SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 3, 1999
Commission File Number 333-40933
THE KRYSTAL COMPANY
(Exact name of registrant as specified in its charter)
Tennessee 62-0264140
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Union Square, Chattanooga, Tennessee 37402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 757-1550
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12 (b) of the Act:
None
----
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 to Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
On September 26, 1997, the registrant was acquired by Port Royal Holdings,
Inc., ("Port Royal") pursuant to a merger in which a wholly-owned subsidiary
of Port Royal was merged with and into the Company. As a result of the merger,
Port Royal became the owner of 100% of the common stock of the Company. Thus,
the aggregate market value of the voting stock held by a non-affiliate is zero
as of March 12, 1999.
This report is filed by the Company pursuant to Section 15(d) of the
Securities Exchange Act of 1934. No annual report or proxy statement has been
sent to security holders and no such annual report or proxy statement is
anticipated to be sent to security holders.
PART I
Item 1. Business
(A) General Development of Business
The Company was founded in 1932 as a single restaurant in Chattanooga,
Tennessee by R. B. Davenport, Jr. and J. Glenn Sherrill. The Company expanded
steadily in subsequent years, entering the Georgia market in 1936, and during
the 1950's and 1960's, began relocating restaurants from urban to suburban
locations and transforming its format from "cook-to-order" items to a more
standardized quick-service menu.
The Company's centerpiece of growth was its namesake, the KRYSTAL, a small,
square hamburger with steamed-in flavor served hot and fresh off the grill.
As competition in the restaurant industry increased in the late 1980's, the
Company firmly maintained its market niche by emphasizing the unique KRYSTAL.
Krystal restaurants have continued to emphasize the KRYSTAL and have built
their customer base around this and other items such as "Krystal Chili,"
"Chili Pups," "Corn Pups," the "Sunriser", a specialty breakfast sandwich,
the "Krystal Chik", a specialty chicken sandwich and the "Country Breakfast."
On December 15, 1995, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code, solely for the purpose of
completely and finally resolving various claims of former and current employees
alleging violations of the Fair Labor Standards Act. On April 10, 1997 the
Bankruptcy Court approved the Reorganization Plan including the settlement
of the FLSA claims which became effective April 23, 1997. All allowed claims
under the Reorganization Plan have been paid.
On September 26, 1997 (effective September 29, 1997 for accounting purposes),
the Company was acquired by Port Royal Holdings, Inc. ("Port Royal") (the
"Acquisition"). At the closing of the Acquisition, a wholly-owned subsidiary
of Port Royal was merged with and into the Company (the "Merger") and the
Company as the surviving corporation retained the name "Krystal." As a result
of the Acquisition and Merger, Port Royal became the owner of 100% of the
common stock of the Company.
(B) Financial Information about Industry Segments
See Part II, Item 7 Results of Operations.
(C) Narrative Description of Business
The Company develops, operates and franchises full-size KRYSTAL and smaller
"double drive-thru" KRYSTAL KWIK quick-service restaurants. The Company has
been in the fast food restaurant business since 1932, and believes it is among
the first fast food restaurant chains in the country. The Company began to
franchise KRYSTAL KWIK restaurants in 1990 and KRYSTAL restaurants in 1991.
In 1995, the Company began to develop and franchise KRYSTAL restaurants
located in non-traditional locations such as convenience stores. At
January 3, 1999, the Company operated 241 units (234 KRYSTAL restaurants
and 7 KRYSTAL KWIK restaurants) in eight states in the southeastern United
States. Franchisees operated 110 units (40 KRYSTAL restaurants, 31 KRYSTAL
KWIK restaurants and 39 KRYSTAL restaurants in non-traditional locations) as
of January 3, 1999.
The Company also leases 23 restaurant sites in the Baltimore, Washington, D.C.
and St. Louis metropolitan areas which it in turn subleases to Davco
Restaurants, Inc. ("Davco"), a Wendy's International, Inc. franchisee
and former affiliate of the Company.
Through a subsidiary company ("Krystal Aviation"), since 1977 the Company
has operated a fixed base hangar and airplane fueling operation in
Chattanooga, Tennessee.
Products --
KRYSTAL restaurants offer a substantially uniform menu consisting of the well
known KRYSTAL hamburger, french fries, "Chili Pups", "Corn Pups", chili,
"Krystal Chiks", milk shakes, soft drinks and hot beverages, pies and
breakfast items including the "Sunriser" and the "Country Breakfast" during
certain morning hours. Most KRYSTAL KWIK restaurants feature essentially
the same menu as Krystal restaurants except breakfast offerings. From time
to time the Company test markets new products.
The Company and its franchisees purchase their food, beverages and supplies
from Company approved independent suppliers. All products must meet standards
and specifications set by the Company. Management constantly monitors the
quality of the food, beverages and supplies provided to the restaurants. The
restaurants prepare, assemble and package these products using specially
designed production techniques and equipment to obtain uniform standards of
quality.
Sources of raw materials --
The Company and its franchisees purchase food, supplies, restaurant equipment,
and signs from Company approved suppliers. The Company believes that
alternate suppliers are available or can be made available.
Trademarks and patents --
The Company has registered "Krystal", "Krystal Kwik" and variations of each,
as well as certain product names, with the United States Patent and Trademark
office. The Company is not aware of any infringing uses that could
materially affect its business or any prior claim to these service marks that
would prevent the Company from using or licensing the use thereof for
restaurants in any area of the United States. The Company's policy is
to pursue registration of its marks whenever possible and oppose vigorously
any infringement of its marks.
Seasonal operations --
The Company does not consider its operations to be seasonal to any material
degree. Revenues during its first fiscal quarter, comprising the months of
January, February and March, will, however, generally be lower than its other
quarters due to consumer shopping habits and the climate in the location of a
number of its restaurants.
Working capital practice --
See Part II, Item 7 Liquidity and Capital Resources.
Customers --
No material part of the business of the Company is dependent upon a single
customer or a small number of customers.
Backlog --
Company-owned restaurants operate in a quick-service environment and have
no backlog.
Government contracts --
No material portion of the business of the Company is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
U.S. Government.
Competition --
The quick-service restaurant industry is highly competitive and is dominated
by major chains with substantially greater financial resources than the
Company. The Company competes primarily on the basis of unique product
offerings, food quality, price and speed of service. A significant change
in pricing or other marketing strategies by one or more of these competitors
could have an adverse impact on the Company's sales, earnings and growth.
In addition, with respect to the sale of franchises, the Company competes
with many franchisors of restaurants and other business concepts.
Research and development --
The Company operates a research and development laboratory in Chattanooga,
Tennessee. While research and development activities are important to the
business of the Company, expenditures for these operations are not material.
Environmental matters --
While the Company is not aware of any federal, state or local environmental
regulations which will materially affect its operations or competitive
position or result in material capital expenditures, it cannot predict the
effect on its operations from possible future legislation or regulation.
During 1998, 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 1998, the Company's average number of employees was approximately 8,150.
(D) Financial Information about Foreign and Domestic Operations and Export
Sales
The Company leases 23 restaurant sites in the Baltimore, Washington, D.C.
and St. Louis metropolitan areas which it in turn subleases to Davco
Restaurants, Inc. Revenue from this operation is less than 10% of the
Company's total revenue. All other operations of the Company are in the
southeastern United States and the Company has no export sales.
Item 2. Properties
See Notes 4 and 9 of the Company's Consolidated Financial Statements.
Item 3. Legal Proceedings
The Company is a party to various legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management and the Company's
legal counsel, have a material adverse effect on the Company's financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
In October 1998 the Company's sole shareholder, Port Royal Holdings, Inc.
("Port Royal"), elected the following directors by written consent:
Philip H. Sanford, James F. Exum, Jr., W. A. Bryan Patten,
Richard C. Patton, Benjamin R. Probasco and A. Alexander Taylor II.
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 the nine months through
September 26, 1997:
High Low
------ -----
1997
First Quarter $ 7.50 $5.00
Second Quarter 5.75 4.875
Third Quarter 15.00 4.875
Fourth Quarter
and thereafter 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 following tables present (i) selected historical data of the Company prior
to the Acquisition ("Pre-Merger Company") as of and for each of the years ended
January 1, 1995, December 31, 1995, December 29, 1996, and the nine month
period ended September 28, 1997, and (ii) selected historical data of the
Company after the Acquisition ("Post-Merger Company") as of and for the three
month period ended December 28, 1997 and the year ended January 3, 1999. The
selected historical financial data as of and for each of the years ended
January 1, 1995, December 31, 1995, December 29, 1996, and the nine month
period ended September 28, 1997 have been derived from the audited financial
statements of the Pre-Merger Company. The selected historical financial data
as of and for the three month period ended December 28, 1997 and the year ended
January 3, 1999 have been derived from the audited financial statements of the
Post-Merger Company. The financial data set forth below should be read in
conjunction with Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements
and notes thereto included in Item 8 - "Financial Statements and
Supplementary Data".
<TABLE>
<CAPTION>
Post-Merger Post-Merger Pre-Merger
Company Company Company
---------- Combined ------ ---------------------------------
Fiscal Twelve Three Nine
Year Months Months Months
Ended Ended Ended Ended Fiscal Year Ended
--------- -------- -------- -------- -------------------------
Jan. 3, Dec. 28, Dec. 28, Sep. 28, Dec. 29, Dec. 31, Jan. 1,
1999 1997 1997 1997 1996 1995 1995
--------- -------- -------- ----------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations data:
Revenues:
Restaurant sales $248,152 $240,255 $ 61,440 $178,815 $236,470 $239,376 $239,104
Franchise fees 333 349 130 219 349 618 796
Royalties 3,775 3,060 828 2,232 2,778 2,420 1,880
Other 5,188 4,759 1,290 3,469 4,671 5,614 6,542
---------------------------------------------------------------
257,448 248,423 63,688 184,735 244,268 248,028 248,322
---------------------------------------------------------------
Cost and expenses 245,644 240,134 61,424 178,710 240,342 253,440 236,190
Operating income (loss) 11,804 8,289 2,264 6,025 3,926 ( 5,412) 12,132
Income (loss) before
extraordinary item $ 1,345 $ 1,126 $ ( 539)$ 1,665 $( 2,422)$( 5,324)$ 6,189
Balance Sheet Data:
Working capital (deficit) $(11,065)$ (8,886) $ (8,886)$ (4,760)$ 19,592 $ 13,442 $ (1,353)
Property owned and
leased, net 102,289 102,860 102,860 90,034 92,826 100,409 100,888
Total assets 179,488 190,121 190,121 119,130 143,870 132,695 130,786
Long term debt, net of
current portion 100,136 112,174 112,174 34,573 3,090 3,621 40,053
Long term debt subject
to compromise - - - 36,000 36,000 -
Capital lease obligations,
net of current portion 2,806 2,029 2,029 2,077 2,278 2,754 3,438
</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
audited financial statements of the Company (including the notes thereto)
contained elsewhere in this report. On September 26, 1997 (effective
September 29, 1997 for accounting purposes) the Company was acquired by, and
merged with a wholly owned subsidiary of, Port Royal. The Acquisition and
Merger were accounted for using the purchase method of accounting. To
facilitate a meaningful comparison of the Company's fiscal years of 1996,
1997 (results of Pre-Merger Company for the nine months ended
September 28, 1997 combined with the results of the Post-Merger Company for
the three months ended December 28, 1997), and 1998, the following discussion
of consolidated results of operations is presented on a traditional comparison
basis of twelve month periods.
Cash operating profit --
Cash operating profit (net income or loss before interest, taxes, depreciation,
amortization and other non-operating gains, losses or expenses) is one of the
key standards used by the Company to measure operating performance. Cash
operating profit is used to supplement operating income as an indicator of
operating performance and cash flows from operating activities as a measure of
liquidity, and not as an alternative to measures defined and required by
generally accepted accounting principles.
Cash operating profit for the fiscal year ended January 3, 1999 was
$24.7 million compared to $19.8 million for the combined twelve months ended
December 28, 1997, an increase of 24.7%. This increase in cash operating
profit was primarily attributable to reduced overall operating costs
as a percentage of sales resulting from improvements in restaurant
operations and reduced general and administrative expenses.
