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 28, 1997
Commission File Number 0-20040
THE KRYSTAL COMPANY
(Exact name of registrant as specified in its charter)
Tennessee 62-0264140
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Union Square, Chattanooga, Tennessee 37402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 757-1550
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12 (b) of the Act:
None
----
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 to Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ] .
On September 26, 1997, the registrant was acquired by Port Royal Holdings,
Inc., ("Port Royal") pursuant to a merger in which a wholly-owned subsidiary
of Port Royal was merged with and into the Company. As a result of the merger,
Port Royal became the owner of 100% of the common stock of the Company. Thus,
the aggregate market value of the voting stock held by a non-affiliate is zero
as of March 20, 1998.
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 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,
and the "Country Breakfast."
On December 15, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code, solely for the purpose of
completely and finally resolving various claims of former and current employees
alleging violations of the Fair Labor Standards Act. On April 10, 1997 the
Bankruptcy Court approved the Reorganization Plan including the settlement
of the FLSA claims which became effective April 23, 1997. All allowed claims
under the Reorganization Plan have been paid.
On September 26, 1997 (effective September 29, 1997 for accounting purposes),
the Company was acquired by Port Royal Holdings, Inc. ("Port Royal") (the
"Acquisition"). At the closing of the Acquisition, a wholly-owned subsidiary
of Port Royal, was merged with and into the Company (the "Merger") and the
Company as the surviving corporation retained the name "Krystal." As a result
of the Acquisition and Merger, Port Royal became the owner of 100% of the
common stock of the Company.
(B) Financial Information about Industry Segments
See Part II, Item 7 Results of Operations.
(C) Narrative Description of Business
The Company develops, operates and franchises full-size KRYSTAL and smaller
"double drive-thru" KRYSTAL KWIK quick-service hamburger restaurants. In
1995, the Company began to develop and franchise smaller KRYSTAL restaurants
located in non-traditional locations such as convenience stores. The Company
has been in the fast food restaurant business since 1932, and believes it is
among the first fast food restaurant chains in the country. At December 28,
1997, the Company owned 238 KRYSTAL restaurants and 10 KRYSTAL KWIK restaurants
in eight states in the southeastern United States. The Company began to
franchise KRYSTAL KWIK restaurants in 1990 and KRYSTAL restaurants in 1991.
Franchisees operated 41 KRYSTAL restaurants, 33 KRYSTAL KWIK restaurants and
27 KRYSTAL restaurants in non-traditional locations as of December 28, 1997.
The Company also owns one and leases 27 restaurant sites in the Baltimore,
Washington, D.C. and St. Louis metropolitan areas which it in turn
subleases or leases to Davco Restaurants, Inc. ("Davco"), a Wendy's
International, Inc. franchisee and former affiliate of the Company.
Through a subsidiary company, the Company began operating a fixed base hangar
and airplane fueling operation in 1977 and managing the leasing of airplanes
in 1989.
Products --
KRYSTAL restaurants offer a substantially uniform menu consisting of the well
known KRYSTAL hamburger, a regular size hamburger, french fries, "Chili Pups",
"Corn Pups", chili, a chicken sandwich, chocolate shakes, soft drinks and hot
beverages, pies and doughnuts and breakfast items during certain morning hours.
KRYSTAL KWIK restaurants feature a more limited menu, including KRYSTAL
hamburgers, french fries, Chili Pups and soft drinks. From time to time the
Company test markets new products.
The Company and its franchisees purchase their food, beverages and supplies
from Company approved independent suppliers. All products must meet standards
and specifications set by the Company. Management constantly monitors the
quality of the food, beverages and supplies provided to the restaurants. The
restaurants prepare, assemble and package these products using specially
designed production techniques and equipment to obtain uniform standards of
quality.
Sources of raw materials --
The Company and its franchisees purchase food, supplies, restaurant equipment,
signs and modular KRYSTAL and KRYSTAL KWIK restaurants from Company approved
suppliers. Alternate suppliers are available or can be made available.
Trademarks and patents --
The Company has registered "Krystal", "Krystal Kwik" and variations of each,
as well as certain product names, with the United States Patent and Trademark
office. The Company is not aware of any infringing uses that could materially
affect its business or any prior claim to these service marks that would
prevent the Company from using or licensing the use thereof for restaurants in
any area of the United States. The Company's policy is to pursue registration
of its marks whenever possible and oppose vigorously any infringement of its
marks.
Seasonal operations --
The Company does not consider its operations to be seasonal to any material
degree. Revenues during its first fiscal quarter, comprising the months of
January, February and March, will, however, generally be lower than its other
quarters due to consumer shopping habits and the climate in the location of a
number of its restaurants.
Working capital practice --
See Part II, Item 7 Liquidity and Capital Resources.
Customers --
No material part of the business of the Company is dependent upon a single
customer or a small number of customers.
Backlog --
Company operated restaurants 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 fast food restaurant industry is a highly competitive business dominated
by major chains with substantially greater financial resources than the
Company. The Company competes primarily on the basis of 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 1997, 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 1997, the Company's average number of employees was approximately 8,500.
(D) Financial Information about Foreign and Domestic Operations and Export
Sales
The Company owns one and leases 27 restaurant sites in the Baltimore,
Washington, D.C. and St. Louis metropolitan areas which it in turn subleases
to Davco Restaurants, Inc. Revenue from this operation is less than 10% of
the Company's total revenue. All other operations of the Company are in the
southeastern United States and the Company has no export sales.
Item 2. Properties
See Notes 4 and 10 of the Company's Consolidated Financial Statements.
Item 3. Legal Proceedings
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, 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
None
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. The following table sets forth the high and low closing sales prices
per share of the Company's common stock as reported by the NASDAQ National
Market System for the periods indicated for 1996 and through
September 26, 1997:
High Low
------ -----
1996
First Quarter $5.375 $4.00
Second Quarter 5.25 4.125
Third Quarter 5.75 4.75
Fourth Quarter 6.375 5.25
High Low
------ -----
1997
First Quarter $ 7.50 $5.00
Second Quarter 5.75 4.875
Third Quarter 15.00 4.875
Fourth Quarter N/A N/A
(b) Holders of common stock. As noted above, Port Royal is the owner
of 100% of the common stock of the Company.
(c) Dividends. The Company has historically not declared dividends on its
common stock and has no present intention to do so in the near future.
Item 6. Selected Financial Data
The selected financial data listed below for each of the periods
ended December 29, 1996, December 31, 1995, January 1, 1995,
January 2, 1994 and the nine months ended September 28, 1997 and the three
months ended December 28, 1997 was derived from the audited consolidated
financial statements of the Company. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Three | Nine
Months | Months
Ended | Ended Fiscal Year Ended
--------|---------- --------------------------------------
Dec. 28, | Sep. 28, Dec. 29, Dec. 31, Jan. 1, Jan. 2,
1997 | 1997 1996 1995 1995 1994
--------|---------- --------------------------------------
| (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations data: |
Revenues: |
Restaurant sales $61,440 |$178,815 $236,470 $239,376 $239,104 $228,468
Franchise fees 130 | 219 349 618 796 533
Royalties 828 | 2,232 2,778 2,420 1,880 1,157
Other revenue 1,290 | 3,469 4,671 5,614 6,542 6,575
---------|------------------------------------------------
63,688 | 184,735 244,268 248,028 248,322 236,733
---------|------------------------------------------------
|
Cost and expenses 61,424 | 178,710 240,342 253,440 236,190 222,843
|
Operating income (loss) 2,264 | 6,025 3,926 ( 5,412) 12,132 13,890
Income (loss) before cumulative |
effect of accounting changes |
and extraordinary item $ ( 539)|$ 1,665 $( 2,422) $( 5,324) $ 6,189 $ 7,466
|
|
Balance Sheet Data: |
Working capital (deficit) $(8,886)| $(4,760) $ 19,592 $ 13,442 $ (1,353) $(7,323)
Property owned and |
leased, net 102,860 | 90,034 92,826 100,409 100,888 85,761
Total assets 190,121 | 119,130 143,870 132,695 130,786 105,972
Long term debt, net of |
current portion 112,174 | 34,573 3,090 3,621 40,053 25,512
Long term debt subject |
to compromise - | - 36,000 36,000 - -
Capital lease obligations, |
net of current portion 2,029 | 2,077 2,278 2,754 3,438 4,093
|
</TABLE>
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
financial statements of the Company (including the notes thereto) contained
elsewhere in this report. On September 26, 1997 (effective September 29, 1997
for accounting purposes) the Company was acquired by, and merged with a wholly
owned subsidiary of, Port Royal Holdings, Inc. The acquisition and merger were
accounted for using the purchase method of accounting. As a result, the
following discussion of the three months ended December 28, 1997, is not fully
comparable to other periods reported in these financial statements. The
results of the nine months ended September 28, 1997, is compared to the
year ended December 29, 1996. These comparisons are not entirely compatible
as noted below.
General --
The Company's revenues are derived primarily from sales by Company-owned
restaurants. Total Company-owned restaurants decreased from 249 at the end
of 1996 to 248 at the end of 1997. Royalties and franchise fees from
franchisees have been a small portion of the Company's revenues to date.
The total number of franchised restaurants grew by 13.0% in 1997 from
89 at the end of 1996 to 101 at the end of 1997. The Company expects its
franchisees to develop 20 new restaurants during fiscal 1998. The Company
also operates through its wholly owned subsidiary a fixed based airport
hangar operation in Chattanooga, Tennessee. Revenues from this operation
in each of the last three years were less than 3.0% of the Company's total
revenues.
The Company expects to open five new full-size restaurants in fiscal 1998.
Management estimates that approximately $4.4 million will be required to
finance the Company's cost of constructing these restaurants. Funds
required to finance the Company's restaurant expansion program are projected
to be provided by cash flow from operations, available cash of approximately
$5.5 million at December 28, 1997, and an unused credit line of approximately
$10.3 million at December 28, 1997.
The Company's fiscal year ends on the Sunday nearest December 31.
Consequently, the Company will occasionally have a 53 week fiscal year.
The years ended December 31, 1995 and December 29, 1996 were 52 week fiscal
years. The period December 30, 1996 through December 28, 1997 is a 52 week
period.
