amortized as a reduction
of rental expense over the life of the leases.
The future minimum payments under operating leases that resulted from this
transaction, which are included in the table above, are $2.7 million per year
for years 2003 through 2007 and $37.4 million thereafter.
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 29, 2002:
Operating
Leases
---------
Year (In thousands)
2003 $ 927
2004 629
2005 627
2006 593
2007 253
Thereafter 82
------
Total minimum lease
payments to be received $ 3,111
======
Rental income under operating leases was $1,082,000, $1,234,000, and
$1,266,000, for the years ended December 29, 2002, December 30, 2001
and December 31, 2000, respectively, and is included in other expenses in the
accompanying consolidated income statements.
9. COMMITMENTS AND CONTINGENCIES
As previously reported, in 2001 the Company settled a lawsuit that alleged
plaintiffs were denied access to the restrooms in one of the Company's
restaurants in violation of the Americans with Disabilities Act. Under the
terms of the settlement agreement the Company is required to renovate all
wheelchair inaccessible restrooms in Krystal owned restaurants over a ten year
period beginning in 2002.
The Company is a party to various 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. 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 and 2000. No options became vested
under the acceleration provisions in 2002 or 2001. No options were granted
or exercised in 2002, 2001 or 2000.
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:
2002 2001 2000
------ ------ ------
Net Income (loss)(in thousands):
As reported $ 9,206 $(3,601) $(5,311)
Stock compensation expense ( 100) ( 93) ( 133)
------- ------- -------
Pro forma $ 9,106 $(3,694) $(5,444)
======= ======= =======
A summary of the Company's stock option activity is as follows:
(shares in thousands)
2002 2001 2000
------------------ ---------------- ----------------
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 $4.50 700 $4.50
Granted - - - - - -
Exercised - - - - - -
----- ----- ----- ----- ----- -----
Outstanding at end of year 700 $4.50 700 $4.50 700 $4.50
===== ===== ===== ===== ===== =====
Exercisable at end of year 250 $4.50 230 $4.50 210 $4.50
Shares available for future grant 300 300 300
Of the 700,000 shares subject to options outstanding at December 29, 2002,
(i) options to purchase 100,000 shares have an exercise price of $4.50, with a
remaining contractual life of 5.6 years, of which 100,000 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 5.6
years, of which 150,000 are exercisable.
11. QUARTERLY INFORMATION (unaudited)
(In thousands of dollars)
Fiscal 2002
Cost of Income from
Revenues Restaurant Continuing Net
Sales Operations Income
-------- --------- ----------- -------
Quarter Ended:
March 31 $ 62,875 $ 49,655 $ 600 $ 3,526
June 30 64,999 50,441 1,581 1,839
September 29 63,495 50,305 203 621
December 29 62,843 48,681 953 3,220
-------- ------- ------- -------
$254,212 $199,082 $ 3,337 $ 9,206
======== ======= ======= =======
Fiscal 2001
Cost of Loss from
Revenues Restaurant Continuing Net
Sales Operations Loss
-------- --------- ----------- -------
Quarter Ended:
April 1 $ 61,007 $ 50,370 $(2,138) $(1,925)
July 1 64,967 53,335 ( 420) ( 175)
October 3 63,417 51,801 (1,442) (1,232)
December 30 64,506 49,882 ( 511) ( 269)
-------- -------- ------- -------
$253,897 $205,388 $(4,511) $(3,601)
======== ======== ======= =======
12. Segment Reporting
The Company has historically operated in three defined reportable segments:
restaurants, franchising, and fixed base airport hangar 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 agreements and collection of royalties from
franchisees of the Krystal brand. The FBO operation was sold in October 2002
and is reflected as assets held for sale in the accompanying 2001 balance sheet
and discontinued operations in the accompanying statement of operations. 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) 2002 2001 2000
Revenues:
Restaurants $246,245 $246,898 $253,967
Franchising 7,967 6,999 5,828
- -------------------------------------------------------------------------------------------
Total segment revenues $254,212 $253,897 $259,795
===========================================================================================
Depreciation and Amortization:
Restaurants $ 10,696 $ 13,847 $ 14,042
Franchising 3 4 4
- -------------------------------------------------------------------------------------------
Total segment depreciation and amortization $ 10,699 $ 13,851 $ 14,046
===========================================================================================
Earnings before Interest, Taxes, Depreciation,
and Amortization ("EBITDA"):
Restaurant $ 19,141 $ 15,409 $ 14,106
Franchising 5,512 4,474 4,165
- -------------------------------------------------------------------------------------------
Total segment EBITDA $ 24,653 $ 19,883 $ 18,271
===========================================================================================
Interest expense:
Restaurant $ 9,332 $ 12,946 $ 13,197
Franchising 0 0 0
- -------------------------------------------------------------------------------------------
Total segment interest expense $ 9,332 $ 12,946 $ 13,197
============================================================================================
Capital Expenditures:
Restaurants $ 9,740 $ 5,665 $ 22,463
Franchising 0 0 0
- -------------------------------------------------------------------------------------------
Total segment capital expenditures $ 9,740 $ 5,665 $ 22,463
===========================================================================================
Total Assets:
Restaurants $153,083 $187,324 $192,615
Franchising 2,043 1,718 1,599
- -------------------------------------------------------------------------------------------
Total segment assets $155,126 $189,042 $194,214
===========================================================================================
A reconciliation of segment depreciation and
amortization to consolidated depreciation and
amortization is as follows:
Segment depreciation and amortization $ 10,699 $ 13,851 $ 14,046
Unreported segments (1) 289 297 251
- -------------------------------------------------------------------------------------------
Total consolidated depreciation and amortization $ 10,988 $ 14,148 $ 14,297
===========================================================================================
A reconciliation of segment EBITDA to consolidated
EBITDA is as follows:
Segment EBITDA $ 24,653 $ 19,883 $ 18,271
Unreported segments (1) 187 607 529
- -------------------------------------------------------------------------------------------
Total consolidated EBITDA $ 24,840 $ 20,490 $ 18,800
===========================================================================================
A reconciliation of segment total assets to
consolidated total assets is as follows:
Total segment assets $155,126 $189,042 $194,214
Assets held for sale 0 5,093 5,236
Unreported segments (1) 3,182 3,855 3,751
- -------------------------------------------------------------------------------------------
Total consolidated assets $158,308 $197,990 $203,201
===========================================================================================
(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 2002.
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 49 Chairman, Chief Executive Officer
and Director
James F. Exum, Jr. 46 President, Chief Operating Officer
and Director
Andrew G. Cope 61 Director
S. K. Johnston III 49 Director
W. A. Bryan Patten 62 Director
Richard C. Patton 41 Director
Benjamin R. Probasco 43 Director
A. Alexander Taylor II 49 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.
S. K. Johnston III has been a director of the Company since April 2001 and
has been the Executive Vice President of Strategic Planning for Coca-Cola
Enterprises, Inc. since January 2000. Prior to that, Mr. Johnston has served
in a variety of executive management positions at Coca-Cola Enterprises, Inc.
since 1993. Mr. Johnston is a director of SunTrust Bank. Mr. Johnston is a
member of the Compensation Committee of the Board of Directors.
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.
Mr. Cope is a member of the Audit Committee of the Board of Directors.
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. Mr. Patten is a member of the Audit
Committee of the Board of Directors.
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). Mr. Patton is a member of the Audit
Committee of the Board of Directors.
Benjamin R. Probasco has been a Director of the Company since September
1997 and has been a principal with Kinsey Probasco & Associates since
June, 2001. Prior to joining Kinsey Probasco, Mr. Probasco was employed by
Gordon Biersch Brewery Restaurant Group, Inc. ("Biersch"), from April 1998 to
June 2001. 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. Mr. Probasco is a member of
the Compensation Committee of the Board of Directors.
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 LLP 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). Mr.
Taylor is a member of the Compensation Committee of the Board of Directors.
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
---- --- --------
Larry D. Bentley 46 Senior Vice President and Chief
Financial Officer
Michael C. Bass 56 Senior Vice President, Administration
Gordon L. Davenport, Jr. 43 Vice President, Marketing - Development
Roger A. Rendin 54 Vice President, Human Resources
Glen R. Griffiths 57 Vice President, Franchise Development
James L. Richards 43 Vice President, Franchise Services
Larry D. Bentley was elected Senior Vice President and Chief Financial
Officer on December 19, 2002. Prior to that, Mr. Bentley served as Vice
President and Chief Financial Officer of the Company since 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 elected Senior Vice President - Administration on
December 19, 2002. Prior to that, Mr. Bass served as Vice President -
Administration since 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.
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.
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.
Glen R. Griffiths was appointed Vice President, Franchising in June 2001.
From 1998 to 2001, Mr. Griffiths served as Director of Business Development for
AFC Enterprises, Inc. From 1997 to 1998, he served as a Regional Director for
Shoney's, Inc. From 1995 to 1997, he served as a Regional Director for a
BOSTON MARKET Area Director.
James L. Richards was appointed Vice President, Franchise Services in
April 2002. From December 1999 to April 2002, he served as Director of
Franchise Services. From February 1998 to December 1999, he served as Regional
Director of Operations of the North Region for the Company. From October 1988
to January 1998, he was the Owner/Vice President of Sequoyah Communications
Inc., a radio station in Knoxville, Tennessee. From November 1983 to September
1988, he was employed by Winner's Corp. "Mrs. Winner Chicken and Biscuits" as
District Manager.
Item 11. Executive Compensation
The following table summarizes the total compensation for the last three
fiscal years of the following six 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)(2) Awarded
Philip H. Sanford 2002 $387,500 $232,500 $ -- 0
Chairman of the Board of 2001 387,500 -- -- 0
Directors and Chief 2000 387,500 -- -- 0
Executive Officer
James F. Exum, Jr. 2002 337,500 202,500 -- 0
President and Chief 2001 337,500 -- -- 0
Operating Officer 2000 337,500 -- -- 0
And Director
Larry D. Bentley 2002 198,000 105,140 85,140 0
Senior Vice President, 2001 187,500 -- -- 0
Chief Financial Officer 2000 176,835 -- -- 0
Gordon L. Davenport, Jr. 2002 203,830 87,647 87,647 0
Vice President Marketing 2001 197,890 -- -- 0
and Development 2000 191,163 -- -- 0
Michael C. Bass 2002 164,012 70,308 70,308 0
Senior Vice President 2001 152,414 -- -- 0
Administration 2000 146,216 -- -- 0
Roger A. Rendin 2002 197,970 79,967 79,967 0
Vice President 2001 193,900 -- -- 0
Human Resources
(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) Amounts reflected in Other Annual Compensation reflect earned, but
unvested, bonuses under the Company's Long-term Incentive Plan. Such
amounts are only payable in the event the employee is still employed
with the Company at the end of fiscal 2005.