The following table reflects certain key operating statistics which impact the
Company's financial results:
<TABLE>
KEY OPERATING STATISTICS
(Dollars in thousands except average check)
<CAPTION>
Post- Post-
Merger Merger Pre-Merger
Company Company Company
-------- Combined ------- --------------------
Fiscal Twelve Three Nine Fiscal
Year Months Months Months Year
Ended Ended Ended Ended Ended
-------- -------- -------- -------- --------
Jan. 3, Dec. 28, Dec. 28, Sept. 27, Dec. 29,
1999 1997 1997 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SYSTEMWIDE RESTAURANT SALES $328,644 $307,553 $79,351 $228,202 $297,573
Percent change 6.86% 3.35%
COMPANY RESTAURANT STATISTICS:
Number of restaurants 241 248 248 249 249
Restaurant Sales $248,152 $240,255 $61,440 $178,815 $236,470
Percent change 3.29% 1.60%
Same restaurant sales $244,708 $235,147 $60,201 $176,049 $233,320
Percent change 4.07% N/A
Average same restaurant sales $ 1,024 $ 984 $ 252 $ 727 $ 945
Percent change 4.07% 4.13%
Customer count per day 692 685 703 679 702
Percent change 1.01% (2.42%)
Average check $ 3.96 $ 3.86 $ 3.92 $ 3.84 $ 3.66
Percent change 2.59% 5.46%
Cost of restaurant sales $204,630 $198,963 $50,570 $148,393 $195,733
As a percent of restaurant sales 82.46% 82.81% 82.31% 82.99% 82.77%
Selected components are --
Food and paper cost $ 76,582 $ 77,499 $19,786 $ 57,713 $ 76,186
As a percent of restaurant sales 30.86% 32.26% 32.20% 32.28% 32.22%
Direct labor $ 58,537 $ 53,834 $13,973 $ 39,861 $ 52,704
As a percent of restaurant sales 23.59% 22.41% 22.74% 22.29% 22.29%
Other labor costs $ 17,231 $ 18,812 $ 4,541 $ 14,271 $ 18,090
As a percent of restaurant sales 6.94% 7.83% 7.39% 7.98% 7.65%
FRANCHISE SYSTEM STATISTICS:
Number of restaurants 110 101 101 95 89
Restaurant Sales $ 80,492 $ 67,298 $17,911 $ 49,387 $ 61,103
Percent change 19.61% 10.14%
Same restaurant sales $ 61,140 $ 59,263 $16,223 $ 40,369 $ 48,254
Percent change 3.17% N/A
Average same restaurant sales $ 746 $ 723 $ 182 $ 538 $ 720
Percent change 3.18% 0.42%
Customer count per day 487 491 498 489 517
Percent change (0.81%) (5.03%)
Average check $ 4.17 $ 4.08 $ 4.11 $ 4.07 $ 3.93
Percent change 2.21% 3.82%
</TABLE>
Consolidated Results of Operations --
<TABLE>
(Dollars in thousands)
<CAPTION> Post- Post-
Merger Merger Pre-Merger
Company Company Company
--------- Combined ------- ------------------
Fiscal Twelve Three Nine Fiscal
Year Months Months Months Year
Ended Ended Ended Ended Ended
----------- -------- -----------------------------
Jan. 3, Dec. 28, Dec. 28, Sep. 28, Dec. 29,
1999 1997 1997 1997 1996
----------- -------- -----------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales $248,152 $240,255 $ 61,440 $178,815 $236,470
Franchise fees 333 349 130 219 349
Royalties 3,775 3,060 828 2,232 2,778
Other 5,188 4,759 1,290 3,469 4,671
-------- -------- --------- -------- --------
257,448 248,423 63,688 184,735 244,268
-------- -------- --------- -------- --------
Cost and Expenses:
Cost of restaurant sales 204,630 198,963 50,569 148,394 195,733
Depreciation and
amortization expense 12,868 11,558 3,342 8,216 11,378
General and administrative
expenses 24,876 26,269 6,612 19,657 25,422
Other expenses, net 3,270 3,344 901 2,443 3,809
Special charge -- -- -- -- 4,000
-------- -------- --------- -------- --------
245,644 240,134 61,424 178,710 240,342
-------- -------- --------- -------- --------
Operating income 11,804 8,289 2,264 6,025 3,926
Reorganization item -- ( 1,218) -- (1,218) (3,846)
Gain on settlement on deferred
compensation obligations 1,805 -- -- -- --
Interest expense, net:
Contractual rate interest, net (10,518) ( 5,251) (2,941) (2,310) (3,191)
Interest related to certain
pre-petition liabilities, net -- 96 -- 96 (791)
-------- -------- --------- -------- --------
Income (loss) before provision
for (benefit from) income
taxes and extraordinary item 3,091 1,916 (677) 2,593 (3,902)
Provision for (benefit from)
income taxes 1,746 790 (138) 928 (1,480)
-------- -------- --------- -------- --------
Income (loss) before
extraordinary item 1,345 1,126 (539) 1,665 (2,422)
Extraordinary charge for early
extinguishment of debt, net of
tax benefit of $134 -- (220) -- (220) --
-------- -------- --------- -------- --------
Net income (loss) $ 1,345 $ 906 $ (539) $ 1,445 $ (2,422)
======== ======== ========= ======== ========
</TABLE>
General --
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 29, 1996 and December 28, 1997 were 52 week fiscal
years. The period December 29, 1997 through January 3, 1999 is a 53 week
period.
The Company's revenues are derived primarily from sales by Company-owned
restaurants. Total Company-owned restaurants decreased from 248 at the end
of 1997 to 241 at the end of 1998. Royalties and franchise fees from
franchisees have been a small, but growing, portion of the Company's revenues
to date. The total number of franchised restaurants grew by 8.9% in 1998 from
101 at the end of 1997 to 110 at the end of 1998. The Company expects its
franchisees to develop up to 25 new restaurants during fiscal 1999. The Company
also operates through its wholly owned aviation subsidiary a fixed based
aircraft hangar operation in Chattanooga, Tennessee. Revenues from this
operation in each of the last three years were less than 3.0% of the
Company's total revenues.
The Company expects to open up to 15 new Company-owned restaurants in fiscal
1999. Management estimates that approximately $10.0 million will be required
to finance the Company's cost of constructing these restaurants. Funds
required to finance the Company's restaurant expansion program are expected
to be provided by cash flow from operations, available cash of approximately
$9.0 million at January 3, 1999, an unused credit line of approximately
$21.3 million at January 3, 1999 and sale leaseback financing through third
party lenders.
Cost of restaurant sales relates to food and paper costs, labor and all other
restaurant costs for Company-owned restaurants. Depreciation and amortization
and general and administrative expenses relate primarily to Company-owned
restaurants and to the Company's franchise sales and support functions.
Other expenses relate primarily to Krystal Aviation.
Petition for relief under Chapter 11--
On December 15, 1995, Krystal filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United States Bankruptcy
Court for the Eastern District of Tennessee for the purpose of
completely and finally resolving the various claims filed against the Company
by current and former employees alleging violations of the Fair Labor
Standards Act of 1938 ("FLSA").
In early 1997, Krystal and the majority of the FLSA plaintiffs reached a
settlement providing for the payment of the FLSA claims and related legal
costs. A plan of reorganization (the "Plan") was formally filed on
February 24, 1997. On April 10, 1997, the Bankruptcy Court confirmed the
Company's plan of reorganization and on April 23, 1997, the Plan became
final resulting in the dismissal of the FLSA claims.
Results of Operations --
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items from the Company's statements of
operations.
<TABLE>
<CAPTION>
Post-Merger Post-Merger Pre-Merger
Company Company Company
--------- Combined ---------- ---------------
Fiscal Twelve Three Nine Fiscal
Year Months Months Months Year
Ended Ended Ended Ended Ended
--------- ------ ------- ------ -------
Jan. 3, Dec. 28, Dec. 28, Sep. 28, Dec. 29,
1999 1997 1997 1997 1996
--------- ------- -------------------- ------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales 96.4% 96.7% 96.5% 96.8% 96.8%
Franchise fees 0.1 0.2 0.2 0.1 0.2
Royalties 1.5 1 2 1.3 1.2 1.1
Other 2.0 1.9 2.0 1.9 1.9
------- ------ ------ ------ ------
100.0 100.0 100.0 100.0 100.0
------- ------ ------- ------- ------
Costs and expenses:
Cost of restaurant sales 79.5 80.1 79.4 80.3 80.1
Depreciation and amortization 5.0 4.6 5.2 4.5 4.7
General and administrative
expenses 9.7 10.6 10.4 10.6 10.4
Other expenses, net 1.2 1.4 1.4 1.3 1.6
Special charge - - - - 1.6
------- ------ ------ ------ ------
95.4 96.7 96.4 96.7 98.4
------- ------ ------ ------ ------
Operating income 4.6 3.3 3.6 3.3 1.6
Reorganization expense - (0.5) - (0.7) (1.6)
Gain on settlement of deferred
compensation obligation 0.7 - - - -
Interest expense:
Contractual rate interest, net (4.1) (2.1) (4.6) (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 1.2 0.7 (1.0) 1.4 (1.6)
Provision for (benefit from)
income taxes 0.7 0.3 (0.2) 0.5 (0.6)
------- ------ ------ ------ ------
Income (loss) before extraordinary
item 0.5 0.4 (0.8) 0.9 (1.0)
Extraordinary charge for early
Retirement of debt - (0.1) - (0.1) -
------- ------ ------ ------ ------
Net income (loss) 0.5% 0.3% (0.8)% 0.8% (1.0)%
======= ====== ======= ====== ======
</TABLE>
Comparison of the Fiscal Year Ended January 3, 1999
to the Combined Twelve Months Ended December 28, 1997
The following discussion compares a 53 week period of operations in 1998 to a
52 week combined period in 1997.
Total Krystal system (Company and Franchise combined) restaurant sales for the
fiscal year ended January 3, 1999 ("fiscal 1998") were $328.6 million
compared to $307.6 million for the combined twelve months ended
December 28, 1997 ("fiscal 1997"), a 6.8% increase. Total Company revenues
increased 3.6% to $257.4 million for fiscal 1998 compared to $248.4
million for fiscal 1997. Of this $9.0 million increase, restaurant sales
accounted for $7.9 million (of which $5.0 million occurred during the fifty
third week in fiscal 1998). The balance of the increase resulted from an
increase in franchise fees and royalties of $699,000, and increased revenue
from the Company's aviation subsidiary of $429,000. Company-owned average
same restaurant sales per week for fiscal 1998 were $19,300 compared to
$18,900 for fiscal 1997, an increase of 2.1%. The Company's management
believes the fiscal 1998 per unit weekly sales increase can be attributed to
several factors, including price increases, new promotional programs, reduced
price discounting, introduction of new products, and continuing improvements
in operations at the restaurant level. The Company had 241 restaurants open
at the end of fiscal 1998 compared to 248 at the end of fiscal 1997.
The average customer check for Company-owned restaurants (both full size and
Kwik) in fiscal 1998 was $3.96 as compared to $3.86 in fiscal 1997,
an increase of 2.6%. The increase in average customer check was due
primarily to product price increases of approximately 2.0% in fiscal 1998
over fiscal 1997, the introduction of the Krystal Chik and new menu
combinations. Customer counts per restaurant day increased to 692 in fiscal
1998 compared to 685 in fiscal 1997, an increase of 1.2%. The customer
count and check average was adjusted for fiscal 1997 for the installation
of new cash registers installed throughout the system during fiscal 1997.
The new registers record a customer with each sale registered rather than
each time the cash drawer is opened. The conversion was completed during 1997.