Cost of restaurant sales relates to food and paper costs, labor and all other
restaurant costs for Company-owned restaurants. Other expenses, such as
depreciation and amortization and general and administrative expenses, relate
primarily to Company-owned restaurants and to the Company's franchise sales
and support functions.
Petition for relief under Chapter 11--
On December 15, 1995, Krystal filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Eastern District of Tennessee in Chattanooga,
Tennessee (the "Court"), for the purpose of completely and finally resolving
the various claims filed against the Company by current and former employees
alleging violations of the Fair Labor Standards Act of 1938 ("FLSA").
Under Chapter 11, enforcement of certain pre-petition unsecured claims were
stayed, while Krystal continued operations in the ordinary course of business
as a debtor-in-possession. Those unsecured stayed claims are reflected in
the December 29, 1996 consolidated balance sheet as liabilities subject to
compromise.
A plan of reorganization, as amended (the "Plan") was formally filed on
February 24, 1997. The Plan was confirmed by the U.S. Bankruptcy Court on
April 10, 1997. The Plan, which became effective April 23, 1997, provided for
full payment of all administrative expenses, tax claims, priority claims and
secured claims. The Plan also provided for full payment of unsecured claims
which includes trade and financial creditors. The Plan further provided for
interest of 8.5% per annum for unsecured trade creditors and for the payment
of 1.3% per annum penalty interest on the unsecured senior notes held by
financial creditors.
In April 1997, the Company obtained sufficient financing from a financial
lending institution to pay all allowed claims as defined in the Plan.
As of December 28, 1997, Krystal has paid all claims associated with the
Chapter 11 Bankruptcy.
For the nine months ended September 28, 1997 and the year ended
December 29, 1996, interest income of approximately $125,000 and $375,000,
respectively, earned on excess cash due to the bankruptcy has been recorded
as a reduction in interest expense related to certain pre-petition liabilities
which include the 1.3% penalty interest on senior notes and the 8.5% interest
expense associated with the unsecured pre-petition trade payables. All other
interest income and contractual interest expense incurred in the ordinary
course of business has been reported separately in the accompanying
consolidated statement of operations for the nine months ended
September 28, 1997 and the year ended December 29, 1996.
Professional and other fees of $1,218,000, $3,846,000, and $184,000 for the
nine months ended September 28, 1997 and the years ended December 29, 1996
and December 31, 1995, respectively and incurred as a result of Krystal's
Chapter 11 filing have been segregated from expenses related to ordinary
operations and reported as a reorganization item in the accompanying
consolidated statements of operations.
Results of Operations --
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items from the Company's statements of
operations.
<TABLE>
<CAPTION>
Three | Nine
Months | Months
Ended | Ended Fiscal Year Ended
----------|---------- -------------------
Dec. 28,| Sep. 28, Dec.29, Dec. 31,
1997 | 1997 1996 1995
----------|---------- -------- --------
<S> <C> <C> <C> <C>
Revenues: |
Restaurant sales 96.5% | 96.8% 96.8% 96.5%
Franchise fees 0.2 | 0.1 0.2 0.2
Royalties 1.3 | 1.2 1.1 1.0
Other revenue 2.0 | 1.9 1.9 2.3
----------|---------- -------- --------
100.0 | 100.0 100.0 100.0
----------|---------- -------- --------
Costs and expenses: |
Cost of restaurant sales 79.4 | 80.3 80.1 79.4
Depreciation and amortization 5.2 | 4.5 4.7 5.0
General and administrative |
expenses 10.4 | 10.6 10.4 10.4
Other expenses, net 1.4 | 1.3 1.6 1.8
Provision for loss on restaurant |
closings and other property |
write-downs - | - - 1.6
Special charge - | - 1.6 4.0
----------|---------- -------- --------
96.4 | 96.7 98.4 102.2
----------|---------- -------- --------
Operating income (loss) 3.6 | 3.3 1.6 (2.2)
Reorganization expense - | (0.7) (1.6) (0.1)
Interest expense: |
Contractual rate interest, net (4.6) | (1.3) (1.3) (1.3)
Interest related to certain |
pre-petition liabilities, net - | 0.1 (0.3) -
----------|---------- -------- --------
Income (loss) before provision |
for income taxes and |
extraordinary item (1.0) | 1.4 (1.6) (3.6)
Provision for (benefit from) |
income taxes (0.2) | 0.5 (0.6) (1.5)
----------|---------- -------- --------
Income (loss) before extraordinary |
item (0.8) | 0.9 (1.0) (2.1)
Extraordinary charge for early |
Retirement of debt - | (0.1) - -
----------|---------- -------- --------
Net income (loss) (.08)% | 0.8% (1.0)% (2.1)%
==========|========== ======== ========
|
</TABLE>
Three months ended December 28, 1997 --
Company-owned average same restaurant sales were $247,000 for the fourth
quarter of 1997. One restaurant was closed during the quarter ended
December 28, 1997, reducing Company-owned restaurants to 248 from 249. The
franchise system had 101 restaurants open at the end of the fourth quarter of
1997 compared to 95 open during the quarter ended September 28, 1997.
The average customer check for Company-owned restaurants (both full service
and double drive-thru) in the fourth quarter of 1997 was $3.85. Customer
counts per restaurant day were 715 in the fourth quarter.
Cost of restaurant sales as a percentage of restaurant sales was 82.3% during
the fourth quarter 1997. Total food and paper costs were $19.8 million or
32.2% of restaurant sales for the period. Direct labor cost was $14.0
million or 22.7% of restaurant sales. Assistant restaurant manager labor cost
was $2.6 million or 4.3% of restaurant sales for the period. Restaurant
manager labor was $1.8 million or 3.0% or restaurant sales for the fourth
quarter 1997.
General and administrative expenses were $6.6 million for the fourth quarter
1997. Advertising expense was $2.5 million or 4.1% of restaurant sales for
the period. Salaries were $2.0 million for the fourth quarter 1997.
Benefit from income taxes was $138,000 for the fourth quarter 1997. The
effective income tax rate of 20.4% is less than the statutory income tax
rate primarily as a result of non-deductible amortization associated
with acquisition-related goodwill.
Comparison of the Nine Months Ended September 28, 1997
to the Fiscal Year Ended December 29, 1996
The following discussion compares a nine month period of operations in 1997
to a twelve month period in 1996.
Total revenues were $184.7 million or 24.4% lower for the first nine months of
1997 ("fiscal 1997") compared to $244.3 million for the twelve months ended
December 29, 1996 ("fiscal 1996"). Restaurant sales accounted for $57.7
million of this $59.6 million decrease. Company-owned average same
restaurant sales per week for fiscal 1997 were $18,500 compared to $18,200
for fiscal 1996, an increase of 1.6%. The Company's management believes the
fiscal 1997 per unit weekly sales increase can be attributed to several
factors, including price increases, new advertising and promotional programs,
continuing improvements in operations at the restaurant level and the mild
weather in the southeast in the first quarter 1997 as compared to fiscal 1996.
The Company had 249 restaurants open at the end of fiscal 1997 and 1996.
Franchise fees and royalties decreased $676,000 to $2.5 million in fiscal
1997 versus fiscal 1996. Expressed on a per week basis, fiscal 1997 increased
4.5% to $62,800 compared to $60,100 for fiscal 1996. This increase in
franchise fees and royalties on a per week basis is a result of an increase
in franchise restaurants. The franchise system had 95 restaurants open at the
end of fiscal 1997 compared to 89 open at the end of fiscal 1996.
Other revenue, which is generated primarily from the Company's aviation
subsidiary, was $3.5 million in fiscal 1997 compared to $4.7 million in
fiscal 1996. Expressed on a per week basis, fiscal 1997 decreased 1.0%
to $88,900 compared to $89,800 for fiscal 1996.
The average customer check for Company-owned restaurants (both full size and
Double drive-thru)in fiscal 1997 was $3.78 as compared to $3.60 in fiscal
1996, an increase of 5.0%. The increase in average customer check are due
primarily to product price increases of approximately 3.7% in fiscal 1997 over
fiscal 1996, and the introduction of promotional products and menu
combinations. Customer counts per restaurant day decreased to 691 in fiscal
1997 compared to 714 in fiscal 1996, a decrease of 3.2%. In addition to
fiscal 1996 having the benefit of the Christmas shopping season (which
increases customer counts), the customer count decline is partly attributable
to a new cash register being installed throughout the system which counts a
customer with each sale registered rather than each time the cash drawer is
opened. Conversion was completed in 208 restaurants at September 28, 1997,
and management believes this change has reduced customer counts by
approximately 1.7%, but produces a more accurate customer count.
Cost of restaurant sales was $148.4 million in fiscal 1997 compared to $195.7
million in fiscal 1996. Cost of restaurant sales as a percentage of restaurant
sales increased to 83.0% in fiscal 1997 from 82.8% in fiscal 1996. This
increase is primarily the result of increases in food and paper costs and labor
expenses. Total food and paper costs were $57.7 million in fiscal 1997 as
compared to $76.2 million in fiscal 1996. Food and paper costs as a
percentage of restaurant sales increased to 32.3% in fiscal 1997 as
compared to 32.2% in fiscal 1996. Direct labor cost was $39.9 million in
fiscal 1997 versus $52.7 million in fiscal 1996. Direct labor cost as a
percentage of restaurant sales was 22.3% for both fiscal 1997 and
fiscal 1996. Assistant restaurant manager labor cost was $8.3 million in
fiscal 1997 compared to $10.6 million in fiscal 1996. Assistant restaurant
manager labor as a percentage of restaurant sales was 4.7% in fiscal 1997
versus 4.5% in fiscal 1996. Restaurant manager labor cost was $5.6 million
in fiscal 1997 compared to $7.2 million in fiscal 1996. As a percentage of
restaurant sales, restaurant manager labor was 3.1% in both fiscal 1997 and
fiscal 1996.
Depreciation and amortization expenses were $8.2 million in fiscal 1997 as
compared to $11.4 in fiscal 1996. Expressed on a per week basis, fiscal 1997
decreased 3.7% to $211,000 per week compared to $219,000 per week in fiscal
1996. This decrease in fiscal 1997 is due primarily to some assets becoming
fully depreciated in late 1996.