There are no employment agreements with any of these individuals. The
Company has adopted performance-based incentive compensation plans for the
management of the Company, including short and long term cash bonus plans 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 29, 2002,
as well as the number and total value of unexercised in-the-money options at
December 29, 2002, 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 29, 2002
Name Number of Value Number of Value of
Shares Realized Unexercised Unexercised
Acquired Options at Options
on Exercise Dec. 29, 2002 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 -- -- --/-- -/-
Glen R. Griffiths -- -- --/-- -/-
James L. Richards -- -- --/-- -/-
(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
S. K. Johnston III(14) 1,233,334(15) 12.3
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
Glen R. Griffiths 0 0
James L. Richards 0 0
5% Shareholders
Katherine J. Johnston Trust(10) 1,233,333 12.3
Ingram Investments, Inc.(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
(14 persons) 7,536,666 75.4
(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 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, 2003 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 Ingram Investments, Inc., 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.
(14) The address for this beneficial owner is 2791 Twin Oaks Way, Wellington,
Florida, 33414.
(15) Includes shares held by his wife, and a trust for the benefit of his
daughter, the Louisa L. Johnston Trust. Mr. Johnston disclaims
beneficial ownership of all but 468,667 of these shares.
Item 13. Certain Relationships and Related Transactions
None
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14 under
the Securities and Exchange Act of 1934). Based upon that evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART IV
Item 15. Exhibits , Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements are included in Part II, Item 8 of this report
on form 10-K.
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 filed a Form 8-K in the second quarter of fiscal 2002
stating a change in the registrant's certifying accountant. The
registrant filed a Form 8-K during the fourth quarter of fiscal
2002 to report the completed sale of substantially all of the assets
of its fixed based hangar operation located in Chattanooga, Tennessee.
CERTIFICATION
-------------
The undersigned principal executive officer and principal financial officer of
the Company certify that (1) the undersigned has reviewed this report on form
10-K, (2) based on the undersigned's knowledge, this report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which the statements were made, not misleading and (3) based on the
undersigned's knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition and results of operations of the Company as of, and
for, the periods presented in this report.
Dated: March 27, 2003
- --------------------- /s/Philip H. Sanford
--------------------
Philip H. Sanford, Chairman and
Chief Executive Officer
/s/Larry D. Bentley
-------------------
Larry D. Bentley, Senior Vice President
and Chief Financial Officer
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 27, 2003 By: /s/ Larry D. Bentley
------------------------------
Larry D. Bentley, Senior 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 27, 2003
/s/ James F. Exum, Jr.
- ----------------------
James F. Exum, Jr. President, Chief Operating
Officer and Director March 27, 2003
/s/ Andrew G. Cope
- ----------------------
Andrew G. Cope Director March 27, 2003
/s/ S. K. Johnston III
- ----------------------
S. K. Johnston III Director March 27, 2003
/s/ W. A. Bryan Patten
- ----------------------
W. A. Bryan Patten Director March 27, 2003
/s/ Richard C. Patton
- ----------------------
Richard C. Patton Director March 27, 2003
/s/ Benjamin R. Probasco
- ----------------------
Benjamin R. Probasco Director March 27, 2003
/s/ Alexander Taylor II
- -----------------------
A. Alexander Taylor II Director March 27, 2003
CERTIFICATIONS
--------------
I, Philip H. Sanford, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of The Krystal
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/Philip H. Sanford
---------------------------
Philip H. Sanford, Chairman
and Chief Executive Officer
I, Larry D. Bentley, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of The Krystal
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/Larry D. Bentley
-----------------------
Larry D. Bentley, Senior Vice
President and Chief Financial
Officer
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 Port Royal, Inc. Stock Incentive Plan for The Krystal
Company, adopted July 30, 1998. (3)
10.2 Sale-leaseback Agreement by and between Crystac Property I LLC
and The Krystal Company dated as of December 31, 2001. (4)
10.3 Master lease dated as of December 31, 2001 by and between
Crystac Property I LLC and The Krystal Company. (4)
10.4 Sale-leaseback Agreement by and between Crystac Property II LLC
and The Krystal Company dated as of December 31, 2001. (4)
10.5 Master lease dated as of December 31, 2001 by and between
Crystac Property II LLC and The Krystal Company. (4)
10.6 Credit Agreement dated as of January 28, 2002 among The Krystal
Company, Krystal Aviation Co., Krystal Aviation Management Co.
and Port Royal Holdings, Inc. and Bank of America, N.A. as
administrative agent, and ORIX Financial Services, Inc. as
documentation agent and the lenders listed therein. (4)
10.7 Purchase Agreement entered into as of 17th day of
October, 2002 by and between Krystal Aviation Co., a Tennessee
corporation with offices at One Union Square, Chattanooga,
Tennessee 37402 and Truman Arnold Companies, a Texas
corporation with offices at 2900 St. Michael Drive, Fifth
Floor, Texarkana, Texas 75503 for Truman Arnold Companies to
purchase substantially all the asset of Krystal Aviation.
21.1 Subsidiaries of the Company. (2)
27.1 Schedule II - Valuation and qualifying accounts
(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.
(4)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 December 30, 2001.
Exhibit 10.7 -
PURCHASE AGREEMENT
FOR PURCHASE AND SALE
OF
THE CHATTANOOGA, TENNESSEE FBO FACILITIES OF
KRYSTAL AVIATION CO.
BETWEEN
KRYSTAL AVIATION CO.
"Seller"
AND
TRUMAN ARNOLD COMPANIES
"Buyer"
October 17, 2002
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is entered into as of 17th day of
October, 2002 by and between KRYSTAL AVIATION CO., a Tennessee corporation
with offices at One Union Square, Chattanooga, Tennessee 37402 ("Seller") and
TRUMAN ARNOLD COMPANIES, a Texas corporation with offices at 2900 St. Michael
Drive, Fifth Floor, Texarkana, Texas 75503 ("Buyer"). The Krystal Company, the
sole shareholder of the Seller, joins in this agreement for the limited
purposes described in Sections 3.3(d) and 15.3.
WITNESSETH:
WHEREAS, Seller currently operates fixed base operations at Lovell Field in
Chattanooga, Tennessee; and
WHEREAS, Buyer desires to purchase and acquire from Seller and Seller
desires to sell, transfer, assign and convey to Buyer, certain assets utilized
by Seller to conduct business at its fixed base operation under the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of these premises, the mutual promises,
representations and covenants set forth herein, and for other good and
valuable consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
Particular Terms and Definitions
As used in this Agreement, the following terms shall have the respective
meanings indicated opposite each of them. Certain other capitalized terms are
defined where they appear in this Agreement.
1.1. "Affiliate" means any person or entity of any nature whatsoever
directly or indirectly controlling or controlled by or under direct or
indirect common control with, the person specified.
1.2. "Agreement" means this Purchase Agreement between Seller and Buyer.
1.3. "Airport" means Lovell Field in Chattanooga, Tennessee.
1.4. "Assumed Obligations" shall have the meaning ascribed to such term
in Section 5.3 hereof.
1.5. "Authority" means the Chattanooga Metropolitan Airport Authority.
1.6. "Claim" shall have the meaning ascribed to such term in Section 15.5
hereof.
1.7. "Closing" shall have the meaning ascribed to such term in Section
2.3 hereof.
1.8. "Closing Date" means the date on which the Closing occurs.
1.9. "Code" means the Internal Revenue Code of 1986, as amended.
1.10. "Contracts" shall have the meaning ascribed to such term in
Section 5.1(a) hereof.
1.11. "Damages" shall have the meaning ascribed to such term in
Section 15.1 hereof.
1.12. "Environmental Claim" means any allegation, notice of violation,
claim, demand, or order or direction by any governmental authority, agency,
court, or any Person for personal injury or death, property damage, damage
to the environment, pollution, contamination or other adverse effects on the
environment, or for fines, penalties or restrictions, resulting from or based
upon (i) the existence or release, or continuation of any release (including,
without limitation, accidental or non-accidental leaks or spills), of, or
exposure to, any Hazardous Substances, chemical, material, pollutant,
contaminant, or other release or emission in, into or onto the environment
(including, without limitation, the air, ground, water or any surface) at,
in, by, from, or related to the FBO, (ii) the environmental aspects of the
use, generation, transportation, storage, treatment, recycling, or disposal of
materials in connection with, or originating from, the operation of the FBO,
or (iii) the violation, or alleged violation, of any statute, ordinance,
order, rule, regulation, permit or license of or from any governmental
authority, agency or court relating to environmental matters connected with
the FBO.
1.13. "Lovell Field" means Lovell Airfield in Chattanooga, Tennessee
operated by the Authority.
1.14. "Excluded Assets" shall have the meaning ascribed to such term
in Section 2.2 hereof.
1.15. "FBO" means the fixed base operations of Seller at Lovell Field,
which fixed base operations are the subject of this Agreement.
1.16. "FBO Leases" mean the three leases entered into between Authority
and Seller or its predecessors dated October 10, 1991, October 21, 1991 and
January 1, 1993 with all amendments which are in effect as of the date of this
Agreement.
1.17. "FBO Subleases" mean the subleases of portions of the Leasehold
Estate subleased by Seller or its predecessors to Star Avionics, Inc. dated
October 15, 1996, to Provident Companies, Inc., dated April 10, 1997, to U.S.
Xpress Enterprises, Inc., dated July 17, 2000, to The Dixie Group, Inc., dated
October 15, 1999, and to Olan Mills, Inc. dated October 1, 1982, and the First
Amendment thereto dated October 1, 1991, as assigned by Olan Mills, Inc. to
Astec Industries, Inc. by an Assignment and Assumption Agreement dated
September 18, 2001, and any standard hangar lease arrangements and to The
Lupton Co., LLC dated September 26, 1986 (John T. Lupton, the original tenant)
together with an Assignment and Assumption Agreement dated January 11, 1996
and Lease Modification Agreement dated March 12, 2002.
1.18. "Fuel, Oil and De-Icing Fluid Inventory" means all fuel, oil and
de-icing fluid on hand at the FBO as of the Closing Date.
1.19. "Hazardous Substance" means those substances which are regulated by
or form the basis of liability under any federal, state or local environmental,
health, or safety statute, ordinance, order, rule, regulation, permit or
license, including, without limitation, solvents, petroleum products,
polychlorinated biphenyls, and radioactive substances, or any other substance
which constitutes a known health, safety, or environmental hazard to the
person or property.