Franchise fees were $333,000 in fiscal 1998 compared to $349,000 for
fiscal 1997, a 4.6% decrease. Royalties increased 23.4% to $3.8 million in
fiscal 1998 from $3.1 million in fiscal 1997. Expressed on a per week basis,
in fiscal 1998 franchise fees and royalties increased 18.1% to $77,500
compared to $65,600 for fiscal 1997. The increase in royalties is primarily
due to an 8.9% increase in franchise restaurants and a 3.2% increase in
franchise same restaurant sales in fiscal 1998 compared to fiscal 1997. The
franchise system had 110 restaurants open at the end of fiscal 1998 compared
to 101 at the end of fiscal 1997.
Other revenue which is generated primarily from the Company's aviation
subsidiary, was $5.2 million in fiscal 1998 compared to $4.8 million in
fiscal 1997. Expressed on a per week basis, fiscal 1998 increased 7.0%
to $97,900 compared to $91,500 for fiscal 1997.
Cost of restaurant sales was $204.6 million in fiscal 1998 compared to $199.0
million in fiscal 1997. Cost of restaurant sales as a percentage of restaurant
sales decreased to 82.5% in fiscal 1998 from 82.8% in fiscal 1997. This
decrease was primarily the result of negotiated decreases in food and paper
costs but was partially offset by the increase in direct labor. Total food
and paper costs were $76.6 million in fiscal 1998 as compared to $77.5 million
in fiscal 1997. Food and paper costs as a percentage of restaurant sales
decreased to 30.9% in fiscal 1998 compared to 32.3% in fiscal 1997. Direct
labor cost was $58.5 million in fiscal 1998 versus $53.8 million in fiscal
1997. Direct labor cost as a percentage of restaurant sales was 23.6% for
fiscal 1998 and 22.4% for fiscal 1997. This increase resulted primarily from
a 5.4% increase in the minimum wage effective September 1, 1997. Other
labor cost, which includes restaurant General Managers' and Assistant
Managers' labor cost, was $17.2 million in fiscal 1998 compared to $18.8
million in fiscal 1997. Other labor as a percentage of restaurant sales
was 6.9% in fiscal 1998 versus 7.8% in fiscal 1997.
Depreciation and amortization expenses were $12.9 million in fiscal 1998 as
compared to $11.6 million in fiscal 1997. This increase in fiscal 1998 was
due to the revaluation of Company assets on September 29, 1997 resulting from
the acquisition of the Company by Port Royal.
General and administrative expenses decreased $1.4 million, approximately
5.3%, to $24.9 million in fiscal 1998 versus $26.3 million in fiscal 1997.
The decrease in general and administrative expenses resulted primarily from
overall reductions in expenditures related to corporate office activities.
Advertising expense was approximately $9.9 million in fiscal 1998 compared
to $10.1 million in fiscal 1997. Advertising expense as a percentage of
restaurant sales was 4.0% in fiscal 1998 compared to 4.1% in fiscal 1997.
Salaries were $7.0 million in fiscal 1998 compared to $7.9 million in
fiscal 1997. Other areas of reduction included corporate office rent expense,
supplies expense, and auto expense.
In accordance with Statement of Position 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, issued by the American Institute
of Certified Public Accountants, the Company expensed Reorganization Items as
incurred. The Company incurred no such professional fees and expenses during
fiscal 1998, compared to $1.2 million in fiscal 1997.
During 1998, the Company agreed to settle its obligations under certain
deferred compensation plans by making lump sum cash payments to two
retired executives. The Company realized a gain of $925,000 from this
transaction. The cash payments were funded with the proceeds from redeeming
the cash surrender value of life insurance policies on the lives of the
retired executives. Also during fiscal 1998 the Company realized a gain of
$880,000 related to receipt of life insurance proceeds in excess of cash
surrender value.
Interest expense, net of interest income, for fiscal 1998 increased $5.2
million to $10.5 million from $5.3 million in fiscal 1997. This increase was
due to the acquisition related increase in long-term debt in the fourth
quarter of fiscal 1997.
Provision for income taxes was $1.7 million for fiscal 1998 compared to
$790,000 for fiscal 1997. The effective income tax rate of 56% for
fiscal 1998 and 41% for fiscal 1997 was more than the statutory income tax
rate primarily as a result of the non-deductible portion of amortization
expense associated with acquisition-related goodwill.
The Company recorded a loss of $220,000, net of tax benefit, in 1997
related to the early extinguishment of debt.
Comparison of the Combined Twelve Months Ended December 28, 1997 to the
Fiscal Year Ended December 29, 1996
Total Krystal system (Company and franchise combined) restaurant sales for
the combined twelve months ended December 28, 1997 ("fiscal 1997") were
$307.6 million compared to $297.6 million for the fiscal year ended
December 29, 1996 ("fiscal 1996"), a 3.4% increase. Total Company
revenues were $248.4 million for fiscal 1997 compared to $244.3 million for
fiscal 1996, a 1.7% increase. Restaurant sales accounted for $3.8 million
of this $4.1 million increase. Company-owned average same restaurant
sales for fiscal 1997 were $969,200 compared to $944,600 for fiscal 1996,
an increase of 2.6%. Fiscal 1997 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 248 restaurants open at the end of
fiscal 1997 and 249 open at the end of fiscal 1996.
Franchise fees were $349,000 in both fiscal 1997 and fiscal 1996. Royalties
increased 10.7% to $3.1 million in fiscal 1997 versus $2.8 million in
fiscal 1996. This increase in royalties was attributable primarily to
a 13.5% increase in franchise restaurants, offset by a 1.8% decrease in
franchise same restaurant sales. The franchise system had 101 restaurants
open at the end of fiscal 1997 compared to 89 open at the end of fiscal 1996.
Other revenue, which is generated from the Company's aviation subsidiary,
was $4.8 million in fiscal 1997 compared to $4.7 million in fiscal 1996,
a 2.1% increase.
The average customer check for Company-owned restaurants (both full size and
double drive thru) in fiscal 1997 was $3.86 as compared to $3.66 in fiscal
1996, an increase of 5.5%. The increase in average customer check was due
primarily to product price increases of approximately 3.1% in fiscal 1997
over fiscal 1996, and the introduction of promotional products and menu
combinations. Customer counts per restaurant day decreased to 685 in fiscal
1997 compared to 702 in fiscal 1996, a decrease of 2.4%. The customer
count and check average was adjusted for fiscal 1997 and fiscal 1996 for the
installation of new cash registers installed throughout the system during
fiscal 1997 and fiscal 1996. The new registers record a customer with each
sale registered rather than each time the cash drawer is opened. The
conversion was completed during 1997.
Cost of restaurant sales was $199.0 million in fiscal 1997 compared to $195.7
million in fiscal 1996. Cost of restaurant sales as a percentage of restaurant
sales was 82.8% in fiscal 1997 and fiscal 1996. Total food and paper costs
were $77.5 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 from 32.2% in fiscal 1996. Direct labor cost was $53.8
million in fiscal 1997 versus $52.7 million in fiscal 1996. Direct labor
cost as a percentage of restaurant sales was 22.4% for fiscal 1997 and
22.3% in fiscal 1996. Other labor cost, which include restaurant General
Managers' and Assistant Managers' labor cost was $18.8 million in fiscal 1997
compared to $18.1 million in fiscal 1996. Other labor as a percentage of
restaurant sales was 7.8% in fiscal 1997 versus 7.7% in fiscal 1997.
Depreciation and amortization expenses were $11.6 million in fiscal 1997 as
compared to $11.4 million in fiscal 1996. Fiscal 1997 depreciation increase
was due primarily to the revaluation of asset at the Acquisition on
September 29, 1997.
General and administrative expenses were $26.3 million in fiscal 1997 versus
$25.4 million in fiscal 1996. Advertising expense was approximately $10.1
million in fiscal 1997 compared to $9.9 million in fiscal 1996. Advertising
expense as a percentage of restaurant sales was 4.2% in both fiscal 1997 and
fiscal 1996. Salaries were $7.9 million in fiscal 1997 compared to $7.7
million 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 expensed
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 fiscal 1996.
A reduction of $331,000 in interest related to certain pre-petition
liabilities, resulted in net 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 $5.3 million in fiscal 1997 compared to
$3.2 million in fiscal 1996. This increase was attributable mainly to the
increase in long-term debt in connection with the Acquisition on
September 29, 1997.
Provision for income taxes was $790,000 in fiscal 1997 as compared to an
income tax benefit of $1.5 million for fiscal 1996. The effective tax rates
of 41% in fiscal 1997, and 38% in fiscal 1996 approximate the combined
statutory federal and state income rates.
An extraordinary charge of $334,000 (pre tax) was recorded in fiscal 1997
to write off unamortized financing costs related to debt extinguished
during fiscal 1997.
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 $11.1 million at January 3, 1999,
compared to a working capital deficit of $8.9 million at December 28, 1997.
At December 28, 1997 the Company's balance sheet reflected an income tax
receivable of approximately $4.6 million, which resulted primarily from tax
loss carrybacks. The income tax receivable was collected during fiscal 1998.
Capital expenditures totaled approximately $10.9 million for the 12 months of
1998, compared to $7.1 million in 1997. Approximately $25.7 million is
expected for capital expenditures in fiscal 1999. Expected capital
expenditures include up to 15 new restaurants to open in fiscal 1999,
acquiring land for restaurants to open in 2000, refurbishing of certain
restaurants, on-going capital improvements and the conversion of all
restaurant computer systems. The Company expects the cost associated with
year 2000 compliance will approximate $7.0 million in fiscal 1999. The
Company owns approximately 56.0% of its restaurant locations and leases the
remainder.
In December 1998, the Company obtained a sales/lease back commitment with
a firm for up to $6.0 million of properties which are to be developed and
operated as Company-owned Krystal restaurants.
At January 3, 1999, the Company had existing cash balances of $9.0 million
and an unused credit line of $21.3 million. The Company expects these funds,
funds from operations and sale leaseback financing through third party lenders
will be sufficient to meet its operating requirements and capital expenditures
through 1999.
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 --
Much of the computer software and, in certain cases, hardware in use today
is not equipped to distinguish the year 2000 from the year 1900. Much of the
software used today was designed with only two digits available for
indicating the current year. This issue, at its fundamental level,
threatens the integrity of date sensitive financial and other information that
is produced by an organization's computer systems, and could undermine
the organization's ability to accurately report financial and other date
sensitive information.
The Company has established a Year 2000 strategic plan which adopts a series
of initiatives necessary to upgrade the Company's computer systems and to
minimize the impact of failures of other computer systems to process date-
sensitive information after December 31, 1999. All mission critical systems
are currently in the validation phase of the Year 2000 plan. The Company
expects all critical systems to be Year 2000 compliant before
December 31, l999.
A portion of the plan involves the replacement of the Company's hardware
and software environment used to run application software, including the
Company's centralized financial systems. During 1998, approximately $2.0
million was expended and capitalized by the Company in connection with this
replacement. For each Company restaurant location, new restaurant reporting
and management systems are scheduled for installation by October 1999,
including upgrading of software and selected hardware and telecommunication
systems to bring restaurant systems into Year 2000 compliance. This cost is
estimated to be approximately $7.0 million, and is included in the Company's
1999 capital budget.
With respect to vendor and third party associations, the plan includes a
survey of the systems and products provided by third parties, and includes
contacting vendors or third-parties to gain knowledge of the status of their
Year 2000 compliance. Currently all items in this area are in the validation
process. Based on information received by the Company, these vendors and third
parties are at various stages of completion of their Year 2000 compliance
plans, and all major suppliers have reported that they expect to be in full
compliance by the end of 1999 calendar year.
Management believes its approach to the Year 2000 issue to be comprehensive,
and does not expect the Year 2000 issue to have a material adverse impact on
its results of operations or financial condition. However, given the nature
of the problem and the number of factors outside the Company's direct
control, management is continuously evaluating the risks associated with
the Year 2000 and cannot guarantee Year 2000 compliance. If for any reason
critical suppliers are unable to resolve their Year 2000 issues in a timely
manner, the Company's business could be adversely affected. Specifically,
the lack of Year 2000 readiness by suppliers could affect the availability
and expected cost of food products and other supplies used by the Company
and, consequently, the Company's restaurant operations.