General and administrative expenses were $19.7 million in fiscal 1997 versus
$25.4 million in fiscal 1996. Advertising expense was approximately $7.5
million in fiscal 1997 compared to $9.9 in fiscal 1996. Advertising expense
as a percentage of restaurant sales was 4.2% in both 1997 and 1996. Salaries
were $6.0 million in fiscal 1997 compared to $7.7 million in fiscal 1996.
Expressed on a per week basis, fiscal 1997 increased 3.4% to $154,000 versus
$149,000 in fiscal 1996. This increase in salaries was primarily the result of
accruing $226,000 for profit incentive bonuses in fiscal 1997; none were
accrued in fiscal 1996.
In accordance with Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, issued by the
American Institute of Certified Public Accountants, the Company is
expensing Reorganization Items as incurred. The total of such professional
fees and expenses during fiscal 1997 was $1.2 million as compared to $3.8
million in 1996.
A reducing adjustment of $331,000 in interest related to certain pre-petition
liabilities, net, resulted in interest income of $96,000 during fiscal 1997
compared to expense of $791,000 in fiscal 1996. Contractual rate interest
expense, net of interest income was $2.3 million in fiscal 1997 compared to
$3.2 million in fiscal 1996. Expressed on a per week basis, fiscal 1997
was $59,000 compared to $61,000 in 1996.
Provision for income taxes was $928,000 in fiscal 1997 as compared to an income
tax benefit of $1.5 million for fiscal 1996. The effective tax rates of 36%
in 1997, and 38% in 1996 approximate the combined statutory federal and state
income tax rates.
An extraordinary charge of $334,000 (pre tax) was recorded in 1997 to
write-off unamortized financing costs related to debt extinguished during 1997.
Comparison of Fiscal 1996 to Fiscal 1995 --
Total revenues decreased 1.5% to $244.3 million in 1996 compared to $248.0
million in 1995. Restaurant sales decreased $2.9 million to $236.5 million in
1996 from 1995. Fiscal 1996 and fiscal 1995 were both 52 week years. Average
sales per Company-owned restaurant decreased by 0.2% to $937,000 from $939,000
in 1995. The Company closed seven full size restaurants in 1996. Franchise
fees decreased $269,000 and royalties increased $358,000 in 1996 as the
Company's franchise system grew to 89 restaurants at the end of 1996 from 80
restaurants at the end of 1995. The Company recognizes franchise fees as
revenues upon the opening of a franchised restaurant.
Same restaurant sales declined 0.4% in 1996 versus 1995. The principal cause
of this decrease was a 3.9% decrease in average customer count per restaurant
day to 714 in 1996 from 743 in 1995. Product prices increased approximately
2.2% in 1996 over 1995. The average customer check in 1996 was $3.59 for
Company-owned KRYSTAL restaurants and $3.90 for Company-owned KRYSTAL KWIK
restaurants as compared to $3.46 and $3.80, respectively, in 1995, an increase
of approximately 3.8% and 2.6%, respectively. The Company's management
believes that the major national chains deep discounting and heavy advertising
combined with the over-expansion within the industry limited the
Company's opportunities for increasing market share. Given the competitive
environment, the Company deferred capital outlays for new restaurant
development and concentrated on building same restaurant sales to the
levels experienced in the early 1990's.
Cost of restaurant sales decreased $1.3 million, approximately 0.7%, to
$195.7 million in 1996 from $197.0 million in 1995. Cost of restaurant sales
as a percentage of restaurant sales increased to 82.8% in 1996 from 82.3% in
1995. Total food and paper costs increased $1.2 million, approximately 1.5%,
and increased as a percentage of restaurant sales to 32.2% in 1996 as
compared to 31.3% in 1995. Direct labor cost decreased $1.2 million,
approximately 2.2%, and decreased as a percent of restaurant sales to 22.3%
in 1996 versus 22.5% in 1995, due to the reduction of the number of
restaurants open in 1996 and the institution of a program to reduce direct
labor staffing and increase assistant manager staffing to improve training
and operations. Assistant restaurant manager labor cost increased $694,000,
approximately 7.0%, and increased as a percentage of restaurant sales to 4.5%
in 1996 compared to 4.1% in 1995 due to the aforementioned program and
average salary increases. Restaurant manager labor cost increased $79,000,
approximately 1.1%, due to average salary increases net of seven restaurant
closings during 1996.
Depreciation and amortization expense decreased $933,000, approximately 7.6%,
to $11.4 million in 1996 as compared to $12.3 million in 1995. The
decrease in 1996 was primarily due to certain assets being fully depreciated
in late 1995 and during 1996.
General and administrative expenses decreased $348,000, approximately 1.4%, to
$25.4 million in 1996 versus $25.8 million in 1995. Advertising expense
increased $18,000 to $9.9 million in 1996 from $9.8 million in 1995.
Advertising expense as a percentage of restaurant sales was 4.2% in 1996
compared to 4.1% in 1995. Salaries increased $478,000, approximately
6.9%, to $7.7 million in 1996 from $7.2 million in 1995. The increase in
salaries was primarily the result of normal cost of living increases given to
staff employees and the addition of key management personnel during 1995.
Professional fees, other than professional fees and expenses related to the
Chapter 11 proceedings, decreased $1.1 million, approximately 53.4%, to
$933,000 in 1996 as compared to $2.0 million in 1995.
In December 1995, the Company recorded a provision for loss on restaurant
closings and other property write-downs of $3,911,000 as discussed in Note 4
to Consolidated Financial Statements.
A special charge of $4.0 million was recorded in 1996, in addition to $10.0
million that was recorded in 1995, in connection with the compensation of
hourly employees as discussed in Note 11 to Consolidated Financial Statements.
Professional fees and expenses related to the Chapter 11 proceedings
increased $3.7 million to $3.8 million in 1996 compared to $184,000 in 1995.
The Company operated under Chapter 11 all of 1996 versus 16 days in 1995.
Contractual rate interest decreased $129,000 to $4.0 million in 1996 compared
to $4.1 million in 1995 due to reductions in principal in 1995 before the
Chapter 11 filing stayed further principal payments.
Interest related to certain pre-petition liabilities was intended to compensate
creditors for the loss of use of funds during the Chapter 11 period.
$1,200,000 was recorded for this expense in 1996, net of approximately
$375,000 of interest income from the investment of funds which, except for the
Chapter 11 restrictions, would have paid vendors' accounts.
Benefit from income taxes was $1.5 million in 1996 versus $3.7 million
in 1995. The Company's effective income tax rates in 1996 and 1995
were 38.0% and 40.9%, respectively, as compared to the approximate combined
statutory federal and state income tax rates of 38.0%. The increased
effective benefit rate for 1995 resulted from utilization of tax credits
which were not available for most of 1996.
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 $8.9 million at December 28, 1997, compared
to a working capital surplus of $19.6 million at December 29, 1996. This
surplus resulted from approximately $30.8 million of liabilities classified as
Liabilities Subject to Compromise during the Chapter 11 period, which would
otherwise have been classified as Current Liabilities at December 29, 1996.
Capital expenditures totaled approximately $7.1 million for the 12 months of
1997, compared to $6.5 million in 1996. The Company closed one restaurant in
1997 and seven in 1996. Approximately $17.9 million is budgeted for capital
expenditures in 1998 for building five restaurants to open in 1998, beginning
construction and/or acquiring land for thirteen restaurants to open in 1999,
refurbishing of certain restaurants and on-going capital improvements. The
Company owns approximately 54.0% of its restaurant locations and leases the
remainder.
At December 28, 1997, the Company had existing cash balances of $5.5 million,
an income tax receivable of $4.6 million and an unused credit line of $10.3
million. The Company expects these funds and funds from operations will be
sufficient to meet its operating requirements for the foreseeable future.
Budgeted Capital Expenditures --
Management believes that existing cash, income tax receivable, unused credit
line and cash flow from operations will be sufficient to meet its anticipated
capital expenditures and other obligations for the next 12 months.
Impact of Inflation --
Although increases in labor, food and other operating costs could adversely
affect the Company's operations, management does not believe that inflation
has had a material effect on income during the past several years.
Seasonality --
The Company does not expect seasonality to affect its operations in a
materially adverse manner. The Company's revenues during its first fiscal
quarter, comprising the months of January, February and March, will, however,
generally be lower than its other quarters due to consumer shopping habits
and the climate in the location of a number of its restaurants.
Year 2000 --
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. Software failures due
to processing errors potentially arising from calculations using the year
2000 date are a known risk. The Company has developed a plan to ensure its
systems are compliant with the requirements to process transactions in the
year 2000. The majority of the Company's internal information systems is
estimated to be replaced with fully compliant new systems. The total cost
of the software and implementation is estimated to be $1,500,000 to
$2,000,000 which will be capitalized as incurred. The actual cash payments
will be made in 1998 as the implementation is expected to be completed.
The Company does not currently have any information concerning the year
2000 compliance status of its suppliers. In the event that any of the
Company's significant suppliers does not successfully and timely achieve
year 2000 compliance, the Company's business or operations could be
adversely affected.