1.20. "Intangible Personal Property" shall have the meaning ascribed to
such term in Section 2.1 hereof.
1.21. "Leasehold Estate" means the property subject to the FBO Leases.
1.22. "Marks" shall have the meaning ascribed to such term in Section 2.2
(f) hereof.
1.23. "Permitted Encumbrances" shall have the meaning ascribed to such
term in Section 6.1(r) hereof.
1.24. "Person" means any state agency, any municipality, governmental
subdivision of the state or the United States, public or private corporation,
individual, partnership, association, limited liability company, or other
entity.
1.25. "Personal Property" shall have the meaning ascribed to such term in
Section 2.1(c) hereof.
1.26. "Purchased Assets" shall have the meaning ascribed to such term in
Section 2.1 hereof.
1.27. "Purchase Price" shall have the meaning ascribed to such term in
Section 3.1 hereof.
1.28. "Receivables" means all service, repair and guest ledger
receivables, credit card charge invoices, and other accounts and notes
receivable related to the FBO existing on the Closing Date.
1.29. "Seller's Knowledge," "Seller has no Knowledge" or words of
similar import means the actual knowledge of Larry Bentley, Terry McDowell,
and Bob Kincaid.
ARTICLE II
Sale of Chattanooga FBO
2.1. Agreement to Sell and Purchase Assets. On the terms and conditions
set forth in this Agreement, and subject to the provisions of Section 2.2
hereof, Seller agrees to sell, transfer, assign and convey to Buyer, and Buyer
agrees to purchase, acquire and accept from Seller all of Seller's rights,
title and interest in and to the following (collectively, the "Purchased
Assets"):
(a) The FBO Leases;
(b) Seller's personal property and fixtures located on the Leasehold
Estate including, without limitations, all leasehold and other improvements
relating to the Leasehold Estate;
(c) Substantially all operating assets of Seller at the FBO, as shown on
the asset schedule attached as Schedule 2.1(c), (the "Asset Schedule"),
including, but not limited to, all shop and maintenance equipment, vehicles
(provided, that Fuel, Oil and De-Icing Fluid Inventory, are to be priced and
paid for separately as hereinafter provided in Sections 3.2(a) and all other
tangible personal property owned by Seller as of the Closing Date and used in
the ownership, operation and maintenance of the FBO (collectively, the
"Personal Property");
(d) All intangible personal property owned by Seller and used in the
ownership, operation and maintenance of the FBO (the "Intangible Personal
Property"), including, without limitation, all assignable executory Contracts
relating to the FBO, including the FBO Subleases, except as provided in
Section 2.2 of this Agreement;
(e) All assignable permits and licenses, in the name of Seller, used or
required in connection with the operation, occupancy or carrying on of the
business of the FBO listed on Schedule 2.1(e) hereto;
(f) All lists of Seller's current customers at the FBO (including name,
address, telephone number and name and title of contact person, to whom
Seller provides services and/or sells goods); and
(g) All telephone numbers used by Seller exclusively in connection with
the FBO.
2.2. Excluded Assets. Anything in Section 2.1 of this Agreement to the
contrary notwithstanding, the Purchased Assets do not include and Seller
reserves and retains all rights, title and interest in and to:
(a) Aircraft;
(b) Cash;
(c) The Receivables;
(d) All of Seller's corporate, accounting and tax books and records
other than those relating to the business operations of the FBO;
(e) Any and all choses in action, claims and litigation arising prior to
the Closing;
(f) Any and all trade marks owned by Seller or The Krystal Company
related to the name or mark "Krystal Aviation Co.," "Krystal" or other name
the FBO is currently using; and
(g) The assets described in Schedule 2.2(g).
2.3. Closing. The closing of the purchase and sale contemplated herein
at which all of the Purchased Assets Seller shall transfer, assign, convey and
deliver to Buyer, and at which Buyer shall deliver the Purchase Price to
Seller and assume the Assumed Obligations (the "Closing"), shall be held at
the offices of Miller & Martin LLP, 1000 Volunteer Bldg., 832 Georgia Ave.,
Chattanooga, Tennessee, 37402, local time, on or before October 17, 2002, or
at such other earlier or later time or other place as the parties may mutually
agree (the actual date of the closing being herein referred to as the "Closing
Date").
ARTICLE III
Purchase Price
3.1. Purchase Price. For and in consideration of the transfer and
assignment of the Purchased Assets and the Covenants Not To Compete set forth
in Section 3.4 hereof, Buyer shall pay to Seller the sum of Ten Million Seven
Hundred Fifty Thousand Dollars ($10,750,000), plus an additional amount equal
to the value of the Fuel, Oil and De-Icing Fluid Inventories, (collectively,
the "Purchase Price"). The price for Fuel, Oil and De-Icing Fluid Inventory
shall be determined in accordance with Sections 3.2(a) hereof. The Purchase
Price shall be allocated among the Purchased Assets as shown on Schedule 3.1
hereto.
3.2 Additional Purchase Price.
(a) Fuel, Oil and De-Icing Fluid Inventory. Prior to the Closing Date,
Buyer and Seller will mutually conduct a physical inventory of all fuel, oil
and de-icing fluid on hand at the FBO as of the Closing Date. Buyer shall pay
Seller at the Closing an amount equal to Seller's actual, out-of-pocket cost,
as evidenced by invoices paid by Seller, of Fuel, Oil and De-Icing Fluid
Inventory. Any and all fuel flowage fees and taxes paid, or due to be paid,
with respect to Fuel, Oil and De-Icing Fluid Inventory shall be prorated as of
the Closing Date. Seller shall be responsible for payment of all flowage
fees and taxes applicable to the Fuel, Oil and De-Icing Fluid Inventory
conveyed to Buyer at Closing to the extent of Buyer's payment thereof to
Seller.
(b) Receivables. Receivables relating to products or services sold or
performed prior to the Closing shall be retained by Seller, whether or not the
party purchasing such product or service shall have actually signed the
appropriate charge slip or invoice relating to such purchase at the Closing
Date.
(c) Implementation of Prorations and Other Payments. Not less than five
(5) business days prior to the Closing Date, Seller and Buyer shall undertake
in good faith to mutually agree upon a closing statement setting forth the
determination of the items to be prorated and accounted for hereunder, and the
net amount due to Buyer shall be paid at the Closing.
(d) Contracts. Contracts (as hereinafter defined) having payments due
less frequently than monthly shall be prorated as of the Closing Date.
3.3. Payment of Purchase Price. The Purchase Price and prorated items
shall be paid in cash or by wire transfer at the Closing as follows:
(a) Escrow. The parties hereto and Century Bank, N.A., Texarkana, Texas
(the "Escrow Agent") have previously entered into an Escrow Agreement (the
"Escrow Agreement"), pursuant to which Buyer tendered and the Escrow Agent is
now holding the sum of One Hundred Thousand Dollars ($100,000) (the "Escrow
Fund"), pending the consummation of the transactions contemplated herein and
therein. The Escrow Fund shall be paid only as provided in Section 5 of the
Escrow Agreement.
(b) Cash Purchase Price. At the Closing, the Escrow Agent shall disburse
the Escrow Fund, plus any income, interest or other amounts received thereon
(the "Total Escrow Fund") to Seller, to be credited by it against payment of
the Purchase Price, and Buyer shall pay to Seller the remainder of the
Purchase Price.
(c) Other Amounts. Any other amounts due to Seller in accordance with
the terms of Article IV hereof shall be paid at the Closing.
(d) Covenants Not To Compete.
(i) Term and Area. In consideration of allocating the sum of One Hundred
Thousand Dollars ($100,000) out of the Purchase Price to the Covenants Not To
Compete contained in this Section 3.4, The Krystal Company, the sole
shareholder of Seller ("Covenanting Shareholder)," and Seller will execute at
Closing agreements ("Covenants Not To Compete") covenanting and agreeing that
for a period of five (5) years from the Closing Date, they will not, directly
or indirectly, within and upon the area known as Lovell Field, engage in, or
own (excluding passive investment interests of less than five percent (5%) of
the voting stock of publicly-traded securities registered under Section 12 of
the Securities Exchange Act of 1934, as amended), manage, operate, control or
participate in the ownership, management, operation or control of or otherwise
be connected in any manner with any business which engages in any activity
that is directly or indirectly competitive with the FBO.
(ii) Invalidity in Whole or Part. The Covenants Not To Compete will
provide that if, in any judicial proceeding, the duration or scope of any
covenant or agreement of Seller or the Covenanting Shareholder contained
therein shall be adjudicated to be invalid or unenforceable, the parties
agree that the Covenants Not To Compete shall be deemed amended to reduce such
duration or scope to the extent necessary to permit enforcement of such
covenant or agreement, such amendment to apply only with respect to the
operation of such covenant or agreement in the particular jurisdiction in
which such adjudication is made. Upon any such adjudication of invalidity or
unenforceability, Buyer shall be entitled to a refund of all of the
consideration paid by Buyer for the Covenants Not To Compete.
(iii) Covenants Specifically Enforceable. The Covenants Not To
Compete will also provide that the parties thereto acknowledge and agree that
money damages would not constitute an adequate remedy in the event of a
breach of the Covenants Not To Compete and that, in addition to any other
remedies which may be available to Buyer, the obligations of Seller or the
Covenanting Shareholder under the Covenants Not To Compete shall be
specifically enforceable. Notwithstanding the foregoing, no remedy conferred
under the Covenants Not To Compete, or otherwise available at law or in
equity, is intended to be exclusive of any other such available remedies, but
each and every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or existing at law, in equity or by statute.
(iv) Summary Provisions. The foregoing subparagraphs relating to the
Covenants Not To Compete are summary in nature and reference is made to the
Covenants Not To Compete themselves for the entire agreements among the
parties relating thereto.
ARTICLE IV
Other Payments
4.1. Prorations and Other Payments. Operation of the FBO until 12:01 a.m.
on the Closing Date shall be for the account of Seller, and thereafter for the
account of Buyer. Those items of revenue and expense of the FBO and other
items hereinafter described shall be prorated and adjusted between Seller and
Buyer as of the Closing Date as follows:
(a) General Adjustment. Real estate taxes, possessory interest taxes and
personal property taxes for the current year, lease payments and rents, and
any other receipts and expenses attributable to any lease by Seller, as lessor
or lessee of the Leasehold Estate, and other operating income and expenses
relating to the Leasehold Estate for the month in which the Closing occurs,
shall be prorated as of the Closing Date between Buyer and Seller pursuant to
the standards applicable in Hamilton County, Tennessee. All business,
license, occupation, sales, use, withholding or similar taxes, or any other
taxes of any kind (other than real estate and personal property taxes which
shall be prorated as herein provided) relating to the FBO or the Purchased
Assets and attributable to the period prior to the Closing Date shall be paid
by Seller, and all such taxes attributable to the period on and after the
Closing Date shall be paid by Buyer.