Forward looking statements --
Certain written and oral statements made by or on behalf of the Company may
constitute "forward-looking" statements" as defined under the Private
Securities Litigation Reform Act of 1995. These statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from the Company's historical experience and its present
expectations or projections. These risks and uncertainties include, but
are not limited to, unanticipated economic changes, interest rate movements,
changes in governmental policies and the possible effects of the year 2000
problem on the Company, including such problems at the Company's vendors,
counterparties and customers and the impact of competition. The Company
cautions that such factors are not exclusive. Caution should be taken not
to place undue reliance on any such forward-looking statements since such
statements speak only as of the date of the making of such statements and
are based on certain expectations and estimates of the Company which are
subject to risks and changes in circumstances that are not within the Company's
control.
Item 7a. Quantitative and qualitative disclosures about market risks
Not applicable
Item 8. Financial Statements and Supplementary Data
(commencing on the following page)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Krystal Company:
We have audited the accompanying consolidated balance sheets of The Krystal
Company (a Tennessee corporation) and subsidiary ("Post-Merger Company") as of
January 3, 1999 and December 28, 1997 (see Note 1) and the related consolidated
statements of operations, shareholder's equity and cash flows for the twelve
and three months then ended. We have also audited the accompanying
consolidated statements of operations, shareholder's equity and cash flows
of The Krystal Company ( a Tennessee corporation) and subsidiary "Pre-Merger
Company" for the nine months ended September 28, 1997 and the year ended
December 29, 1996. 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 January 3, 1999 and December 28, 1997 and the results of its operations
and its cash flows for the twelve months and the three months then ended and
the Pre-Merger Company's results of operations and cash flows for the nine
months ended September 28, 1997 and for the year ended December 29, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
February 12, 1999
<TABLE>
The Krystal Company and Subsidiary
----------------------------------
Consolidated Balance Sheets
---------------------------
(Dollars in thousands)
<CAPTION>
January 3, December 28,
1999 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 9,012 $ 5,507
Receivables, net 2,305 1,477
Income tax receivable -- 4,582
Net investment in direct financing
leases-current portion 58 247
Inventories 1,684 2,241
Deferred income taxes 2,817 2,736
Prepayments and other 720 830
-------- -------
Total current assets 16,596 17,620
-------- -------
NET INVESTMENT IN DIRECT FINANCING
LEASES, excluding current portion -- 58
-------- -------
PROPERTY, BUILDINGS AND EQUIPMENT, net
of accumulated depreciation of $16,221
at January 3, 1999 and $2,659 at
December 28, 1997 99,694 101,200
-------- -------
LEASED PROPERTIES, net of accumulated
amortization of $271 at January 3, 1999
and $53 at December 28, 1997 2,595 1,660
-------- -------
OTHER ASSETS:
Cash surrender value of life insurance -- 6,266
Prepaid pension asset 8,329 8,955
Deferred financing costs, net 4,577 5,359
Goodwill, net 47,429 48,674
Other 268 329
-------- -------
Total other assets 60,603 69,583
-------- -------
$ 179,488 $ 190,121
======= =======
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>
January 3, December 28,
1999 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,009 $ 6,819
Accrued liabilities 22,253 19,399
Current portion of long-term debt 53 53
Current portion of capital
lease obligations 346 235
-------- -------
Total current liabilities 27,661 26,506
-------- -------
LONG-TERM DEBT, excluding current portion 100,136 112,174
-------- -------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,806 2,029
-------- -------
DEFERRED INCOME TAXES 11,735 10,256
-------- -------
OTHER LONG-TERM LIABILITIES 1,344 4,695
-------- -------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
SHAREHOLDER'S EQUITY:
Common stock, without par value;
100 shares authorized, issued
and outstanding at January 3, 1999
and December 28, 1997 35,000 35,000
Retained earnings (deficit) 806 ( 539)
-------- -------
Total shareholder's equity 35,806 34,461
-------- -------
$ 179,488 $ 190,121
======== =======
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
Fiscal Year Months | Months Fiscal Year
Ended Ended | Ended Ended
------------ -----------|----------------------
Jan. 3, Dec. 28, | Sep. 28, Dec. 29,
1999 1997 | 1997 1996
------------ -----------|----------------------
<S> <C> <C> |<C> <C>
Revenues: |
Restaurant sales $248,152 $ 61,440 |$178,815 $236,470
Franchise fees 333 130 | 219 349
Royalties 3,775 828 | 2,232 2,778
Other 5,188 1,290 | 3,469 4,671
--------- ----------|--------- --------
257,448 63,688 | 184,735 244,268
--------- ----------|--------- --------
Cost and Expenses: |
Cost of restaurant sales 204,630 50,569 | 148,394 195,733
Depreciation and |
amortization expense 12,868 3,342 | 8,216 11,378
General and administrative |
expenses 24,876 6,612 | 19,657 25,422
Other expenses, net 3,270 901 | 2,443 3,809
Special charge -- -- | -- 4,000
--------- ----------|--------- --------
245,644 61,424 | 178,710 240,342
--------- ----------|--------- --------
Operating income 11,804 2,264 | 6,025 3,926
Reorganization item -- -- | (1,218) (3,846)
Gain on settlement of deferred |
compensation obligations 1,805 -- | -- --
Interest expense, net: |
Contractual rate interest, net (10,518) (2,941)| (2,310) (3,191)
Interest related to certain |
pre-petition liabilities, net -- -- | 96 (791)
--------- ----------|--------- ---------
Income (loss) before provision |
for (benefit from) income |
taxes and extraordinary item 3,091 (677)| 2,593 (3,902)
Provision for (benefit from) |
income taxes 1,746 (138)| 928 (1,480)
--------- ----------|--------- ---------
Income (loss) before |
extraordinary item 1,345 (539)| 1,665 (2,422)
Extraordinary charge for early |
extinguishment of debt, net of |
tax benefit of $134 -- - | (220) -
--------- ----------|--------- ---------
Net income (loss) $ 1,345 $ (539)|$ 1,445 $ (2,422)
========= ==========|========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<TABLE>
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Shareholder's Equity
-----------------------------------------------
(Dollars in thousands)
<CAPTION>
Common Retained Deferred
Stock Earnings Compensation
------ -------- ------------
<S> <C> <C> <C>
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) $ --
Net income 1,345 --
------- ------- ------
BALANCE, January 3, 1999
Post-Merger Company $ 35,000 $ 806 $ --
======= ======= ======
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
-----------------------|---------------------
Fiscal Three | Nine Fiscal
Year Months | Months Year
Ended Ended | Ended Ended
---------- -----------|----------------------
Jan. 3, Dec. 28, | Sep. 28, Dec. 29,
1999 1997 | 1997 1996
---------- -----------|----------------------
<S> <C> <C> | <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income (loss) $ 1,345 $ (539) | $ 1,445 $ (2,422)
Adjustments to reconcile net |
income (loss) to net cash provided |
by (used in) operating activities- |
Depreciation and amortization 12,868 3,342 | 8,216 11,378
Deferred income taxes 1,398 ( 187) | 5,152 (3,207)
Loss on early extinguishment |
of debt -- -- | 220 --
Changes in operating assets and |
liabilities: |
Receivables, net ( 828) 2,535 | (1,446) (814)
Income tax receivable 4,582 2,541 | (4,524) 609
Inventories 557 (174) | 266 166
Prepayments and other 110 245 | 905 (1,150)
Accounts payable (1,810) 2,063 | 221 2,854
Income taxes payable -- (212) | (822) 822
Accrued liabilities 2,104 (986) | 271 8,559
Other, net 3,193 (1,189) | (840) (64)
Liabilities from |
reorganization activities -- -- | (22,317) 1,408
-------- --------|---------- ---------
Net cash (used in) provided by |
operating activities 23,519 7,439 | (13,253) 18,139
-------- --------|---------- ---------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Acquisition of |
The Krystal Company -- (111,256) | -- --
Additions to property, buildings |
and equipment (10,917) (1,643) | (5,437) (6,457)
Proceeds from sale of property, |
buildings and equipment 1,978 20 | 635 3,282
Payments received on net |
investment in direct |
financing leases 247 100 | 462 856
-------- --------|---------- ---------
Net cash used in investing |
activities (8,692) (112,779) | (4,340) (2,319)
-------- --------|---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES: |
Decrease in debt from |
reorganization activities -- -- | (36,000) --
Borrowings (repayments)under |
revolving credit facility (11,113) 5,113 | 6,000 --
Proceeds from issuance |
of long-term debt -- -- | 30,000 --
Repayments of Pre-Merger |
Company long-term debt (53) (29,512) | (3,431) (53)
Issuance of 10.25% senior notes -- 100,000 | -- --
Principal payments of capital |
lease obligations (156) (83) | (385) (675)
Capital contribution from |
Port Royal Holdings, Inc. -- 35,000 | -- --
Deferred financing costs -- (5,597) | (1,430) --
Other -- -- | -- (40)
-------- --------|---------- ---------
Net cash provided by (used in) |
financing activities (11,322) 104,921 | (5,246) (768)
-------- ---------|---------- ---------
NET INCREASE(DECREASE) IN CASH AND |
TEMPORARY INVESTMENTS 3,505 (419) | (22,839) 15,052
|
CASH AND TEMPORARY INVESTMENTS, |
beginning of period 5,507 5,926 | 28,765 13,713
-------- ---------|---------- ---------
CASH AND TEMPORARY INVESTMENTS, |
end of period $ 9,012 $ 5,507 | $ 5,926 $28,765
======== =========|========== =========
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW |
INFORMATION: |
Cash paid during the period for: |
Interest, net of amounts |
capitalized $ 11,260 $ 653 | $ 6,797 $ 648
======= ========|========== =========
Income taxes $ 958 $ 23 | $ 862 $ 917
======= ========|========== =========
Reorganization item $ -- $ -- | $ 14,955 $ 1,092
======= ========|========== =========
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 September 26, 1997, (effective September 29, 1997 for accounting purposes),
pursuant to an Agreement and Plan of Merger by and among the Company,
Port Royal Holdings, Inc. ("Port Royal") and TKC Acquisition Corp. dated
July 3, 1997, Port Royal acquired the Company for an aggregate purchase
price of $112,009,000 (the "Acquisition"). As a result of the merger, each
share of the Company's issued and outstanding stock prior to the merger
was converted into the right to receive $14.50 cash, and the Company became
a wholly-owned subsidiary of Port Royal. The Company prior to the Acquisition
is referred to herein as the "Pre-Merger Company." The Company after the
Acquisition is referred to as the "Post-Merger Company."
The purchase price for the Acquisition was funded through (i) a $35 million
equity contribution from Port Royal funded by a private equity placement,
(ii) borrowings under a revolving credit facility of $25 million with a bank
and (iii) the sale of the Company's 10.25% senior notes due 2007 in
the aggregate principal amount of $100 million (the "Senior Notes").
The acquisition and merger were completed on September 26, 1997 (September 29,
1997 for accounting purposes) and were accounted for using the purchase method
of accounting. Accordingly, the purchase price was allocated to assets
acquired and liabilities assumed based on fair market values at the date of
acquisition, with the remainder to goodwill. The historical shareholders'
equity of Krystal was eliminated on the Post-Merger Company's consolidated
balance sheet. The fair value adjustments to the historical consolidated
balance sheet were as follows:
(In thousands)
Net assets acquired on September 29, 1997
at historical cost $ 46,279
Revaluation of Krystal's property, buildings
and equipment to estimated fair value 15,797
Adjustment to fair value of other
assets acquired and liabilities assumed 3,075
Deferred income taxes associated with
the revaluation of Krystal's assets
and liabilities (3,052)
Goodwill 49,910
---------
Total purchase price allocated $ 112,009
=========
2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities --
Krystal (a Tennessee corporation) is engaged primarily in the development,
operation and franchising of quick-service restaurants in the southeastern
United States. Krystal's wholly-owned subsidiary, Krystal Aviation Co.