Item 8. Financial Statements and Supplementary Data
(commencing on the following page)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Krystal Company:
We have audited the accompanying consolidated balance sheet of The Krystal
Company (a Tennessee corporation) and subsidiary ("Post-Merger Company") as of
December 28, 1997 (see Note 1) and the related consolidated statements of
operations, shareholders' equity and cash flows for the three months then
ended. We have also audited the accompanying consolidated balance sheet of
The Krystal Company (a Tennessee corporation) and subsidiary ("Pre-Merger
Company") as of December 29, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the nine months ended
September 28, 1997 and the years ended December 29, 1996 and December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Post-Merger Company
as of December 28, 1997 and the results of its operations and its cash
flows for the three months then ended and the financial position of the
Pre-Merger Company as of December 29, 1996 and the results of its operations
and its cash flows for the nine months ended September 28, 1997 and for the
years ended December 29, 1996 and December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
February 9, 1998
<TABLE>
The Krystal Company and Subsidiary
----------------------------------
Consolidated Balance Sheets
---------------------------
(Dollars in thousands)
<CAPTION>
----------- | -----------
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
----------- | -----------
|
<S> <C> | <C>
ASSETS |
CURRENT ASSETS: |
Cash and temporary investments $ 5,507 | $ 28,765
Receivables, net 1,477 | 2,566
Income tax receivable 4,582 | --
Net investment in direct financing |
leases-current portion 247 | 562
Inventories 2,241 | 2,156
Deferred income taxes 2,736 | 8,327
Prepayments and other 830 | 1,980
-------- | -------
Total current assets 17,620 | 44,356
-------- | -------
NET INVESTMENT IN DIRECT FINANCING |
LEASES, excluding current portion 58 | 305
-------- | -------
PROPERTY, BUILDINGS AND EQUIPMENT, net 101,200 | 91,173
-------- | -------
LEASED PROPERTIES, net of accumulated |
amortization of $53 at December 28, |
1997 and $3,162 at December 29, 1996 1,660 | 1,653
-------- | -------
OTHER ASSETS: |
Cash surrender value of life insurance 6,266 | 5,638
Prepaid pension asset 8,955 | --
Deferred financing costs, net 5,359 | 375
Goodwill, net 48,674 | --
Other 329 | 370
-------- | -------
Total other assets 69,583 | 6,383
-------- | -------
$ 190,121 | $ 143,870
======= | =======
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
</TABLE>
<TABLE>
The Krystal Company And Subsidiary
----------------------------------
Consolidated Balance Sheets
---------------------------
(Dollars in thousands)
<CAPTION>
----------- | -----------
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
----------- | -----------
<S> <C> | <C>
LIABILITIES AND SHAREHOLDERS' EQUITY |
CURRENT LIABILITIES: |
Accounts payable $ 6,819 | $ 4,535
Accrued liabilities 19,399 | 17,986
Current portion of long-term debt 53 | 967
Current portion of capital |
lease obligations 235 | 454
Income taxes payable -- | 822
-------- | -------
Total current liabilities 26,506 | 24,764
-------- | -------
LIABILITIES SUBJECT TO COMPROMISE |
(Notes 3 and 7) -- | 58,317
-------- | -------
LONG-TERM DEBT, excluding current portion 112,174 | 3,090
-------- | -------
CAPITAL LEASE OBLIGATIONS, excluding |
current portion 2,029 | 2,278
-------- | -------
DEFERRED INCOME TAXES 10,256 | 2,286
-------- | -------
OTHER LONG-TERM LIABILITIES 4,695 | 8,447
-------- | -------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11) |
|
SHAREHOLDERS' EQUITY: |
Common stock, without par value; |
100 shares authorized; issued |
and outstanding, 100 shares at |
December 28, 1997; 15,000,000 shares |
authorized; issued and outstanding, |
7,491,768 shares at December 29, 1996 35,000 | 40,556
Retained earnings (539) | 5,873
Deferred compensation -- | (1,741)
-------- | -------
Total shareholders' equity 34,461 | 44,688
-------- | -------
|
$ 190,121 | $ 143,870
======== | =======
|
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
</TABLE>
<TABLE>
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Operations
-------------------------------------
(Dollars in thousands)
<CAPTION>
Post-Merger | Pre-Merger
Company | Company
-----------|------------------------------
Three | Nine
Months | Months
Ended | Ended Fiscal Year Ended
-----------|------------------------------
Dec. 28, | Sep. 28, Dec. 29, Dec. 31,
1997 | 1997 1996 1995
-----------|------------------------------
<S> <C> |<C> <C> <C>
Revenues: |
Restaurant sales $ 61,440 |$178,815 $236,470 $239,376
Franchise fees 130 | 219 349 618
Royalties 828 | 2,232 2,778 2,420
Other revenue 1,290 | 3,469 4,671 5,614
----------|--------- -------- ----------
63,688 | 184,735 244,268 248,028
----------|--------- -------- ----------
Cost and Expenses: |
Cost of restaurant sales 50,569 | 148,394 195,733 197,031
Depreciation and |
amortization expense 3,342 | 8,216 11,378 12,311
General and administrative |
expenses 6,612 | 19,657 25,422 25,770
Other expenses, net 901 | 2,443 3,809 4,417
Provision for loss on |
restaurant closings and |
other property write-downs - | - - 3,911
Special charge (Note 11) - | - 4,000 10,000
----------|--------- -------- ----------
61,424 | 178,710 240,342 253,440
----------|--------- -------- ----------
Operating income (loss) 2,264 | 6,025 3,926 (5,412)
Reorganization item - | (1,218) (3,846) (184)
Interest expense, net: |
Contractual rate interest, net (2,941)| (2,310) (3,191) (3,416)
Interest related to certain |
pre-petition liabilities, net - | 96 (791) -
----------|--------- --------- ---------
Income (loss) before provision |
for (benefit from) income |
taxes and extraordinary item (677)| 2,593 (3,902) (9,012)
Provision for (benefit from) |
income taxes (138)| 928 (1,480) (3,688)
----------|--------- --------- ---------
Income (loss) before |
extraordinary item (539)| 1,665 (2,422) (5,324)
Extraordinary charge for early |
extinguishment of debt, net of |
tax benefit of $134 - | (220) - -
----------|--------- --------- ---------
Net income (loss) $ (539)|$ 1,445 $ (2,422) $(5,324)
==========|========= ========= ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<TABLE>
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
(Dollars in thousands)
<CAPTION>
Common Retained Deferred
Stock Earnings Compensation
------ -------- ------------
<S <C> <C> <C>
BALANCE, January 1, 1995 $40,909 $13,438 $(2,711)
Issuance of 73,440 common shares
under restricted stock plan 567 -- (567)
Forfeiture of 56,480 restricted
shares (646) -- 646
Net loss -- (5,324) --
Amortization of deferred
compensation -- -- 254
Tax benefit of restricted
stock vested -- 81 --
------- ------- -------
BALANCE, December 31, 1995 40,830 8,195 (2,378)
Issuance of 960 common shares
under restricted stock plan 4 -- (4)
Forfeiture of 36,000 restricted
shares (278) -- 278
Net loss -- (2,422) --
Amortization of deferred
compensation -- -- 363
Tax benefit of restricted
stock vested -- 100 --
------- ------- -------
BALANCE, December 29, 1996 40,556 5,873 (1,741)
Issuance of 720 common shares
to management & non-employee
director under restricted stock
plans 4 -- (4)
Forfeiture of 16,400 restricted
shares (197) -- 197
Amortization of deferred
compensation -- -- 1,548
Net income -- 1,445 --
------- ------- -------
BALANCE, September 28, 1997
Pre-Merger Company $40,363 $ 7,318 $ --
======= ======= =======
- ---------------------------------------------------------------------
Cancellation of Pre-Merger
balances upon merger (40,363) (7,318) --
Capital Contribution by
Port Royal Holdings, Inc. 35,000 -- --
Net loss -- (539) --
------- ------- -------
BALANCE, December 28, 1997
Post-Merger Company $35,000 $ (539) $ --
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<TABLE>
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(Dollars in thousands)
<CAPTION>
-----------|-------------------------------
Post-Merger| Pre-Merger
Company | Company
-----------|-------------------------------
Three | Nine
Months | Months
Ended | Ended Fiscal Year Ended
-----------|-------------------------------
Dec. 28, | Sep. 28, Dec. 29, Dec. 31,
1997 | 1997 1996 1995
-----------|-------------------------------
<S> <C> | <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net (loss) income $ (539) | $ 1,445 $ (2,422) $ (5,324)
Adjustments to reconcile net |
(loss) income to net cash provided |
by (used in) operating activities- |
Depreciation and amortization 3,342 | 8,216 11,378 12,221
Deferred income taxes ( 187) | 5,152 (3,207) (5,011)
Provision for loss on restaurant |
closings and other property |
write-downs -- | -- -- 3,911
Loss on early extinguishment |
of debt -- | 220 -- --
Changes in operating assets and |
liabilities: |
Receivables, net 2,535 | (1,446) (814) 406
Income tax receivable 2,541 | (4,524) 609 (609)
Inventories (174) | 266 166 (185)
Prepayments and other 245 | 905 (1,150) (49)
Accounts payable 2,063 | 221 2,854 (5,423)
Income taxes payable (212) | (822) 822 (318)
Accrued liabilities (986) | 271 8,559 (3,376)
Other, net (1,189) | (840) (64) 523
Liabilities from |
reorganization activities -- | (22,317) 1,408 20,909
-------|---------- --------- --------
Net cash provided by (used in) |
operating activities 7,439 | (13,253) 18,139 17,675
--------|---------- --------- --------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Acquisition of |
The Krystal Company (111,256) | -- -- --
Additions to property, buildings |
and equipment (1,643) | (5,437) (6,457) (16,307)
Proceeds from sale of property, |
buildings and equipment 20 | 635 3,282 908
Payments received on net |
investment in direct |
financing leases 100 | 462 856 766
--------|---------- --------- --------
Net cash used in investing |
activities (112,779) | (4,340) (2,319) (14,633)
--------|---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: |
Decrease in debt from |
reorganization activities -- | (36,000) -- --
Borrowings under revolving |
credit facility 5,113 | 6,000 -- --
Proceeds from issuance of |
long-term debt -- | 30,000 -- --
Repayments of Pre-Merger |
Company long-term debt (29,512) | (3,431) (53) (3,472)
Issuance of 10.25% senior notes 100,000 | -- -- --
Principal payments of capital |
lease obligations (83) | (385) (675) (652)
Capital contribution from |
Port Royal Holdings, Inc. 35,000 | -- -- --
Deferred financing costs (5,597) | (1,430) -- --
Other -- | -- (40) (9)
--------|---------- --------- --------
Net cash provided by (used in) |
financing activities 104,921 | (5,246) (768) (4,133)
---------|---------- --------- --------
NET INCREASE(DECREASE) IN CASH AND |
TEMPORARY INVESTMENTS (419) | (22,839) 15,052 (1,091)
|
CASH AND TEMPORARY INVESTMENTS, |
beginning of period 5,926 | 28,765 13,713 14,804
---------|---------- --------- --------
CASH AND TEMPORARY INVESTMENTS, |
end of period $ 5,507 | $ 5,926 $28,765 $13,713
=========|========== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
INFORMATION: |
Cash paid during the period for: |
Interest, net of amount |
capitalized $ 653 | $ 6,797 $ 648 $4,005
========|========== ========= ========
Income taxes $ 23 | $ 862 $ 917 $1,819
========|========== ========= ========
Reorganization item $ -- | $ 14,955 $ 1,092 $ 184
========|========== ========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER WITH PORT ROYAL HOLDINGS INC.