(b) Utilities. Buyer shall make appropriate arrangements for transfer of
all necessary utility and other services in its own name to be effective as of
the Closing Date. In lieu of prorating power, gas and water bills, the
appropriate utilities will be requested by Seller to take meter readings as
close to the Closing Date as possible and to bill Seller for service prior to
such readings and to bill Buyer for service thereafter. The readings may
occur before or after the Closing Date. With respect to telephone services,
upon receiving a copy of the billing for telephone service following the
Closing, Seller will either pay directly or reimburse Buyer within ten (10)
business days after receipt thereof for those charges attributable to calls
made prior to the Closing Date. General monthly charges reflected by such
billing for telephone service to the FBO will be prorated on the basis of the
number of days Seller owned the FBO during the period covered by the billing.
4.2. Costs. Costs and expenses relating to the transactions contemplated
by this Agreement shall be borne and paid as follows:
(a) Transfer Fees. Transfer fees (if any) related to the transactions
contemplated herein shall be borne and paid by the parties as follows:
Seller:
(i) for the sale, assignment and conveyance of the Purchased Assets;
(ii) for all excise taxes; and
(iii) for assignment of the FBO Lease and the FBO Subleases, or other
specified leases.
Buyer: motor vehicle transfer taxes and vehicle registration fees relating
to the purchase and sale of the Purchased Assets.
Any documentary stamp or transfer taxes relating to the purchase and sale
of the Purchased Assets shall be borne and paid by the parties in equal
proportion.
(b) Parties to Bear Their Own Expenses. Except as otherwise specifically
provided in this Agreement, Seller and Buyer shall bear their own costs and
expenses arising out of, and otherwise related to, the negotiation, execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated, including, without limitation, legal and
accounting fees and expenses.
ARTICLE V
Contracts, FBO Leases and Assumption of Obligations
5.1. Contracts
(a) Contracts Defined. For purposes of this Agreement, the term
"Contracts" shall mean and include: (i) all contracts, existing on the date
hereof, referenced on Schedule 5.1 hereto, including the FBO Leases and the
FBO Subleases, fuel supply trucks and other vehicle leases, radio station
licenses, if any, and such other licenses and permits as are necessary to
continue the business of the FBO; (ii) all other contracts and agreements
incurred in connection with the FBO and which are entered into in the ordinary
course of Seller's operations at the FBO, after the date hereof and prior to
the Closing, provided that Seller shall secure Buyer's approval of any such
contract or agreement which calls for the owner of the FBO to provide services
or sell parts or equipment, which services, parts or equipment have a value in
excess of Ten Thousand Dollars ($10,000); (iii) all purchase orders for
non-capital expenditures outstanding on the Closing Date incurred in the
ordinary course of operating the FBO; (iv) all oral contracts or agreements in
the nature of those described in Sections 5.1(a)(i) or (ii) above that are
currently existing and are listed on Schedule 5.1, or (v) all oral contracts
or agreements that (A) are entered into after the date hereof and prior to
Closing in the ordinary course of business, (B) contain terms and conditions
which are not materially less favorable than those which would have been
available for such product or services as of the date of execution of such
oral agreements, (C) are not between Seller and any Affiliate of Seller,
and (D) which have been approved by Buyer if such approval is required by
(ii) above; and (vi) any other contracts and agreements entered into by Seller
with the consent of Buyer after the date hereof in connection with the FBO.
Seller shall provide an updated Schedule 5.1 at the Closing to include
Contracts entered into after the date hereof.
(b) Assignment and Assumption. At the Closing, Seller shall assign and
transfer to Buyer all of Seller's rights, title and interest in and to the
Contracts.
5.2 FBO Lease. Seller and Buyer agree to use commercially reasonable
efforts to obtain the authorization of the Authority on or prior to Closing,
to extend the FBO Leases for an additional term of ten (10) years.
5.3. Assumption of Obligations by Buyer. At the Closing, Seller shall
assign to Buyer, and Buyer shall assume, pay, perform and discharge, the
following obligations of Seller, except for such obligations, including
without limitation obligations to pay money, which, pursuant to the terms of
the Contracts, were to be performed by Seller prior to Closing (collectively,
the "Assumed Obligations"):
(a) The FBO Leases and all lessee obligations and liabilities thereunder
and the FBO Subleases and all lessor obligations and liabilities thereunder
(but excluding any and all environmental and other obligations or liabilities
as of the Closing Date, either as set forth or in any way related to the FBO
Leases or FBO Subleases or otherwise, including, but not limited to, any
environmental obligations or liabilities which are related to the current fuel
storage facilities located on the premises of the FBO), but only to the extent
that such obligations and liabilities occur subsequent to the Closing and
(b) All of the other Contracts and Seller's obligations and liabilities
thereunder, but only to the extent that such obligations and liabilities arise
subsequent to the Closing.
(c) All debts, obligations, or liabilities arising out of or resulting
from the operation of the FBO by Buyer on or after the Closing Date.
5.4. No Other Liabilities or Obligations Assumed. Notwithstanding
anything to the contrary provided in this Agreement, Buyer shall not assume
nor be obligated to pay, perform or discharge, any debt, obligation,
Environmental Claim, expense or liability of Seller, whether absolute or
contingent, arising out of, resulting from, or in any manner connected with
operation of the FBO prior to the Closing Date.
5.5. Employees. A list of employees employed by Seller at the FBO
(collectively, the "Employees," and, individually, an "Employee") is attached
hereto as Schedule 6.1(e)(i). Buyer may interview each such Employee for the
purpose of determining whether Buyer desires to offer employment to such
Employee as of the Closing. In the event that Buyer hires any such Employee,
Seller will terminate such Employee(s) and will pay such Employee(s) all
wages, salaries, commissions, bonuses, accrued vacation pay, and any other
benefit or claim, which is due or owing to Employee up to but not including
the Closing Date. Buyer shall have no responsibility for any of such
Employees to which it does not extend an offer of employment, nor for any
payment to any Employees employed by Buyer relating to or arising out of
(i) any such Employee's prior service with Seller, or (ii) the separation from
Seller of any such Employee, and Seller shall indemnify, defend and hold Buyer
harmless from any claims asserted under any plant closing or similar state or
federal laws, or by any of Seller's Employees arising out of such Employee's
employment by Seller. Buyer shall give Seller reasonable notice of the date,
time and place where it proposes to interview any Employees.
Notwithstanding the foregoing, to the extent Buyer elects not to offer
employment to any Employees, Buyer shall reimburse Seller for one-half of the
severance costs for such Employees within five days following delivery by
Seller of a calculation of the amount of such severance expense.
ARTICLE VI
Representations and Warranties
6.1. Representations and Warranties of Seller. Seller represents and
warrants to Buyer, that:
(a) Due Organization. Seller is a corporation duly formed, validly
existing and in good standing under the laws of the state of Tennessee, is
qualified to do business in such other states where the nature of its business
requires it to be so qualified, and has all requisite corporate power and
authority to enter into, perform and carry out all of its duties and
obligations in the transactions contemplated by this Agreement.
(b) Due Authorization; Binding Effect. The execution, delivery and
performance of this Agreement and the consummation of the transactions on the
part of Seller contemplated hereunder have been duly authorized by all
necessary corporate action on the part of Seller. This Agreement and the
other documents to be executed and delivered by Seller pursuant to this
Agreement constitute the legal, valid and binding obligations of Seller,
enforceable in accordance with their respective terms.
(c) Financial Statements. Attached hereto as Exhibit 1 are true and
complete copies of the unaudited financial statements of Seller for the
fiscal years ended January 2, 2000, December 31, 2000 and December 30, 2001,
which are the financial statements for Seller that are included in the audited
consolidated financial statements for The Krystal Company for those same
periods and the unaudited interim financial statements of Seller for the
period from December 31, 2001 through September 29, 2002. Except as disclosed
on Schedule 6.1(c), such financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in all material
respects, have been applied on a consistent basis, and present fairly the
financial position and results of operations for the periods covered.
(d) Liabilities and Obligations. Since December 30, 2001, Seller has not
incurred any liabilities or obligations (whether direct or indirect, known or
unknown, absolute, accrued, matured or unmatured, contingent or otherwise) of
any nature, which would cause Seller, either before or after the consummation
of the transaction contemplated by this Agreement, to be insolvent as that sum
is defined by the Bankruptcy Code of the United States or any fraudulent
conveyance law of the State of Tennessee.
(e) Employees.
(i) Except as disclosed on Schedule 6.1(e)(i), all Employees are
employees-at-will and are employed for an indefinite term. Except as
disclosed on Schedule 6.1(e)(i), there are no employment contracts for the
benefit of any Employee or other person relating to operation of the FBO.
Schedule 6.1(e)(i) is a list of all Employees and, for each such Employee,
his or her current title, position, salary or wage, and dates of hire,
whether employee is on leave under the Family Medical Leave Act or similar
state law and sex. Except as disclosed on Schedule 6.1(e)(i), Seller has no
written or enforceable oral employment contracts with any Employees, and there
are no individual or collective bargaining agreements or other labor, union or
similar agreements or arrangements currently in effect covering or affecting
any Employees or for which Seller has any ongoing liability or obligation
whatsoever.
(ii) Except as disclosed by Seller on Schedule 6.1(e)(ii):
(A) Since January 1, 1999, there has not been, nor is there
pending, threatened or anticipated, any strike, material dispute, slowdown,
picketing or work stoppage by any union or other group of employees against
Seller or any of their premises or products, or similar labor trouble;
(B) No certification or decertification question or
organizational drive exists or has existed since January 1, 1999, respecting
any employees of Seller;
(C) No grievance proceeding or arbitration proceeding arising
out of or under any collective bargaining agreement is pending or threatened
against Seller, and, no basis for any claim therefor exists; and
(D) No agreement (including, but not limited to any collective
bargaining agreement), arbitration or court decision or governmental order
which is binding on Seller in any way limits or restricts its operations or
the transactions contemplated herein.