("Aviation") operates a fixed base airport hangar operation in
Chattanooga, Tennessee. Aviation's revenues in each of the last three years
were less than 3% of the Company's total revenues. As discussed in Note 3,
on December 15, 1995, Krystal filed a petition for relief under Chapter 11 of
the federal bankruptcy laws. Krystal emerged from Chapter 11 bankruptcy with
the confirmation of Krystal's plan of reorganization by the U.S. Bankruptcy
Court on April 10, 1997.
Basis of Presentation --
The consolidated financial statements for the nine months ended
September 28, 1997 and for the year ended December 29, 1996 were prepared using
the Pre-Merger Company's historical basis of accounting. The accompanying
consolidated financial statements for the three months ended
December 28, 1997 and for the year ended January 3, 1999 were prepared
under a new basis of accounting that reflects the allocation of the fair
value of assets acquired and liabilities assumed, the related financing and
acquisition costs and all debt incurred in connection with the acquisition
of Krystal by Port Royal. Accordingly, the consolidated financial statements
for periods prior to September 29, 1997 are not comparable to consolidated
financial statements on or subsequent to September 29, 1997. A black line
on the accompanying consolidated financial statements distinguishes between
the Pre-Merger and Post-Merger Company.
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
The Krystal Company and Aviation (herein after referred to collectively as
The "Company"). All significant intercompany balances and transactions have
been eliminated.
Fiscal Year End --
The Company's fiscal year ends on the Sunday nearest December 31.
Consequently, the Company will periodically have a 53-week fiscal year.
The fiscal year ended January 3, 1999 was 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) and
December 29, 1996 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. The change in
accounting principle was made primarily to reflect inventory on the
consolidated balance sheet at a value that more closely represents current
cost at the date of the acquisition and merger. This accounting change was
not material to the financial statements on an annual or quarterly basis, and
accordingly, no retroactive restatement of prior years' financial statements
was made.
Property, Buildings and Equipment --
Prior to September 29, 1997, property, buildings and equipment are stated at
cost. Effective with the acquisition by Port Royal, property, buildings and
equipment were adjusted to their estimated fair values. Properties acquired
after September 29, 1997 are stated at cost.
Expenditures which materially increase useful lives are capitalized, whereas
ordinary maintenance and repairs are expensed as incurred. Depreciation
of fixed assets is computed using the straight-line method for financial
reporting purposes and accelerated methods for tax purposes over the estimated
useful lives of the related assets as follows:
Buildings and improvements 10 - 39 years
Equipment 3 - 10 years
Leaseholds Life of lease up to 20 years
Long-lived Assets --
The Company periodically evaluates the carrying value of its long-lived
assets. The carrying value of specific long-lived assets are reviewed for
potential impairment when the projected undiscounted future cash flow of
such assets is less than its carrying value.
Intangibles --
The consolidated balance sheet of the Post-Merger Company includes the
allocation of purchase accounting goodwill of $49,910,000 and
deferred financing costs of $5,604,000. Intangibles are amortized on a
straight-line basis over 10 to 25 years. Amortization expense for goodwill
and deferred financing costs for the 3 months ended December 28, 1997 was
$483,000 and $204,000, and $1,999,000 and $823,000 for the year ended
January 3, 1999, respectively. Accumulated amortization of goodwill at
January 3, 1999 and December 28, 1997 was $2,482,000 and $483,000,
respectively. Accumulated amortization of deferred financing costs at
January 3, 1999 and December 28, 1997 was $1,027,000 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 January 3, 1999, there were 110
franchised or licensed restaurants of which 74 restaurants were operated under
multi-unit agreements. At December 28, 1997, there were 101 franchised or
licensed restaurants of which 68 restaurants were operated under multi-unit
agreements.
Franchisees and licensees are required to pay the Company a franchise or
license fee plus a weekly royalty and service fee of either 4.5% or 6.0%
of the restaurants' gross receipts, depending on the duration of the franchise
agreement. 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
January 3, 1999 and December 28, 1997, total deferred franchise and license
fees were approximately $396,000 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.
Effects of Accounting Changes --
Statement of Financial Accounting Standards No. 132, "Employers' disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"), requires
changes in the disclosures about pensions and other benefits provided by
employers. This standard does not affect accounting measurements nor does
it revise the disclosures made in the financial statements of the plans.
The provisions of SFAS No. 132 are effective for fiscal years beginning after
December 15, 1997. The Company adopted the provisions of SFAS No. 132
effective for fiscal 1998.
3. PETITION FOR RELIEF UNDER CHAPTER 11
On December 15, 1995, Krystal filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United States Bankruptcy
Court for the Eastern District of Tennessee for the purpose of
completely and finally resolving the various claims filed against the
Company by current and former employees alleging violations of the Fair
Labor Standards Act of 1938
In early 1997, Krystal and the majority of the FLSA plaintiffs reached a
settlement providing for the payment of the FLSA claims and related legal
costs. A plan of reorganization (the "Plan") was formally filed on
February 24, 1997. On April 10, 1997, the Bankruptcy Court confirmed the
Company's plan of reorganization and on April 23, 1997, the Plan became
final resulting in the dismissal of the FLSA claims.
4. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment at January 3, 1999 and December 28, 1998,
consisted of the following:
January 3, December 28,
1999 1997
----------- -----------
(In thousands)
Land $ 40,254 $ 40,248
Buildings and improvements 32,026 27,315
Equipment 30,204 26,216
Leasehold improvements 9,654 8,701
Construction in progress 3,777 1,379
--------- ---------
115,915 103,859
Accumulated depreciation
and amortization (16,221) (2,659)
--------- ---------
$ 99,694 $ 101,200
========= =========
5. ACCRUED LIABILITIES
Accrued liabilities at January 3, 1999 and December 28, 1997, consisted of
the following:
January 3, December 28,
1999 1997
------------ -----------
(In thousands)
Salaries, wages and vacation pay $ 7,185 $ 4,018
Workers' compensation 3,258 4,590
State sales taxes 1,836 1,341
Accrued interest 2,676 2,823
Other 7,298 6,627
-------- --------
$ 22,253 $ 19,399
======== ========
6. INDEBTEDNESS
Long-term debt at January 3, 1999 and December 28, 1997, consisted of the
following:
January 3, December 28,
1999 1997
----------- -----------
(In thousands)
Revolving credit facility,
due August 26, 2000 $ -- $ 11,113
10.25% senior notes,
due October 2007 100,000 100,000
Other 189 1,114
--------- --------
100,189 112,227
Less--
Current maturities ( 53) ( 53)
--------- --------
$100,136 $112,174
========= ========
In September 1997, Port Royal issued $100,000,000 in unsecured 10.25% senior
notes ("the Notes") which mature on October 1, 2007. Following the
acquisition and merger, the Post-Merger Company became the obligor of
the Notes. The Notes pay interest semi-annually on April 1 and
October 1 of each year. The Notes are redeemable at the option of the
Company at prices decreasing from 105 1/8% of the principal amount on
April 1, 2002 to 100% of the principal amount on April 1, 2005. On or
prior to April 1, 2000, the Company may redeem up to 35% of the original
principal amount with the proceeds of one or more public equity offerings
at a redemption price of 110 1/4%. Additionally, upon a change of control
of the Company, the holders of the Notes will have the right to require the
Company to purchase all or a portion of the Notes at a price equal to 101%
of the original principal amount. The proceeds of the Notes were used to fund
the acquisition by Port Royal.
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 January 3, 1999, 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 January 3, 1999,
and for the year then ended, 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.
Essentially all assets of the Company at January 3, 1999, are pledged as
collateral on the Credit Facility. Additionally, the Credit Facility
is guaranteed by Port Royal through a secured pledge of all the
Company's common stock held by Port Royal and the common stock of each
existing and future subsidiary of the Company.
Scheduled maturities of long-term debt at January 3, 1999, are as follows:
(In thousands):
1999 $ 53
2000 36
2001 5
2002 95
Thereafter 100,000
At January 3, 1999, the estimated fair value of the Credit Facility
approximates the carrying amount of such debt because the interest rate
changes with market interest rates. The estimated fair value of the Notes at
January 3, 1999 exceeds their carrying value by approximately $2,000,000.
The fair value was estimated based upon quoted market prices for the same
or similar issues.
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 previously held 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.
7. BENEFIT PLANS
Retirement Plans --
Effective October 1, 1998, the Company amended and restated its defined benefit
pension plan. The plan, as amended, is a defined benefit pension plan
covering each employee who was participating in the plan on September 30, 1998
and each salaried employee or salaried benefits employee who is employed on or
after October 1, 1998. The cost of the plan shall be borne by actuarially
determined contributions made by the employer and by contributions made by
the participants. The plan provides benefits of stated amounts based on years
of service and the employee's compensation. This event was accounted for as
a plan amendment. The Company's funding policy is consistent with the
requirements of the Employee Retirement Income Security Act of 1974.
Effective March 31, 1998, the Company terminated its hourly benefit program to
retired employees for all current and future participants. The Company's
obligation for any future obligation under this plan was settled. This event
was accounted for as a plan termination.
<TABLE>
(Dollars in thousands)
<CAPTION>
Post-Merger |Pre-Merger Post-Merger |Pre-Merger
Company |Company Company |Company
-------------- |--------- -------------- |---------
Pension Benefits Postretirement Benefits
-----------------|--------- ---------------- |---------
Jan. 3, Dec. 28,| Sep. 28, Jan. 3, Dec. 28, | Sep. 28,
1999 1997 | 1997 1999 1997 | 1997
------- --------| ------- ------- ------- | -------
<S> <C> <C> | <C> <C> <C> | <C>
Change in benefit obligation -- | |
Benefit obligation at beginning | |
of period $26,653 $24,673 | $24,112 $1,097 $ 1,034 | $ 969
Service costs 1,614 341 | 1,023 68 20 | 60
Interest cost 1,981 476 | 1,373 67 19 | 56
Plan participants' contributions -- -- | -- 37 4 | 11
Amendments (2,816) -- | -- -- -- | --
Gain from plan termination -- -- | -- ( 137) -- | --
Actuarial loss (gain) 3,141 1,504 | ( 683) 21 41 | --
Benefits paid (1,991) ( 341)| (1,152) ( 136) ( 21)| ( 62)
------- ------- | ------- ------ ------- | -------
Benefit obligation at | |
end of period 28,582 26,653 | 24,673 1,017 1,097 | 1,034
------- ------- | ------- ------ ------- | -------
| |
Change in plan assets -- | |
| |
Fair value of plan assets at | |
beginning of period 33,197 33,833 | 27,936 -- -- | --
Actual return on plan assets 3,519 ( 295)| 7,049 -- -- | --
Employer contributions 193 -- | -- 99 17 | 51
Plan participants' contributions -- -- | -- 37 4 | 11
Benefits paid (1,991) ( 341)| (1,152) ( 136) ( 21)| ( 62)
------- ------- | ------- ------ ------ | -------
Fair value of plan assets at | |
end of period 34,918 33,197 | 33,833 -- -- | --
------- ------- | ------- ------ ------ | -------
| |
Funded status 6,336 6,544 | 9,160 (1,017) (1,097)| (1,034)
| |
Unrecognized prior service cost (2,816) -- | 268 -- -- | --
Unrecognized net loss (gain) 4,809 2,411 | (12,426) 61 40 | ( 36)
Unrecognized transition asset -- -- | ( 943) -- -- | --
------- ------- | ------- ------ ------ | -------
Asset (liability) recognized | |
in the consolidated balance | |
sheet $ 8,329 $ 8,955 | $(3,941) $( 956) $(1,057)| $(1,070)
======= ======= | ======= ====== ====== | =======
| |
Weighted-average assumptions as | |
of the end of period -- | |
| |
Discount rate 7.0% 7.5% | 8.0% 7.5% 8.0% | 8.0%
Expected return on plan assets 9.0% 9.0% | 9.0% n/a n/a | n/a
Rate of compensation increase 3.0% 3.0% | 3.0% n/a n/a | n/a
| |
| |
For measurement purposes, a 6.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed for fiscal year 1999 and
assumed to remain constant thereafter. | |
| |
| |
| |
| |
Components of net periodic benefit cost -- | |
| |
Service cost $1,614 $ 341 | $1,023 $ 68 $ 20 | $ 60
Interest cost 1,981 476 | 1,373 67 19 | 56
Gain from plan termination -- -- | -- ( 137) -- | --
Actual return on plan assets (2,916) 295 | (7,049) -- -- | --
Net amortization and deferral -- (1,028)| 4,764 -- -- | --
------ ------ | ------ ----- ----- | -----
$ 679 $ 84 | $ 111 $( 2) $ 39 | $ 116
====== ====== | ====== ===== ===== | =====
<TABLE/>
Assumed health care cost trend rates have a significant effect on the amount
reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-Percentage-Point
---------------------
Decrease Increase
-------- --------
Aggregate service and interest costs $ 114 $ 160
Accumulated postretirement benefit obligation 897 1,156
The Company had a supplemental executive retirement plan for certain
former officers. The plan provided additional benefits upon retirement. The
supplemental retirement benefit was to be paid over the officers' lifetime but
for no less than a period of 10 years following retirement. The Company
provided an annual amount necessary to amortize the total cost of the estimated
deferred compensation at retirement. Total deferred compensation accrued for
this plan at December 27, 1997, was $3,261,000. During 1998, the Company
agreed to settle its obligations under this deferred compensation plan by
making lump sum cash payments to the two retired executives. The cash payments
were funded with the proceeds from redeeming the cash surrender value of
life insurance policies on the lives of these executives. The Company
realized a gain of $925,000 from this transaction. Also during 1998, the
Company realized a gain of $880,000 related to the receipt of life insurance
proceeds in excess of cash surrender value.