On July 3,1997 The Krystal Company ("Krystal" or the "Pre-Merger Company")
entered into a merger agreement with a wholly-owned subsidiary of Port Royal
Holdings, Inc. ("Port Royal"), whereby Port Royal commenced a tender offer for
all the outstanding shares of the Pre-Merger Company's common stock for $14.50
per share in cash.
As a result of the merger, each share of Krystal's issued and outstanding
stock prior to the merger was converted into the right to receive $14.50 in
cash, and Krystal became a wholly-owned subsidiary of Port Royal. Port
Royal's total purchase price of common stock and related acquisition costs
amounted to $111.3 million. The acquisition was funded primarily through the
issuance of $100 million in unsecured senior notes (Note 6). Additionally,
a $25 million credit facility was obtained (Note 6) and a $35 million equity
contribution was made by Port Royal to fund the acquisition, pay off
outstanding Pre-Merger Company debt (Note 6), and provide working capital.
The acquisition and merger were completed on September 26, 1997 (September 29,
1997 for accounting purposes) and were accounted for using the purchase method
of accounting. Accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based on fair market values at the date of
acquisition, with the remainder to goodwill. The historical shareholders'
equity of Krystal was eliminated on the Post-Merger Company's consolidated
balance sheet. The fair value adjustments to the historical consolidated
balance sheet were as follows:
(In thousands)
Net assets acquired on September 29, 1997
at historical cost $ 46,279
Revaluation of Krystal's property, buildings
and equipment to estimated fair value 15,797
Adjustment to fair value of other
assets acquired and liabilities assumed 3,075
Deferred income taxes associated with
the revaluation of Krystal's assets
and liabilities (3,052)
Goodwill 49,157
---------
Total purchase price allocated $ 111,256
=========
2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities --
Krystal (a Tennessee corporation) is engaged primarily in the development,
operation and franchising of fast food restaurants in the southeastern United
States. Krystal's wholly-owned subsidiary, Krystal Aviation Co. ("Aviation")
operates a fixed base airport hangar operation in Chattanooga, Tennessee.
Aviation's revenues in each of the last three years were less than 3% of the
Company's total revenues. As discussed in Note 3, on December 15, 1995,
Krystal filed a petition for relief under Chapter 11 of the federal bankruptcy
laws. Krystal emerged from Chapter 11 bankruptcy with the confirmation of
Krystal's plan of reorganization by the U.S. Bankruptcy Court on April 10,1997.
Basis of Presentation --
The consolidated financial statements for the nine months ended
September 28, 1997 and for the years ended December 29, 1996 and
December 31, 1995,were prepared using the Pre-Merger Company's historical
basis of accounting. The accompanying consolidated financial statements as
of and for the three months ended December 28, 1997 were prepared under a new
basis of accounting that reflects the preliminary allocation of the fair
value of assets acquired and liabilities assumed, the related financing and
acquisition costs and all debt incurred in connection with the acquisition of
Krystal by Port Royal. Accordingly, the consolidated financial statements for
periods prior to September 29, 1997 are not comparable to consolidated
financial statements on or subsequent to September 29, 1997. A black line on
the accompanying consolidated financial statements distinguishes between the
Pre-Merger and Post-Merger Company.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
The Krystal Company and Aviation (herein after referred to collectively as
The "Company"). All significant intercompany balances and transactions have
been eliminated.
Fiscal Year End --
The Company's fiscal year ends on the Sunday nearest December 31.
Consequently, the Company will periodically have a 53-week fiscal year.
The years ended December 28, 1997 (comprised of the nine months ended
September 28, 1997 and the three months ended December 28, 1997),
December 29, 1996 and December 31, 1995 were 52 week fiscal years.
Cash and Temporary Investments --
For purposes of the consolidated statements of cash flows, the Company
considers repurchase agreements and other temporary cash investments with a
maturity of three months or less to be temporary investments.
Inventories --
Inventories are stated at cost and consist primarily of food, paper products
and other supplies. Prior to the acquisition of Krystal by Port Royal, the
Company used the last-in, first-out (LIFO) method of accounting for a
substantial portion of its inventories. Effective September 29, 1997, the
Company changed to the first-in, first-out (FIFO) method. If the FIFO method
had been used instead of LIFO, inventories at December 29, 1996 would have
been approximately $154,000 higher. The change in accounting principle was
made primarily to reflect inventory on the consolidated balance sheet at a
value that more closely represents current cost at the date of the acquisition
and merger. This accounting change was not material to the financial
statements on an annual or quarterly basis, and accordingly, no retroactive
restatement of prior years' financial statements was made.
Property, Buildings and Equipment --
Prior to September 29, 1997, property, buildings and equipment are stated at
cost. Effective with the acquisition by Port Royal, property, buildings and
equipment were adjusted to their estimated fair values.
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
Leaseholds Life of lease up to 20 years
Long-lived assets --
The Company periodically evaluates the carrying value of long-lived assets
to be held and used when events or changes in circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired
when the projected undiscounted future cash flow of such asset is less than
its carrying value.
Intangibles --
The consolidated balance sheet of the Post-Merger Company includes the
preliminary allocation of purchase accounting goodwill of $49,157,000 and
deferred financing costs of $5,597,000. Intangibles are amortized on a
straight-line basis over 10 to 25 years. Amortization expense for goodwill
and deferred financing costs for the 3 months ended December 28, 1997 was
$483,000 and $204,000, respectively.
Franchise and License Agreements --
Franchise or license agreements are available for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants
the franchisee or licensee is to construct and open in the franchised area
during the term of the agreement. At December 28, 1997, there were 101
franchised or licensed restaurants of which 68 restaurants were operated under
multi-unit agreements. At December 29, 1996, there were 89 franchised or
licensed restaurants of which 57 restaurants were operated under multi-unit
agreements.
Franchisees and licensees are required to pay the Company a franchise or
license fee and a weekly royalty and service fee of either 4.5% or 6.0%,
depending on the duration of the franchise agreement, of the restaurants'
gross receipts. Unit franchise and license fees are recorded as income as
related restaurants begin operations. Royalty and service fees, which are
based on restaurant sales of franchisees and licensees, are accrued 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 28, 1997 and December 29, 1996, total deferred franchise and license
fees were approximately $628,000 and $682,000, respectively.
Fair market value of financial instruments --
Unless otherwise indicated elsewhere in the notes to the consolidated financial
statements, the carrying values of the Company's financial instruments
approximate their fair values.
Use of Estimates --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications --
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
3. PETITION FOR RELIEF UNDER CHAPTER 11
On December 15, 1995, Krystal filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Eastern District of Tennessee in
Chattanooga, Tennessee (the "Court"), for the purpose of completely and
finally resolving the various claims filed against the Company by current and
former employees alleging violations of the Fair Labor Standards Act of 1938
("FLSA"). Under Chapter 11, enforcement of certain pre-petition unsecured
claims were stayed, while Krystal continued operations in the ordinary course
of business as a debtor-in-possession. Those unsecured stayed claims are
reflected in the December 29, 1996 consolidated balance sheet as liabilities
subject to compromise (Notes 6, 7 and 11).
A plan of reorganization, as amended (the "Plan") was formally filed on
February 24, 1997. The Plan was confirmed by the U.S. Bankruptcy Court on
April 10, 1997 and the Company emerged from Chapter 11 bankruptcy. The Plan,
which became effective April 23, 1997 provided for full payment of all
administrative expenses, tax claims, priority claims and secured claims.
The Plan also provided for full payment (including interest) of unsecured
claims which includes trade and financial creditors. As of December 28, 1997,
Krystal has paid all claims associated with the Chapter 11 Bankruptcy.
For the nine months ended September 28, 1997 and the year ended
December 29, 1996, interest income of approximately $125,000 and $375,000,
respectively, earned on excess cash due to the bankruptcy has been recorded
as a reduction in interest expense related to certain pre-petition
liabilities. Such liabilities include certain interest on senior notes and
unsecured pre-petition trade payables. All other interest income and
contractual interest expense incurred in the ordinary course of business
has been reported separately in the accompanying consolidated statement of
operations for the nine months ended September 28, 1997 and the year ended
December 29, 1996.
Professional and other fees of $1,218,000, $3,846,000, and $184,000 incurred
as a result of Krystal's Chapter 11 filing have been segregated from expenses
related to ordinary operations and reported as a reorganization item in the
accompanying consolidated statements of operations for the nine months ended
September 28, 1997 and the years ended December 29, 1996 and December 31, 1995,
respectively.
4. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment at December 28, 1997 and December 29, 1996,
consisted of the following:
----------- | -----------
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
----------- | -----------
(In thousands)
|
Land $ 40,248 | $ 33,803
Buildings and improvements 27,315 | 49,044
Equipment 26,216 | 69,467
Leaseholds 8,701 | 20,333
Construction in progress 1,379 | 896
--------- | ---------
103,859 | 173,543
Accumulated depreciation |
and amortization (2,659) | (82,370)
--------- | ---------
$ 101,200 | $ 91,173
========= | =========
In December 1995, the Company recorded a provision for loss on restaurant
closings and other property write-downs of $3,911,000 which is reflected in
the accompanying consolidated statement of operations for the year ended
December 31, 1995. This provision primarily relates to the Company's
estimated losses to be incurred associated with decisions to close certain
restaurants.