(f) Tax Returns and Taxes. All tax returns, information returns and
reports of Seller required by federal law or the laws of any state or local
jurisdiction or authority or under the laws of any foreign country have been
duly filed and all taxes (whether or not shown on the return) and assessments
(other than those taxes and assessments presently payable without interest or
penalty which are reflected on the balance sheet as an accrued liability)
upon, or measured by, any of the properties, franchises, income or receipts of
Seller have been paid by, or for the benefit of, Seller or will be paid by, or
for the benefit of, Seller for all periods prior to the Closing Date. All
property tax returns pertaining to Purchased Assets covering the period prior
to the Closing Date due to be filed by Seller prior to the Closing Date have
been filed by Seller, or will be filed by Seller, prior to the Closing Date,
and all such property taxes and assessments for the period prior to the
Closing Date have been or will be paid or accrued by Seller prior to the
Closing Date.
..
(g) Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Seller does not maintain, nor has it maintained, any "Employee Welfare Benefit
Plan," as such term is defined in Section 3(1) of ERISA, or any "Employee
Pension Benefit Plan", as such term is defined in Section 3(2) of ERISA, or is
or has been a contributing employer to any multi-employer plans, as defined in
Section 3(37) or Section 4001(a)(3) of ERISA, other than those plans
identified on Schedule 6.1(g) (complete and correct copies of which have been
furnished by Seller to Buyer) and medical and dental benefit plans identified
on Schedule 6.1(g) (complete and correct copies of which have been furnished
by Seller to Buyer). Seller has done nothing, nor failed to do anything,
which would cause Buyer to be liable to Seller's employees, former employees,
retirees, their beneficiaries or any other person, government or government
agency, because of or arising out of any such plans or any other employee
beneficiary of plans of Seller whatsoever.
(h) Absence of Certain Changes. Except as set forth on Schedule 6.1(h),
since September 29, 2002 Seller and the FBO have not, except in each case as
approved in writing by Buyer:
(i) suffered any material adverse change in their assets, properties,
operating or net income, liabilities, financial or other condition, business
or prospects;
(ii) suffered any damage, destruction or loss (whether or not covered by
insurance) materially adversely affecting its business or prospects;
(iii) incurred any obligations or liabilities, absolute or contingent,
for money borrowed or otherwise except obligations not exceeding in the
aggregate Thirty Thousand Dollars ($30,000.00) entered into in the ordinary
course of business;
(iv) made any material additions to or sold, transferred or otherwise
disposed of, any assets, including cash accounts, other than in the
ordinary course of business not exceeding in the aggregate Thirty Thousand
Dollars ($30,000.00);
(v) incurred, assumed or become subject to or agreed to incur, assume
or become subject to any liability under or in respect to any guarantee or
endorsement;
(vi) increased directly or indirectly (other than by normal labor
contract negotiation, bonus, cost of living and merit increases) the
compensation payable to any management or other employee or entered into
any agreement regarding employment with any person or in respect of
compensation with any employee, or paid any bonus or any unusual
compensation to any management or other employee during fiscal year 2001 or
subsequently except as set forth as an accrued liability on the
September 29, 2002 Balance Sheet, or paid any bonus or any unusual
compensation to any management or other employee from September 29, 2002
to Closing not accrued prior to September 29, 2002.
(vii) made any single capital expenditure or commitment therefor
exceeding Ten Thousand Dollars ($10,000) other than in ordinary course of
business;
(viii) entered into any contract or commitment with respect to the sale,
purchase or lease of supplies, equipment or services other than in the
ordinary course of business and which do not exceed in the aggregate Thirty
Thousand Dollars ($30,000.00);
(ix) entered into or agreed to enter into any agreement or arrangement,
other than in the ordinary course of business, with respect to the purchase by
a third party of any of the Purchased Assets;
(x) entered into any other transaction other than in the ordinary
course of business and which do not exceed in the aggregate Thirty Thousand
Dollars ($30,000.00);
(xi) failed to discharge any of its obligations or liabilities in
accordance with their terms or make any payments required in connection
therewith as and when due and payable;
(xii) waived any material rights;
(xiii) made any offer for the sale or purchase of any goods or services
which offer is outstanding as of the Closing Date and is significant in the
context of the FBO; or
(xiv) suffered any other event or condition of any character materially
adversely affecting the FBO or the Purchased Assets.
(i) Books and Records. The books and records of Seller relating to
the Purchased Assets and the FBO operations accurately reflect in all material
respects all transactions to which Seller is a party or by which its
respective assets are subject or bound, and such books and records have been
properly kept and maintained in all material respects.
(j) Franchises, Licenses, Permits, etc. Except as set forth on
Schedule 6.1(j), Seller owns or possesses in the operation of the FBO, all
material licensor authorizations that are necessary for the operation, and all
other authorizations that are material to the conduct of its business as now
conducted. Except as disclosed on Schedule 6.1(j), Seller has operated in
compliance, is not in default, and has not received any notice of any claim of
default, in each case in any material respect, with respect to any such
authorization, or has no Knowledge of any other claim or proceeding or
threatened proceeding relating to any such authorization or claimed lack of
any necessary authorization. Other than conditions and requirements relating
to such franchises, licenses, and permits that are within the sole control of
Buyer, except as set forth in Schedule 6.1(j), there is no reason why the
authorizations will not be kept fully in force or, if required under the terms
of the specific authorization, not be transferred to Buyer or otherwise not
continue so that Buyer, upon acquisition of the assets, can operate the FBO
and conduct the business of Seller relating to the FBO as fully as it is now
operated and conducted. Where joint application for consents relating to the
licensor authorizations is required by any licensor company, Seller will join
in the joint application.
(k) Major Customers. Schedule 6.1(k) sets forth a complete, true and
correct list of Seller's ten (10) largest customers for fuel in terms of
dollar volume the year ended December 30, 2001 and for the nine months ended
September 29, 2002. Except as set forth on Schedule 6.1(k), Seller has no
Knowledge that any of such customers for the nine months ended
September 29, 2002 intends to terminate or materially reduce its customer
relationship with the FBO, whether by reason of the transactions contemplated
hereby or otherwise, and none of such customers is otherwise involved in a
material dispute with Seller.
(l) Notice and Approvals; No Violation of Agreements. Except as set
forth on Schedule 6.1(l) hereto, including for consents which are required to
permit Seller's assignment to Buyer of the FBO Leases, and certain of the
Contracts, licenses, and permits described in Section 6.1(j) above, (i) no
notice to, or approval or consent of, any court or governmental authority or
other person or entity is required in connection with the execution, delivery
and performance of this Agreement by Seller; and (ii) neither the execution
and delivery of the Agreement, nor the consummation of the transactions herein
contemplated, nor compliance by Seller with any of the provisions hereof, will
(A) conflict with any provision of the articles of incorporation or bylaws of
Seller, or (B) materially violate, conflict with, result in a breach of or
constitute a material default under or pursuant to any statute, agreement,
judicial or administrative order, injunction, award, judgment or decree to
which Seller is a party or by which Seller is bound, which violation,
conflict, breach or default would have a materially adverse effect on Seller
or the FBO.
(m) Assets. The Asset Schedule attached hereto as Schedule 2.1(c) is
complete and accurate in all material respects as of the date thereof. Except
as disclosed in Section 6.1(h) and the schedules thereto, there has been no
change in the financial condition, results of operations, properties,
prospects or assets of the FBO since the December 30, 2001 Balance Sheet that
is materially adverse to the operations of the FBO.
(n) Compliance With Laws. Except as disclosed on Schedule 6.1(n)
hereto, Seller is in material compliance with the requirements of all
applicable laws, rules, regulations, licenses, permits, orders, judgments
and decrees of federal, state or local judicial or governmental authorities
that are applicable to ownership or operation of the FBO.
(o) Contracts. As of the date of execution of this Agreement, other than
as set forth in Schedule 5.1 hereto,
(i) there are no contracts material to the ownership and operation
of the FBO to which Seller is a party;
(ii) all Contracts material to the ownership and operation of the
FBO, including the FBO Leases and the FBO Subleases, other than Contracts
that, prior to the Closing, in accordance with their respective terms shall
terminate or expire, are in full force and effect;
(iii) Seller has paid all amounts due on or before Closing and
unpaid under the Contracts at Closing and has satisfied all other material
obligations accrued to date, therewith;
(iv) Seller has not received any written notice of default in any
material respect under the Contracts and no fees are payable to any party on
account of or as a condition of the assignment of such Contracts pursuant to
the transactions herein contemplated; and
(v) To Seller's Knowledge, no party to any of the Contracts is in default
in any material respect under any Contract.
(p) Litigation. Except for matters set forth on Schedule 6.1(p) hereto,
neither Seller, nor the FBO, are a party to (and Seller has no Knowledge that
Seller or the FBO are threatened to become a party to) any legal or
governmental actions, claims, suits, administrative or other proceedings or
investigations before or by any governmental department, commission, board
regulatory authority, bureau or agency, whether foreign, federal, state or
municipal, or any court, arbitrator or grand jury which would (i) prevent or
materially interfere with the consummation of the transactions contemplated by
this Agreement, or (ii) which, individually or in the aggregate, if decided
adversely to Seller, would impair or interfere in any material respect with
the ownership of the Purchased Assets by Buyer or operation by Buyer of
the FBO.
(q) Eminent Domain or Other Proceedings. Seller has received no written
notice of any initiated or pending condemnation or eminent domain proceedings,
or contemplated sales in lieu thereof, and has no Knowledge of any threatened
proceedings involving a partial or total taking of the Purchased Assets or
otherwise affecting the FBO.
(r) Properties. Except as set forth on Schedule 6.1(r) hereto, on the
Closing Date, Seller shall have good and marketable title to all of the
Purchased Assets, free and clear of any and all liens, security interests,
mortgages, pledges, claims, options, leases, imperfections of title, building
use restrictions, reservations, limitations, easements, or other encumbrances
or rights of third parties or imposed by statute or regulation or governmental
decree or order, except only for (i) liens for current taxes which are not
delinquent and other constitutional or statutory inchoate liens; (ii) such
liens and other imperfections of title as do not materially detract from the
value or impair the use of the Purchased Assets; and (iii) claims based on or
included in the Assumed Obligations (the excepted items referenced in (i),
(ii) and (iii) of this Section 6.1(r) being herein referred to, collectively,
as the "Permitted Encumbrances"). The fixed assets comprising a part of the
Purchased Assets are structurally sound, in normal operating condition and
repair, and sufficient and adequate to carry on the business conducted at the
FBO as presently conducted and meet in all material respects applicable
contractual and federal, state, and local governmental, statutory, regulatory
and other requirements.
(s) Insurance. Schedule 6.1(s) hereto sets forth a true, complete and
correct list of all policies of fire and liability coverage, and other forms
of insurance maintained by or for Seller or with respect to the Purchased
Assets and the FBO as of the date of execution of this Agreement. All such
policies are in full force and effect, the premiums therefor have been fully
paid for periods through the Closing Date and Seller has received no notice
of intent to cancel, reduce or not renew such policies.