The Company was 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 was $6,226,000. During 1998, the Company
submitted and received the proceeds from these insurance policies.
8. INCOME TAXES
The provision for (benefit from) income taxes included the following
components:
Post-Merger | Pre-Merger
Company | Company
-------------------|------------------------
Fiscal Three | Nine Fiscal
Year Months | Months Year
Ended Ended | Ended Ended
---------- ------ | -------- ----------
Jan. 3, Dec. 28,| Sept. 28, Dec. 29,
1999 1997 | 1997 1996
------ ------ | -------- --------
(In thousands)
Current tax provision |
(benefit): |
Federal $ 242 $ 40 | $(3,613) $ 1,459
State 106 9 | (611) 268
------ ------ | ------ ------
348 49 | (4,224) 1,727
Deferred income taxes 1,398 (187) | 5,152 (3,207)
------ ------ | ------ ------
Provision for (benefit |
from) income taxes $1,746 $(138) | $ 928 $(1,480)
====== ====== | ====== ======
The income tax effects of temporary differences that give rise to the current
deferred tax asset and the noncurrent net deferred tax liability as of
January 3, 1999 and December 28, 1997, were as follows:
January 3, December 28,
1999 1997
----------- -----------
(In thousands)
Current deferred tax asset:
Workers' compensation $ 1,238 $ 1,768
Deferred franchise fees 151 239
Miscellaneous payables 249 56
Accrued interest -- 7
Other 1,179 666
------ ------
Current deferred tax asset $ 2,817 $ 2,736
====== ======
Noncurrent net deferred tax liability: |
Noncurrent deferred tax asset: |
Deferred compensation $ -- | $ 513
Net operating loss carryforwards 842 | 1,306
Tax credit carryforwards 1,847 | 1,767
Accrued postretirement benefit cost 502 | 1,239
Other 254 | 330
------- | -------
Noncurrent deferred tax asset 3,445 | 5,155
------- | -------
Noncurrent deferred tax liability: |
Property, buildings and equipment (12,015) | (12,008)
Pension asset (3,165) | ( 3,403)
------- | -------
Noncurrent deferred tax liability (15,180) | (15,411)
------- | -------
Noncurrent net deferred tax liability $(11,735) |$(10,256)
======= | =======
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>
<TABLE>
<CAPTION>
Post-Merger | Pre-Merger
Company | Company
------------------ -|----------------------
Fiscal Three | Nine Fiscal
Year Months | Months Year
Ended Ended | Ended Ended
------ ------ | -------- --------
Jan. 3, Dec. 28, | Sept. 28, Dec. 29,
1999 1997 | 1997 1996
------ ------ | -------- --------
(In thousands)
<S> <C> <C> | <C> <C>
Computed "expected" tax |
provision (benefit) $1,051 $ (230)| $ 882 $(1,327)
Goodwill amortization 639 144 | -- --
State income taxes (net of |
federal income tax effect) 164 6 | 2 (99)
Other, net (108) (58)| 44 (54)
----- ----- | ----- -----
Reported tax provision (benefit)$1,746 $ (138)| $ 928 $(1,480)
===== ===== | ===== =====
</TABLE>
9. LEASES
The Company leases certain buildings and equipment and a number of restaurants
(land and/or building) under noncancellable lease agreements, some of which
are subleased to third parties. The restaurant lease terms are normally for a
period of 15 to 20 years with options that permit renewals for additional
periods. Certain leases provide for additional contingent rentals based on
sales. Generally, the building portions of the restaurant leases have been
recorded as capital leases, while the land portions have been recorded as
operating leases.
The future minimum lease payments under capital and operating leases, together
with the present value of such minimum lease payments as of January 3, 1999,
are summarized as follows:
Capital Operating
Leases Leases
------- ---------
Year (In thousands)
1999 $ 598 $ 4,227
2000 598 3,836
2001 598 3,280
2002 580 2,329
2003 548 1,500
Thereafter 1,374 3,906
------ -------
Total minimum lease payments 4,296 $19,078
=======
Less amount representing
interest 1,144
------
Present value of minimum
lease payments including
current portion $3,152
======
Rental expense under operating leases was $5,158,000, $1,324,000, $3,974,000,
and $4,903,000 for periods ended January 3, 1999, December 28, 1997,
September 28, 1997, and December 29, 1996, respectively.
Rental expense includes contingent rentals of $150,000, $31,000, $95,000 and
$110,000 for periods ended January 3, 1999, December 28, 1997,
September 28, 1997, and December 29, 1996, 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 January 3, 1999:
Direct
Financing Operating
Leases Leases
--------- ---------
Year (In thousands)
1999 $ 56 $ 1,148
2000 7 1,164
2001 - 1,045
2002 - 535
2003 - 128
Thereafter - 97
------ ------
Total minimum lease
payments to be received 63 $ 4,117
======
Less unearned income ( 5)
------
Net investment in direct
financing leases including
current portion $ 58
======
Rental income under operating leases was $1,006,000, $185,000, $557,000,
and $557,000 for periods ended January 3, 1999, December 28, 1997,
September 28, 1997, and December 29, 1996, respectively.
10. CONTINGENCIES
The Company is 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.
11. EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK PLANS
Employee stock options plan--
On July 30, 1998, the Board of Directors of Port Royal Holdings, Inc.,
authorized a nonqualified Incentive Stock Option Plan (the "Plan") for key
employees of the Company and its subsidiary. The Plan is administered by the
Compensation Committee (the "Committee") of the Board of Directors. Under the
Plan, the Committee may grant options of up to 1,000,000 shares of Port Royal
common stock. The Committee granted 700,000 options in 1998 of which 100,000
vest ratably over 5 years and the remaining 600,000 vest in 2007, or upon a
change of control of the Company. These 700,000 options also contain a
vesting acceleration provision if the Company achieves certain cash flow
targets. No such options were vested under the acceleration provision in
1998.
The Company accounts for its stock-based compensation plans under APB No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
expense has been recognized as all employee stock options have been granted
with an exercise price equal to the estimated fair value of Port Royal
common stock. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair-value based
method of accounting for stock-based employee compensation plans. The Company
has adopted the disclosure requirements as detailed below.
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of the grant using the minimum value option pricing
model because there is no established fair market value of the Company's stock
as it is not available on the open market. The following weighted average
assumptions were used for fiscal year 1998: expected dividend yield of 0%, a
risk-free interest rate of 5.49% and expected life of 10 years. Using these
assumptions, the fair value of the employee stock options granted in 1998 is
$1,303,000, which would be amortized as compensation expense over the vesting
period of the options. Had compensation cost been determined in accordance
with SFAS No. 123, utilizing the assumptions detailed above, the Company's
net income would have adjusted to the pro forma amounts indicated below:
1998
------------
Net Income (in thousands):
As reported $1,345
Pro forma 1,284
A summary of the Company's stock option activity is as follows
(shares in thousands):
1998
----------------------
Weighted
Shares Average
Under Exercise
Option Price
--------- ----------
Outstanding at beginning of year 0 $ 0
Granted 700 4.50
--------- ----------
Outstanding at end of year 700 $4.50
========= ==========
Exercisable at end of year 20 $4.50
Weighted average fair value of
options granted $4.50
=========
Of the 700,000 shares subject to options outstanding at January 3, 1999,
(i) options to purchase 100,000 shares have an exercise price of $4.50, with
a remaining contractual life of 9.6 years, of which 20,000 shares are
exercisable; and (ii) options to purchase 600,000 shares have an exercise
price of $4.50, with a weighted average remaining contractual life of 9.5
years, of which none are exercisable.
Restricted stock plan --
The Company's 1990 Restricted Stock Plan ("Restricted Stock Plan") provided
for the granting of shares of common stock to certain directors and key
employees of the Company. The maximum number of shares that were issuable
under the Restricted Stock Plan was 1,100,000 shares. The shares issued
under the Restricted Stock Plan were restricted when issued and subject to
forfeiture under certain circumstances. Due to the change in control and the
merger with Port Royal, restrictions on the Restricted Stock Plan were
terminated and restricted stockholders were entitled to receive $14.50 per
share in cash and the Restricted Stock Plan was terminated.
A summary of the Company's restricted stock activity is as follows:
Restricted
Stock Plan
----------
(Number of shares)
Issued at December 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 was recorded based
on the market value of the Company's common stock at the date of grant and
such deferred compensation was amortized to expense over the period the
restrictions lapsed. Compensation expense related to the restricted stock
plans was $146,538 and $363,688 for the nine months ended September 28, 1997
and for fiscal year 1996.
12. QUARTERLY INFORMATION (unaudited)
(In thousands of dollars)
Fiscal 1998
Net
Operating Income
Revenues Income (Loss)
-------- --------- ------
Quarter Ended:
March 29 $ 59,625 $ 2,016 $ 228
June 28 61,546 2,593 ( 83)
September 27 66,271 2,214 ( 287)
January 3, 1999 70,006 4,981 1,487
-------- ------- --------
Total $257,448 $11,804 $ 1,345
======== ======= ========
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)
======== ======= =======
(1) As described in Note 1, the Company was acquired and merged with and
into a wholly-owned subsidiary of Port Royal Holdings, Inc. as of
September 26, 1997 (September 29, 1997 for accounting purposes).
13. SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS
The Senior Notes are guaranteed by each of the Company's subsidiaries. The
guarantees are full, unconditional, joint and several obligations of each of
the subsidiary guarantors. Summarized financial information for the
subsidiary guarantors is set forth below. Separate financial statements for
the subsidiary guarantors of the Company are not presented because the
Company has determined that such financial statements would not be material
to investors. The subsidiary guarantors comprise all of the direct and
indirect subsidiaries of the Company. There are no restrictions on the
ability of the subsidiary guarantors to declare dividends, or make loans
or advances to the Company.
The following table presents summarized financial information for subsidiary
guarantors in connection with the Company's Senior Notes:
January 3, December 28,
1999 1997
---------- -----------
(in thousands)
Balance Sheet Data:
Current assets $ 872 $ 576
Noncurrent assets $ 954 $1,354
Current Liabilities $1,220 $1,659
Non Current Liabilities $ 79 $ 131
Post-Merger | Pre-Merger
Company | Company
------------------------- | ---------------------
Fiscal Year Three Months | Nine Months Fiscal Year
Ended Ended | Ended Ended
------------ ----------- | ----------- ---------
Jan.3, Dec. 28, | Sep. 28, Dec. 29,
1999 1997 | 1997 1996
----------- ----------- | ----------- ---------
(in thousands)
Income Statement Data: |
Net sales $5,188 $1,290 | $3,469 $4,671
Gross profit $1,647 $ 334 | $ 889 $ 815
Income before provision |
for Federal and State |
Income Taxes $1,222 $ 228 | $ 471 $ 210
Net Income $ 758 $ 140 | $ 293 $ 130
14. BUSINESS SEGMENTS
The Company and its subsidiary operate in two industry segments, quick-service
restaurants and fixed base airport hangar operations ("FBO"). See Note 13,
Summarized Financial Information-Subsidiary Guarantor, for summarized financial
information for the FBO segment.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with accountants on accounting and financial
disclosure in 1998.