5. ACCRUED LIABILITIES
Accrued liabilities at December 28, 1997 and December 29, 1996, consisted of
the following:
----------- | -----------
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
------------ | -----------
(In thousands)
|
Salaries, wages and vacation pay $ 4,018 | $ 3,477
Workers' compensation 4,590 | 3,753
State sales taxes 1,341 | 1,321
Accrued interest 2,823 | 4,178
Accrued reorganization expenses -- | 2,286
Other 6,627 | 2,971
-------- | --------
$ 19,399 | $ 17,986
======== | ========
6. INDEBTEDNESS
Long-term debt at December 28, 1997 and December 29, 1996, consisted of the
following:
----------- | -----------
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
----------- | -----------
(In thousands)
|
Revolving credit facility, |
due August 26, 2000 $ 11,113 | --
10.25% senior notes, |
due October 2007 100,000 | --
7.6% senior notes, payable |
in annual installments |
beginning in May 1997 and |
balance due May 2004 -- | $ 20,000
11.16% senior notes, payable |
in annual installments and |
balance due May 1999 -- | 16,000
10.5% mortgage bonds, payable |
in monthly installments |
through October 2001 -- | 2,884
Other 1,114 | 1,173
-------- | --------
112,227 | 40,057
Less-- |
Current maturities (53) | (967)
Liabilities subject to |
compromise -- | (36,000)
-------- | --------
$112,174 | $ 3,090
======== | ========
In September 1997, Port Royal issued $100,000,000 in unsecured 10.25% senior
notes ("the Notes") which mature on October 1, 2007. Following the
acquisition and merger, the Post-Merger Company became the obligor of
the Notes. The Notes will pay interest semi-annually on April 1 and
October 1 of each year, commencing April 1, 1998. The Notes are redeemable
at the option of the Company at prices decreasing from 105 1/8% of the
principal amount on April 1, 2002 to 100% of the principal amount on
April 1, 2005. On or prior to April 1, 2000, the Company may redeem up to
35% of the original principal amount with the proceeds of one or more public
equity offerings at a redemption price of 110 1/4%. Additionally, upon a
change of control of the Company, the holders of the Notes will have the
right to require the Company to purchase all or a portion of the Notes at a
price equal to 101% of the original principal amount. The proceeds of the
Notes were used primarily to fund the acquisition by Port Royal.
In September 1997, the Company entered into a credit agreement with a bank for
a $25 million credit facility (the "Credit Facility") which matures
August 26, 2000. Borrowings under the credit facility bear interest rates,
at the option of the Company, equal to either: (a) the greater of the prime
rate or the federal funds rate plus 0.5%, plus a margin of 0.5%, or
(b) the rate offered in the Eurodollar market for amounts and periods
comparable to the relevant loan, plus a margin that is determined by
certain financial covenants. At December 28, 1997, the margin applicable
to the Eurodollar interest rate was 2.5%.
The Credit Facility contains restrictive covenants including, but not
limited to: (a) the Company's required maintenance of minimum levels of
tangible net worth; (b) limitations regarding additional indebtedness;
(c) the Company's required maintenance of a minimum amount of fixed charges
coverage; and (d) limitations regarding liens on assets. Additionally, the
Credit Facility contains a provision that, in the event of a defined change of
control, the Credit Facility will be terminated. As of December 28, 1997, the
Company was in compliance with all loan covenants.
The proceeds of the Credit Facility were used to pay a portion of the purchase
price, certain fees and expenses related to the acquisition and merger,
certain indebtedness and provide working capital for the Post-Merger Company.
Property and buildings with a net book value of $80,530,000 at
December 28, 1997, are pledged as collateral on the Credit Facility.
Additionally, the revolving Credit Facility is guaranteed by Port Royal by a
secured pledge of all the Company's common stock held by Port Royal and the
common stock of each existing and future subsidiary of the Company.
Scheduled maturities of long-term debt at December 28, 1997, are as follows:
(In thousands):
1998 $ 53
1999 53
2000 11,149
2001 5
2002 95
Thereafter 100,872
In April 1997, the Company obtained financing (the "Financing")from a financial
lending institution to pay the settlement of the FLSA class suit, the payment
of senior unsecured and secured debt and creditors' allowed claims in full
including interest of 8.5%. The Financing provided for a $23,000,000 five year
revolving credit facility, a $10,000,000 term loan due in equal quarterly
installments over five years and a $20,000,000 term loan due in quarterly
installments in the third through the fifth year following completion of the
financing. The revolving credit facility and term loans were secured by
substantially all of the Company's assets. In the first quarter of 1997, the
Company recognized an extraordinary after-tax charge of $220,000 as a result of
the early extinguishment of the senior unsecured debt and secured debt in
conjunction with the Financing. In conjunction with the acquisition by
Port Royal, the Financing was repaid in full.
At December 28, 1997, 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 28, 1997 exceeds their carrying value by approximately $3,500,000.
The fair value was estimated based upon quoted market prices for the same
or similar issues.
7. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise at December 29, 1996, consisted of the
following:
(In thousands)
Unsecured long-term debt $ 36,000
Accounts payable 7,920
Special charge reserve 13,875
Other 522
-------
$ 58,317
=======
8. BENEFIT PLANS
Retirement Plans --
The Company has a noncontributory, defined benefit pension plan covering
substantially all operating and salaried employees. 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. Plan assets at
December 28, 1997 and December 29, 1996, are invested primarily in equity
securities, managed international equity and bond index funds and U.S.
government securities.
Net pension expense included the following components:
<TABLE>
<CAPTION>
Post-Merger | Pre-Merger
Company | Company
-----------|-------------------------------
Three | Nine
Months | Months
Ended | Ended Fiscal Year Ended
------ | -------- -----------------
Dec. 28,| Sept. 28, Dec. 29, Dec. 31,
1997 | 1997 1996 1995
------ | -------- -------- --------
| (In thousands)
<S> <C> | <C> <C> <C>
Service cost (benefits earned |
during the period) $ 341 | $1,023 $1,594 $1,182
Interest cost on projected |
benefit obligation 476 | 1,373 1,728 1,575
Actual return on plan assets 295 | (7,049) (4,224) (5,254)
Net amortization and deferral (1,028) | 4,764 1,868 3,253
------ | ------ ------ ------
Net pension expense $ 84 | $ 111 $ 966 $ 756
====== | ====== ====== ======
</TABLE>
The following table sets forth the status of the plan as of December 28, 1997
and December 29, 1996:
<TABLE>
<CAPTION>
----------- | -----------
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
----------- | -----------
(In thousands)
<S> <C> | <C>
Actuarial present value of |
accumulated benefit obligations: |
Vested benefit obligation $ 22,598 | $ 19,884
Nonvested benefit obligation 896 | 767
------ | ------
Accumulated benefit obligation $ 23,494 | $ 20,651
====== | ======
|
Projected benefit obligation $(26,653) | $(24,112)
Plan assets at fair value 33,197 | 27,936
------ | ------
Plan assets in excess of |
projected benefit obligation 6,544 | 3,824
Unrecognized net gain (loss) 2,411 | (6,893)
Unrecognized initial asset -- | (1,160)
Unrecognized prior service cost -- | 400
------ | ------
Pension asset (liability) recognized |
in the consolidated balance sheets $ 8,955 | $ (3,829)
====== | ======
</TABLE>
The projected benefit obligation was determined using a discount rate of 7.5%,
8.0%, 8.0% and 7.5% for the three months ended December 28, 1997, the nine
months ended September 28, 1997,and the years ended December 29, 1996 and
December 31, 1995, respectively. The assumed rates of compensation increase
are 3.0%. The expected long-term rates of return on plan assets are 9.0%.
The Company also has a supplemental executive retirement plan for certain
former officers. The plan provides additional benefits upon retirement. The
supplemental retirement benefit shall be paid over the officers' lifetime but
for no less than a period of 10 years following retirement. The Company
provides an annual amount necessary to amortize the total cost of the estimated
deferred compensation at retirement. Total deferred compensation accrued for
this plan at December 28, 1997 and December 29, 1996, was $3,261,000 and
$2,876,000, respectively.
The Company is the beneficiary of life insurance policies with a face amount
of $7,722,000 at December 28, 1997. Total cash surrender value of such life
insurance at December 28, 1997 and December 29, 1996 was $6,226,000 and
$5,638,000, respectively.
Postretirement Health Care and Dental Benefits --
Employees retiring from the Company on or after attaining age 55 that meet
certain eligibility requirements are entitled to postretirement health care
and dental benefit coverage. These benefits vary for hourly and salaried
employees and are subject to deductibles, copayment provisions and other
limitations. The Company may amend or change the plan periodically. Retirees
contribute at a fixed rate per month toward the cost of the plan.
Net periodic postretirement health care benefits cost included the following
components:
<TABLE>
<CAPTION>
Post-Merger | Pre-Merger
Company | Company
-----------|-------------------------------
Three | Nine
Months | Months
Ended | Ended Fiscal Year Ended
------ | -------- ------------------
Dec. 28,| Sept. 28, Dec. 29, Dec. 31,
1997 | 1997 1996 1995
------ | -------- -------- --------
| (In thousands)
<S> <C> | <C> <C> <C>
Service cost (benefits earned |
during the period) $ 20 | $ 60 $ 78 $ 74
Interest cost on accumulated |
postretirement health care |
benefits obligation 19 | 56 67 68
---- | ---- ---- ----
Net periodic postretirement |
health care benefits cost $ 39 | $ 116 $ 145 $ 142
==== | ==== ==== ====
</TABLE>
The following table sets forth the funded status of the plan, reconciled
to the accrued postretirement health care benefits recognized in the
Company's consolidated balance sheets at December 28, 1997 and
December 29, 1996:
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
----------- | -----------
(In thousands)
Accumulated postretirement health |
care benefits obligation: |
Retirees $ (88) | $ 146
Employees fully eligible (298) | 270
Other active participants (711) | 553
----- | -----
Total (1,097) | 969
Unrecognized net gain 40 | 36
----- | -----
Accrued postretirement health |
care benefits cost $(1,057) | $1,005
===== | =====
In 1997 and 1996, a 6.0% annual rate of increase in the per capita cost of
covered health care benefits was assumed for measurement purposes. The effect
of a one percentage point increase in the health care cost trend assumption
would not have a significant effect on the accumulated postretirement benefits
obligation as of December 28, 1997 and the periodic postretirement health care
benefit cost for the year then ended. The weighted-average discount rate used
in determining the accumulated postretirement health care benefits obligation
was 7.5% and 8.0% at December 28, 1997 and December 29, 1996, respectively.