(t) Presence of Hazardous Substances. Except as set forth on Schedule
6.1(t) hereto, otherwise disclosed in Buyer's environmental audit or as may be
lawfully present, to Seller's Knowledge no Hazardous Substances are present or
stored at the FBO, and the substances, chemicals, fuels and lubricants
described on Schedule 6.1(t) are stored in the containers in which they were
delivered to Seller or otherwise in material compliance with applicable law
and regulations.
(u) Environmental Claims. Except as otherwise disclosed in Buyer's
environmental audit, there are no Environmental Claims pending, nor to the
Seller's Knowledge is there any basis for the assertion of an Environmental
Claim, in any manner connected with the operation of the FBO or because of
prior use of the property constituting the Leasehold Estate.
(v) Disclosure. No representation, warranty, undertaking or agreement
of Seller made under this Agreement and no statement, certificate, exhibit,
schedule, list, or other document furnished or to be furnished to Buyer
pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of a material fact, or omits
a material fact necessary to make the statements contained therein not
misleading.
6.2. Representations and Warranties of Buyer. Buyer hereby represents
and warrants to Seller that:
(a) Due Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the state of Texas, is
qualified to do business in all states where the nature of its business
requires it to be so qualified, and has all requisite corporate power and
authority to enter into, perform and carry out all of its duties and
obligations in connection with the transactions contemplated by this Agreement.
(b) Due Authorization; Binding Effect. The execution, delivery and
performance of this Agreement and the consummation of the transactions on the
part of Buyer contemplated hereunder have been duly authorized by all
necessary corporate action on the part of Buyer. This Agreement, and the
other documents to be executed and delivered by Buyer pursuant hereto,
constitute the legal, valid and binding obligations of Buyer, enforceable in
accordance with their terms.
(c) Notices and Approvals; No Violation of Agreements. Except as set
forth on Schedule 6.2(c) hereto: (i) no notice to, or approval or consent of,
any court or governmental authority or other person or entity is required in
connection with the execution, delivery and performance of this Agreement by
Buyer; and (ii) neither the execution and delivery of this Agreement, nor the
consummation of the transactions herein contemplated, nor compliance by Buyer
with any of the provisions hereof, will (A) conflict with any provision of
Buyer's articles of incorporation or bylaws, or (B) violate, conflict with,
result in a breach of or constitute a default under or pursuant to any
statute, agreement, judicial or administrative order, injunction, award,
judgment or decree to which Buyer is a party, or by which it is bound, which
violation, conflict, breach or default would have a material adverse effect on
the assets, business or financial condition of Buyer.
(d) Litigation. Except for the matters set forth on Schedule 6.2(d)
hereto, on the date hereof Buyer is not a party to any legal or governmental
actions, claims, suits, administrative or other proceedings or investigations
before or by any governmental department, commission, board, regulatory
authority, bureau or agency, whether foreign, federal, state or municipal or
any court arbitrator or grand jury which would materially interfere with the
consummation of the transactions contemplated by this Agreement and to Buyer's
knowledge, no such proceedings are threatened or contemplated by any
governmental authority or any other person or entity.
(e) Disclosure. No representation, warranty, undertaking or agreement
of Buyer made under this Agreement and no statement, certificate, exhibit,
schedule, list, or other document furnished or to be furnished to Seller
pursuant to this Agreement or in connection with the transactions contemplated
hereby contains or will contain any untrue statement of a material fact, or
omits or will omit to state, a material fact necessary to make the statements
contained therein not misleading.
6.3. Representations and Warranties of Seller and Buyer as of the Closing.
The representations and warranties of Seller and Buyer contained in Sections
6.1 and 6.2 of this Agreement shall be true and correct in all material
aspects at the Closing as though such representations and warranties were made
at such time.
ARTICLE VII
Conditions Precedent to Closing
7.1. Buyer's Conditions. The obligations of Buyer to purchase the FBO
and the Purchased Assets and to make payment of the Purchase Price for the
FBO and the Purchased Assets at the Closing are subject only to:
(a) Compliance with Terms and Conditions. All terms, covenants,
agreements and conditions of this Agreement to be complied with and performed
by Seller on or prior to the Closing shall have been complied with and
performed in all material respects, and all of the representations and
warranties of Seller contained in Section 6.1 hereof shall be true and correct
in all material respects on the Closing Date as if made on and as of such
date, and Seller shall have delivered to Buyer a certificate, executed by
Chief Executive Officer and its Chief Financial Officer, dated as of the
Closing Date, to that effect.
(b) Consents Received. All third parties, including but not limited to
the Authority, and any other governmental units or authorities, required to
consent to and/or approve the transactions herein described including, without
limitation, consent to the assignment of the FBO Leases, the FBO Subleases, or
any other leases, and the Contracts, to the extent required by a particular
contract, and any other required consents, approvals and/or waivers shall have
granted such consent, approval, and/or waiver in writing at or prior to the
Closing.
(c) Consent to Assignment. Buyer and the Authority shall have entered
into or agreed to enter into a consent to the assignment to Buyer of the FBO
Leases.
(d) Delivery of Documents. Seller shall have delivered to Buyer the
instruments, documents, certificates and other matters described in
Section 12.1 hereof at or prior to Closing.
(e) Permits and Licenses. The permits and licenses listed on Schedule
2.1(e) required for Buyer to operate the FBO shall have been assigned to
Buyer and such assignments shall have been received at or prior to the Closing.
(f) Absence of Litigation. There shall be no investigation, action,
suit, or pending or threatened litigation or legal proceedings, brought by a
third party, seeking to enjoin the consummation of the transaction
contemplated herein, or which seeks to restrain, prohibit or otherwise
challenge or interfere with the consummation of the transactions contemplated
hereby, or which is capable of having a materially adverse effect on the FBO,
the Purchased Assets or Buyer's operation of the FBO using the Purchased
Assets.
(g) Environmental Matters. Buyer shall have received such environmental
audits and other assurances that it may reasonably require and in form and
substance acceptable to Buyer that the FBO and the Purchased Assets are in
compliance in all material respects with all applicable environmental laws and
do not contain any Hazardous Substances in violation of applicable law, or
assurances reasonably acceptable to Buyer that appropriate remediation will be
accomplished in a manner which is reasonably acceptable to Buyer.
(h) Title Evidence. Buyer, at its expense, shall have received an
appropriate policy of leasehold title insurance, assuring that, upon the
Closing, the only entity having an interest in the FBO and the Purchased
Assets other than the Buyer is the Authority.
(i) Opinion of Counsel. Buyer shall have received the favorable opinion
of Miller & Martin LLP, counsel to Seller, which shall be in the form of
Exhibit 2 hereto.
(j) No Material Adverse Change. There shall have been no materially
adverse change since the date of this Agreement in the financial condition,
results of operation, properties, Purchased Assets, liabilities to be assumed
or the business of the FBO.
(k) Covenants Not To Compete. The Seller and the Covenanting
Shareholder shall have executed and delivered the Covenants Not To Compete.
7.2. Seller's Conditions. The obligation of Seller to deliver the
Purchased Assets to Buyer at the Closing is subject only to:
(a) Compliance with Terms and Conditions. All terms, covenants,
agreements and conditions of this Agreement to be complied with and performed
by Buyer on or prior to the Closing shall have been complied with and
performed in all material respects, and all of the representations and
warranties of Buyer contained in Section 6.2 hereof shall be true and correct
in all material respects on the Closing Date as if made on and as of such
date, and Buyer shall have delivered to Seller a certificate, executed by its
Chief Executive Officer, President, or a Vice President of Buyer, dated as of
the Closing Date, to that effect.
(b) Consents Received. All third parties, including but not limited to
the Authority, and any other governmental units or required to consent to
and/or approve the transactions herein described including, without
limitation, consent to the assignment of the FBO Leases or any other leases,
and the Contracts, to the extent required by a particular Contract, and any
other required consents, approvals and/or waivers, shall have granted such
consent, approval, and/or waiver in writing at or prior to the Closing.
(c) Delivery of Documents. Buyer shall have delivered to Seller the
instruments, documents, certificates and other matters described in
Section 12.2 hereof.
(d) Absence of Litigation. There shall be no pending or threatened
litigation or legal proceedings, brought by a third party, seeking to enjoin
the consummation of the transaction contemplated hereby, capable of having a
materially adverse effect on the FBO, the Purchased Assets or Buyer's
operation of the FBO using the Purchased Assets.
(e) Opinion of Counsel. Seller shall have received the favorable opinion
of Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., counsel for Buyer,
which shall be in the form of Exhibit 3 hereto.
ARTICLE VIII
Conduct of Business Pending Closing
8.1. Seller's Covenants. Seller covenants and agrees that, after the
execution hereof and prior to the Closing (unless Buyer consents in writing
otherwise):
(a) Operation in Ordinary Course. Seller will operate the FBO in the
ordinary course and will use all reasonable efforts to preserve intact the
present business operations of the FBO and the relationships with the
Authority, employees, suppliers and customers at the FBO.
(b) Customary Maintenance and Repairs. Seller will make such repairs and
replacements and perform such maintenance operations as are necessary to
maintain and keep the Purchased Assets in substantially the same repair,
working order and condition as the Purchased Assets are in on the date hereof
(reasonable wear and tear excepted). Except as otherwise set forth in this
Agreement, Seller will not commit to make any capital expenditure relating to
the Purchased Assets which would be required to be paid or assumed by Buyer
after the Closing.
(c) No Sales Out of Ordinary Course. Seller will not voluntarily sell
or otherwise dispose of (i) any of the Leasehold Estate; (ii) except in the
ordinary course of business which will not in the aggregate exceed Thirty
Thousand Dollars ($30,000.00), any of the other Purchased Assets.
(d) Maintenance of Insurance. Seller will maintain in full force and
effect the existing insurance covering the FBO and the Purchased Assets.
(e) No Termination or Modification of Contracts. Seller will not
terminate (other than for cause) or waive any material rights under any
Contract to be assigned to and assumed by Buyer hereunder, nor shall Seller
modify or exercise any option under any such Contract.
(f) COBRA. Seller shall comply with the applicable provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 in connection with the
termination of the employment of any persons as a result of or as a
consequence of the transactions contemplated by this Agreement.
(g) Update of Schedules. Seller will update any and all exhibits and
schedules accompanying this Agreement upon any material change(s) in the
information contained therein, so that all exhibits and schedules shall
reflect the most current information as of the date of Closing.