Item 10. Directors and Executive Officers of the Company
The directors of the Company are:
Philip H. Sanford 45 Chairman, Chief Executive Officer
and Director
James F. Exum, Jr. 42 President, Chief Operating Officer
and Director
W. A. Bryan Patten 58 Director
Richard C. Patton 37 Director
Benjamin R. Probasco 39 Director
A. Alexander Taylor II 45 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 as Vice President, Real Estate, for Big River
Breweries, Inc. since April 1998. Prior to joining Big River Breweries, Inc.,
Mr. Probasco was employed for two years at Probasco & Company, a real estate
development company, six years at Leonard, Kinsey & Associates from 1991 to
1997 and from 1983 to 1988 was employed at Johnston Coca-Cola Bottling Group.
A. Alexander Taylor II has been a Director of the Company since
April 22, 1998 and has been President and Chief Operating Officer of
Chattem, Inc. since January 1998. Prior to joining Chattem, Inc. Mr. Taylor
was a partner in the law firm of Miller & Martin and was affiliated with that
firm from 1978 to 1998.
The Executive Officers of the Company, in addition to Messrs.
Sanford and Exum, are:
Gordon L. Davenport, Jr. 39 Vice President, Marketing - Development
Larry J. Reeher 51 Vice President, Human Resources
Larry D. Bentley 42 Vice President and Chief Financial
Officer
Michael C. Bass 52 Vice President, Administration.
Thomas C. Ragan 48 Vice President, Franchising
Gordon L. Davenport, Jr. has been Vice President Marketing -
Development at Krystal since February 1997. From 1995 to 1997, Mr. Davenport
served as Vice President of New Business and Strategic Planning and Vice
President of Marketing and New Business. From 1986 to 1995, Mr. Davenport
served in various marketing and sales management positions with Warner
Lambert Company.
Larry 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.
Michael C. Bass was appointed Vice President - Administration on
April 22, 1998. He has served in various capacities with the Company since
1979, including Director of Purchasing, Director of Administration and Vice
President of Administration. From 1969 to 1979 he held various management
positions with Marriott Corporation.
Thomas C. Ragan was appointed Vice President of Franchising on
May 14, 1998. From 1997 to 1998, Mr. Ragan served as Vice President of
Franchising for Famous Dave's of America, Inc. From 1992 to 1997, he
served as Vice President of Franchise Sales for Papa John's International,
Inc. He served as Area Director of Operations for Rally's Hamburger, Inc.
from 1986 to 1992.
Item 11. Executive Compensation
The following table summarizes the total compensation for the last three
fiscal years of the following five highest compensated named executive officers
of the Company during the last fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
-------------------------------------------- ---------------------
Name and Other Annual Securities underlying
Principal Position Year Salary Bonus Compensation Options Awarded(1)
<S> <C> <C> <C> <C> <C>
Philip H. Sanford (2) 1998 $351,120 $193,073 $165,392(3) $ 0
Chairman of the Board of 1997 92,361 0 0 0
Directors and Chief
Executive Officer
James F. Exum, Jr. (4) 1998 301,117 165,573 47,714(5) 500,000
President and Chief 1997 79,167 0 3,167 0
Operating Officer
and Director
Larry D. Bentley (6) 1998 146,664 58,674 9,702 100,000
Vice President, Chief 1997 16,111 0 0 0
Financial Officer
Gordon L. Davenport, Jr.(7) 1998 172,107 78,966 11,789 100,000
Vice President Marketing 1997 163,623 7,500 5,314 0
and Development 1996 152,023 0 5,548 0
Larry J. Reeher (8) 1998 139,373 63,876 13,127 0
Vice President 1997 133,735 7,500 6,182 0
Human Resources 1996 127,352 0 6,826 0
</TABLE>
(1) Represents stock options granted during fiscal 1998 under the Port
Royal Holdings, Inc. Stock Incentive Plan for the Krystal Company.
(2) Mr. Sanford was appointed Chairman and Chief Executive Officer of the
Company on September 26, 1997.
(3) This amount includes $153,290 paid to Mr. Sanford for moving expenses
and $12,000 automobile expenses.
(4) Mr. Exum was appointed President and Chief Operating Officer of the
Company on September 26, 1997.
(5) This amount includes $35,714 paid to Mr. Exum for moving expenses
and $12,000 for automobile expenses.
(6) Mr. Bentley was appointed Vice President and Chief Financial Officer
on December 18, 1997.
(7) Mr. Gordon L. Davenport, Jr. was appointed Vice President Marketing
and Development on February 17, 1997. Bonus compensation includes
$10,124 of bonus compensation earned in 1997, but paid in 1998.
(8) Mr. Reeher was appointed Vice President Human Resources on
August 14, 1995. Bonus compensation includes $8,269 of bonus
compensation earned in 1997, but paid in 1998.
There are no employment agreements with any of these individuals. The
Company has adopted performance-based incentive compensation plans for
senior management of the Company, including a cash management bonus plan and
a stock ownership plan, under which total awards may, in the aggregate,
equal 10% of the outstanding common stock of the Company on a fully-diluted
basis, assuming exercise of options. Non-employee directors receive a fee
of $1,000 for each Board of Directors and committee meeting attended.
STOCK OPTIONS GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to acquire shares of Port Royal Stock to the named executive officers
during the fiscal year ended January 3, 1999. All references to options
refer to Port Royal Stock.
<TABLE>
Options/Grants in Last Fiscal Year
Individual Grants
---------------------------------------
<CAPTION> Potential Realization
Percentage Value at Assumed
of Total Annual
Options Rates of Stock Price
Granted to Exercise Appreciation for
Employees or Base Option Term
Options in Fiscal Price Expiration -----------------------
Name Granted Year ($/sh) Date 5%($) 10%($)
- -------------------- ------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Philip H. Sanford -- -- -- -- -- --
James F. Exum, Jr. 500,000 71.4% $4.50 1-05-07 $3,490,488 $5,305,382
Larry D. Bentley 100,000 14.3% 4.50 12-21-07 698,103 1,061,076
Gordon L. Davenport, Jr. 100,000 14.3% 4.50 12-21-07 698,103 1,061,076
Larry J. Reeher -- -- -- -- -- --
</TABLE>
OPTION EXERCISES AND HOLDINGS
The option exercises by the Company's chief executive officer and the
other named executive officers during the fiscal year ended January 3, 1999,
as well as the number and total value of unexercised in-the-money options at
January 3, 1999, are shown in the following table. All references to options
and shares refer to Port Royal Stock.
Aggregate Option Exercises in Last Fiscal Year
and Option Values at January 3, 1999
Name Number of Value Number of Value of
Shares Realized Unexercised Unexercised
Acquired Options at Options
on Exercise Jan. 3. 1999 In-the-Money
Exercisable/ Exercisable/
Unexercisable Unexercisable(1)
- --------------------- -------- -------- ------------- -------------
Philip H. Sanford -- -- --/-- -/-
James F. Exum, Jr. -- -- 20,000/480,000 0/0
Larry D. Bentley -- -- --/100,000 -/0
Gordon L. Davenport, Jr. -- -- --/100,000 -/0
Larry J. Reeher -- -- --/-- -/-
(1) Since the shares of Port Royal Stock do not trade on any market, it is
the assumed that the fair market value of the Port Royal Stock is equal
to exercise price of the option.
Item 12. Security Ownership of Certain Beneficial Owners and Management
All of the outstanding capital stock of the Company is held by Port Royal.
The following table sets forth certain information regarding beneficial
ownership of the common stock of Port Royal by: (i) each person who holds more
than 5% of the common stock of Port Royal, (ii) each Director of the Company,
(iii) each of the Executive Officers of the Company and (iv) all Directors and
Executive Officers as a group.
Name Amount of Percent of
Beneficial Ownership Class (1)
Directors
Philip H. Sanford(2) 2,600,000 26.0
James F. Exum, Jr.(3) 20,000 0.2
W. A. Bryan Patten(4) 863,333(5) 8.6
Richard C. Patton(6) 1,233,333(7) 12.3
Benjamin R. Probasco(8) 863,333(9) 8.6
A. Alexander Taylor II 123,333 1.2
Executive Officers
Larry D. Bentley 0 0
Gordon L. Davenport, Jr.(13) 246,667 2.5
Larry J. Reeher 0 0
Michael C. Bass 0 0
Thomas C. Ragan 0 0
5% Shareholders
Katherine J. Johnston Trust(10) 1,233,333 12.3
Woodmont Capital, LLC(11) 1,233,333 12.3
P&P Port Royal Investors, LP(12) 863,333 8.6
All Directors and Executive
Officers as a group (9 persons) 5,949,999 59.5
(1) For purposes of computing percentage of outstanding shares owned by each
beneficial owner, the shares issued pursuant to exercisable stock options
held by such beneficial owner are deemed outstanding. Such shares are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) The address for this beneficial owner is The Krystal Building,
One Union Square, Chattanooga, Tennessee 37402.
(3) Includes 20,000 shares subject to purchase within sixty days of
March 12, 1999 under the company's Incentive Stock Plan.
(4) The address for this beneficial owner is 520 Lookout Street,
Chattanooga, Tennessee 37403.
(5) Includes shares held by P&P Port Royal Investors, LP, an investment fund
for which an affiliate of Patten & Patten, Inc. serves as general
partner. Mr. Patten is a director, officer and shareholder of Patten
& Patten, Inc. Mr. Patten disclaims ownership of all but 5,920 of
these shares.
(6) The address for this beneficial owner is 4400 Harding Road, Nashville,
Tennessee 37205.
(7) Includes shares held by Woodmont Capital, LLC, an investment fund for
which Mr. Patton is the President.
(8) The address for this beneficial owner is 100 East Tenth Street,
Suite 600, Chattanooga, Tennessee 37402.
(9) Includes shares held by various trusts of which Mr. Probasco is a
beneficiary.
(10) The address for this beneficial owner is Suite 600, The Krystal Building,
Chattanooga, Tennessee 37402.
(11) The address for this beneficial owner is 4400 Harding Road, Nashville,
Tennessee 37205.
(12) The address for this beneficial owner is 520 Lookout Street, Chattanooga,
Tennessee 37403.
(13) The address for this beneficial owner is One Union Square, Chattanooga,
Tennessee 37402.
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
Exhibit 10.2 --
PORT ROYAL HOLDINGS, INC. STOCK INCENTIVE PLAN FOR THE KRYSTAL COMPANY
A. Establishment and Purpose of the Plan. The purpose of this Plan is
to provide a flexible means of compensation and motivation for outstanding
performance by employees of The Krystal Company and its subsidiaries
("Krystal") and other certain persons to further the continued growth and
profitability of Krystal through the grant of equity or equity-related
interests in Port Royal Holdings, Inc. ("Port Royal"), which owns all of the
issued and outstanding stock of Krystal.
B. Definitions. As used in the Plan, the following terms have the
meanings indicated:
(a) Board of Directors. The Board of Directors of Port Royal.
(b) Committee. The Compensation Committee of the Board of
Directors, which committee shall have at least three members, each of whom
shall be a Non-Employee Director of Port Royal or Krystal within the meaning
of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended.
(c) Common Stock. The common stock of Port Royal, no par value,
or such other class or kind of shares of other securities as may be applicable
under Section 11 of this Plan.
(d) Employee. A full-time key employee of the Krystal or its
subsidiaries, including an officer who is such an employee.