9. INCOME TAXES
The provision for (benefit from) income taxes included the following
components:
Post-Merger | Pre-Merger
Company | Company
-----------|-------------------------------
Three | Nine
Months | Months
Ended | Ended Fiscal Year Ended
------ | -------- -----------------
Dec. 28,| Sept. 28, Dec. 29, Dec. 31,
1997 | 1997 1996 1995
------ | -------- -------- --------
| (In thousands)
Current tax provision |
(benefit): |
Federal $ 40 | $(3,613) $ 1,459 $ 1,176
State 9 | (611) 268 147
------ | ------ ------ ------
49 | (4,224) 1,727 1,323
Deferred income taxes (187) | 5,152 (3,207) (5,011)
------ | ------ ------ ------
Provision for (benefit from) |
income taxes $(138) | $ 928 $(1,480) $(3,688)
====== | ====== ====== ======
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 28, 1997 and December 29, 1996, were as follows:
----------- | -----------
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
----------- | -----------
(In thousands)
Current deferred tax asset: |
Special charge reserve $ -- | $ 5,273
Workers' compensation 1,768 | 1,426
Deferred franchise fees 239 | 259
Miscellaneous payables 56 | 703
Accrued interest 7 | 242
Other 666 | 424
------- | ------
Current deferred tax asset $ 2,736 | $ 8,327
======= | ======
Post-Merger | Pre-Merger
Company | Company
----------- | -----------
December 28, | December 29,
1997 | 1996
----------- | -----------
(In thousands)
Noncurrent net deferred tax liability: |
Noncurrent deferred tax asset: |
Deferred compensation $ 1,239 | $ 2,019
Accrued pension cost -- | 1,465
Net operating loss carryforwards 1,306 | --
Tax credit carryforwards 1,767 | --
Accrued postretirement benefit cost 513 | 445
Other 330 | 286
------- | -------
Noncurrent deferred tax asset 5,155 | 4,215
------- | -------
Noncurrent deferred tax liability: |
Property, buildings and equipment (12,008) | (6,501)
Pension asset (3,403) | --
------- | -------
Noncurrent deferred tax liability (15,411) | (6,501)
------- | -------
Noncurrent net deferred tax liability $(10,256) | $(2,286)
======= | =======
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:
<TABLE>
<CAPTION>
Post-Merger | Pre-Merger
Company | Company
-----------|-------------------------------
Three | Nine
Months | Months
Ended | Ended Fiscal Year Ended
------ | -------- -----------------
Dec. 28,| Sept. 28, Dec. 29, Dec. 31,
1997 | 1997 1996 1995
------ | -------- -------- --------
| (In thousands)
<S> <C> | <C> <C> <C>
Computed "expected" tax |
provision (benefit) $ (230)| $ 882 $(1,327) $(3,122)
Goodwill amortization 144 | -- -- --
Targeted jobs tax credits -- | -- -- (137)
State income taxes (net of |
federal income tax effect) 6 | 2 (99) (340)
Other, net (58)| 44 (54) (89)
----- | ----- ----- -----
Reported tax provision (benefit) $ (138)| $ 928 $(1,480) $(3,688)
===== | ===== ===== =====
</TABLE>
10. 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 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 capital and operating leases, together
with the present value of such minimum lease payments as of December 28, 1997,
are summarized as follows:
Capital Operating
Leases Leases
------- ---------
Year (In thousands)
1998 $ 463 $ 3,988
1999 364 3,266
2000 364 2,868
2001 364 2,464
2002 345 1,654
Thereafter 1,527 3,313
------ -------
Total minimum lease payments 3,427 $17,553
=======
Less amount representing
interest 1,163
------
Present value of minimum
lease payments including
current portion $2,264
======
Rental expense under operating leases was $1,929,000, $5,755,000, $5,212,000
and $4,715,000 for periods ended December 28, 1997, September 28, 1997,
December 29, 1996, and December 31, 1995, respectively.
Rental expense includes contingent rentals of $31,000, $95,000, $110,000 and
$117,000 for periods ended December 28, 1997, September 28, 1997,
December 29, 1996, and December 31, 1995, respectively.
Direct Financing and 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 components of the net investment in direct
financing leases and the minimum future rentals on operating leases/subleases
as of December 28, 1997:
Direct
Financing Operating
Leases Leases
--------- ---------
Year (In thousands)
1998 $ 268 $ 1,239
1999 56 1,079
2000 6 1,050
2001 - 990
2002 - 446
Thereafter - 159
------ ------
Total minimum lease
payments to be received 330 $ 4,963
======
Less unearned income (25)
------
Net investment in direct
financing leases including
current portion $ 305
======
Rental income under operating leases was $185,000, $557,000, $557,000 and
$626,000 for periods ended December 28, 1997, September 28, 1997,
December 29, 1996, and December 31, 1995, respectively.
11. CONTINGENCIES
In July 1994, Krystal was named a defendant in a suit in which
plaintiffs, who were current and former employees of Krystal, alleged
violations of the FLSA and sought back wages, liquidated damages, costs and
attorney's fees. In 1995, additional plaintiffs filed separate suits
containing essentially the same allegations. On August 28, 1995,
the Court provisionally granted the plaintiffs motion for court-supervised
notice of the pendency of that action to prospective class members from among
current and former employees of Krystal for the past three years.
On December 15, 1995, Krystal filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code with the Court for the purpose of completely
and finally resolving the various claims filed against the Company by current
and former employees alleging violations of the FLSA. The pending
lawsuits filed against Krystal under the FLSA were stayed by the
bankruptcy filing. In April 1997, Krystal and the FLSA plaintiffs
reached a settlement providing for the payment of approximately $13,000,000
for the FLSA claims and related legal costs. As of December 28, 1997, all
claims have been paid.
The Company is party to other 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, have a material
adverse effect on the Company's financial condition or results of operations.
12. RESTRICTED STOCK AND STOCK OWNERSHIP PLANS
The Company's 1990 Restricted Stock Plan ("Restricted Stock Plan") provided
for the granting of shares of common stock to certain directors and key
employees of the Company. The maximum number of shares that were issuable
under the Restricted Stock Plan was 1,100,000 shares. The shares issued
under the Restricted Stock Plan were restricted when issued and subject to
forfeiture under certain circumstances. Due to the change in control and the
merger with Port Royal, restrictions on the Restricted Stock Plan were
terminated and restricted stockholders were entitled to receive $14.50 per
share in cash and the Restricted Stock Plan was terminated.
During 1992, the Company adopted a restricted stock plan ("Non-Employee
Director Plan") which provided for the issuance of 8,000 shares of restricted
stock to each existing non-employee director who had not previously been
awarded restricted stock. At the date of the Merger, no previously issued
restricted stock was outstanding and the Non-Employee Director Plan was
terminated.
A summary of the Company's restricted stock activity is as follows:
Restricted
Stock Plan
----------
(Number of shares)
Issued at December 31, 1995 984,400
Issued at an average market
value of $4.63 per share 960
Forfeitures (36,000)
-------
Issued at December 29, 1996 949,360
Issued at an average market
value of $5.38 per share 720
Forfeitures (16,400)
-------
Issued at September 28, 1997 933,680
Cancelled upon merger (933,680)
-------
Issued at September 29,1997 --
=======
Deferred compensation related to the restricted stock awards is recorded based
on the market value of the Company's common stock at the date of grant and
such deferred compensation is amortized to expense over the period the
restrictions lapse. Compensation expense related to the restricted stock
plans was $146,538, $363,688, $254,203, for the nine months ended September
28,1997 and for fiscal years 1996 and 1995, respectively.
13. QUARTERLY INFORMATION (unaudited)
(In thousands of dollars)
Fiscal 1997
Net
Operating Income
Revenues Income (Loss)
-------- --------- ------
Quarter Ended:
March 30 $ 59,163 $ 1,509 $ (263)
June 29 63,325 2,669 1,107
September 28 62,247 1,847 601
-------- ------- -------
$184,735 $ 6,025 $ 1,445
======== ======= =======
December 28 (1) $ 63,688 $ 2,264 $ (539)
======== ======= =======
Fiscal 1996
Operating Net
Income Income
Revenues (Loss) (Loss)
-------- --------- ------
Quarter Ended:
March 31 $ 57,667 $ 693 $ (746)
June 30 60,903 2,095 426
September 29 62,432 1,611 (11)
December 29 (2) 63,266 (473) (2,091)
-------- ------- --------
Total $244,268 $ 3,926 $(2,422)
======== ======= ========
(1) As described in Note 1, the Company was acquired and merged with and
into a wholly-owned subsidiary of Port Royal Holdings, Inc.
(2) The fourth quarter of 1996 includes a special charge for litigation
(Note 11) of $4,000,000 before income tax benefit ($2,480,000 after income
tax benefit).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 10. Directors and Executive Officers of the Company
The directors of the Company are:
Philip H. Sanford 44 Chairman, Chief Executive Officer
and Director
James F. Exum, Jr. 41 President, Chief Operating Officer
and Director
W. A. Bryan Patten 57 Director
Richard C. Patton 36 Director
Benjamin R. Probasco 38 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.
James F. Exum, Jr. has been President, Chief Operating Officer and a
Director of the Company since September 1997. From 1995 to September 1997, Mr.
Exum served as President and Chief Executive Officer of Pennant Foods Corp.,
Knoxville, Tennessee. He was President and Chief Executive Officer of Southern
California Food Services Corp. from 1991 to 1995.
W. A. Bryan Patten has been a Director of the Company since September 1997
and is the President of Patten & Patten Inc., a registered investment
advisory firm in Chattanooga, Tennessee.
Richard C. Patton has been a Director of the Company since September
1997 and has been President of Investments at Ingram Industries Inc., a
diversified holding company, since January of 1996. Prior to joining
Ingram Industries Inc., Mr. Patton was self-employed as an investor. From June
1992 to June 1995, Mr. Patton was an equity analyst and portfolio manager with
Fidelity Investments. From June 1984 to September 1990 Mr. Patton developed
the San Antonio Taco Co. and Granite Falls restaurants.
Benjamin R. Probasco has been a Director of the Company since September
1997 and has been employed at Probasco & Company, a real estate development
company, since 1997. Prior to joining Probasco & Company, Mr. Probasco spent
six years at Leonard, Kinsey & Associates from 1991 to 1997 and from 1983
to 1988 was employed at Johnston Coca-Cola Bottling Group.