(h) Access to Information and Documents. Seller will (i) afford to
Buyer and its representatives reasonable access during normal business hours
and as reasonably requested at other times, to tax returns, books and records
and to Employees of Seller and to Seller's offices, plants and properties,
(ii) permit Buyer and its accounting representatives to inspect Seller's
accountants' work papers and other records relating to the business and
operations of Seller and the FBO, (iii) furnish or cause to be furnished to
Buyer such additional financial and operating data and other information
regarding the assets, properties, goodwill and business included in the FBO
and the Purchased Assets as Buyer from time to time shall reasonably request
and (iv) consult and upon mutual consent cause the Employees to consult with
Buyer regarding all significant developments, transactions and proposals
relating to Seller in connection with the FBO's business and operations.
8.2. Cooperation. Each party shall make or file all required
notifications and use all reasonable efforts to obtain all consents,
approvals, permits, licenses and authorizations which must be obtained,
and shall fulfill all conditions which must be fulfilled, by such party in
order to consummate the transactions herein contemplated. Each party shall
render to the other party its full and complete cooperation in giving such
notices or obtaining such consents, approvals and authorizations, and shall
promptly notify the other party upon receiving oral or written communications
concerning such consents, approvals and authorizations and furnish a copy of
such written communication to the other party. Each party covenants and
agrees promptly to furnish to the other all information and data in the
furnishing party's possession requested in writing by the requesting party
which is reasonable and necessary in order to assist the requesting party to
give the necessary notices or secure any permits, licenses and approvals
required as contemplated by this Agreement.
ARTICLE IX
Notice of Litigation
Each party covenants and agrees promptly to notify the other of any claim,
action, suit, proceeding or third party investigation which is commenced or
threatened and becomes known to either of them after the date of this
Agreement and on or prior to the Closing relating to or affecting the FBO
or the Purchased Assets or which challenges in any manner the transactions
contemplated by this Agreement.
ARTICLE X
Risk of Loss
10.1. Fire or Other Casualty. In the event that, prior to the Closing,
there is Material Damage to the Purchased Assets, Buyer shall have the right
to terminate this Agreement by reason thereof. For the purpose of this Section
10.1, the term "Material Damage" shall mean damage to Purchased Assets having
an estimated cost of repair in excess of One Hundred Fifty Thousand Dollars
($150,000), such determination to be made by the adjuster for the insurance
carrier or carriers providing the Fire and Casualty coverage for the damaged
Purchased Assets. In the event of damage to Purchased Assets having an
estimated cost of repair in an amount less than One Hundred Fifty Thousand
Dollars ($150,000) ("Non-material Damage"), Buyer shall not have the right to
terminate this Agreement, but, in such event, the Purchase Price shall be
reduced by the amount of such Non-material Damage, and Seller shall retain
all rights to receive any and all insurance proceeds or payments with respect
to any such damage or destruction, and the sale of the Purchased Assets shall
otherwise be consummated as though such destruction or damage had not occurred.
10.2. Condemnation. In the event that Seller is notified of the intent
of any municipal authority or body to commence condemnation of all or any part
of the Leasehold Estate prior to the Closing Date, Buyer shall have the right
to terminate this Agreement by reason thereof.
10.3. Leasehold Estate. Notwithstanding any provision contained in
Sections 10.1 and 10.2 hereof to the contrary, if an event of loss,
destruction or damage occurs on or with respect to the Leasehold Estate (and
other property leased thereunder, if any), Seller before the Closing shall
take such steps as are required to comply with the requirements imposed on the
lessee under the FBO Lease.
ARTICLE XI
Termination; Remedies
11.1. Termination. Subject to the provisions of Section 11.2 hereof,
this Agreement may be terminated:
(a) On the mutual written agreement of Seller and Buyer;
(b) On Seller's notice to Buyer at any time on or prior to the Closing
(i) if any of the representations, warranties, covenants or other agreements
of Buyer contained herein prove to be false or shall have been breached in
any material respect, (ii) if Buyer shall fail to deliver the Purchase Price
at or before the Closing; or (iii) if Buyer otherwise commits a material
default under the terms of this Agreement.
(c) On Buyer's notice to Seller at any time on or prior to the Closing
if (i) any of the representations, warranties, covenants or other agreements
of Seller contained herein prove to be false or shall have been breached in
any material respect, (ii) if Seller shall fail to deliver the documents
required hereunder at or before the Closing, or (iii) for any of the reasons
allowing Buyer to terminate pursuant to Sections 10.1 or 10.2 hereof, or
(iv) all of Buyer's conditions to the Closing set forth in Section 7.1 hereof
have not been met or waived by Buyer.
(d) On notice of either party to the other if the Closing does not
occur for any other reason on or before October 31, 2002 (or such later date
as the parties hereto may mutually agree in writing).
If this Agreement is terminated for any of the foregoing reasons (other than
termination by the Seller pursuant to Section 11.1(b) hereof), the Total
Escrow Fund is to be returned by the Escrow Agent to Buyer.
11.2. Rights and Remedies on Termination. If this Agreement terminates
on account of the breach of either party, any additional obligations of the
non-breaching party shall cease, and such non-breaching party shall have the
right to exercise all rights and remedies available both at law and in equity.
Upon termination for any other reason, neither party hereto shall have any
liabilities to the other party except as may be provided for herein.
ARTICLE XII
Deliveries at Closing
12.1. Deliveries by Seller. At the Closing, Seller shall deliver or
cause to be delivered to Buyer, in form and substance satisfactory to Buyer,
the following:
(a) Bill of Sale, Assignment and Assumption Agreement. A confirmatory
bill of sale, assignment and assumption agreement for the Purchased Assets.
(b) Delivery of Contracts. The Contracts, and the books and records
relating to the FBO except to the extent previously delivered to Buyer or
located at the FBO.
(c) Miscellaneous. Such other agreements, notices, certificates or
other instruments as are required to be delivered by Seller hereunder or which
Buyer reasonably requests.
(d) Board Resolution. A certified copy of a resolution of Seller's
Board of Directors approving the execution and delivery of this Agreement and
consummation of the transactions herein contemplated.
(e) Assignment of FBO Leases. The executed assignments of Seller to
the FBO Leases and the consents to such assignments of the Authority required
by this Agreement.
(f) Covenants Not To Compete. The executed Covenants Not To Compete.
12.2. Deliveries by Buyer. At the Closing, Buyer shall deliver or cause
to be delivered to Seller, in form and substance satisfactory to Seller, the
following:
(a) Purchase Price. The Purchase Price pursuant to Section 3.3 hereof.
(b) Miscellaneous. Such other agreements, notices, certificates and
other instruments as are required to be delivered by Buyer hereunder or which
Seller reasonably requests.
(c) Board Resolution. A certified copy of a resolution of Buyer's
Board of Directors approving the execution and delivery of this Agreement
and consummation of the transactions herein contemplated.
12.3. Possession. Possession of the Purchased Assets shall be delivered
to Buyer as of the Closing Date.
ARTICLE XIII
Post-Closing Documents and Agreements
13.1. Further Assurances. Each party shall, at the reasonable request
of the other, at any time and from time to time following the Closing, execute
and deliver to the requesting party all such further instruments as may be
reasonably necessary or appropriate in order to more effectively (a) assign,
transfer and convey to Buyer, or to perfect or record Buyer's title to or
interest in the Purchased Assets, (b) evidence and confirm the assumption by
Buyer of the Assumed Obligations, or (c) otherwise confirm or carry out the
provisions of this Agreement.
13.2. Cooperation; Retention of Records. Each party acknowledges that
the other may be a party to legal proceedings following the Closing which
relate to the FBO and covenants to maintain and make available to the other
party, on reasonable request and at the expense of the requesting party,
(a) any and all files and business records in its custody or control relating
(b) to the FBO or the Purchased Assets, and (b) any and all individuals
(c) employed by the other party hereto whose testimony or knowledge, in the
(d) reasonable opinion of the other party's counsel, is necessary or useful to
(e) it with respect to the issues involved in such litigation or preparation
(f)
(g) therefor.
13.3 Collection of Receivables. Buyer will provide Seller with
reasonable assistance in the collection of receivables retained by Seller.
Collections from customers of the FBO shall be first applied to the oldest
outstanding invoices.
ARTICLE XIV
Brokerage Fees
Each of the parties hereto agrees to indemnify and hold and save the other
party harmless from any brokerage or finder's fees to any person, firm or
corporation in connection with the transactions contemplated by this
Agreement (including reasonable attorneys' fees and other expenses incurred
in connection with any such claim) which may be due or asserted by reason of
any agreement or purported agreement by the indemnifying party or any of its
directors, officers, or agents to pay such fees. This Article shall survive
the Closing.
ARTICLE XV
Survival of Representations and Warranties; Indemnification
15.1. Seller's General Indemnity. Seller covenants and agrees to
indemnify, release, defend and save and hold Buyer harmless at all times
after the Closing with respect to any and all claims, liabilities, loss,
cost, damage and expense, including reasonable attorneys' fees and expenses
(collectively, "Damages") arising from, by reason of or in connection with
(h) its operations and conduct of its business at the FBO prior to Closing,
(i) (ii) any environmental claim arising out of or resulting from the
(j) operation of the FBO prior to the Closing Date or (iii) any untruth,
(k) breach or inaccuracy in any material respect of any representation,
(l) warranty, covenant or other agreement; (a) on the part of Seller under
(m) Section 6.1 or 8.1 of this Agreement, or (b) in any certificate or other
(n) instrument provided by Seller pursuant to this Agreement.
15.2. Buyer's Indemnity. Buyer covenants and agrees to release, defend,
indemnify, save and hold Seller harmless at all times after the Closing with
respect to any and all Damages arising from, by reason of or in connection
with (i) its operation and conduct of its business at the FBO after the
Closing, (ii) any environmental claim arising out of or resulting from its
operation of the FBO on or after the Closing Date (iii) any untruth, breach
or inaccuracy in any material respect of any representation or warranty (a)
on the part of Buyer under Section 6.2 of this Agreement, or (b) in any
certificate or other instrument provided for in this Agreement, and (iv) the
Assumed Obligations.
15.3 Guaranty of Parent. In the event of the dissolution and
liquidation of Seller or if Seller is unable to satisfy any of its indemnity
obligations arising in this Article XV, then The Krystal Company, as the
parent corporation of Seller (the "Parent"), guarantees the payment of such
indemnity obligations of Seller.