(e) Fair Market Value. The fair market value of shares of Common
Stock as of such date based upon (i) if publicly-traded, the closing price of
the Common Stock as of the day in question (or, if such day is not a trading
day, on the nearest preceding trading day) as reported with respect to the
market in which such shares are traded, or (ii) if not publicly-traded, the
determination of the Committee using any reasonable method in good faith.
(f) Incentive Stock Option. Any Option intended to meet the
requirements of an incentive stock option as defined in Section 422.
(g) Non-Qualified Stock Option. Any Option not intended to be an
Incentive Stock Option.
(h) Option. An option to purchase Common Stock granted under the
Plan, including both an Incentive Stock Option and a Non-Qualified Stock
Option.
(i) Other Plan Grants. Grants, other than those specified herein,
that are valued in whole or part by reference to, or otherwise based upon,
Common Stock, including without limitation performance shares, convertible or
exchangeable debt or equity, and rights valued by reference to financial
performance of Port Royal or Krystal or any of its subsidiaries.
(j) Plan. The Port Royal Holdings, Inc. Stock Incentive Plan for
The Krystal Company herein set forth, as the same may from time to time be
amended.
(k) Restricted Stock. Common Stock granted by the Committee
subject to restrictions as to transferability and conditions of forfeiture in
the hands of the grantee as determined by the Committee.
(l) Section 422. Section 422 of the Internal Revenue Code of
1986, as amended, or any successor statute.
(m) Stock Appreciation Right. A right to receive a payment equal
to the excess of the (i) Fair Market Value of the shares of Common Stock
covered by such right as of the date of exercise or termination over (ii) such
amount as is determined by the Committee at the time the Stock Appreciation
Right is granted.
(n) Time-Accelerated Options. An Option to purchase Common Stock
granted under the Plan, which may be an Incentive Stock Option or a
Non-Qualified Stock Option, with the right to exercise such Option vesting at
specified times and subject to accelerated vesting upon the occurrence of
certain events established by the Committee.
C. Eligibility. A grant under this Plan may be made to any Employee
or any other person as to whom the Committee determines that making such grant
is in the best interests of Krystal; provided, however, that (i) no person may
participate in the decision to make a grant to himself, and (ii) no grant of
an Incentive Stock Option may be made to a person other than an Employee.
D. Plan Administration. This Plan shall be administered by the
Committee or, in the event the Committee is not for any reason constituted,
by the Board of Directors (in which case all references to the Committee shall
refer to the Board of Directors). The Committee shall have full power to
interpret and administer this Plan and full authority to act in selecting the
grantees and in determining type and amount of grants, the terms and
conditions of grants, and the terms of agreements which will be entered into
with grantees governing such grants. The Committee shall have the power to
make rules and guidelines for carrying out the Plan and to make changes in
such rules and guidelines as from time to time it deems proper. Any
interpretation by the Committee of the terms and provisions of the Plan and
the administration thereof and all action taken by the Committee shall be
final.
E. Shares Subject to the Plan. Subject to adjustment as provided in
Section 11, the total number of shares of Common Stock available for grant
under this Plan shall be 1,000,000. Shares of Common Stock issued hereunder
may consist, in whole or in part, of authorized and unissued shares, treasury
shares, and shares acquired by private purchase. Any Common Stock which is
purchased shall be purchased at prices no higher than the Fair Market Value of
such Common Stock at the time of purchase. If for any reason any shares of
Common Stock issued under any grant hereunder are forfeited or canceled, or a
grant otherwise terminates or is terminated for any reason without the
issuance of any shares, then all such shares, to the extent of any such
forfeiture, cancellation or termination, shall again be available for grant
under this Plan.
F. Types of Grants.
(a) The Committee may make such grants under this Plan as in its
discretion it deems advisable to effectuate the purpose of the Plan,
including without limitation grants of Restricted Stock, Incentive Stock
Options, Non-Qualified Stock Options, Time-Accelerated Options, Stock
Appreciation Rights, and Other Plan Grants. Such grants may be issued
separately, in combination, or in tandem, and additional grants may be issued
in combination or in tandem with grants previously issued under this Plan or
otherwise. As used in this Plan, references to grants in tandem shall mean
grants consisting of more than one type of grant where the exercise of one
element of the grant effects the cancellation of one or more other elements
of the grant.
(b) The exercise price of an Option or other grant shall be paid
in cash or such other consideration as the Committee may determine consistent
with applicable law, which may include without limitation (i) shares of
Common Stock; and (ii) the withholding, from the shares of Common Stock
receivable on exercise, of shares of Common Stock with a Fair Market Value as
of the date of exercise equal to the exercise price.
G. Restricted Stock. Each grant of Restricted Stock shall specify
the restrictions thereon and the terms and conditions governing the
termination of such restrictions. Each certificate representing Restricted
Stock shall at the Committee's discretion either bear a legend as to the
restrictions thereon or be deposited by the grantee, together with a stock
power endorsed in blank, with Port Royal. The grantee shall have the right
to receive dividends from and to vote the shares of Restricted Stock owned by
the grantee.
H. Options.
(a) The price at which Common Stock may be purchased upon exercise
of an Option shall be determined by the Committee, but, for the grant of an
Incentive Stock Option, shall not be less than 100 percent of the Fair Market
Value of shares of Common Stock as of the date on which the Option is granted.
(b) Each Option shall have such terms and conditions as the
Committee shall determine, except that no Incentive Stock Option shall have a
term of more than ten years. A grantee shall have no rights of a shareholder
with respect to any shares of Common Stock subject to an Option unless and
until a certificate for such shares shall have been issued.
(c) All the provisions of Section 422 and the regulations
thereunder as in effect from time to time are hereby incorporated by
reference herein with respect to Incentive Stock Options to the extent that
their inclusion in this Plan is necessary from time to time to preserve their
status as incentive stock options for purposes of Section 422. Each provision
of the Plan and each agreement relating to an Incentive Stock Option shall be
construed so that it shall be an incentive stock option for purposes of
Section 422, and any provisions thereof which cannot be so construed shall be
disregarded.
I. Stock Appreciation Rights. Each grant of a Stock Appreciation
Right shall be credited to the grantee's account on the books of the Plan.
Payment may be made in whole or in part in cash, shares of Common Stock, or
such other form as the Committee may determine.
J. Other Plan Grants. Other Plan Grants may be made by the Committee
upon such terms and conditions as it may determine from time to time.
K. Adjustments Upon Changes in Capitalization. In the event of a
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation or any other change in the corporate structure
of Port Royal affecting Common Stock, or a sale by Port Royal of all or part
of its assets, or any distribution to shareholders other than a normal cash
dividend, or any assumption or conversion of outstanding grants as a result of
an acquisition, the Board of Directors shall make appropriate adjustment in
the number and kind of shares authorized by the Plan and any adjustments in
outstanding grants as it deems appropriate.
L. Termination and Amendment. This Plan shall become effective upon
its approval by the shareholders of Port Royal and shall terminate upon the
tenth anniversary of such date. It shall remain in full force and effect
during such period unless earlier terminated by the Board of Directors, which
shall have the power to amend, suspend, terminate or reinstate this Plan at
any time, provided that no amendment which increases the number of shares of
Common Stock subject to the Plan or changes the exercise price of an Option
shall be made without shareholder approval.
M. Non-Assignability. Grants are not transferable other than by will
or the laws of descent and distribution, except that grants other than
Incentive Stock Options may also be transferable to the grantee's spouse,
children or a family limited partnership, trust or other similar entity solely
for the benefit of the grantee or the grantee's spouse or children. A grant
is exercisable during the grantee's lifetime only by the grantee or his or her
guardian or legal representative.
N. Exercise by Estate. Any provision of this Plan to the contrary
notwithstanding, unless otherwise determined by the Committee, the estate of
any grantee shall have one year from the date of death to exercise any grant
hereunder, or such longer period as the Committee may determine, except that
this sentence shall in no event extend the term of any Incentive Stock Option
beyond ten years.
O. General Provisions.
(a) Nothing contained in this Plan, or in any grant made pursuant
to the Plan, shall confer upon any grantee any right with respect to terms,
conditions or continuance of employment by Krystal or any subsidiary.
(b) Appropriate provision may be made by the Committee for all
taxes required to be withheld in connection with any grant, the exercise
thereof, and the transfer of shares of Common Stock, in respect of any
federal, state, local or foreign withholding taxes. In the case of payment
in the form of Common Stock, Port Royal shall have the right to retain the
number of shares of Common Stock whose Fair Market Value equals the amount to
be withheld.
(c) If any day on or before which such action the Plan must be
taken falls on a Saturday, Sunday or legal holiday, such action may be taken
on the next preceding day which is not a Saturday, Sunday or legal holiday.
(d) This Plan and all determinations made and actions taken
pursuant thereto shall be governed by the laws of Tennessee without regard to
principles of conflicts of laws.
(e) The Committee may amend any outstanding grants to the extent
it deems appropriate, provided that the grantee's consent shall be required
in the case of amendments adverse to the grantee.
See exhibit index
(b) Reports on Form 8-K -
The registrant did not file a Form 8-K during the fourth quarter of
1998.
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 18, 1999 By: /s/Larry D. Bentley
------------------------------
Larry D. Bentley, Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Signature Title Date
/s/Philip H. Sanford
- ----------------------
Philip H. Sanford Chairman of the Board of
Directors and Chief Executive
Officer and Director March 18, 1999
/s/James F. Exum, Jr.
- ----------------------
James F. Exum, Jr. President, Chief Operating
Officer and Director March 18, 1999
/s/W. A. Bryan Patten
- ----------------------
W. A. Bryan Patten Director March 18, 1999
/s/Richard C. Patton
- ----------------------
Richard C. Patton Director March 18, 1999
/s/Benjamin R. Probasco
- ----------------------
Benjamin R. Probasco Director March 18, 1999
/s/A. Alexander Taylor II
- -----------------------
A. Alexander Taylor II Director March 18, 1999
Supplemental information to be furnished with Reports filed pursuant
to Section 15(d) of the Act by Registrants which have not registered securities
pursuant to Section 12 of the Act --
The Company has not sent an annual report or proxy statement to its sole
shareholder, Port Royal Holdings, Inc.
THE KRYSTAL COMPANY AND SUBSIDIARY
EXHIBIT INDEX
Exhibit
Number Description
2.1* Agreement and Plan of Merger dated July 3, 1997 by and
among Port Royal Holdings, Inc., TKC Acquisition Corp.
and The Krystal Company.
3.1** Charter of the Company.
3.2** By-laws of the Company.
4.1** Indenture, dated as of September 26, 1997 between TKC
Acquisition Corp. and SunTrust Bank, Atlanta, N.A.
4.2** Supplemental Indenture No. 1 dated as of September 26,
1997, between The Krystal Company, Krystal Aviation Co.,
Krystal Aviation Management Co. and SunTrust Bank, Atlanta.
4.3** Form of Exchange Note (included in Exhibit 4.1).
4.4** Registration Rights Agreement, dated as of September 26,
1997, between TKC Acquisition Corp. and UBS Securities, LLC.
10.1** Credit Agreement dated as of September 26, 1997 among TKC
Acquisition Corp., to be merged with and into the Krystal
Company, SunTrust Bank, Atlanta, as agent, and Union
Bank of Switzerland, New York Branch, as syndication agent.
10.2 Port Royal, Inc. Stock Incentive Plan for The Krystal
Company, adopted July 30, 1998.
21.1** Subsidiaries of the Company.
27*** Financial Data Schedule.
* Incorporated by reference from the Definitive Proxy Statement of
the Company filed on September 15, 1997.
** Incorporated by reference from the Company's Registration Statement
on Form S-4 filed November 25, 1997.
*** Submitted only with the electronic filing of this document with the
Commission pursuant to Regulation S-T under the Securities Act.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-03-1999
<CASH> 9012
<SECURITIES> 0
<RECEIVABLES> 2305
<ALLOWANCES> 0
<INVENTORY> 1684
<CURRENT-ASSETS> 16596
<PP&E> 115915
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0
0
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</TABLE>