The Executive Officers of the Company, in addition to Messrs.
Sanford and Exum, are:
Gordon L. Davenport, Jr. 38 Vice President, Marketing
Larry J. Reeher 50 Vice President, Human Resources
Larry D. Bentley 41 Vice President and Chief Financial
Officer
Gordon L. Davenport, Jr. has been Vice President Marketing and New
Business at Krystal since November 1995. From 1986 to 1995, Mr. Davenport
served in various marketing and sales management positions with Warner
Lambert Company.
Larry J. Reeher has been Vice President Human Resources since August 1995.
From 1988 to 1995, Mr. Reeher was Executive Vice President Human Resources for
Gardner Merchant Food Services, Inc.
Larry D. Bentley was elected Vice President and Chief Financial Officer
of the Company in December 1997. From 1991 to 1996, Mr. Bentley was Executive
Vice President and Chief Financial Officer of U.S. Express Enterprises, Inc.
Item 11. Executive Compensation
The following table summarizes the total compensation for the last three
fiscal years of the following named executive officers of the Company during
the last fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensa-
tion
Other ----------
Name and Annual Compen- Restricted All Other
Principal Position Year Salary Bonus sation(1) Stock Compensa-
Awards(2) tion
<S> <C> <C> <C> <C> <C> <C>
Philip H. Sanford (3) 1997 $ 92,361 $0 $ 0 $ 0 $ 0
Chairman of the Board of
Directors and Chief
Executive Officer
James F. Exum, Jr. (4) 1997 79,167 0 3,167 0 0
President and Chief
Operating Officer
and Director
Larry D. Bentley (5) 1997 16,111 0 0 0 0
Vice President, Chief
Financial Officer
Gordon L. Davenport, Jr.(6) 1997 163,623 7,500 5,314 0 0
Vice President Marketing 1996 152,023 0 5,548 0 0
and Development 1995 51,154 0 15,528(7) 186,000(8) 0
Larry J. Reeher (9) 1997 133,735 7,500 6,182 0 0
Vice President 1996 127,352 0 6,826 0 0
Human Resources
Carl D. Long (10) 1997 269,538 0 8,718 0 37,527(11)
Chairman of the Board 1996 365,000 0 3,075 0 0
of Directors, Chief 1995 365,000 0 25,952 0 0
Executive Officer
R. B. Davenport, IV (12) 1997 150,000 0 10,545 0 0
President, Chief 1996 200,000 0 6,440 0 0
Operating Officer 1995 200,000 0 9,985 0 0
Camden B. Scearce (13) 1997 145,950 25,000 10,308 0 40,950(14)
Vice President, Chief 1996 145,619 0 8,392 0 0
Financial Officer, 1995 133,005 0 8,767 0 0
Secretary, Treasurer
</TABLE>
(1) Consists of the costs of personal benefits provided to the named
executive officer by the Company.
(2) The fair market value of restricted stock awards is calculated by
multiplying the closing market price of unrestricted stock on the
date of grant by the number of shares awarded.
(3) Mr. Sanford was appointed Chairman and Chief Executive Officer of the
Company on September 26, 1997.
(4) Mr. Exum was appointed President and Chief Operating Officer of the
Company on September 26, 1997.
(5) Mr. Bentley was appointed Vice President and Chief Financial Officer
of the Company on December 18, 1997.
(6) Mr. Gordon L. Davenport, Jr. was appointed Vice President New Business
and Strategic Planning on August 30, 1995.
(7) Includes moving bonus of $12,500.
(8) Represents 24,000 shares of restricted stock valued at $7.75, the
trading price at the close of business on the date of grant.
The stock underlying the restricted stock award was acquired by Port
Royal pursuant to the merger on September 26, 1997.
(9) Mr. Reeher was appointed Vice President Human Resources on
August 14, 1995.
(10) Mr. Long resigned as Chairman and Chief Executive Officer of the
Company on September 25, 1997.
(11) Represents payments to the named executive officer under the Company's
supplemental executive retirement plan.
(12) Mr. R. B. Davenport, IV resigned as President and Chief Operating
Officer of the Company on September 26, 1997.
(13) Mr. Scearce resigned as Vice President and Chief Financial Officer of
the Company on October 31, 1997.
(14) Represents severance payments to the named executive officer.
There are no employment agreements with any of these individuals. The
Company expects to adopt performance-based incentive compensation plans for
senior management of the Company, including a cash management bonus plan and
a stock ownership plan, under which total awards may, in the aggregate,
equal 10% of the outstanding common stock of the Company on a fully-diluted
basis, assuming exercise of options. Non-employee directors receive a fee
of $1,000 for each Board of Directors meeting attended.
Item 12. Security Ownership of Certain Beneficial Owners and Management
All of the outstanding capital stock of the Company is held by Port Royal.
The following table sets forth certain information regarding beneficial
ownership of the common stock of Port Royal by: (i) each person who holds more
than 5% of the common stock of Port Royal, (ii) each Director of the Company,
(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
Directors
Philip H. Sanford(1) 2,600,000 26.0
James F. Exum, Jr. 0 0
W. A. Bryan Patten(2) 863,333(3) 8.6
Richard C. Patton(4) 1,233,333(5) 12.3
Benjamin R. Probasco(6) 863,333(7) 8.6
Executive Officers
Larry D. Bentley 0 0
Gordon L. Davenport, Jr. 246,667 2.5
Larry J. Reeher 0 0
5% Shareholders
Katherine J. Johnston Trust(8) 1,233,333 12.3
Woodmont Capital, LLC(9) 1,233,333 12.3
P&P Port Royal Investors, LP(10) 863,333 8.6
All Directors and Executive
Officers as a group (8 persons) 5,806,666 58.1
(1) The address for this beneficial owner is The Krystal Building,
One Union Square, Chattanooga, Tennessee 37402.
(2) The address for this beneficial owner is 520 Lookout Street,
Chattanooga, Tennessee 37403.
(3) 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.
(4) The address for this beneficial owner is 4400 Harding Road, Nashville,
Tennessee 37205.
(5) Includes shares held by Woodmont Capital, LLC, an investment fund for
which Mr. Patton is the President.
(6) The address for this beneficial owner is 100 East Tenth Street,
Suite 501, Chattanooga, Tennessee 37402.
(7) Includes shares held by various trusts of which Mr. Probasco is a
beneficiary.
(8) The address for this beneficial owner is Suite 600, The Krystal Building,
Chattanooga, Tennessee 37402.
(9) The address for this beneficial owner is 4400 Harding Road, Nashville,
Tennessee 37205.
(10) The address for this beneficial owner is 520 Lookout Street, Chattanooga,
Tennessee 37403.
PART IV
Item 13. Certain Relationships and Related Transactions
None
Item 14. Exhibits , Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements are included herein by reference.
2. Financial statement schedules
All schedules are omitted because the information is either not
required or is included in the financial statements or notes hereto.
3. Exhibits
See exhibit index
(b) Reports on Form 8-K -
The registrant filed a Form 8-K on October 10, 1997 announcing the
merger of the registrant with and into Port Royal Holdings, Inc.
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 24, 1998 By: /s/Philip H. Sanford
------------------------------
Philip H. Sanford, Chairman of
Board of Directors and Chief
Executive 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 24, 1998
/s/James F. Exum, Jr.
- ----------------------
James F. Exum, Jr. President, Chief Operating
Officer and Director March 24, 1998
/s/W. A. Bryan Patten
- ----------------------
W. A. Bryan Patten Director March 24, 1998
/s/Richard C. Patton
- ----------------------
Richard C. Patton Director March 24, 1998
/s/Benjamin R. Probasco
- ----------------------
Benjamin R. Probasco Director March 24, 1998
/s/Larry D. Bentley
- ----------------------
Larry D. Bentley Vice President and Chief
Financial Officer March 24, 1998
THE KRYSTAL COMPANY AND SUBSIDIARY
EXHIBIT INDEX
Exhibit
Number Description
2.1* Agreement and Plan of Merger dated July 3, 1997 by and
among Port Royal Holdings, Inc., TKC Acquisition Corp.
and The Krystal Company.
3.1** Charter of the Company.
3.2** By-laws of the Company.
4.1** Indenture, dated as of September 26, 1997 between TKC
Acquisition Corp. and SunTrust Bank, Atlanta, N.A.
4.2** Supplemental Indenture No. 1 dated as of September 26,
1997, between The Krystal Company, Krystal Aviation Co.,
Krystal Aviation Management Co. and SunTrust Bank, Atlanta.
4.3** Form of Exchange Note (included in Exhibit 4.1).
4.4** Registration Rights Agreement, dated as of September 26,
1997, between TKC Acquisition Corp. and UBS Securities, LLC.
10.1** Credit Agreement dated as of September 26, 1997 among TKC
Acquisition Corp., to be merged with and into the Krystal
Company, SunTrust Bank, Atlanta, as agent, and Union
Bank of Switzerland, New York Branch, as syndication agent.
21.1** Subsidiaries of the Company.
27*** Financial Data Schedule.
* Incorporated by reference from the Definitive Proxy Statement of
the Company filed on September 15, 1997.
** Incorporated by reference from the Company's Registration Statement
on Form S-4 filed November 25, 1997.
*** Submitted only with the electronic filing of this document with the
Commission pursuant to Regulation S-T under the Securities Act.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> SEP-29-1997
<PERIOD-END> DEC-28-1997
<CASH> 5507
<SECURITIES> 0
<RECEIVABLES> 6059
<ALLOWANCES> 0
<INVENTORY> 2241
<CURRENT-ASSETS> 17620
<PP&E> 103859
<DEPRECIATION> 2659
<TOTAL-ASSETS> 190121
<CURRENT-LIABILITIES> 26506
<BONDS> 0
0
0
<COMMON> 35000
<OTHER-SE> (539)
<TOTAL-LIABILITY-AND-EQUITY> 190121
<SALES> 61440
<TOTAL-REVENUES> 63688
<CGS> 50569
<TOTAL-COSTS> 50569
<OTHER-EXPENSES> 901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2941
<INCOME-PRETAX> (677)
<INCOME-TAX> (138)
<INCOME-CONTINUING> (539)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (539)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