15.4. Survival of Representations, Etc. The representations, warranties,
covenants, and agreements and indemnities of Seller and Buyer contained herein
shall survive the consummation of the transactions contemplated hereby and the
Closing Date. Except as provided in this sentence, all such representations,
warranties, covenants, agreement and indemnities and all claims and causes of
action with respect thereto (other than the provisions of Section 6.1(a), (b)
and (f) and Sections 7.1(a) and (b) and subsections (i) and (iii) of Section
15.2 and all claims and causes of action with respect thereto) shall terminate
upon the expiration of three (3) years after the Closing Date. The
representations and warranties in Section 6.1(a) and (b) and Sections 7.1(a)
and (b) and subsections (i) and (iii) of the Buyer's Indemnity of Section 15.2
shall not terminate. The representations and warranties of Section 6.1(f)
shall survive until the expiration of the applicable statute of limitations
(with extensions) with respect to the matter addressed in such section. The
termination of the representations and warranties, covenants, agreements and
indemnities provided herein shall not affect the rights of a party in respect
to any Claim (hereafter defined) made by such party in a writing received by
the other party prior to the expiration of the applicable survival period
provided herein.
15.5. Procedure for Indemnification. Notwithstanding any other
provision of this Articles XV, the indemnifying party shall not have any
indemnification obligations for Damages under Sections 15.1 or 15.2 unless
and to the extent the total amount of all such Damages exceeds $30,000, in
which case the indemnifying party will be liable to the indemnified party for
all such amounts, including the first $30,000. The amount of any Damages for
which indemnification is provided under Sections 15.1 and 15.2 shall be net
of (i) any amounts recovered by the indemnified party pursuant to any
indemnification by or indemnification agreement with any third party and
(ii) any insurance proceeds or other funds received as an offset against such
Damages. Promptly after receipt by an indemnified party under Sections 15.1
or 15.2 of notice of the commencement of any action in or before any court or
administrative agency or of facts which give rise to a claim for
indemnification under Sections 15.1 or 15.2 (collectively, a "Claim") against
it, such indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party under such Section, give notice in writing to
the indemnifying party of the commencement thereof describing the Damages, the
amount or estimated amount thereof, and the method of computation of such
Damages, all with reasonable particularity and containing a reference to the
provisions of this Agreement in respect of which such Damages shall have
occurred, but the failure so to notify the indemnifying party shall not
relieve it of any liability that it may have to any indemnified party except
to the extent the defense of such action is prejudiced thereby. In case any
such Claim shall be brought against an indemnified party and if notice shall
be given to the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish (unless the indemnifying party is also a party to
such Claim and the indemnified party determines in good faith that joint
representation would be inappropriate) to assume the defense thereof with
counsel satisfactory to such indemnified party and, after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party under such Sections 15.1 or 15.2, as the case may be, for
any fees of other counsel or any other expenses with respect to the defense of
such Claim, in each case subsequently incurred by such indemnified party in
connection with the defense thereof, other than reasonable costs of
investigation. If an indemnifying party assumes the defense of such a Claim,
(a) no compromise or settlement thereof may be effected by the indemnifying
party without the indemnified party's consent unless (i) there is no finding
of admission of any violation of legal requirements applicable to the
operation of a fixed base operation under federal, state or local laws and/or
regulations or any effect on any other claims that may be made against the
indemnified party and (ii) the sole relief provided is monetary damages that
are paid in full by the indemnifying party and (b) the indemnifying party
shall have no liability with respect to any compromise or settlement thereof
effected without its consent. If notice is given to an indemnifying party of
the commencement of any Claim and it does not, within fifteen (15) days after
the indemnified party's notice is given, give notice to the indemnified party
of its election to assume the defense thereof, the indemnifying party shall be
bound by any determination made in such Claim or any compromise or settlement
thereof effected by the indemnified party.
ARTICLE XVI
Notices
All notices, consents, waivers or other communications which are required or
permitted hereunder shall be sufficient if given in writing and delivered
personally, by confirmed telefacsimile, or by prepaid overnight delivery
service for next day delivery, proof of delivery required:
(a) to Buyer, addressed as follows:
Truman Arnold Companies
2900 St. Michael Drive, Fifth Floor
Texarkana, Texas 75504
Attn: James H. Day,
Administrative Vice President
Fax: (903) 334-8987
with a copy to:
John S. Selig, Esq.
Mitchell, Williams, Selig,
Gates & Woodyard, P.L.L.C.
425 West Capitol Avenue, Suite 1800
Little Rock, Arkansas 72201
Fax: (501) 688-8807
(b) to Seller and Parent as addressed as follows:
The Krystal Company
One Union Square
Chattanooga, Tennessee 37402
Attn: Larry D. Bentley
Vice President and Chief Financial Officer
Fax: (423) 757-5773
with a required copy to:
Hugh F. Sharber, Esq.
Miller & Martin LLP
Volunteer Bldg. Suite 1000
832 Georgia Avenue
Chattanooga, Tennessee 37402
Fax: (432) 785-8480
(or such other address of Buyer or Seller as shall be set forth in a notice
given in the same manner). All such notices shall be deemed given on the date
personally delivered or the date the telefacsimile is confirmed or the day
following delivery to the overnight delivery service.
ARTICLE XVII
Miscellaneous
17.1. Governing Law. This shall be interpreted, construed and governed
in accordance with the laws of the State of Tennessee, including its statutes
of limitation but without regard to its rules governing conflict of laws.
17.2. Assignment; Binding Effect. Buyer may not assign, transfer or
convey any of its rights herein or hereunder to any person or entity
whatsoever other than one of its Affiliates without the prior written consent
of Seller, which consent shall not be unreasonably withheld. This Agreement
shall be binding upon the parties hereto and their successors and permitted
assigns.
17.3. Partial Invalidity. If any term, provision, covenant or condition
of this Agreement, or any application thereof, should be held by a court of
competent jurisdiction to be invalid, void or unenforceable, then the
remaining terms, provisions, covenants and conditions of this Agreement shall
continue in full force and effect and shall in no way be affected, impaired or
invalidated.
17.4. Time of Essence. Time is of the essence of this Agreement and all
of the terms, provisions, covenants and conditions hereof.
17.5. Captions. The captions appearing at the commencement of the
Articles and Sections hereof are descriptive only and for convenience in
reference to this Agreement and in no way whatsoever define, limit or
describe the scope or intent of this Agreement.
17.6. Pronouns. Masculine or feminine pronouns shall be substituted
for the neuter form and vice versa in any place or places herein in which
the context requires such substitution or substitutions.
17.7. Entire Agreement; Amendment; Waiver. Except for the
Confidentiality Agreement dated August 27, 2002, which shall remain binding
and in effect, this Agreement and any other documents executed concurrently
herewith constitutes the entire agreement between the parties pertaining to
he subject matter contained herein and supersedes all prior agreements,
informational memoranda, representations and understandings of the parties.
No amendment or modification of this Agreement shall be binding unless
executed in writing by the parties. Except as may be otherwise provided in
this Agreement, no waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver, and no waiver
shall be binding unless evidenced by an instrument in writing executed by the
party against whom the waiver is sought to be enforced.
17.8. No Third Party Beneficiary. This Agreement is for the benefit
of, and may be enforced only by, Seller and Buyer and their respective
successors and permitted assigns, and is not for the benefit of, and may not
be enforced by, any third party.
17.9. Counterparts. This Agreement may be executed in any number of
counterparts, with each such counterpart being deemed to be an original
instrument.
17.10 Attorneys' Fees. If any action is brought by any party thereto
concerning a breach of any of the provision of this Agreement, the
prevailing party shall be entitled to recover from the other party the
reasonable attorneys' fees and expenses of the prevailing party incurred
in connection therewith.
[Signature on the following page]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 17th day of October, 2002.
SELLER:
KRYSTAL AVIATION COMPANY
a Tennessee Corporation
By:
------------------------------------
Larry D. Bentley
Vice President and Chief Financial Officer
BUYER:
TRUMAN ARNOLD COMPANIES,
a Texas corporation
By:
-----------------------------------
Greg Arnold,
President and Chief Operating Officer
Solely for the purposes described in Sections 3.3(d)
and 15.3 of the Agreement, the undersigned joins in
this Agreement:
THE KRYSTAL COMPANY
Tennessee Corporation
By:
--------------------------------------
Larry D. Bentley
Vice President and Chief Financial Officer
List of Exhibits and Schedules
Exhibit 1 Seller's Financial Statements (see Section 6.1(c))
Exhibit 2 Form of Seller's Counsel's Opinion Letter
Exhibit 3 Form of Buyer's Counsel's Opinion Letter
Schedule 2.1(c) Asset Schedule
All Assets and Equipment Related to the
Operation of the FBO Location
Schedule 2.1(e) All assignable permits and licenses used or
required at the FBO
Schedule 2.2(g) Specific Excluded Assets
Schedule 3.1 Allocation of Purchase Price
Schedule 5.1 All Contracts
Schedule 6.1(c) Exceptions to Balance Sheets shown on Financial
Statements
Schedule 6.1(e)(i) List of all employees, including name, title,
position, salary, dates of hire, whether employee
is on leave under the Family Medical Leave Act or
similar state law and sex
Schedule 6.1(e)(ii) All pending, threatened or anticipated strikes,
work stoppage, labor action, certification or
decertification question, grievance procedure,
arbitration or collective bargaining agreement
Schedule 6.1(g) Medical and Dental Benefit Plans, ERISA plans,
Employee Pension Benefit Plans currently in effect
Schedule 6.1(h) Since September 29, 2002 any material adverse
change in assets or properties
Schedule 6.1(j) Franchises, licenses and permits, etc.
Schedule 6.1(k) List of 10 largest customers for fuel in terms of
dollar volume for the year ended December 30, 2001
and the eight months ended September 29, 2002
Schedule 6.1(l) Required notices and approvals; no violation of
agreements
Schedule 6.1(n) Compliance with laws
Schedule 6.1(p Litigation
Schedule 6.1(r) Exceptions - good and marketable title to all
properties
Schedule 6.1(s) Fire and liability coverage in place
Schedule 6.1(t) Hazardous Substances
Schedule 6.2(c) Required notices and approvals; no violation of
agreements
Schedule 6.2(d) Litigation
Exhibit 27.1 -
The Krystal Company
Schedule II - Valuation and Qualifying accounts
Additions Amounts
Description Balance Charged to Written off Balance
Beginning of Costs and Against the (Transfer) at End
Year Expenses Allowance Recoveries of Year
- ----------------------- ----------- ----------- ----------- ------------ -------
(In Thousands)
Allowance for doubtful
accounts and notes
receivable
Year ended:
December 29, 2002 $627 $249 $ -- $ -- $876
December 30, 2001 $ 72 $555 $ -- $ -- $627
December 31, 2000 $136 $ -- $ -- $ (64) $ 72